Employee welfare: practice what you preach before it is too late

Employees are often told how much they are valued, but this view does not usually come across in the annual report. Will Rowlands-Rees argues that IROs should address this issue urgently.

How often has the story of ‘employee as the most important asset’ been told in internal staff meetings, only to be overshadowed by a curtailment of R&D, cutting back of salaries or reduction in resources? Despite many companies’ operating profits running in excess of 20% and 30%, I would posit that many employees experience just such a contradiction in corporate policy and ethos. This presents the fundamental challenge of balancing managing stakeholders (e.g. shareholders, employees, customers, suppliers – everyone affected by the company’s actions) and just shareholders.

At its most basic level, the key to corporate success lies in optimal day-to-day functioning of the company, especially in an environment of accelerated change. This happens first with properly-valued, motivated and sufficiently prepared employees, rather than shareholders, whose intrinsic primary focus must mainly fall in comparative financial metrics.

These shareholders are managing against financial goals, looking for returns over a time period, whether in dividends, share price appreciation, or both. Yet they’re typically managing upwards of 300 companies in their portfolios or market, so it is very difficult for them to get involved or invested in anything other than comparative financial metrics. And while there is much literature that can be googled that debunks employees as being the most important asset (rather than say their empowerment, or investment in them as leaders/managers/individuals) the simple fact remains that with all the technology in the world, and investment in AI, you still need someone to give the instructions, set the direction, manage and deliver results.

Hoping that demotivated, poorly equipped employees will manage in an environment of accelerating change and still enable you to succeed is like buying a ticket and expecting to win the lottery. It could happen, but probably won’t.

Engagement and retention
So if people and investing in them, and enabling them, are such key ingredients for success, are they getting the right focus both from companies to investors, and back the other way from investors? The short answer, is no. Because if they were, the actions and narrative would form a critical part of a company’s investor communication, particularly the annual report.

Doing a search of the latest annual filings from UK listed companies, there were only 43 mentions in annual reports of‘employee engagement’, ‘employee retention’, ‘staff engagement’ or ‘staff retention’ in the last 12 months. Even assuming that there are no duplication in results and that these terms talk to strategy rather than a boiler plate statement about how employee retention is important, this is less than 2% of UK listed companies. US companies are not taking this much more seriously, with 503 mentions on 10Ks over the same time period – only ~13% of companies are talking to this, still not setting the world alight.
Let that sink in for just a moment. Less than 2% of public listed companies in the UK care enough about their greatest asset, and how they are investing in it and nurturing it, to make it a keynote feature of their business strategy in their most important company marketing and update tool.

Even worse, there is a plethora of literature that says millennial employees want to be invested in. If you assume the annual report is one way people learn about what you really stand for, and then might be looked at before applying to your company, if you’re just talking numbers, you have a problem attracting the future wave of employees. Because no matter what you put on your HR or recruiting website about people being key, if it’s not in your public report that you communicate to shareholders, it clearly isn’t as important as you say.

Creating change
Doing something about this is not easy, and responsibility lies on all of us. I would suggest there are three ways to create change:

As IR professionals, start talking actively in every meeting with your shareholders about stakeholders. Educate them about what you are doing across your stakeholder base, and why this is important. Lead and educate them.
Make your actions a key tenet of your annual report, outlining the steps you are taking to invest in and elevate your stakeholder community. Practice what you preach (because let’s hope this is a preach, not practice, issue).
As investors, demand to know how the company is enabling and empowering their stakeholders and employees in particular. Start tracking and benchmarking companies, and demand updates. If a company is managing just to financials, how are they creating the necessary space to imagine and execute the future?

While everyone is caught up with ESG, it’s essential to remember that at its core, ESG is a proxy for good and thoughtful strategy. Stakeholder management and metrics is going to be the next reporting frontier. You can either question the data principles laid out above, or front run the problem and lead. Your call.

Will Rowlands-Rees is managing director, II Research, Institutional Investor.

Published 18 July, 2019