The Mishcon Academy Digital Sessions
Conversations on the legal topics affecting businesses and individuals today
Åsa Waring
In this episode, how does corporate governance link with employee engagement and diversity? How have companies responded in practice and has Covid changed the landscape? Hello and welcome to the Mishcon Academy Digital Sessions podcast. I’m Åsa Waring, I’m a Legal Director specialising in Employment Law and I’m Head of Employment Policy and Engagement. I’m here with my colleague Kate Higgins, a Legal Director in the Corporate Department and a corporate governance practice lead at Mishcon. Kate, we have been following the development of new governance principles and standards, particularly around employee engagement. Can you explain why this is so high on the agenda and how it fits into the wider sound corporate governance practices?
Kate Higgins
Yeah, I mean I think there’s been a paradigm shift in recent years in the role of companies in society. There’s traditionally been perhaps a slightly short-termist view of the way companies behave, maximising profits to shareholders in the short-term and there is a lot of pressure globally now to be taking a longer-term sustainability view and for companies to act more responsibly. So, yes I think there’s been a paradigm shift in recent years in the way that companies are viewed and the model has moved pretty much from a short-term capitalist return and maximise profits to shareholders model to a stakeholder model and expecting companies to behave more responsibly and to achieve sustainability in the longer-term. And there’s a recognition that in order to do that they should engage with their stakeholders more closely. Take for example, employees, which is what we’re talking about here today. If you place employees at the heart of what you do, if a business has a sound purpose and the employees are engaged and aligned with that purpose and culture in the organisation, you’re going to achieve better results and the shareholders want to know that that’s happening, particularly in the quoted company markets but more widely and are holding companies to account increasingly on principles of ESG.
Åsa Waring
What’s ESG?
Kate Higgins
Sorry, ESG is short for Environmental, Social and Governance. So, it’s really holding companies to account on their governance model, including their employee engagement model, and looking at the role they perform in society under the ‘S’ and of course, employees and their welfare sits very firmly with the S. So, that’s the sort of global movement. In the UK we’ve had a number of corporate collapses and instances of really quite shocking behaviour on behalf of a couple of companies that has thrown their need to look after the workforce into the spotlight and also when companies collapse, pension schemes and pension holders being out of pocket. So, that resulted a couple of years ago in three new codes being introduced, new corporate governance codes. One for quoted companies, the gold standard, UK corporate governance code. One for AIM companies, the QCA code and one for private companies. For the first time we have a corporate governance model for private companies which is fantastic. So then you add to that some reporting. There’s lots of reporting on directors’ duties but in particular on employee engagement. There are new reporting requirements and they differ depending on the size of the company gut if you’ve got 250 or more employees then you’re going to have to report, or the Board will have to report on how they’ve taken into account in their decision-making in the year, employee needs and engagement. At then at the other end of the scale you have the corporate governance code requirements to report on the models of employee engagement which they have.
Åsa Waring
And can you explain what those models are?
Kate Higgins
So, one highly trumpeted model was to appoint an employee as a director on the main Board of Directors. So, that’s the first. The second is to have an advisory panel comprised of representatives from the workforce and the third is to have a non-executive director who would not be an employee who would be designated as responsible for looking after employee engagement. I know also you’re perhaps closer to the practice than I am so… and we’ve been together looking at some studies to see how things have moved and what people are doing in practice. So perhaps you could explain what we’ve learned?
Åsa Waring
Absolutely. I think what we have seen from the stats that are out so far and because of course this is a new code and we’re still seeing some of the reports coming through but so far, overwhelmingly, it’s been the designated NED that has been the method of choice for a lot of the companies. And what they have done, so they have appointed somebody with the interest of the workforce at heart to report to the Board, be on the Board and report to the feedback from employees to the Board. So, it’s been very much, I think so far, a listening exercise and making sure that those voices are heard at the top level.
Kate Higgins
So, they stop short of an employee director?
Åsa Waring
Absolutely. This is an ordinary NED with this designated responsibility, not an employee. So, that has been what they seem to have used, sometimes together with other arrangements. Alternative arrangements feature also in these reports. They can vary, they can be very simple Town Hall newsletters, surveys, that sort of thing often combined with other things or focus groups for example. It hasn’t been clear exactly what companies are using as their alternatives. This would obviously be quite interesting and important to see because they also have to report on the impact and how that is helping bring the employee voice to the Board, so, that is something that we’ll be looking at seeing more in the future. Not surprisingly, the worker onboard option is the least popular. This, I think, was fully expected, it requires quite a big cultural shift to get that in place. It is still quite an alien concept in this country unlike most of the European countries but there are signs that this is changing which is interesting to see. First Group, for example, is a well-known example of a large PLC that have had a board director from the workforce on the Board for many years now and more recently at Capita has appointed two employees to sit as NED’s on their board in response to the new code. And what the benefits that have been highlighted as part of this, is that it shows that the employees’ views are central to decision making. So, that’s, that’s one positive and another is that they say it improves quality of decision making by making different perspectives count at Board level. And this feeds in to this different form of diversity, I guess. It’s one way of having a diverse Board which leads us quite neatly into the topic of diversity on Boards which is hugely important as well for sound corporate governance. Kate, how does that framework tackle questions of diversity?
