The E has dominated many of the ESG initiatives that have been introduced into the investment world, but there is now a strong push to move the S and the G into the spotlight.
Railpen, together with seven other institutional investors with a combined £400bn in assets under management, has launched an initiative to encourage companies to include the voice of their rank and file workers at board level.
This guidance for appointing workforce directors, as well as exploring worker voice mechanisms more generally, provides insights into ‘what good looks like’ regarding the role, recruitment and retention.
The initiative has was created in response to requests from some of Railpen’s portfolio companies for the investor perspective on members of the workforce joining the board.
It incorporates feedback from discussions with companies, investors, regulators, workforce representatives and academics, as to how companies can take a meaningful approach to considering appointing one or more directors from the broader workforce.
A workforce director is a director drawn from the company’s wider workforce or employee base. Interestingly, Railpen’s definition does not consider the workforce director to be a representative of the workforce. Rather, they have the same set of fiduciary duties and stakeholders to consider as any other director, but they are also part of the firm’s broader workforce.
Caroline Escott, senior investment manager at Railpen, explained the rationale behind this. “They become a director, in the same way as any other director. We are trying to avoid is creating a two-tier or segregated approach to companies, where the workforce director is only considered to be able to contribute to a particular set of issues.
“In fact, we think that while that broader workforce perspective is useful, it is useful across a whole range of issues: everything from remuneration to broader business strategy,” she added. “We want them to be treated with the same set of director duties as any other director.”
Financially material
Railpen, and others from the investor group, will engage with companies and their asset managers, where it believes there is merit in considering or raising the issue of workforce directors. It will also work with policymakers where it is felt that improvements can be made to create a supportive regulatory environment.
Furthermore, the guidance draws upon evidence which reveals that there aretwo main benefits for companies and investors from appointing one or more workforce directors.
First, potential improvements to the cognitive diversity of a board, providing a particularly valuable perspective, with diverse boards more likely to make informed and effective decisions.
Second, it is helping workers to feel their voice is heard and acted upon. This could see them become more engaged and motivated which in turn has, what Escott has said are, ‘financially material’ benefits for company performance.
Railpen’s guidance also draws upon research showing that workforce directors are most effective as part of a broader, coherent and intentional approach to workforce engagement and alongside other mechanisms.
Railpen has stressed investors are keen to understand how the worker perspective is intentionally included in strategic decision-making at their portfolio companies because, the pension fund says, a fulfilled, engaged, and motivated workforce is important to the long-term, sustainable financial performance of a business.
Power to the people
Other signatories to the officially titled: Workforce Directors Investment Statement, include Border to Coast, Brunel Pension Partnership, the Church of England Pension Board, Merseyside Pension Fund, the Universities Superannuation Scheme (USS), Rathbone Greenbank Investments and Royal London Asset Management.
“Fulfilled, engaged and empowered workers are fundamental to the long-term success of companies,” Escott said. “The Covid-19 pandemic and the subsequent ‘great resignation’ have highlighted how important it is that a company’s most senior leaders genuinely consider and respond to the perspective of the wider workforce.”
She added that while the investor group do not think there is a single ‘right’ way for firms to engage the workforce, “more companies should at least consider the merits of appointing a workforce director to the board – such as the potential improvements to cognitive diversity.
“We hope our guidance provides some helpful considerations and insights into what we think is an underexplored workforce engagement mechanism and welcome the opportunity for open and collaborative conversations with all those keen to ensure the worker voice is effectively heard,” Escott said.
Bruce Jackson, senior responsible investment analyst at USS, added that the UK’s largest pension fund is ‘delighted’ to support the initiative. “This will provide company boards with meaningful suggestions to enhance workforce engagement and consider appointing workforce directors to their boards,” he said.
USS has workforce directors on the board – directors that are appointed by University and College Union, a trade union. Jackson added that while USS recognise this may not be suitable for all companies, it believes the inclusion of workforce perspectives at board level can align the interests of shareholders, management and workers over the long term.
“It can also provide valuable insight into company operations to improve strategic decision making,” Jackson said.
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