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FRC reviews new workforce engagement requirements: good work, but room for improvement

4 February 2020: Elizabeth Richards, Head of Corporate Governance at ICAEW, unpicks the findings from the FRC’s annual review of the Corporate Governance Code. Notably, the review shows that, while progress is being made with new workforce engagement reporting requirements, there is a risk that lessons from workforce engagement won’t reach boardrooms.

The review looked at the quality of reporting on the current code. The FRC also commented on reporting by “early adopters” of the new corporate governance code despite the fact that the new code did not come into effect until 1 January 2019 and so companies won’t formally report their compliance until this year’s annual reports.

Inevitably, early adopters often chose to discuss workforce engagement in their reports because this was one of the main changes in the new code.

The new code requires boards to understand the views of the company’s key stakeholders (including the workforce). Annual reports must describe how stakeholders’ interests and the matters set out in section 172 of the Companies Act (2006) have been considered in board discussions and decision-making.

The new code allows companies to choose between: a director appointed from the workforce, a formal workforce advisory panel, or a designated non-executive director. Alternative arrangements are allowed as long as they are effective. The review found that designating a NED is the most popular option.

Companies commonly reported on their staff surveys, employee AGMs, employees’ ad hoc attendance at board meetings, directors’ site visits and staff elections of colleagues to key engagement roles.

Although this may seem like a reasonable start, the FRC have made it clear that it is insufficient. The FRC isn’t convinced that companies have considered workforce engagement enough. For example, how will there be two-way dialogue between the workforce and the board?

Expectations in this area have also grown because of new reporting requirements. Reports on stakeholder engagement have been added to strategic reports. BEIS have suggested that companies will probably want to include information on some or all of the following:

  • directors’ considerations of factors and stakeholders relevant for complying with section 172(1)(a) to (f) of the Companies Act (2006) and how directors have formed that opinion. Employees are covered in section 172(1)(b), and companies may struggle to describe their employees as irrelevant;
  • the main methods the directors have used to engage with stakeholders (including employees) and understand the issues to which they must have regard; and
  • information on the effect of those issues on company’s decisions and strategies during the financial year.

Employee engagement has also been added to directors’ reports. This new report will detail:

  • how directors have engaged with employees;
  • how they have had regard to employee interests; and
  • how employee interests have affected principle decision-making.

Employees aren’t the only ones who are likely to take an interest in these new reports. Another recent report from the FRC’s Reporting Lab describes investors’ high expectations.

They want boards to regard the workforce as an important strategic asset.

The importance of workforce engagement is clear, and ICAEW provides further guidance and reassurance in our report: how employee directors add value.

We explain the significant benefits of employee directors and how perceived problems can be kept in perspective. We also suggest that directors ask themselves a basic question: is this a company I’d like to work for?

Watch a video of David Styles, Director of Corporate Governance at the FRC, discussing highlights of the annual review of the UK Corporate Governance Code.