Soaring to new heights
Governance considerations for nomination and remuneration committees with commentary from 2020 annual reports September 2021
Part 3 of 3 Contents
Introduction 1
3 Nomination and remuneration committees 4
3.1 Introduction 5
3.2 Investor expectations 7
3.3 Governance — oversight over D&I 10
3.4 Strategy — HC priorities and culture 15
3.5 Risk management 20
3.6 Metrics and targets 22
3.7 Key questions to assess effectiveness 32
3.8 Reporting examples 34 Introduction
Stakeholder capitalism1 and moving Given this broadened focus on planet and people, the away from a focus on maximising shareholder value was the theme of prospects of increasing directors’ accountability and the Davos Manifesto 2020. Whilst new requirements likely to be placed on companies this concept dates as far back as 19322, its more recent revival, with and those running them, we decided to shift gear this a specific focus on ’people’ and year. Instead of our traditional review of narrative ‘planet’, has reignited the debate about the role of governance and the reporting practice in the FTSE 350, we have instead board in the context of, what often focussed on analysing what reporting can tell us seem like, competing stakeholder priorities. As a result, the concept of about FTSE 350 governance practices and how purpose as the North Star that helps governance is likely to continue to evolve in light navigate this complexity has come to the fore in recent years. of the Government’s reform proposals, the shift The changes in the UK’s governance towards stakeholder capitalism and the pandemic. framework resulting from the We cover this analysis in three parts: 2018 UK Corporate Governance Code (2018 Code or the Code) and Companies Miscellaneous Reporting Regulations (MRR) reflected these global trends. However, high profile business failures keep resurfacing Part 1 Part 2 the underlying sentiment and concerns that some critical aspects of Part 1 is dedicated to the Published in July 2021, governance are not being addressed board, with a specific emphasis Part 2 is focussed on in their entirety, or in some cases, on governance over social, the audit (and risk) potentially at all. These concerns environmental and other committee — the committee were only exacerbated by the impact sustainability matters. most impacted by the that COVID-19 has had on all aspects BEIS proposals. of the economy. Contrary to the expectations of some, the much anticipated White Paper issued in March 2021 by the Department for Business, Energy & Industrial Strategy (BEIS)3, went Part 3 beyond proposals to reform the audit market and product solely. This report, addressing the Welcomingly titled “Restoring trust in oversight of human capital (HC) audit and corporate governance”, it and matters related to people, recognises that rebuilding public trust with a focus on the evolving in business also requires changes in roles of the nomination and how the UK’s largest companies are remuneration committees. run and the frameworks governing the oversight of directors’ duties.
1 A form of capitalism in which companies do not only optimise short-term profits for shareholders, but seek long term value creation, by taking into account the needs of all their stakeholders, and society at large. 2 Referring to the publication, The Modern Corporation and Private Property by Adolf A. Berle and Gardiner C. Means. 3 Referred to throughout this publication as the BEIS consultation.
Soaring to new heights | Governance considerations for nomination and remuneration committees 1 Each part follows a similar structure: 1 2 3
We start by setting the We then provide points of view, We close with high level scene and cover investor thoughts and analysis under the questions that boards and expectations based on broad headings of: board committees can use to i) direct engagement we i) think about their current • Governance have had with investors roles and how they may ii) highlights on investor • Strategy evolve; and ii) debate priorities and responsible • Risk their effectiveness. stewardship from EY’s annual • Targets and metrics investor report. supplemented with disclosure extracts from a sample of over 100 FTSE 350 annual reports (ARAs) to illustrate specific points.
