Investors and the Fourth Bottom Line – Human Capital

Nick Ellins, Chief Executive of Energy & Utility Skills looks at the impact of labour market resilience as investors take a greater interest in human capital. Clearly on the boardroom agenda – it is now the “fourth bottom line”.

Whilst listening to a radio presenter talking earnestly about the tension that is now within companies’ “fourth bottom line”, she revealed the latest Office of National Statistics (ONS) insights into the UK labour market.

As she spoke, it became clear that politicians and employers will have heard two very different scenarios.

Yet again, the record books were rewritten as employment lifted to its highest ever on record, and unemployment dropped even further than has ever been recorded. Employee salaries also rose above inflation.

Politicians listening must have wondered, what else must be done before success for employment can be claimed?

For employers listening, the well-known issue of labour market resilience just flashed even more brightly on their risk radar. For utility sector employers, it will have further persuaded them of the increasing need to strategically protect and enhance their human capital. This is far greater than just maintaining training budgets.

For anyone still hesitating to see direct and indirect workforce sustainability as needing executive level and Board visibility, price setting instruments such as the Ofwat PR19 Final Methodology and Ofgem RIIO2 Sector Specific Scenarios will have reminded them of the need for companies to act to ensure their workforce resilience in a highly competitive labour market. This is not just for the price review period, but for ten years ahead.

If that regulatory interest were not enough, another key audience has just announced their need to understand more on companies’ approach to workforce resilience and human capital investment – the utility sector’s own investment community.

Just days before the ONS announcements, the same broadcast media had reported the latest research results from the Workforce Disclosure Initiative (WDI). Created in response to institutional investors’ concerns, that they struggle to access meaningful data on company workforce management, over 120 institutional investors, with over £9 trillion of funds under management are now involved. They are openly looking to see which companies will flourish and which will be the laggards.

Utility companies will already be used to listing various measures of performance to attract and retain investment. This initiative is seeking to know more than just financial reporting, environmental impact and corporate social responsibility investment statements. They wish to see how their prospective or chosen investment home will work on that “fourth bottom line” – their commitment to human capital development.

The initiative follows an example set by the former Carbon Disclosure Project, with investors seeking transparent disclosure from companies on their human capital approaches, so that they can be incorporated into investment and engagement strategies and risk analysis.

The funders are clear. A skilled and motivated workforce is vital to delivering business performance, and critical to achieving the desired outperformance. Poor labour resilience and workforce approaches, can often also indicate where risks exist across the wider company organisation and leadership.

The research indicated that investors looking for outperformance, innovation and future-proofing, are no longer content with hearing that a company is ‘doing training’ or maintaining its status quo position of practicing ‘learning and development’. More is needed to ensure the culture, skills and competences are in place for an optimum operational approach.

One investment article stated that they want to see employers “turn human capital into human equity as a strategic asset.” They feel that if their job is to analyse the true underlying performance of a company and read the indicators of its future performance, then not to ask about human capital is remiss.

For now, the WDI research is based around detailed reporting. A cumbersome and blunt instrument some in price review weary companies may feel. They might also point out that, whilst there is a definite rise in awareness of utility skills needs and human capital, anyone attending their results conference call with analysts and investors, would soon realise there was a long way to go in terms of investor interest. They would ask “have you ever seen a slide on human value or corporate culture in an investor presentation?”

It highlights a tension in the UK and many global economies. Investors don’t engage with the information companies offer because it’s not informative and comparable, and the companies can’t see the value of spending time on human capital reporting when investors never ask for it.

The 120 plus investors involved in the WDI apparently see it differently, and are increasingly vocal. The detailed report structure starts a flow of data that is meaningful, comparable and consistent. They are seeking narrative on the value that a people strategy will deliver, alongside a robust set of numbers and statements. They are looking for the direction of travel, trends, benchmarks, comparisons and other evidence that will clearly show them that their chosen investment knows what it is trying to do through its people and is attracting the right human assets.

Is the WDI alone in seeking this assurance?

No, there are a number of initiatives underway to help investors calculate where their patronage is best rewarded, and they are clear the issue is about more than just providing shareholder returns. They see it as indicative of good governance and showing the consumer, employees and key stakeholders that there is sustainable value in a business that is practicing workforce resilience excellence and inclusive people management.

Should the UK utilities fear the rise of the WDI?

I would argue that the UK utility sector – including its regulators, unions and stakeholders, already has the track record, attitude, momentum and strategies in place, to proactively adopt the whole process as a potential global leading sector. Some of our leading utility businesses are already reporting to the WDI, and publishing their activity in their annual reports.

In addition to the wide range of efforts that utility-based employers are making as individual businesses, our sector has shown visible leadership to many industries across the UK economy. One example is the Energy & Utilities Skills Partnership.

Twenty-eight leaders from across the gas, power, water and waste management sector have joined together, on behalf of their industries, to focus on the main workforce issues impacting all of them. That is the quantity of people, the quality of people and the optimisation of transferability of the skilled workforce.

The work is still in its youth, but their partnership and determination has already:

  • Initiated a mass talent attraction initiative that has reached millions of new people in society, with over half of the enquiries from females
  • Delivered more than one in five of all the apprentices, from all industries, graduating through the new English apprenticeship policy reforms
  • Brought a UK-wide inclusion commitment that is already supported by 34 utility businesses, and engages with diverse stakeholder groups
  • Built an accord between 56 asset owners and supply chain partners, that targets skills gaps and puts people investment into procurement practices
  • Successfully worked with the Achilles UVDB to build workforce resilience and skills investment into the main procurement database questions
  • Supported industry-wide schemes that encourage excellence in operations and develop the optimal cultures and behaviours

The success achieved so far has come about with strong support from the regulators, policy makers, professional bodies, unions and wider interest groups. It is an example of partnership in action, within a subject area of common interest.

Many utilities-based employers are already comfortable to show in some form, how their investment in their people, will help to lead to sustainable business success. Having institutional investors asking more informed questions about that approach, will only push it further up the management and Board agenda.

The utility sector has an opportunity to show their approach to human assets straight to current and potential investors. A quick look at the 2018 WDI research report shows that the finance community has already become tired of reading bland statements about how “our people are our greatest asset,” but then finding no substance to show how that asset is bringing value, ensuring sustainable returns, or informing investment and consumer decisions. They are seeking proof as to how companies are nurturing the human assets, within their direct and indirect workforce, to ensure the capital is in place to deliver future outperformance.

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