The corporate governance reform framework that will apply to financial years on or after 1 January 2019 seeks to rebuild confidence in large businesses after an erosion of trust following a number of high profile corporate failures. In what many will see as a significant cultural change, the focus is shifting to highlight employee engagement as central to good corporate governance and the long term prospects of a business. With increased emphasis on reporting and the spotlight on transparency, it is imperative that organisations start preparing for the new rules on employee engagement.
Statement of engagement with employees
So what do companies have to do to demonstrate employee engagement? First, there will be a new reporting requirement for companies with more than 250 employees. These are the same companies that have recently had to get to grips with the reporting obligations on gender pay (click here for our article Mind the Gap – Gender Pay Reporting and Reputational Impact). The new employee engagement reporting does not require statistics but will focus on action, and the report must be included in the directors' or the strategic report. There is no requirement to publish separately on the company or a government website.
The requirement is to produce a statement of the company's engagement with employees and a summary of its effect on the company's principal decisions. In more detail, this entails:
- a statement describing the company's action to:
- provide employees systematically with information of concern to them
- consult employees or their representatives on a regular basis to take account of their views in making decisions likely to affect them
- encourage employees' involvement in the company's performance (such as through employee share schemes), and
- achieve employee awareness of financial and economic factors affecting the company's performance;
- a summary of:
- how the directors have engaged with employees
- how directors have had regard to employee interests and the effect of that regard on the company's principal decisions taken during the financial year.
Clearly, the requirements are much wider than just a box ticking exercise. In order to comply, companies will need to review the arrangements for employee engagement that they currently have and, if not sufficient, consider what action needs to be taken to engage in a meaningful way. The engagement that the business is required to report on involves a two way process – providing information, awareness and encouragement to the workforce on the one hand and actively listening to and taking into account the worker voice on the other.
There is no one size fits all approach but each business should ask itself how it can best engage with its workforce, bearing in mind the structure of the organisation and its culture. Companies can inform and engage employees in a variety of ways, from surveys and online forums to town hall meetings and staff consultation committees. It is not so much the method that is important, but being able to demonstrate that action has been taken and how that has impacted on key decisions.
A new corporate governance code
Worker voice at the top table
For listed companies, the new Corporate Governance Code places considerable emphasis on a more inclusive approach and in particular on the quality of relations with the workforce. While such companies also have to comply with the requirement to produce an engagement statement, there are a number of additional obligations under the new Code in relation to strengthening the voice of employees. These include being asked to adopt one of three methods for engaging with and gathering the views of the workforce (without displacing already established channels of communication and consultation):
- a director appointed from the workforce – such director would sit on the board alongside other directors and would have the same statutory and fiduciary duties;
- a formal workforce advisory panel – the panel can consist of representatives from across the business and some companies may already have a similar set up in the form of a staff consultation committee. This option will require a mechanism for the panel's views to be taken into account by the board;
- a designated non-executive director – again, the director will be a full board member with the same general duties as all other directors, but the non-executive status may lessen the concern for potential conflict and provide a more independent voice.
There is currently no detailed guidance on implementing these options in practice (for a discussion of some of the pros and cons of workers on boards click here but it is perhaps safe to say that most companies are likely to opt for the second or third option. However, it is recognised that the three methods specified are not the only ways of engaging with the workforce and that boards may decide to adopt a combination of methods, or develop other ways of engagement. If the latter, the Code provision will still be considered met if the board can explain why it is not adopting one of the recommended methods, and demonstrate that the alternative approach delivers effective, regular dialogue with the workforce.
Culture, diversity and speaking up
In addition to engaging with workers as part of decision making, the new Code also highlights the importance of culture, and that worker policies and practices are in line with the company's values. This can include, for example, ensuring that values are embedded in human resources policies and practices and that action is taken to address gender pay gaps and other pay discrepancies.
Creating an environment in which individuals are encouraged to speak up and raise concerns is an essential part of an ethical and supportive culture and the Code provides that there should be a means for the workforce, most commonly through an effective whistleblowing policy, to raise concerns in confidence (and anonymously), allowing for independent investigation and follow-up action.
Furthermore, the Code expects companies to promote diversity of gender, social and ethnic backgrounds and cognitive strengths on boards, and the guidance that supplements the Code calls for the development of a more diverse executive pipeline and greater transparency about the make-up of the workforce.
- All companies with more than 250 employees should consider how best to engage with their workforce and to gather their views, bearing in mind the structure of the organisation and its culture. Consideration should also be given to how to record engagement methods and outcomes to be able to report on their influence on decision-making.
- Companies subject to the Corporate Governance Code should also;
- Determine which of the three methods for engagement to use
- Consider how to capture, monitor and assess the company's culture
- Review their whistleblowing policies
- Review existing procedures to promote diversity and consider setting diversity objectives and strategies, or review existing ones, and monitor the impact of diversity initiatives.
It remains to be seen to what extent the corporate governance reform will lead to meaningful change in worker engagement and involvement. The government has indicated that more stringent regulation, including new reporting requirements on workforce statistics, may follow if the corporate governance reforms do not lead to larger companies being more transparent about their workforce structures and practices.