Our ambition is for For those of you, who look forward to our annual narrative reporting analysis, we have your backs! The only new narrative reporting requirement applicable boards and board for 31 December 2021 year ends relates to companies’ disclosures against the committees to be able recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and we covered this separately in our publication “Towards TCFD to use these three parts compliance” issued in May 2021. For those looking for a broader review of when they are debating narrative reporting, we believe that our September 2020 report “From intent to action” remains relevant. Looking back at this report, we stated that change their roles and their in the governance and reporting arena and adapting to it seems to be set as a forward rolling agenda. constant fixture for some years to come. This statement couldn’t be truer given the events of the last 18 months and the Government’s future agenda. We hope that this report will help boards, nomination and remuneration committees with their governance over HC and people related matters. Best regards, Mala and Maria
2 Soaring to new heights | Governance considerations for nomination and remuneration committees 3 Nomination and remuneration committees
4 The Organisation for Economic Co-operation and Development (OECD) defines human capital (HC) as ‘the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances’.
Commonly, the concept of HC is associated with a company’s workforce; recruitment and selection, learning and development, remuneration, culture and diversity being some of its core elements. HC can, however, be seen more broadly to include people from across the stakeholder ecosystem, including suppliers, distributors and even communities. Throughout, we refer to HC in the more traditional sense.
3.1 Introduction
When we produced our report remuneration. The RC is also of the DNEDs were also the senior “Nomination committees — coming responsible for determining senior independent director (SID) or out of the shadows” in 2016, we management remuneration and RC chairs. There was consensus identified that leading nomination for engaging with the workforce to that these positions involve committees (NC) had moved away explain how executive remuneration complementary responsibilities, from focussing purely on board aligns with wider company pay policy. already interacting with the level succession and appointments, Many premium listed companies workforce: the SID, alongside the and started looking deeper into the introduced a designated non- Chair, is viewed as a representative organisation to oversee and seek executive director (DNED) to comply of the board; the RC Chair often assurance on how management with Provision 5 of the 2018 Code interacts closely with the workforce was developing its future leaders. on workforce engagement. From our due to their responsibilities in The 2018 Code formalised this by 2020 report “Designated NEDs: the 2018 Code to consider wider expanding the NC’s responsibilities The journey from scepticism to employee pay policy and practices. to include oversight of talent meaningful insights", we found that development in the executive unsurprisingly, a large proportion pipeline. A stronger focus on reporting actions and outcomes was also added e.g., on the NC's approach to succession planning and how its activities support Although some may quote Juliet Capulet and developing a diverse pipeline. “challenge, “What’s in a name?” has the time The 2018 Code also expanded the come for the NC and/or RC to rebrand to a responsibilities of the remuneration committee (RC) to include review broader 'human capital committee' in order to of workforce remuneration and better reflect their expanded remit and signal related policies (including pension arrangements) and the alignment to the organisation and its stakeholders the of incentives and rewards with importance the board places on human capital? culture, taking these into account when setting the policy for executive Maria Kępa, Director, EY UK Corporate Governance team
Soaring to new heights | Governance considerations for nomination and remuneration committees 5 Changes to the Code, reinforced to become the People and employee engagement and D&I. by the 2018 Guidance on Board Governance Committee, reflecting In 2020 this committee, amongst Effectiveness4, along with evolving its wider remit in covering other things, reviewed and societal expectations, especially in workforce engagement, wellbeing monitored the implementation of respect of diversity and inclusion and talent management. The the 2020 human resources plan, (D&I) and social equality, created a committee’s agenda is structured reviewed results from workforce clear momentum for the NC and RC to cover four matters: talent surveys, reviewed progress of to take on oversight over workforce- and capability, D&I, engagement, the implementation of the D&I related matters more broadly. This and culture and governance, strategy, monitored collective impetus has only grown stronger and the committee oversees bargaining negotiations and a with the pandemic. workforce engagement. “New Ways of Working” project to generate a more flexible and Two notable examples of changing • Antofagasta (see Figure 3.1) adaptable organisation following committee remits include: has a Remuneration and Talent Management Committee, and the COVID-19 pandemic. • BP (2020 ARA, pp87-92) under its terms of reference it is renamed its NC in 2020 responsible for talent retention,
As part of their more traditional remit relating to board composition, NCs will also need to consider: ▶ how the expansion in matters that boards and their committees now have to oversee e.g., ESG matters, are factored into their respective terms of reference and agendas. NCs will need to assess whether these are best dealt with by existing committees taking into account directors’ time commitment and the existing workload of the committee or whether a new committee is warranted. ▶ the cognitive diversity of the committee they are allocating the oversight of these matters to (see section 3.3.15). ▶ whether the committees are being adequately supported — the audit committee (AC) has strong interaction with and support from the finance and risk functions. As new committees are formed or remits expanded, the support structure at management level may also need to evolve.
