Draft amendments to Strategic Report Guidance TUC comments

Transcription

1 Draft amendments to Strategic Report Guidance TUC comments October 2017

2 Introduction The Trades Union Congress (TUC) is the voice of Britain at work. We represent nearly six million working people in 52 unions across the economy. We campaign for more and better jobs and a better working life for everyone, and we support trade unions to grow and thrive. The TUC welcomes this opportunity to respond to the FRC s consultation on amendments to the Strategic Report Guidance (henceforth Guidance ). Company reports are a vital part of the transparency that should support broader corporate accountability and responsibility. The Strategic Report is a key document in terms of reporting on a company s relationships with its stakeholders, including the workforce. At present, the quality of reporting on non-financial issues, including workforce relationships, is patchy and uneven. There are many key indicators that are rarely or never reported; and too many reports are unbalanced in their approach and do not set out areas of difficulty and challenge. Widespread public and political concern about the employment practices of some companies was a key factor informing the government s decision to consult on reforming corporate governance and its subsequent proposals announced in the summer. In addition, the Taylor Review 1 focussed on the rise in precarious employment practices and put forward recommendations to address this. Proposed changes to requirements on reporting on employment issues are included in both the government s corporate governance proposals and the Taylor Review recommendations. It is vital that reform of this area is considered holistically and that the different recommendations that have been put forward are taken together and reflected as a whole in the various instruments of reform of which the Strategic Report Guidance is one. The implementation of the Taylor Review s recommendations on employment reporting should be integrated within the implementation of the government s corporate governance reform proposals, rather than being treated as a separate reform initiative. It is important to recognise that poor employment practices are a feature of some listed companies, as well as non-listed companies and other organisations in the UK today. This is not to imply that all listed companies are poor employers; there are, of course, examples of excellent employment practices among the UK s listed companies. It does mean, however, that the regulatory framework governing the UK s listed and non-listed companies must reflect the reality of the range of employment relationships that not only exist but are now increasingly mainstream across the private sector. In terms of reporting on employment issues, this means that requirements must be designed to encompass the whole workforce of a company and the full range of employment relationships through which they are connected to it. Furthermore, the requirements must be designed specifically to throw light on the issue of insecurity in 1 Good Work: The Taylor Review of Modern Working Practices, July 2017, 2

3 employment relationships and the extent to which these form a part of a company s business model. In recent years there has been increasing interest from investors and unions in improving standards of corporate reporting on workforce issues. In 2015, the Pensions and Lifetime Savings Association (PLSA) published a report Where Is the workforce in corporate reporting An NAPF discussion paper 2, which argued that investors need more information about the workforce of the companies in which they invest. Following this, the PLSA developed Understanding the worth of the workforce: a stewardship toolkit for pension funds 3. In 2017 the Investment Association published its Long Term Reporting Guidance 4, which includes discussion of a company s approach to human capital management and the link with productivity. ShareAction has brought together a coalition of investors to launch a Workforce Disclosure Initiative 5, which asks companies to provide information on key workforce issues. The indicators included draw on the work of the Committee for Workers Capital (see below). The Committee on Workers Capital (CWC), an international union network on responsible investment, has published Guidelines for the Evaluation of Workers Human Rights and Labour Standards 6, a comprehensive set of key performance indicators (KPIs) for investors to evaluate companies performance on labour issues. This response will set out a number of issues relating to the TUC s particular area of interest and expertise, reporting on workforce issues, before turning to the questions in the consultation document. Reporting on workforce issues Use of the word employee and the impact on scope There is a serious problem relating to the scope of reporting on workforce issues. The relevant legislation and the existing Strategic Report Guidance use the term employees throughout. This reflects the fact that when the Companies Act 2006 was being drafted, and indeed to some extent today, the word employees may be used to mean the workforce generally so in conversation many people would not see a significant difference between referring to an employee, a worker or a member of the workforce. However, in legal terms, 2 The PLSA was at that time called the National Association of Pension Funds or NAPF Workers'%20Human%20Rights%20and%20Labour%20Standards_final_May17(1).pdf 3

