Business, Innovation and Skills CommitteeWritten evidence submitted by the Chartered Institute of Personnel and Development (CIPD)


1. The CIPD is the leading independent voice on workplace performance and skills. Our primary purpose is to improve the standard of people management and development across the economy and help our individual members do a better job for themselves and their organisations. Our purpose is to champion better work and working lives, through improving people management and development practices to build greater value for organisations, benefiting economies and society.

2. Public policy at the CIPD exists to inform and shape debate, government policy and legislation in order to enable higher performance at work and better pathways into work, especially for young people. Our views are informed by evidence from 135,000 members responsible for the recruitment, management and development of a large proportion of the UK workforce.

3. Our membership base is wide, with 60% of our members working in private sector services and manufacturing, 33% working in the public sector and 7% in the not-for-profit sector. In addition, 76% of the FTSE 100 companies have CIPD members at director level. We draw on our extensive research and the expertise and experience of our members on the front-line to highlight and promote new and best practice and produce practical guidance for the benefit of employers, employees and policy makers.

General Comments

4. Public opinion of big businesses, particularly in the financial sector, has nosedived following recent events that demonstrated a lack of fundamental ethical positions and responsibilities in certain organisations, as well as how widely the behaviour of others differed from their stated values and ethics. This is by no means confined to the banks—surveys of public opinion show a significant decline in trust in all types of businesses doing the right thing, as well as authoritative figures such as politicians.

5. Events ranging from the fixing of the LIBOR rate to the mis-selling of PPI insurance have pointed to a crisis of culture existing within these organisations (albeit also reaching beyond particular institutions and sectors). Over time, the understanding of an organisation’s purpose has become unduly biased towards short-term performance measures, reinforced by misaligned remuneration incentives at different levels of the organisation, at the expense of a focus on longer-term performance and business sustainability.

6. We welcomed the insights, conclusions and recommendations made by John Kay in his review into UK Equity Markets. We believe that the state of affairs outlined above is linked to a decidedly short-termist outlook that certain organisations and sectors have embodied for some time, driven by a focus on short-term financial and share price performance reinforced by remuneration and reward practices. This has been accompanied by a real and apparently increasing lack of long-term-focused investment behaviour, which belies a lack of long-term thinking and a failure to properly account for the needs of the organisation in the future. Organisations need to focus on those factors that will enable long-term sustainable business performance, both internally and externally, that go beyond simply the financial metrics.

7. We do not think it is either possible or desirable to legislate for culture change, believing instead that this is more likely to be achieved through clear identification of best practice and non-statutory routes. It is important to give businesses “ownership” of the way they grow and implement their own cultures—a “one size fits all” approach is unlikely to work. Changing an organisation’s culture fundamentally requires changes in leadership behaviours and cannot happen overnight, but it begins at the top and is reinforced through performance measures and reward practices. However, we believe that many of the measures recommended in the Kay Review, if implemented properly, will go some way to ensuring more company directors to take a longer term, sustainable view of their business activities.

8. On directors’ pay, we believe that this should not only be dependent on long-term performance, but that performance measures themselves should include a wider range of considerations that go beyond the purely financial and how much profit is being generated. The vast majority of today’s shareholdings are traded in very short-term cycles, which runs counter to the long-term view we are trying to encourage company directors to focus on. As well as generating profit, business leaders must show awareness of, and commitment to, longer-term stewardship responsibilities, as well as the leadership qualities required to take their workforce with them and drive sustained high performance. The measures used to determine pay of executives and the different reward components should be visible and open to external scrutiny.

9. Regarding narrative reporting, we have always been in favour of a more consistent standard of what is reported, where relevant and necessary information about the health and direction of the organisation not found in the statutory financial reports is given in a way that provides greater insight to all stakeholders. Today the significant majority of value of organisations is tied up in the so called intangible values—human and organisational capital, brand value etc. These are also the areas of value that are most critical to future performance, whereas traditional financial measures point to past performance.

10. We believe that now must be the time to better recognise the importance of human capital to organisational performance and to provide clearer direction and guidance on how information on the human capital of organisations is captured and reported. Previous initiatives such as the Accounting for People taskforce led my Denise Kingsmill in 2003 provided a good base to start from, but the prevailing economic times and political environment did not provide an impetus for take up. Many of the issues we are now confronting on encouraging the right cultures and behaviours, focusing on the issues and measures that really define longer term organisational performance and success have at their root the need to provide more visibility on the human capital and organisational dimensions of business. Providing a framework for reporting and comparing on these dimensions will be critical to providing insight to all stakeholders, including shareholders, and the pressure on management to focus on these longer term variables. This is something that the CIPD in combination with others such as CIMA and the UKCES are determined to make progress on, but will require sponsorship and support from Government.