4 Working with human resources, the nomination committee will need to take an active role in setting and meeting diversity objectives and strategies for the company as a whole, and in monitoring the impact of diversity initiatives (Guidance on Board Effectiveness 2018). 5 See section 3.3.1.
6 3.2 Investor expectations
Several factors, including the revised Stewardship Code, changing societal expectations and government action Diversity is about differences. Inclusion is about leveraging have led to investors sharpening and We think broadly about differences, these differences to achieve expanding their focus on D&I and which include nationality, better business outcomes. It is remuneration, and being much more background, education, gender, about creating an environment attuned to the ethical and business ethnicity, generation, age, working where people feel they are valued, case for diversity. The government’s and thinking styles, religious where they feel they belong and growing attention to social factors background, sexual orientation, contribute their personal best is demonstrated for example, by abilities, experiences and technical in every encounter. Inclusion is the Department for Work and skills. There are also differences necessary to ensure diversity Pensions consultation in March according to geography, sector leads to value creation and not 2021 on ‘Consideration of social risks and function. Visible diversity just box-ticking. and opportunities by occupational is necessary (e.g., important pension schemes’ which highlights for role models etc.) but not the need for pension schemes to sufficient on its own. better integrate social themes, including D&I, into their investment Increasingly we are seeing a move from D&I to diversity, equity strategies. Recently, several pension and inclusion (DEI). schemes have signed up to the newly launched Asset Owner Diversity Charter that commits them to incorporating D&I into manager selection and monitoring. Many companies have started including ‘equity’ “within the traditional D&I acronym. Equity is 3.2.1 Diversity an important addition – not just a buzzword – Investors have traditionally focussed on gender diversity, and this has been acknowledging that there is an unequal starting supported by successive government- point for some groups within society and/or the sponsored reviews, notably the Davies Review and, latterly, the Hampton- workplace. These groups may experience more Alexander Review6. Their focus is setbacks, have less access, or greater barriers, broadening to other elements of which can challenge a well-intended notion of diversity, particularly ethnicity which the Parker Review has shone a light meritocracy. Organisations which are starting to on. In September 2020, Legal and think about equity are signalling their commitment General Investment Management (LGIM) warned 35 FTSE 100 to identifying and reducing inequities and companies that from 2022 it will start barriers by using equitable practices to account voting against the chair of their board for differences in opportunities or resources. or of the NC if there is still no ethnic diversity at board level. In 2021, Simon Feeke, Director, EY Culture, Diversity and Inclusion Advisory State Street stated it would vote [email protected] against the chair of the NC at FTSE 100 companies that do not disclose the racial and ethnic composition of their boards, and in 2022, it will vote against the NC chairs at FTSE 100 companies that do not have at least one director from an under- represented community on their boards.
6 The Hampton-Alexander review published its fifth and final report in February 2021. This showed its target of a third of women on boards had been achieved on average across the FTSE 350. The UK Government is considering whether to relaunch the review later this year with an expanded remit as part of a broader effort from regulators (such as the Financial Conduct Authority) to encourage companies to push for equality in senior leadership positions.
