Investor engagement

A new dawn for employee engagement

If you’ve ever commented on the difference between a savvy shop assistant and one who appears not to care, you know that employee engagement matters – hugely. But how do companies make that count? And in the light of the FRC’s new Corporate Governance Code, how do directors make sure it’s on the agenda in the boardroom? Employee engagement has always mattered. Engaged employees are a key component of long-term business success and a key driver of reputational value. Good engagement leads to higher productivity, higher shareholder returns, a reduction in absenteeism, greater operating margin and reputational benefits.

Companies unwilling to authentically engage with their employees forfeit these advantages. And while, in my opinion, most companies do engage with their employees, it has been difficult to understand if the results of that engagement make it into the Boardroom and, furthermore, what the Board does (if anything) with the information.

What’s changed? Secondary legislation requires companies (private as well as public) to include a section 172 statement in their strategic report which describes how their directors have complied with their duty to promote the success of the company for the benefit of its stakeholders whilst having regard to the matters set out in the section:

• the likely consequences of any decision in the long term
• the interests of the company’s employees
• the need to foster the company’s business relationships with suppliers, customers and others
• the impact of the company’s operations on the community and the environment
• the desirability of the company maintaining a reputation for high standards of business conduct
• the need to act fairly as between members of the company.

This is supported by a requirement as part of the directors’ report (or strategic report) to summarise how the directors have engaged with employees, and taken their views into account; and how directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others.

There is considerable overlap with the Financial Reporting Council’s 2018 Corporate Governance Code, which places greater focus on workforce engagement. Provision 5 states that a board must describe how it has engaged with all of the company’s key stakeholders and how it has kept the effectiveness of its engagement mechanisms under review. In addition, for engagement with the workforce, one or a combination of the following methods is most likely to be used – however, the Code does allow a company to develop a different engagement strategy if the board feels it fits better with the company and its stakeholders’ needs:

• a director appointed by the workforce
• a formal workforce advisory panel
• a designated non-executive director.

A new dawn for employee engagement

In many senses, engagement is moving from being an operational matter to a strategic imperative. At Luminous, our stakeholder engagement team works with companies to design and implement effective engagement strategies. When looking at the impending changes, which are effective for years ending on or after 1 January 2019, we recommend the following:

What you need to consider in response to the Code
Directors from the workforce

• How to determine how many representatives there should be.
• How to formulate the process for appointing them.
• Deciding what support they will need to fulfil their duties.
• Determining the arrangements that should be in place for them to communicate with their colleagues.

Workforce advisory council
• What will be the formal remit and status of the council?
• How will the members be selected?
• Will the council engage directly with the Board or via management?
• How frequently should it meet?
• What administrative, financial or other support will it need?

Designated Non-Executive Director (NED)
• What support will the designated NED need to carry out their role?
• Will this NED engage directly with employees without management present?
• Will the NED be expected to report formally to the board on how they have fulfilled their brief?
• How will the designated NED report to employees on how their input has been communicated to, and considered by the board?
• What should the term of their role be?
• What are the implications in terms of time commitment and fees?

Section 172 – what you need to consider

The section 172 duty is consistent with the principle of enlightened shareholder value – recognising that companies are run for the benefit of shareholders, but that the long-term success of a business is dependent on maintaining relationships with stakeholders and considering the external impact of the company’s activities.

The section 172 statement should explain how the board has had regard to the broader matters in their actions, behaviours and decisions.

Based on the GC100 Guidance, here are five points to help your company embed section 172 in its decision making.

• Strategy: reflect the section 172 duty when you set and update your company’s strategy.
• Training: establish and attend training courses on induction to the board, with ongoing updates on the section 172 duty in the context of your wider duties and responsibilities.
• Information: consider, and arrange to receive, the information you need on appointment and going forward to help you carry out your role and satisfy the duty.
• Policies and process: put in place policies and processes appropriate to support your company’s operating strategy and to support its goals in the light of the section 172 duty.
• Engagement: consider what should be the company’s approach to engagement with employees and other stakeholders for your company, whether through board engagement or wider corporate engagement.

Both the revised Code and the focus on section 172 are intended to repair the reputation of UK business in the eyes of the wider public. At Luminous, we look forward to working with clients to implement the revisions in a practical and authentic way.

If you would like to learn more about how you can engage more meaningfully with your employees, please get in touch.
[email protected]

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