Talent is key to corporate success, investors say

Institutional investors see talent management and climate change as the stand-out issues factoring into companies’ strategic success, according to new research.

Asked which factors are critical to their portfolio issuers’ fate over the next three to five years, almost two thirds (64 percent) point to talent management – in reference to the workforce as a whole – and 56 percent cite environmental issues/climate change. Corporate culture and board composition and diversity rank next, with each being named by 38 percent of respondents.

Behind these come customer preference (34 percent), investment and R&D (34 percent) and data privacy and cyber-security (33 percent).

The findings are derived from interviews that EY’s Center for Board Matters (EY CBM) conducted with governance specialists at more than 60 institutional investors representing a combined $35 trillion in assets under management.

‘[I]nvestors said that having an appropriately skilled, fully engaged and diverse workforce is critical,’ the report’s authors write. ‘Some stressed that in this era of rapid technological disruption and cultural shifts, human capital is essential to helping companies adapt, problem‑solve, innovate and increase productivity.’

They add: ‘Several commented on their dissatisfaction with issuers’ current human capital disclosures, particularly given its importance to driving corporate competitiveness and value.’

Stephen Klemash, EY CBM Americas leader, tells Corporate Secretary he expects companies will start having to field questions from buy-side analysts on talent management and related issues amid a shift in the economy that has greatly increased the value of intangible assets such as human capital.

The finding that talent management ranks ahead of other issues is in line with a growing focus among both investors and issuers on human capital management as a whole. In addition, SEC plans to modernize corporate reporting include an amended Item 101(c) that would insert as a topic for disclosure human capital resources, such as any human capital measures or objectives that management focuses on in managing the business. Depending on the nature of the company’s business and workforce, these would be measures or objectives that address the attraction, development and retention of personnel.

Sixty-six percent of respondents in the EY CBM survey say workforce diversity is the human capital component they are most focused on. This is followed by board oversight of human capital management and workforce compensation, including pay equity, which are each cited by 52 percent of those polled.

In terms of workforce diversity, many investors point to the importance of diversity and inclusion in terms of attracting and retaining top talent and that ‘bringing together different perspectives that spur innovation and lead to more effective problem solving and decision‑making,’ the authors write. When it comes to board oversight of human capital, investors are interested in understanding how boards are assessing human capital management, development and performance and which metrics they use in making these assessments, according to the report.

The authors note that many investors talk about culture and talent management in tandem, emphasizing that companies need the right culture to attract, retain and get the best out of employees. For example, investors stress that a culture of inclusivity is key as workforces become more diverse, and that a good culture supports strategic adaptability and innovation, according to the report.

Klemash notes that there is now a widespread appreciation of the importance of managing corporate culture – and not just to avoid downside risks such as reputational damage. There is now a recognition of the positive connections between values and culture and that culture can help companies achieve their strategic aims, he says.

Klemash expects to see increasing disclosures regarding culture in shareholder reports. It is notoriously tricky to assess and measure culture. But he suggests that companies could look to metrics such as workforce turnover rates, engagement scores or external awards. He also predicts that companies will start to present such information in comparison to their peers.

The poll finds that the top three investor engagement priorities for 2020 are environmental issues/climate change (cited by 59 percent of respondents), board diversity (54 percent) and talent management (32 percent). Despite the differences in their scores, Klemash says all three issues are likely to be on investors lists of topics to engage on, depending on the degree of progress a company has made in addressing them.

Another issue of great importance to investors is board oversight of risk. According to the report, some of the key factors investors use in assessing this are:

• Directors’ risk oversight acumen. Investors want to see board members who have expertise relevant to the risks most relevant to the company’s strategy. For some, this does not have to mean appointing a specific expert, but can relate to continuing director education
• The structure and process for risk oversight at the board level. This includes explicit responsibilities assigned to the full board and its committees
• The strength of company reporting on how risks are managed and measured. This should include the structure of an enterprise risk management program and the methods and metrics the company uses to identify, assess, monitor and mitigate risk
• Directors’ understanding of the business’ social impacts. For example, how is a pharmaceutical company considering public health issues?

For Klemash, talking to directors themselves remains the best way to assess a board’s risk oversight, and more directors are taking part in shareholder engagement. An investor would want to see that a director can talk confidently and knowledgeably about the issues involved without following scripted answers, he adds.