Annual reports paint incomplete picture of opportunity and risk

Many companies are yet to recognise their people as being crucial to creating and preserving value. The consequent failure to collect human capital data and use them to inform decision-making means organisations miss opportunities and run unnecessary risks.

The failure to account for the impact and value of people also has implications for investors as it generates a significant discrepancy between a company’s balance sheet and its market valuation.

A study by The Chartered Institute of Management Accountants and the Chartered Institute of Personnel and Development (CIPD) found that 30% of FTSE 100 annual reports leave investors with an incomplete picture of business performance and risk.

Vital workforce information commonly omitted from such reports includes health and safety incidents, data breaches, skills gaps, and employee turnover.

The study, which focused on the annual reports published by FTSE 100 companies between 2013 and 2015, found that:

• Two in five companies reduced the amount of information they provided on people welfare in that time frame.
• Some reports omitted details of workforce issues that had occurred in the relevant year. For instance, three cases of workplace strikes amongst FTSE 100 companies were reported in the media. Two of the strikes were reported on in full in the affected organisation’s annual reports, but one case was not reported at all. Furthermore, four cases of employees being involved in insider trading were reported in the media, but none of these were covered in the annual reports.
• Reporting on some issues is improving, with an increase in the quality and quantity of information provided about ethics (up by 22%), diversity (up by 39%), and human rights (up by 127%).
• The largest increases in human capital reporting were made by companies in the property and leisure sectors.

Disclosure recommendations

Researchers called on organisations to measure and disclose the impact and contribution of people on business performance so stakeholders can make informed decisions based on an accurate snapshot of opportunities and risk.

“Having a clearer view of the people in our workforces can only be a good thing,” said former UK Business Secretary Vince Cable, speaking at the launch of the Valuing Your Talent: Illustrating Your Company’s True Value report. “It could lift the lid on our productivity issues and the skills challenges that are preventing so many businesses from reaching their potential.”

A framework associated with the report details the relevant metrics businesses can use to better understand the value of their people.

Peter Cheese, chief executive of CIPD, highlighted the need for greater transparency and consistency of human capital reporting. “Whilst organisations appear to be improving their corporate reporting on how people help to drive organisational performance,” he said, “there’s still a long way to go before we have a consistent picture of how organisations are managing and developing their people.

“We need more common definitions of key people and organisational metrics and for businesses to better articulate how they are using these measures to provide consistent insight for all stakeholders. This is now vital in building trust, in understanding the real drivers of productivity, in understanding critical risks, and in helping to create better work and working environments for all.”

—Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.