4 employee, worker and workforce mean very different things, and in many companies a significant proportion of the workforce do not have employee status in legal terms. Companies can and do use this differentiation to report on those members of their workforce who are employees, while not reporting on those members of their workforce who are not, legally, employees - for example, those employed on short-term or zero hours contracts. The TUC estimates that there may be 1.5 million working people in this position. In companies where a significant proportion of the total workforce are not employees, their reports in some cases present only a partial picture of those people whose work creates the company s outputs and value. The TUC would be happy to discuss specific examples of partial workforce reporting by companies if that would be useful. The rise in insecure and precarious employment relationships throughout the economy has made this an increasing problem. The TUC believes that where companies with a large nonemployee workforce report only on their employees and not the wider workforce, such reports are incomplete and therefore misleading and contravene the spirit, if not the letter, of the relevant legislation. The TUC would welcome amendments to the relevant legislation, but it is vital that other documents that form part of the broader corporate governance framework do not wait for legislative change to incorporate amendments to address this problem as soon as possible. Amending the Strategic Report Guidance to make it clear that companies should include their whole workforce in their reporting and not hide behind the legal terminology to report only on their directly-employed workforce could bring about a significant improvement in practice on this issue. The TUC proposes that the Guidance should address this in two ways. Firstly, the Guidance should itself use words like worker and workforce throughout so that it is not perpetuating the language which has (inadvertently) facilitated the partial reporting of workforce issues. Secondly, the issue should be addressed directly within the Guidance, which should clearly state that reporting should cover the whole of a company s workforce and not only its employees. A full description of a company s employment model must be included in its discussion of its business model Companies are already required to include a description of the company s business model in their Strategic Reports (s414c(8)(b)). This is also a requirement of the Non-Financial Reporting Directive. The importance of companies focussing their Strategic Reports around reporting on their business model was emphasised at the Financial Reporting Council s recent roundtable at which the draft Guidance was discussed. The type of employment model and relationship used by companies is a key element of their business model. It is also an area that has driven public and political concern about corporate employment practice in recent years and has a major impact on the wellbeing of the company s workforce and their experience of work. It is also highly relevant to 4

5 productivity, an area of weakness within UK businesses 7. Reporting by companies on their employment model should therefore comprise a core element of their business model reporting. It is also extremely relevant to the requirements set out in the Companies Act that companies should report on their employees (s414c(7)(b)(ii)) and that they should report on how they have performed their duty under s172 (duty to promote the success of the company) (s414c(1)). The Taylor Review recommended that the government should require companies beyond a certain size to make public their model of employment and use of agency services beyond a certain threshold. In addition, it recommended that companies be required to report on how many requests they have received (and the number agreed to) from zero hours contracts workers for fixed hours after a certain period; and how many requests they have received (and number agreed) from agency workers for permanent positions with a hirer after a certain period. Ensuring that the Guidance will not need to be amended further in the light of the Taylor Review strengthens further the argument that the Guidance should encourage companies to report on their employment model and the type/s of employment relationship they use in their Strategic Reports. The need for companies to report regularly and clearly on their employment model and type/s of employment relationships has been made more urgent by changes in the labour market. Information about the increased use of employment intermediaries and the growth of insecure employment relationships is set out below. The use of employment intermediaries and the type of employment relationship used by companies are integral to their business model and should be included in all Strategic Reports. Employment intermediaries In recent years, the structure of the UK labour market has changed. Employment relationships have become increasingly fragmented, with the emergence of long and complex supply chains for the provision of labour. These changes are manifested in different ways, including: The use of agencies (employment businesses) to supply workers. Recent research by the Resolution Foundation found that agency worker assignments are increasingly permanent in nature, leading to a displacement of stable, direct employment 8. The expanded role of umbrella companies. While in the past such companies primarily performed payroll functions or business and organisation, they are increasingly performing the role of intermediary employers. The growing use of personal service companies, which is spreading beyond high-skill professional workers, such as IT specialists, freelancers and management consultants, to 7 See The Gig is Up Trade unions tackling insecure work, TUC, June Lindsay Judge & Daniel Tomlinson, Secret agents Agency workers in the new world of work, Resolution Foundation December

