The recommendations are:
- HCM reports should have a strategic focus, be balanced and objective, following a process that is susceptible to review by auditors and provide information that enables comparison over time;
- directors of bodies producing operating and financial reviews (OFRs) should either include information on HCM, or explain why it is not material to an understanding of performance;
- the standards board (to be set up under the impending OFR legislation) should invite stakeholders to develop guidelines on key indicators and definitions, possibly through a standing sub-group on HCM reporting;
- the government should consult with stakeholders on how to disseminate best practice on HCM and HCM reporting; and
- the standards board should monitor the extent of HCM reporting in OFRs, reporting to the industry secretary within two years.
So on the surface the recommendations are sensible, measured and put the focus on an organisation’s leadership and management to step up or explain why reporting on key aspects of their people agenda is not material to their stakeholders’ understanding of performance. Below the surface there was a large amount of consultation, research and listening to a wide range of views. Equally, there was overwhelming support for doing something in this critical area.
The philosophy that underpins the recommendations is that the move towards reporting on HCM will be evolutionary, not revolutionary; driven by consensus, rather than compulsion; and fuelled by peer pressure, investor interest and enlightened self-interest.
Early on, the taskforce took the view that its recommendations should apply to both the private and public sector and they are framed with this in mind. It was encouraging to hear how many public sector bodies felt this was important from an overall stakeholder perspective, including of course, their own employees.
The taskforce worked with more than 15 organisations to produce example HCM reports, as well as shorter illustrations of particular HCM policies and practices. These are all in the final report.
The taskforce is optimistic about its recommendations being taken up over time, but recognises that momentum must be built and that the proposal for inclusion in the OFR must be pursued with vigour. Informing our optimism is the fact that people-related costs account for up to 60% or 70% of organisational expenditure and that the CEOs consulted by the taskforce agreed that HCM is central to their performance and reporting on it is therefore the logical next step.
The taskforce believes that a sub-group of the proposed standards board should take responsibility for producing guidance on the HC aspects of OFRs as soon as possible.
OFRs will need to include information on factors material to an organisation’s success. It is clearly hard to argue that people are not central to this.
When a few companies in a sector pick up the baton, then market forces should encourage others to follow. There will be leaders and laggards, but the market will start to differentiate.
The implications of the recommendations for the public sector are undoubtedly different, but the benefits are nevertheless there. We need the leaders of organisations in that sector to set out expectations and follow them through.
There have been doubts about the sufficiency of the reporting model – steeped in historic cost accounting complexities, disclosure rules and arguably absent of information about leading indicators of sustainable performance.
This debate is about the future of the financial reporting model, which has relevance in reporting on past performance – the scorekeeper model.
It is more dubious in its utility for investors and stakeholders as a guide for providing information about the future. What is management doing to nurture key value drivers such as brand, customers, innovation and people – all critical in managing a modern enterprise?
It is contentious, but broadening stakeholders’ legitimate interests in enterprise performance and creating greater transparency of more relevant and useful performance measures is an important debate for our profession and for leadership of public and private sector enterprises. Accounting for people is one important part of that debate.
With its emphasis on guidance rather than rules and a desire that the impetus comes from organisations and ‘the market’ rather than enforcement, the taskforce has chosen a route for the UK where the main reason is not compliance, nor the creation of a ‘tick box’ mentality.
The taskforce wants organisations to adopt HCM measurement as they see it as a driver of performance and can see that reporting on it will be useful for them and stakeholders.
If they do everyone will be the better for it. If they do not, the pressure for compliance through regulation may create a response, but not a solution.
- Ed Smith is a member of the taskforce and a senior partner responsible globally for assurance research and development at PricewaterhouseCoopers.