11. Also crucial to a sustainable, long-term business strategy is investment in future talent pipelines, to ensure an organisation has the skills they need both immediately and for the future. In 2012, the CIPD launched its Learning to Work programme, aimed at achieving a shift in employer engagement with young people, so that they are encouraged to help them in entering and remaining in the labour market. As part of this, we encourage employers to adopt a “youth policy”, whereby they offer a wider range of entry routes into their organisations in order to be accessible to wider talent pools. This will not only contribute towards the important goal of driving social mobility, but will also help organisations develop the diverse and dynamic workforces they need to carry them into the future.

12. We welcome the actions taken by the Government following the publication of the final Kay report. We are strongly in favour of higher quality narrative reporting, incorporating strong guidance on human capital reporting, which is simpler and more relevant to its intended audience. In our response to the Department for Business, Innovation and Skills’ consultation on The future of narrative reporting, we called for the inclusion of human capital evaluation in company reports. We believe this to be crucial to long-term sustainability and performance because the practice of collecting, evaluating and reporting on these measures should enable better business decision-making for the long term. More generally, companies should be encouraged to be more long-term in their outlook. CIPD is also supportive of measures to remove mandatory quarterly reporting requirements also as a means to shift focus of measurement and incentive to longer term outcomes.

We will now turn to address some of the specific recommendations set out in the Kay Review, focusing on those on which our expertise enables us to comment most fully.

On whether the Stewardship Code should be developed to incorporate a more expansive form of stewardship, focusing on strategic issues as well as questions of corporate governance:

13. The revised UK Stewardship Code of September 2012 already includes strategy, corporate governance and culture within its definition of “stewardship activities”, on which institutional investors are encouraged to publicly disclose their activity with the aim of protecting value for their clients. It is also recommended that investors should consider intervening when they have concerns about the company’s strategy, governance and approach to risks, including those that are social or environmental.

14. However, we would encourage a greater focus on the aforementioned subjects in the Code, in recognition of the importance of culture and corporate governance to an organisation’s performance and brand. To date, there has been an insufficient demonstrated appreciation of the importance of issues such as management and leadership, employee engagement and workplace culture (and of corporate governance and culture more widely) amongst business leaders. Whilst we do not believe that culture change can be achieved through legislation, we believe that having clear guidance focused on good practice and outlining the business benefits to be gained from consistently demonstrating the right values in behaviours, communications and actions, will encourage directors and investors to ask more probing questions about a wider range of activities, both internally and externally.

15. A more expansive form of stewardship should entail a focus on employee engagement; we welcomed the launch of the Employee Engagement Taskforce by the Government in 2011 and the Engage For Success initiative in 2012, and will continue to support its aims of driving the value of employee engagement to business and financial performance. Company directors need to take a broader view of what is important, ensuring they operate with strong ethical principles, visibly demonstrating an awareness of the importance of long-term performance measures that go beyond the financial. Internally, starting from the top, directors must ensure they have channels and procedures in place to account for employee voice and challenge, as well as provisions for whistleblowing, to ensure that employees feel comfortable reporting wrongdoing.

16. We would like to stress that a Stewardship model may not be appropriate for all types of business—it might not work for a start-up, for instance. It would be unfortunate if one set of unintended consequences were replaced with another and we would warn the Government against pursuing this outcome too stringently as a “one size fits all” solution.

On whether company directors, asset managers and asset holders should adopt Good Practice Statements that promote stewardship and long-term decision making; and regulators and industry groups should take steps to align existing standards, guidance and codes of practice with the Review’s Good Practice Statements:

17. We support the development of Good Practice Statements in principle. These will provide non-regulatory, non-binding guidance to company directors and investors on how organisations should be run for the benefit of their clients, employees and business. We favour a “comply or explain” approach to adherence to these statements rather than a hard regulatory approach.

18. The Good Practice Statements in John Kay’s Review rightly require asset managers and holders to operate in the best long-term interests of their client, operate within “a culture of open dialogue” and be transparent in their operations. The Statements also specify that remuneration should not be related to any short-term incentives of performance measures. We would recommend that these should be adopted and existing standards aligned to them.