6 become increasingly prevalent in other sectors, including construction and the public sector. These developments mean that there is increased fragmentation within employment relationships, with intermediary businesses used to link companies to their workforce. As well as potentially reducing tax liabilities, these structures can allow companies to outsource their responsibility for the standards of employment practice that are used in the creation of their products or services. This must be addressed in company reporting by requiring companies to report on their use of employment intermediaries. In addition, it is essential that companies are required to report on their whole workforce, including those who are supplied through an intermediary employer. Insecure employment relationships As well as an increase in the use of employment intermediaries, there has been a marked increase in the use of insecure employment relationships. This is in part linked to the use of employment intermediaries, but many companies that do not use intermediaries are nonetheless increasingly using insecure employment relationships. There are over three million people experiencing insecurity at work, and this number has risen sharply (by around 27 per cent) in the last five years. This includes those on zerohours and short-hours contracts, in agency and other insecure temporary work, and in low-paid self-employment. Insecurity is concentrated among those groups that already face labour market disadvantage: women, black and minority ethnic workers and those in poorer regions of the UK are all more likely to face insecurity at work. The rise in insecurity is driven by particular sectors. Those working in hospitality (such as waiters in restaurants and pubs) make up one-fifth of the total increase, with the number in insecure work rising by 146,000 (+128 per cent) between 2011 and The next largest increase was in residential care, which accounts for one-tenth of the increase in precarious working: the number of care home workers facing insecurity rose by 133 per cent over the same period. The sharp rise in insecurity in the UK is out of step with the rest of Europe. The UK had the third-largest increase in the number of temporary workers for EU countries from 2008 to 2015 (albeit from a lower base of temporary work). And the UK had the largest increase in the number of self-employed workers for EU countries from 2008 to Insecurity at work often means insecurity about working hours, short-notice cancellation of shifts and worries about pay. But it also comes with a significant loss of rights; we estimate that 1.5 million workers are employed, but risk missing out on key rights including maternity, the right to return to paid work after maternity leave, and rights to union representation in the workplace. The lower pay experienced by those in insecure work not only affects their living standards but also has a significant impact on public finances. Research for the TUC 6

7 estimates that the rise in insecure work in the last decade has led to a net loss of revenue of over 5bn a year 9. The experience of insecure employment can have a profound effect on people s lives. The quotes below are from people working on insecure contracts; their words illustrate why companies that use these forms of employment practices should report on them as part of reporting on how they have carried out their duty to promote the success of the company under s172. Changeable income makes paying bills and budgeting hard. Can t afford to take holidays or be off sick as it means a lower wage that month. A woman aged 26 30, working in a supermarket on a zero hours contract The work starts early and it s hard to find childcare at short notice. I worry that my children won t get to school and have their breakfast. I feel as though I am neglecting my children and not parenting them well enough. A man aged 30 49, temping in warehouses through an agency Often, I get shifts last minute, which means often having to cancel social plans. When these last minute shifts come through I don t have to accept them but when I don t accept them I get shouted at and threatened with being fired. A woman aged 20 25, working in a restaurant on a zero hours contract Key elements of employment reporting As already noted, there are explicit requirements for companies to include information on their employees, on how they have fulfilled their duty under s172 and to report on their business model in their Strategic Reports. All of these require clear and comprehensive reporting on the workforce. While innovation can be beneficial and companies should be encouraged to report in ways that are most relevant for their particular experiences, variation cannot be at the expense of minimum quality standards. At present, there are no widely accepted standards for reporting on employment issues and the current Strategic Report Guidance does not even suggest key areas that should be covered in employment reporting. The TUC believes that this should change and that the Guidance should explicitly encourage companies to include key elements of workforce reporting in their Strategic Report disclosures. The TUC is in the process of developing recommendations on workforce reporting and we will share our proposals with the FRC as soon as they are available. However, there are three areas where reporting is currently extremely patchy or non- 9 The Gig is Up Trade unions tackling insecure work, TUC, June

8 existent that we believe are integral to a company s business strategy and should be included in all Strategic Reports: Workforce composition and structure as well as more accepted diversity reporting, this should include the type of contract through which the workforce is connected to the company and the use of employment intermediaries Workforce voice and representation Rates of staff turnover, absence and sickness In addition, there are other areas that should be included within company reports, elements of which are likely to be relevant to the Strategic Report, including: Pay and progression Training and development Health and safety The TUC believes that it is essential that greater guidance is given to companies to improve the quality of their reporting on employment issues. We propose that the Strategic Report Guidance should guide companies on the broad areas that their employment reporting should cover. Some standardisation of key performance indicators (KPIs) would be useful to support best practice and facilitate comparability of information over time and between companies. This does not have to be at the expense of enabling innovation and development; best practice guidance on KPIs can develop over time and be informed by the ongoing experiences of companies and stakeholders. While the Strategic Report Guidance may not be the place to go into detailed discussion of KPIs on employment issues and how they should be calculated, it should direct companies to further guidance on this. This could either be included elsewhere on the FRC s own website or provided by other organisations. For example, the TUC has published The Great Jobs Agenda, which gives guidance to employers and others on what constitutes good work 10, and organisations such as ACAS have produced extensive guidance on employment issues. Guidance on workplace KPIs could be given in a live document or one kept under review, in the hope that as reporting on employment issues improves, experience and best practice in using KPIs will also develop. Consultation questions Question 1 Do you agree with the approach for updating the Guidance for the changes arising from the implementation of the non-financial reporting Directive? The TUC strongly supports the aim of making the Guidance as coherent and widely applicable as possible, notwithstanding the slightly different requirements that apply to 10 The Great Jobs Agenda, TUC, June

