Handling accountability

Proposed
changes to companies’ annual reports and accounts will provide an opportunity
for employers to put staff first and for HR to play a more strategic role

The
proposed plans to revamp the way company accounting and reports are conducted
present a historic opportunity for the HR profession. It will gain a say on
strategy, and an almost unstoppable argument for representation at board level.

This
may sound unlikely judging from the moderately phrased clauses on employee
relations and skills in the new White Paper on modernising company law –
matters that will figure in company reporting for the very first time. But they
come during a stage of upheaval in corporate governance in the wake of the
Enron, WorldCom and other scandals in the US. Being ethical and putting
employees first are now political and corporate imperatives.

"At
long last, company law is beginning to reflect what many have known for years –
that people are an organisation’s real asset," says Linda Holbeche,
director of research at Roffey Park.

"Working
through the implications of these reforms may seem laborious, but the end
result should be that leaders and managers start to take their people
responsibilities as seriously as their financial goals."

The
main proposals are:


a company director will foster relationships with staff as a specific, core duty


For larger companies, there will be a statement in the annual report on
employment, skills and employee relations – the proposed ‘Operating and
Financial Review’.

This
may not seem like a revolution. And if enacted grudgingly, the new reporting
requirements would indeed see personnel executives become slightly more
important box-tickers, responsible for filing a new paragraph in the annual
report, but still sidelined from strategic decisions.

However,
such sentiment underestimates the wider forces in motion that will be felt
irrespective of the law.

Following
Enron and WorldCom, issues such as governance, accountability, human capital,
the worth of a company and the anachronism of conventional accounts, are being
reappraised.

Conventional
checks and systems have not worked. Accounts – which the standard annual report
is based on – simply record fixed assets and transactions; they are not designed
to reveal the worth of companies. Nearly all of a firm’s value, particularly in
services, is bound up in skills and reputation – yet investment analysts are
still relying on guesswork. Shareholders will increasingly insist upon more
reporting of stakeholder relationships, employee skills and future prospects,
even if the law does not.

And
the matter is international. The US Federal Accounting Standards Board has
proposed a requirement on reporting intangible assets, and France has had the
Bilan Social – essentially the same as the proposed Operating and Financial
Review – in the annual report for years.

Concetta
Lanciaux, senior vice-president of luxury goods group LVMH, says: "The
Bilan Social has given us useful information on intellectual capital. It is an
example of good regulation."

Companies
do not even have the excuse that the proposed UK law is onerous or
prescriptive. It will be for firms to decide on the content of the Operating
and Financial Review.

This
was welcomed by human resources directors and the Chartered Institute of
Personnel and Development (CIPD). This is partly because relevant factors will
differ from company to company; but it will also give HR executives the freedom
to opt for pragmatic measures, rather than some of the more intricate
intellectual capital formulae that are on the market.

Bruce
Warman, personnel director at Vauxhall, says: "It is right and appropriate
that there is increased focus on the value of people in an organisation.

"Companies
have always had the opportunity to give a lead. They should use it to gain a
competitive advantage, in the marketplace for recruiting and retaining talented
people. The statement should focus on real issues for real people, not esoteric
concepts that staff and customers do not understand."

Carol
Madeley, HR director at Autoglass, says the proposed law will provide a great
opportunity to remove the generalised platitudes that often make up the people
statement in the annual report – the customary bland sentence about people
being "our greatest asset".

"It
needs to get to another level of detail," she says. "For this piece
of legislation to translate into something that makes a difference, [HR] will
have to be quantitative, producing data that is comparable between businesses."

Most
information that might appear in the statement already exists, she says.
"But it is not at the top table in the way it should be. Labour turnover
is a good example. I used to work in retail, which has huge turnover issues. If
you compared the turnover rates of different companies, you would find very
different levels.

"It
is more complex than saying that lower turnover is better for business, but the
indicator is going to be part of the overall blend."

Wanda
Bridge, a freelance HR consultant and member of Roffey Park’s HR executive
network, agrees that much information is already gathered.

"There
are traditional measures, in terms of staff turnover, stress levels and
sickness levels," she says. "A lot of organisations might measure
that, but they do not translate into what it means to the company in terms of
profit and loss. There is still work to be done."

So
what should be in the statements? Work is already underway. The CIPD has
established a taskforce to look at the measurement of human capital before publication
of the White Paper in July.

"When
we kicked off it did not seem to be a particularly central aspect of our
work," says Duncan Brown, deputy general secretary of the CIPD. "But
that was pre-Enron. It is interesting how the climate has changed."

Holbeche
notes that this is not a discipline in its infancy. There is a wealth of
research demonstrating the links between people management and business
success, and helping practitioners realise this in practice (see left).

"Until
now, there has been no shared view on how to put a real business value on human
capital beyond complex and spurious formulae which few people take
seriously," she says.