19. However, we also believe that given the importance of human capital management (HCM) and reporting to the long-term business success of an organisation, this should be actively recommended in Good Practice Statements. Number 9 of the Review’s “Good Practice Statements for Asset Managers” recommends that asset managers be informed by “an understanding of company strategy and a range of information relevant to the specific company”. We believe that this could be developed, made clearer and more specific, in order to “nudge” companies to recognise the value of human capital reporting and act accordingly.

20. We believe that the HR function in particular has an important role to play in driving professional standards and best practice. CIPD is working with the City Values Forum, the Chartered Banker Institute and the City HR Association to promote professional standards in the City. Similarly, our own work as a Chartered institute encourages organisations to operate to a higher standard, incorporating performance against values and behaviours alongside the financial considerations. Within the past year, we have produced research insights into the importance of trust in the workplace, and the exploration of effective leadership models in the current political and economic climate. We have also worked with Business In The Community (BITC) on developing public reporting guidelines that take account of HCM data, and are actively seeking to collaborate more with bodies like CIMA to develop future-focused HCM guidelines.

On whether an investors’ forum should be established to facilitate collective engagement by investors in UK companies:

21. We believe that an investors’ forum would be a useful and valuable way for investors to share ideas and experiences, as well as discuss challenges as and when they arise. The opportunities for collective engagement that arise from information sharing in this way have the potential to be as useful as written public guidelines, and indeed would be complementary to them.

22. The existence of the City Values Forum and the Lord Mayor’s Restoring trust in the City initiative is evidence of a wider opinion that the current state of affairs does need to change and move towards a more inclusive understanding of purpose and performance. We encourage the Government to capitalise on this momentum and encourage greater collaboration with these and similar initiatives more widely.

Whether mandatory quarterly reporting obligations should be removed:

23. We support proposals to remove quarterly reporting obligations. We believe that this approach is consistent with the aim of fostering a longer-term approach to the evaluation of an organisation’s activities and performance. Reporting on a quarterly basis is not only quite burdensome for some companies, but may act as a contributory factor to a short-term outlook on company performance.

Whether high-quality, succinct narrative reporting should be strongly encouraged:

24. We are in favour of a high-quality, succinct approach to narrative reporting, with a strong focus on human capital management and other measures that support evaluation of the less tangible dimensions of sustained business performance. Good quality human capital information is crucial to informed decision-making, both internally and externally, in order to support sustainable organisation performance. We believe that the creation of a clear narrative reporting framework to help and encourage more employers to provide meaningful HCM reporting would be a useful step towards, over time, ensuring better-quality people management information is provided to shareholders.

25. HCM has historically been under-valued by investors, as has the importance of good management and leadership to organisational performance. CIPD’s 2006 research, Investors’ view of human capital, showed that even where human capital information was collected and analysed, this was too often focused too much on the top team, whilst data on the rest of the organisation was rarely used as the basis for investment decisions. Our 2010 report, View from the City, showed a refreshing positive change for the better in investors’ views of HCM, but that the pace of change was slow. Crucially, however, there is evidence of stronger agreement around people management as a potential leading indicator of long-term business sustainability.

26. One of the difficulties inherent in using human capital data is that it does not translate easily into hard numbers and statistics, which investors typically feel most comfortable with. However, the increasing realisation that numerical data alone cannot give sufficient information for judgements to be made, and the need to be able to interpret hard data in the right context, may point to the increased use of more qualitative human capital data in recent years.

27. This, in turn, points to the argument that human capital data should be framed more in terms around HR and business risk, rather than in terms more related to social responsibility. Business leaders will inevitably be concerned about factors that stand to influence their productivity and overall profitability. If human capital data is presented in this kind of framework, it will encourage directors and investors to ask different questions about what factors stand to have positive (and negative) effects on their current performance and long-term sustainability.

28. We call on the Government to promote the use of HCM reporting by quoted companies on a voluntary basis. We believe that this position would be strengthened by the publication of good practice examples. Many companies already operate to high standards of narrative reporting, and shining a light onto best practice will clarify to others how high-quality reporting can be done. In response to what we believe to be the poor quality of reporting on HCM, CIPD with Henderson Global Investors supported BITC in producing public reporting guidelines in 2011, with the longer term aim of producing an accessible public reporting template for early 2013. We would be happy to share this with the Committee.

