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FRC disappointed by ‘box-ticking’ on employee engagement reporting

Caroline O'Keeffe | 26th November 2020

Are you guilty of ignoring the Financial Reporting Council? Many, many are…

Findings of the new FRC report on adherence to corporate governance code outlines expectations for how companies must improve!

The Financial Reporting Council (FRC) has released a new report on compliance with the revised UK Corporate Governance Code, which is designed to ensure companies report on employee engagement and workplace culture in a meaningful way. It stresses the disappointment of the FRC that too many companies continue to treat the Code as a box-ticking exercise, providing formulaic reporting which doesn’t provide meaningful insight.

The report also highlights how the Covid-19 pandemic has forced many companies to reconsider their purpose, strategy and relationships with their stakeholders. It concludes that companies that were better aligned with expectations of the Code were more equipped to face these challenges and that those who demonstrated a healthier corporate culture and good employee engagement were more resilient. 

Why was the UK Corporate Governance Code revised? 

The Code was revised to emphasise the wider benefits of good governance for the economy and society. It demands that companies establish a purpose which is aligned with its culture and strategy, and forge strong relationships with key stakeholders including employees. Company reports should communicate high-quality information about the way in which the company then delivers against this purpose and strategy. 

The Code states that the board must set the tone from the top and drive culture and change aligned with purpose, values and strategy.

“Company culture supports the success of the strategy, and if a board embeds a culture that is supported by the employees, then companies should have a motivated and high performing workforce which delivers the outcomes necessary for long term success.”

How well have companies complied? 

“Whilst we have found examples of good reporting, overall, we are disappointed with the response to the new Code.” 

Although some companies have embraced the opportunities the revised Code offers, the FRC found that this was not consistent across the board. For example, many companies stated the importance of diversity at board level and in the succession pipeline but offered little explanation to set out what they are doing to deliver that. It noted that better reporting was observed when companies made a clear link between the actions to improve culture with associated KPIs.

The FRC is concerned that:

  • Some companies continue to rely on “process rather than substance”. They highlight the need to demonstrate how stakeholder feedback (including employees) is considered at board level, and how that then affects decision-making
  • Many companies continue to set out a purpose that is “more of a marketing slogan”. They highlight that many companies are still considering how to define purpose and embed culture throughout the organisation, and that “work is required in terms of monitoring culture, with only a minority of companies setting out in detail how they plan to assess their culture”

What are the FRC’s expectations on how companies must improve? 

The review has allowed the FRC to set out their expectations for improvement. They advise companies:

  1. Have a well-defined purpose and clearly show their progress towards achieving it
  2. Provide clear and meaningful explanations of how they achieve good governance standards
  3. Discuss the issues raised and feedback received during engagement with shareholders and employees
  4. Clearly show the impact of this engagement with stakeholders, including employees, on decision-making, strategy and long-term success
  5. Increase focus on the assessment and monitoring of culture, with particular consideration to the methodology and metrics used
  6. Demonstrate commitment to diversity and inclusion through actions, such as improved succession planning and recruitment from diverse talent pools
  7. Clearly show the impact of engagement with shareholders on remuneration policy and outcomes 
  8. Clearly show the impact of the engagement with employees in relation to executive remuneration policy

What are the recommendations for employee engagement and culture reporting? 

The FRC concluded that although reporting on culture has improved compared to early adoption reporting last year, there is still more work to do on monitoring and assessing company culture. Within their sample, 65% of companies reported or alluded to the use of an employee survey (either in isolation or in combination with other indicators) as a way of monitoring culture, and 20% did not report any such monitoring. Too many companies relied on reporting that they were just a ‘great place to work’, and few looked beyond the headlines to try and better understand any negative comments or poorer scores.

The FRC is clear that using an annual employee survey is often not sufficient by itself to comply with the code. They expect companies to fully explain why their method of employee engagement is effective.

They advise: 

  1. Follow-up via more regular surveys is often necessary since an annual survey in isolation can only offer insight at one point in time and “it is not sufficient on its own as an indicator of workforce views”
  2. Using just a generic annual engagement survey can make it difficult to fully understand what issues underpin employees responses and that more information can be gleaned from targeted surveys e.g. culture surveys
  3. Companies take a more rigorous approach to culture and set up effective ways of monitoring and assessing both the culture and its alignment with purpose, values and strategy, including setting out any actions taken in this area. They highlight the importance of a ‘culture dashboard’ which the board considers on a regular basis and strengthens employee voice in the boardroom
  4. Leaders must always set out their plans to deal with concerns raised by employees
  5. There is often pressure on employees to complete surveys, so they should be allowed complete anonymity in sharing their views to deliver meaningful and regular feedback

How can you improve your culture and employee engagement strategy? 

Speak to us to understand how The Happiness Index can help you assess and measure your culture and create an environment of trust where employees’ voice is central

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