Susannah Haan, the CIPD’s Senior Corporate Governance Adviser, summarises the key changes in the revised code, the implications for boards, and where HR can add value
The need for boards to recognise key workforce issues and the role of HR in managing risk and supporting positive working cultures is given greater emphasis in the recently revised UK Corporate Governance Code and associated guidance.
The CIPD responded to the consultation to inform the new code and highlighted the need for it to place more attention on directors’ understanding of the significance of workforce investment, policies and practices.
Consequently, we were pleased to see a number of changes in the code and the accompanying guidance that recognise that HR, people management and development are critical to effective corporate governance.
Is the desired culture embedded?
One of the positive changes in the revised code is that it now encourages boards to go beyond assessing and monitoring company culture to consider how the desired culture has been embedded. This will require directors to place more attention on assessing the effectiveness of HR and people management policies and practices in supporting the development of positive, trust-based working cultures.
People professionals will need to consider what HR analytics and information they can provide to the board to demonstrate that the desired culture is being role-modelled across the organisation. HR professionals should also be identifying emerging workforce issues that suggest there are people-related risks to employees, as well as to the organisation and its reputation. These could include indications of toxic or inappropriate behaviour among managers or senior staff, high levels of stress-related absence or staff turnover in particular teams or parts of the business. HR will also need to think about public disclosures around culture in the annual report.
Broader focus on equality, diversity and inclusion required
Another key revision in the new code is that it now requires boards to consider equality, diversity and inclusion (EDI) more broadly rather than just as gender and ethnicity. This change will help emphasise to boards that a focus on delivering EDI across the business is central to efforts to prevent ‘group think’, attract and retain key talent and tackle critical skills gaps and shortages. In practice this is about creating working environments where individuals can feel safe, have a sense of belonging and be empowered to progress and achieve their full potential. This will also mean that more employees will feel confident to have a voice and speak out if there is inappropriate behaviour or wrongdoing.
Both of these changes to the code are underpinned by significant revisions to the associated guidance, which covers purpose, strategy, conduct, culture, decision-making and outcomes.
For example, under culture, the guidance highlights five critical areas of HR policies and practice that boards should focus on: recruitment, onboarding, performance management and reward and communication with the workforce. The guide recommends that a key question for boards is how the culture, values and desired behaviours have been reinforced in the organisation’s ‘recruitment, promotion, reward, performance management’ and other policies and practices.
It also suggests a number of key people metrics boards should have data on including diversity and inclusion initiatives and strategy, recruitment, reward and promotion decisions, use of non-disclosure agreements, employee surveys and direct engagement.
The CIPD’s report on The value of people expertise on corporate boards found that most board members need training on EDI issues. Consequently, the changes to the code and guidance are an opportunity for HR to add value and engage with the chair and board members to help raise their knowledge on this issue and why it is so important to an organisation’s success. HR data and analytics can highlight the business case for investing in HR and people management capability to help improve the recruitment and retention of a more diverse workforce.
A recent study by Chapter Zero Brussels emphasises why improving the knowledge of boards on ESG issues is key to making progress on these issues. It found that the companies which were most successful in moving towards Net Zero were the ones which had either upskilled their boards (70%) or changed their board composition (60%) in order to ensure that they had the right skills in place to meet the environmental challenges ahead.
The FRC guidance also asks boards to consider whether the company workforce has the knowledge, skills and tools to support the company’s objectives and manage risks. Investment in the workforce is key to future growth opportunities and the guidance provides a route for HR to engage the board on key metrics which can help demonstrate this.
There are other questions where HR can add value to board debates, including external reporting on social matters, modern slavery and supply chain diligence and aligning remuneration strategy with sustainability.
With the new code, the social aspects of governance have been recognised more fully than previously, which should open up more opportunities to HR for non-executive director routes in the future.