Based
on this principle, some indicators can be drawn up. Not all are abstract or
difficult – for example, the outcome of employee suggestion schemes or
contingency plans for key individuals.

These
are the measures that businesses should have been considering at a strategic
level for years, and they are far more tangible than some so-called ‘hard’
business concepts – such as ‘synergistic benefits’, or ‘leveraging process
efficiencies’.

Brown
stresses that the CIPD guidelines on gauging human capital, which are being
drawn up by the taskforce, will not be overly prescriptive.

"There
is no universal formula on measuring human capital," he says. "It is
going to involve a mix of quantitative and qualitative data, and context is
critical. Measures that are relevant to a retailer and those for a financial
services company are going to be different."

The
Operating and Financial Review will be public information, so its drafting
presents a new challenge for HR executives, who are accustomed to writing
reports for internal use alone.

People
looking for jobs or promotions are likely to use this information in
conjunction with lists such as 100 Great Companies to Work For and the like.
They will be searching for clues on company culture, and the statements will
inevitably include qualitative information.

The
data must also encompass all a company’s people, not just the high-fliers, says
Madeley. Autoglass used its employee satisfaction survey to change the way its
glass fitters were rewarded.

"Two
years ago we had to make changes to how we remunerated fitters. One of the key
pieces of data was the staff satisfaction survey," she says.

"We
asked people to buy into the new arrangements. The basic pay was lower, but
there was an opportunity to earn substantially more, and we gave them a van and
addressed other issues they were concerned about."

Since
then, satisfaction levels have gone back up. In the same period, sales and
market share have markedly improved for the company.

In
implementing the law, HR professionals may find themselves educating other
executives that business does not consist of ‘press button X and Y will
happen’. There are an infinite number of variables, there is complexity, there
are some important things that just cannot be measured. Qualitative does not
mean ‘soft’.

Human
resources, indeed, all management, is about the degree of probability.
Autoglass satisfaction survey and new reward system for its fitters probably
helped to boost sales. That is as precise as it gets.                                        

What
should be in the Operating and Financial Review?

Linda
Holbeche, director of research at the Roffey Park Management Institute,
suggests including the following information:


Information on calibre of leadership


Employee attitude survey data and 360 degree feedback


Suggestions from staff that lead to performance improvements, supported by data
on the business benefits


Outcomes of employee suggestion schemes


Level and type of employee turnover


Analysis of key people: their skills, risk of leaving, retention and
contingency plans


Demographics of employee base


Analysis of succession plans, linked with outputs of assessment centres and
graduate recruitment activity


On-going measures of productivity per employee


Data on numbers employed, qualifications, and quantity of staff development
activity

Weblinks

Mori:
http://www.mori.com/digest/2002/c020830.shtml

Rutgers
University: http://www.rci.rutgers.edu/~huselid/

Watson
Wyatt: www.watsonwyatt.com/hci

Gallup:
http://www.gallupjournal.com/GMJarchive/issue1/2001315i.asp

What
the white paper says

The
Modernising Company Law White Paper sets out plans to reform the procedures of
company reporting, much of which remains unaltered since the 19th Century. It
proposes that larger companies should produce an Operating and Financial
Review, summarising intangible assets.

It
states: "The Government agrees that companies should provide more
qualitative and forward-looking reporting … It recognises that companies are
increasingly reliant on intangible assets such as the skills and knowledge of
their employees, their business relationships and their reputations.

"Any
company that fails to do so [provide information of the right quantity and
quality] will risk adverse comparison and questions from shareholders and
others."

A
standards board will monitor the Operating and Financial Review and produce
guidance.

Elaine
Aarons, employment law partner at Eversheds, says: "It is very important
that the HR industry is fully engaged in consulting with the standards board.
It is going to be providing guidelines on the disclosures that are made. It is
important that there is effective communication of the HR issues."

Directors’
duties, which are currently determined by case law, have been codified in the
White Paper. Among other duties, directors will have to "foster
relationships with employees". The overall objectives of the directors are
set broadly, centring on the interests of shareholders, but with specific
reference to other stakeholders.

Aarons
adds: "There appears to be a strengthening of directors’ duties, for
example fostering business relationships – including with employees – as part
of the core description. This is all going to have to be seamless with the
Works Councils legislation."

Further
information

The
White Paper, introduced in July 2002, was based on the findings of a three-year
review, which was reported in July 2001. Consultation on the White Paper ended
in November 2002.

The
category ‘larger companies’, which have to produce an Operating and Financial
Review, is defined as listed firms with a turnover of more than £50m, and
private companies with a turnover of £500m. The Standards Board may review this.

Weblinks

White
Paper: www.dti.gov.uk/companiesbill/part2.pdf

US
proposals: www.fasb.org/project/intangibles.pdf

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