How do we assess the value of a company? It’s a question that’s getting increasingly more complex, thanks in no small part to a growing recognition that it is often the more intangible parts of a business – corporate culture, leadership behaviour and employee motivation and wellbeing, to name but three – that drive sustainable longer-term success. The business context in which we operate is clearly shifting, with the revised UK Corporate Governance Code putting more of a focus on traditionally “HR” issues, such as employee engagement and voice.
This presents an opportunity for the investment community to gather data beyond the financial when making an assessment about the future value of a business. But it is an ask that is anything but easy. The CIPD’s recent research on investor perspectives of human capital found an increasing recognition of the importance of human capital information, but very little consensus of which facets of human capital are important in firm valuation.
To find out more about this appetite for change, and as a starting attempt to identify the practical outcomes needed to make change happen, Jericho Chambers convened an initial roundtable, on behalf of Peter Cheese, Chief Executive of the CIPD. The aim was to stimulate a conversation that will lead to a tangible programme of action to get traction from the investment community. Bringing together a wide-range of expert voices from across investment, banking and social justice organisations, the CIPD sought input and guidance. This is a write-up of the conversation held under The Chatham House Rule – which means we can report what was said but not who said it.
Questions addressed during the discussion included:
- What workforce data can investors use to help them make a valuation of a company?
- How can we fight against short-termism in business?
- Do investors really see themselves as ‘stewards’ of a company?
- What workforce and societal measures are true indicators of ‘Good Work’?
- Who exerts the greatest influence? Is this a push or a pull agenda?
The perspective of investors:
There has to be value to an active investor in the information provided. If the information provided doesn’t allow investors to make decisions about which companies are likely to outperform or underperform (over a relevant time period) then it doesn’t have much value. There are two broad groups: passive investors and active investors. The latter can be divided broadly into fundamental and quantitative – although the lines are quite blurred. There are often different teams making investing decisions to those who determine voting at AGMs. An understanding of these different segments and related attitudes is vital.
The investment landscape is changing rapidly. More and more people think that “purpose” is extremely important and over time it is anticipated that the attitude to investing will evolve and change. There is certainly evidence of increasing interest in the fundamentals of firms beyond simple profitability. However, there is an apathy if the information is of little value – they won’t pay attention. Value may arise because investors think it will improve their investment decision making/ returns to clients, or because clients ask them to pay attention for the clients’ own reasons. The investment community are more likely to follow than lead. There is no doubt that the CEO and management team need to demonstrate the tangible benefits of this agenda before the investment community takes notice. The role of the HR function in this is critical.
It’s not currently the job of the investor to run a firm day to day although some are more involved in strategic discussions. Some quantitative investors are renting certain characteristics of shares for a period of time. That’s not really the legal position. Boards are responsible to shareholders and have fiduciary obligations to them.
If you can show a connection between “good work” and increased value evidenced by data then investors will focus on it. It could start a stampede. However, there is always the risk of numbers being gamed once they become a focus of attention of which forms need to be mindful.
Those who are critical of this agenda say the data isn’t there and/ or this doesn’t fit with how investors operate. But truthfully, there is still a lack of audit and quality assurance around data points. In order for any data to make a difference to share price there will have to be some standardisation.
Metrics and Narratives:
What’s measured gets done but where is the measurement in this space?
Gender and CEO ratio reporting are not perfect measures, but they have caught the attention of boards and employees alike. In this case, reputational risk has been a useful driver of corporate behaviour.
‘If you asked colleagues are they biased against women they would say ‘no’ but when we saw the evidence we were able to argue to hire more women’.
It was suggested that from a campaigning point of view ‘Good Work’ would benefit from a similarly eye-catching single metric.
So, what is relevant to measure? The Investment Association has surveyed its members and identified over 70 different KPIs. To focus on consistency, they have whittled this down to four including Total headcount – broken down by the division between full-time and part-time employees, Gender & Diversity; Annual turnover – including both planned and regrettable turnover; Investment – in training, skills, and professional development including the rate of progression and promotion within the business; and Employee Engagement Score. This is a good start. Investors will need to be convinced that these measures are useful to the CEO and board before they take them seriously.
There is also an appetite for better metrics around good quality governance and stewardship. The FRC is developing a new Stewardship Code looking at the value of environmental and social factors for a company. It’s also revising how investors should comply.
The trouble is that the data alone doesn’t tell the real story. Even with Gender Pay Gap reporting there was a lack of good narration to explain the data. We don’t mandate the explanation.
To get real traction you have to show information about employee sentiment – particularly in middle management who everyone agrees are key as their tasks are becoming increasingly difficult. If you are interested in more than just next year’s performance you need to get an understanding of what’s going on with employees in a company. Investors are often clutching at straws to see what they can learn about how an organisation really operates. They are interested in information that changes behaviour at board level. In many ways positive working cultures are seen as a way to attract and retain talent, and it is only useful to investors as a by-product.
Meaningful Work & The Squeezed Middle
The research shows that people who feel happy and well at work are more productive. But how do you measure culture – what external characteristics can you use to measure it? What makes a person believe their job is high quality?
CIPD’s research shows words like meaningfulness, fulfilment, and diversity are key. Creating a sense of localised meaning can be useful. How does my job connect with the bigger picture or impact on another real person?
Employees have a desire to do something worthwhile and meaningful at work but part of the problem is that we’re not honest about how much work doesn’t feel meaningful. These unrealistic expectations are a problem but as an employer, it’s a real challenge to get the work done, in a context of greater job sharing and flexibility, without removing the meaningfulness of a task.
The relationship millennials have with their employers compared to previous generations is changing. Driven by the erosion of incentives and benefits that historically rewarded loyalty and long tenure.
Many employers are surprised to hear that surveyed people in their twenties think they have paid back the costs of their training and recruitment if they stay for only 7 months.
If there are problems in top management there will be issues further down but it’s always down to the quality of leadership. Leadership is essential in setting standards and culture, but the squeezed middle managers are also a good yardstick for how a company is performing. They have the senior leadership team with their grand ambitions above them and the new working generation at the other end who increasingly work from home or more flexibly. They are trying to look after remote teams and fulfil the expectations of their bosses. The task is getting harder and harder. A lot of investors go to websites like GlassDoor to find out what’s really going on, indicating the lack standardised available data.
Do we need to make a move towards standardised “Good Work” reporting?
Key Questions and Next Steps:
What is the role for HR in pushing this data agenda up to their own Boards? What tools and advice will be needed to succeed? Could a Non-Executive Director or Employee Engagement Role be the connecting force (as the latest version of the corporate governance code would suggest)?
The CIPD will continue to convene advisory groups to help build governance and shape further research and guideline development. If you are an HR leader and want to get involved with this conversation please contact email@example.com or if you would like to help shape further research and guideline development please contact firstname.lastname@example.org.