Whether companies should structure directors’ remuneration to relate incentives to sustainable long-term business performance:

29. High executive pay and financial rewards for short-term successes (and sometimes failures) have become symptomatic of the destructive culture that pervades certain sectors, where a singular focus on financial gain has been allowed to predominate over consideration for how that growth is achieved. This has also led a tone to be set within certain organisations that encourages rule-bending and unnecessary risk-taking in pursuit of financial and other rewards.

30. Furthermore, this focus on financial gain to the exclusion of other considerations has played a large part in distorting views of businesses’ purpose and role within society, resulting in the aforementioned decline in trust in big business. We believe that levels of senior pay should not only be related to longer-term performance measures, but that these performance measures themselves should account for a wider range of aims and objectives—going beyond the purely financial.

31. However, it is important to retain a degree of flexibility and perspective in this debate. In many instances, it would be entirely appropriate to reward short-term success, and we do not advocate that organisations should be dissuaded from doing so in all cases, rather that they should seek to base reward decisions on long-term performance measures and outcomes where possible.

32. We believe that organisations would benefit from clear guidelines (that are not prescriptive), as well as some examples of good practice on ways to manage reward-related risks. Evidence shows that many businesses can find the management of reward and reward risks quite challenging, which suggests the need for guidance that organisations can then tailor to their specific business models.

33. The CIPD’s annual Reward Risks survey explores how organisations manage reward-related risks as perceived by practitioners and consultants, including strategic, implementation and governance risks. Our October 2012 report showed that the alignment of reward policy to wider business strategy remains as important, yet as nuanced and as challenging, to employers as in previous years. The overall top ten ranking of perceived reward risks include:

Employees not understanding what is required of them in terms of behavior and performance.

An inability to change reward practices quickly.

Difficulty communicating desired behaviour and performance requirements to employees.

34. The top concern for reward practitioners and consultants last year, as well as for 2011, was that employees did not appreciate the value of their total reward offering—perhaps unsurprisingly in the context of the communication difficulties many employers are experiencing. Employers also expressed concern that reward packages were not adequately engaging employees at all organisational levels. High pay has traditionally been cited as being necessary to keep “top talent” in an organisation. However, CIPD research, Employee attitudes to pay, shows that directors’ pay, and the pay of other senior figures in an organisation, has the potential to affect levels of employee engagement and satisfaction lower down the organisation as well.

35. The idea that a reward package might not be seen as fair is another key concern for reward professionals and practitioners, featuring in our Reward Risks top ten ranked list of concerns for the past three years. Particularly during difficult financial times, the question of the distribution of pay throughout an organisation will arise more frequently as lower-paid employees feel the pinch. The CIPD’s Employee attitudes to pay report series examines employer pay decisions across the sectors and employee reactions to these. Our January 2013 report showed that many employees feel that senior managers and leaders are paid too much for what they do, whilst they themselves are undervalued by their organisation.

36. It is crucially important for organisations to acknowledge the importance of how their employees, as well as Boards and external stakeholders, are feeling about issues such as top-level pay and how it relates to their own remuneration. If employees believe that their employer is being inconsistent in their approach to remuneration at top and bottom, there is a real risk that this might cause disengagement with their jobs and their organisation, becoming less engaged with the collective endeavour. Organisations stand to suffer if their CEOs are not seen to regard themselves as stewards of the enterprise who are interested in long-term, sustainable success, and instead come across as being focused only on the short-term outlook, their career development and pay trajectory.

Concluding Comments

37. Notwithstanding the importance of financial considerations to businesses of all sizes, and the role of remuneration in recruiting and retaining talent, we see the greatest challenge following the Kay Review and the Committee’s inquiry as that of widening perception beyond the realms of the financial, to take account of the importance of other factors that contribute to business success and sustainability.

38. The evidence, both from CIPD and other bodies, is that issues surrounding organisational and workplace culture, investment in skills and talent development, employee engagement, fair and open performance management and reward practices, and appropriate corporate governance, are what makes the difference to a business’ long-term sustainable performance. The biggest issues are not only the financial considerations but how a company operates, whether it is seen externally to adhere to high ethical standards, and whether it demonstrates responsibility to both its internal and external stakeholders. The greatest contribution the Kay Review and the Committee can make to the future of UK business behaviour is to acknowledge this and to ensure that organisations themselves act accordingly.

22 January 2013

Prepared 24th July 2013