Kate Higgins
Yeah I mean, I guess there’s two elements. There’s the codes and what they say and then there’s investors’ expectations which is where ESG standards come into play. I mean taking the codes first, the gold standard, the UK corporate governance code has quite a lot to say on diversity and obviously there’s no single definition of diversity but in the code it’s fairly wide, it covers gender, social and ethnic backgrounds and cognitive and personal strengths which I guess would be where employee engagement comes in. One of the principal tenants of the code is that Boards should be diverse in order to be effective in what they do and this builds on studies out there that have shown that increased diversity reduces group think, i.e. the concept that people just follow each other and don’t challenge each other and this effectiveness of the Boards, says the code, should be evaluated annually and at least every three years by an external agency. So, that’s what happens at Board level and then the Board would often delegate to a nomination committee and they’re given the role under the code of securing a diverse pipeline, reporting on a diversity and inclusion policy of the wider workforce as well as the Board and on gender balance in particular. So, it doesn’t go into the more practical steps and you know, you and I as we were discussing this the other day were saying you know, it’s such a huge subject how you engage and actually change the culture. There are specialists in the field but usually there’ll be someone within the organisation who is responsible for encouraging and promoting diversity across the organisation. They will usually implement some sort of mentoring and other types of training such as unconscious bias so, that’s the code and to a certain extent the practical application. Then you’ve got the holding to account by investors and ESG and this is where because the rating agencies love metrics and there have been a number of reports that have recommended various targets such as Hampton Alexander for gender diversity and Parker for ethnic diversity, ESG encourages reporting if you have targets and at quoted company level we’ve seen pressure from investor bodies such as IVIS who were naming and shaming companies who weren’t on track to meet the Hampton Alexander targets by red and amber topping as it’s called. But then you have investors in private companies such as private equity houses who also expect to see progress on these issues. I’ve probably thrown in some concepts there such as Hampton Alexander and Parker without explaining them in more detail. I know this is an area you know a lot about so would you be able to explain how that’s come about?
Åsa Waring
Absolutely. So, Hampton Alexander is a review that has been going on now for quite a few years to track progress against targets for gender diversity on Boards as well as looking at the pipeline for Boards and the target that they have set is one third women on Boards and the good news is that there has been real progress on Board gender diversity.
Kate Higgins
That was by 2020. So, this year.
Åsa Waring
2020, absolutely. So, this is the key year where companies will want to show that they have achieved that target. So, it hasn’t been reported yet this year, it comes out in November so, the latest one is from last year in November but it was looking on track at that point which is positive for the Board. What we have seen however, is that the largest numbers is at the non-executive as opposed to the executive. Which, longer-term, means that there is less coming through for the real decision making body and the same with pipeline unfortunately, not quite there on pipeline yet. So, it remains to be seen.
Kate Higgins
Right okay and this is because we pulled a few of our own statistics from what we’ve seen in company AGM’s before the summer, although the season hasn’t quite finished.
Åsa Waring
Yeah. We have looked at some other data and it seems consistent with that to date. So, progress, absolutely and good news but not perhaps completely there yet and of course it remains to be seen whether the Covid crisis has had an impact on this as well. The Parker review is looking at diversity on Boards with ethnic minority board directors and the target was set in 2017 that by next year it should be one director from an ethnic minority background on each of the Boards of the FTSE 100 companies.
Kate Higgins
So one by ‘21.
Åsa Waring
One by ’21. Exactly and at the beginning of this year there was still a long way to go unfortunately. There was slower progress than had been hoped. So, disappointingly it isn’t currently on track to meet the target for next year. This is also based on self-reporting to some extent, so there is a chance that it may actually be a little worse than that and more recent data that we have looked at suggests a similar trend. It is possible that with recent events and Black Lives Matter movement that there will be an increased focus on getting this right now and it really is hoped that this may speed up that progress. It is, of course, also true to say that the Covid Pandemic and its impact on businesses and society has thrown into sharp focus the need for good governance and close attention will no doubt be paid to how Boards have approached the crisis. So, employee engagement to come back to that plays a crucial part in navigating the crisis and I think there certainly appears to have been an increased willingness by Boards to listen to the employee voice and actually by employees to make their voices heard. So, it would be really, really great to see that trend continuing into the future and also for the reporting regime itself to move beyond that box-ticking exercise and into more meaningful action. That’s engagement. Diversity however, I’m not sure there has been such a positive effect but Kate, what do you think?
Kate Higgins
I mean, I agree with you on diversity there’s really a long way to go. Has the crisis had an impact? Yes, I mean I think there… it probably has been taken off the agenda slightly as Boards have had to respond to the immediate crisis and the results of the Pandemic but you are right the Black Lives Matter has had a huge impact socially and really, I don’t think, can be ignored especially again, I keep saying the same words, ESG that will be part of it, part of the ‘S’ in ESG and Boards are faced with needing to transform their business models and one of the things we understand from all the surveys about diversity is that you’re more likely to be able to pivot to a sound business model with the right kind of engagement and the right diversity on the Board. So, I think shareholders will be pressurising and I think Boards should be looking around and checking that they’ve got the right people on their team.
Åsa Waring
Thank you. And that will bring this podcast to an end. Thank you for joining me and Kate for this Mishcon Academy Digital Sessions podcast. In the next episode, our colleagues Nina O’Sullivan and Rob Murray will be discussing what businesses need to be doing now to prepare for Brexit.
The Digital Sessions are a series of online events, videos and podcasts all available at Mishcon.com and if you have any questions you would like answered or suggestions of what you would like us to cover, do let us know at digitalsessions@mishcon.com. Until next time, take care.