9 difference categories of companies. We believe that in the main the draft Guidance has achieved this. There is one area, however, where we would suggest a slightly different approach. Paragraphs 7.41 and 7.42 in the draft Guidance tell directors not to locate information on matters covered in 7.32 (relating to s172 of the Companies Act) that is required for compliance but not for materiality reasons in the Strategic Report. We believe that reportwriters should have greater discretion over this; there may be a case for including some additional information in the Strategic Report that is not strictly required for materiality reasons on the grounds of coherence. Report writers should be able to do this without feeling that they are acting against the Guidance. Questions 2 and 3 Do you support the enhancements that have been made to Sections 4 and 7 of the Guidance to strengthen this link? Do you have any suggestions for further improvements in this area? The TUC broadly supports the amendments that have made to the Guidance to strengthen the link between the purpose of the Strategic Report - that is to report on how directors have fulfilled their duty under s172 - and the content of reports. However, we do have comments on the draft text. The comments on reporting on the workforce set out at the beginning of this response are relevant to this and reference is made there to s172 and directors duty to report how they have fulfilled it. We have some proposals for some small textual amendments to section 4: Paragraph 4.2: add and practice after its culture. Paragraph 4.5: add or experienced after a highly trained and before workforce. In paragraph 4.7, the final sentence is not clear talking about matters being applied as a checklist is confusing when the previous sentence says that information additional to that prescribed in the Act may be required. Our specific comments on section 7 are included in response to questions 6 and 7 below. Question 4 Do you agree with the draft amendments to Section 5? We believe that section 5 should clearly refer to stakeholder relationships and specifically workforce relationships as a source of value for companies. This alters the argument about the materiality of stakeholder relationships as set out in paragraph 5.4. In addition to information being assessed as material because it is of interest to stakeholders, information on stakeholder relationships is also material because these relationships make an important contribution to company success. They may also be a source of risk. The point about stakeholder relationships as a source of value is clearly set out in section 7, but should also be included in the discussion of materiality. It could be useful to make the link between the business model and key stakeholder relationships to illustrate this. 9

10 Paragraph 5.9: The TUC strongly disagrees that the Strategic Report of a parent company should only include those matters that are material in the context of the consolidated group. This can have the effect of reducing the materiality threshold for large companies in relation to small ones with regard to an identical issue, simply because the larger scale of the company group changes the impact of the issue on the parent company. Question 5 Do you have any suggestions on how the Guidance could encourage better linking of information in practice, or common types of disclosures that would benefit from being linked? Please see our comments above about reporting on workforce issues as part of reporting on the business model. Question 6 Do you agree with how the sources of value have been articulated in the draft amendments to the sections on strategy and business model in Section 7? Question 7 Do you consider that disclosures on how value is generated would be helpful? We strongly support the objective of encouraging companies to report on sources of value and support the amendments made to section 7 that aim to achieve this. We do have some comments on the draft text, however, and these are set out below. In addition, the arguments set out above on reporting on workforce issues are most relevant to this section. In particular, guidance to companies to report on their employment model as an integral part of their business model should be reflected within this section. Our specific comments on the draft text for section 7 are below. Paragraph 7.1: a company s workforce is not part of its business environment. This makes it sound more like a background factor rather than a key source of business value and risk. We would propose that business relationships should be added to Strategic management. After business model the words including their employment model should be added. Paragraph 7.2: add in all cases between required and by law. Paragraph 7.12: we are not clear of the value expected from encouraging companies to report on what makes them different from their peers. Paragraph 7.14: it would be useful to include an example of a company generating longterm value through good workforce management and committed employment relationships. Paragraph : the TUC strongly supports the inclusion of this text as a valuable addition to the Guidance. We would suggest though placing it earlier in the text, before the section on trends and factors. Paragraph 7.21: add including in stakeholder relationships to after investments in the box. 10

11 Paragraph 7.49: reference to KPIs on employment issues should be made under the section on KPIs as outlined above. Question 8 Do you consider that the draft amendments relating to reporting of non-financial information give sufficient yet proportionate prominence to the broader matters that may impact performance over the longer term? Please see our comments on reporting on workforce issues at the beginning of this response. Question 9 Are there any other specific areas of the Guidance that would benefit from improvement? Please see the earlier comments on reporting on workforce issues. 11