ESG and how to improve workforce reporting

By 24.03.22BlogMarch 29th, 2022No Comments

Has narrative reporting gone too far? Rachel Kay writes for Accountancy Daily

For investors, unions, civil society and other stakeholders looking to understand companies’ employment practices, annual reports are a valuable resource. Clearer and more informative workforce reporting is an objective that these groups have long been pushing for.

The High Pay Centre analysed workforce disclosure in 2021 FTSE 100 annual reports for a recently-published piece of research by the CIPD, Railpen and PLSA. We used a framework covering a wide range of workforce-related topics, and examined the use of both narrative and metrics. This research builds on several previous reports on the same topic, the most recent of which was a report by the High Pay Centre and PLSA published in 2019.

Our analysis found that companies are now dedicating substantially more space to their workforces in annual reports than they have done in previous years. This is a welcome development as it indicates that companies are more conscious of the importance of employment practices, and are increasingly recognising the connection between workforce and strategy. However, the increased volume of reporting was mainly the result of companies providing additional narrative, rather than disclosing more workforce-related metrics. For almost every theme in our framework, companies tended to provide at least some discussion, but little or no data. For example, whilst 97% of companies mentioned the importance of skills and training, only 35% disclosed hours of training per employee and 16% the cost of training.

The theme of Inclusion and Diversity (I&D) was a particularly pertinent example of this issue. Companies discussed I&D almost without fail, with 93% of companies giving some evidence of how they were investing in this. In the wake of the protests against structural racism in 2020, companies were clearly keen to emphasise their commitment to tackling racial injustice. However, discussion of this was rarely accompanied by data on the pay or representation of ethnic minorities: 22% of companies disclosed the ethnic composition of their workforces, whilst only 9% of companies disclosed their ethnicity pay gap. For the majority of companies who failed to provide this data, there is no way for stakeholders to measure the impact of the companies’ actions on I&D.

This prevalence of narrative over data has been encouraged by policymakers and regulators. The Department for Business Innovation and Science’s 2012 ‘Future of narrative reporting’ consultation response emphasised the value of narrative reporting and encouraged companies to ‘tell their own story’. Understandable aversions to ‘box ticking’ and ‘boilerplate’ reporting have also been used as cover to promote narrative over data.

Of course, there are important differences between companies, and some narrative is certainly needed to give context to data. However, a regulatory exhortation to ‘tell stories’ is not conducive to accurate reporting, nor to good decision-making in the areas that annual reports are intended to inform, such as the responsible allocation of investment capital. Without data, workforce reporting tells stakeholders very little about a company’s workforce, and does not allow them to monitor progress over time. Shifting the balance from narrative towards data would also shorten annual reports (currently, the average FTSE 100 annual report exceeds 200 pages in length). A page of workforce data tells us far more about a company’s employment practices than a page of narrative.

Narrative reporting without data also allows companies to put a positive ‘spin’ on their employment practices without having to substantiate their claims. However, we should hardly be surprised that companies are using annual reports to present themselves in a positive light. There is a limit to how much self-criticism we can realistically expect from companies in a public document that they themselves have authored. This prompts us to consider the limitations of reporting: can reporting ever really provide stakeholders with assurance that companies are treating their workforces well?

Whilst high quality reporting is extremely valuable, increasing corporate transparency does not guarantee that companies are providing good work. We argue in the report that the best way to guarantee this is through strong workplace democracy. Companies should have robust worker voice mechanisms in place to enable internal scrutiny of pay and employment practices. Trade unions are the most effective and practical way to do this, as they facilitate collective workforce voice in all parts of the company and thus enable the board to know what is going on across the whole workforce. Another way to increase workplace democracy is to diversify boards to include stakeholder representatives so that boards are more focussed on employment practices. This should include the appointment of worker directors to the board, which provides a mechanism for workforce scrutiny of board activities and gives the board greater insight into workforce issues.

These measures are the most reliable way for companies to ensure better working lives. Nonetheless, the disclosure of workforce data plays an essential role in this, as it enables stakeholders to hold companies to account. This means that investors and other stakeholders should be pushing companies both to disclose more workforce data and to strengthen worker voice. Ultimately, the aim of improving corporate disclosure is to encourage companies to better serve society: this is in the interests of all stakeholders, and of the companies themselves.