Soaring to new heights | Governance considerations for nomination and remuneration committees 7 In addition, the Institutional Voting Information Service (IVIS), part of the Investment Association (IA), will issue an amber top to FTSE 350 companies that do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Parker Review’s targets7. Given the above, we expect to see increased investor engagement and voting on ethnic diversity. While the primary focus for policy makers, investors and regulators has been on board level diversity, this is shifting to looking at the make- up of senior management and the wider workforce. For instance, on gender, IVIS will issue a red top to any FTSE 350 company if female representation is 25% or less in their executive committee and its direct reports. Similarly, EOS at Federated Hermes recommends a vote against chairs of FTSE 100 companies where women make up ‘materially less’ than 20% of the executive committee and its direct reports. In its recent report, the Commission on Race and Ethnic Disparities echoed recommendations by the 2017 McGregor-Smith Review relating to ethnicity pay gap transparency. There is also growing collective action on D&I by investors in collaboration with business and industry bodies. The Investor Leadership Network’s (ILN) latest report8, developed in partnership with EY, seeks to address D&I, both internally as employers and externally as active asset managers 2020 was a stark reminder that the world and owners. It is in the process of creating an 'Inclusive Finance is much more interconnected than we Platform', designed to help investors thought, and companies are part of a delicate and companies integrate D&I into their operations. In addition, several stakeholder ecosystem. Appointments that investors (Aviva, Federated Hermes, are no more representative of the company’s Schroders etc.) as well as corporates including Pennon (2021 ARA, employees, customers or supplier base will p44) joined the Confederation not bring the different perspectives needed of British Industry’s ‘Change the Race Ratio’ campaign, to increase to counter groupthink. racial and ethnic participation in British businesses. The Ethics of Diversity; Institute of Business Ethics Board Briefing
7 Parker Review expects FTSE 100 companies to have at least one ethnically diverse board member by 2021 and for each FTSE 250 board to do the same by 2024. 8 ILN, Creating a more inclusive economy: Practical insights from global institutional investors, June 2021.
8 We use third-party data sources to form views on employee engagement, satisfaction and “other aspects of corporate culture. We regularly ask company management and boards how they are measuring culture and employee engagement, what values and behaviours they are hoping to embed in corporate culture and how they are incentivising this. While some boards have qualitative and quantitative data to support their views on corporate culture, there are also boards who cannot answer our queries, or cannot rebut third-party data and reviews. We inform companies where we view corporate culture as very weak or poorly aligned to the business model, that we will not invest. A strong positive culture is an important factor in judging the competitive dynamics of a company and hence its investability. We view a positive and aligned culture as a form of intangible ESG asset that should lead to strong long-term value creation.
Ben Yeoh, Senior Portfolio Manager, RBC Global Asset Management
3.2.2 Culture consensus yet (for further information of these material ESG risks as refer to section 3.6.3). The devil is in performance conditions in the Institutional shareholders are the detail of how this is implemented, company’s variable remuneration. increasingly focussed on corporate and many investors are wary about culture, noting that D&I is one of its • In March 2021, Cevian Capital the clarity, appropriateness and important dimensions. For example, called upon European public reliability of ESG data, especially if in 2019, State Street issued a letter companies to incorporate being used to determine incentives. stating it will seek insights into how significant, measurable and As a result, where used, investors boards monitor corporate culture. transparent ESG targets into senior are encouraging companies to seek It recommends a framework for management compensation plans extended assurance to increase the assessing and monitoring culture, to be put to shareholder vote at rigour of material ESG information. which includes considering the AGMs in 2022. alignment of current culture and Examples that highlight investor • Where Amundi Asset long-term strategy, implementing focus on ESG metrics in executive Management voted against mechanisms to embed and monitor remuneration: executive compensation plans, in almost a third of the cases this progress on culture, as well as • While the IA’s Remuneration was because they did not contain reporting on the board’s role in Principles do not seek to prescribe ESG indicators. influencing culture. or recommend any particular variable remuneration structure, • APG Asset Management monitors 3.2.3 Remuneration where companies incorporate the the remuneration policies of its portfolio companies and has With COVID-19, investors are management of material ESG risks called for compensation policies scrutinising whether executives and opportunities into their long- to reflect both financial and non- ‘share the pain’ with employees term strategy, the IA advocates for financial goals. and shareholders. For example, the RCs to consider the management investor-led International Corporate Governance Network (ICGN) and the IA issued letters calling on corporate leaders to ensure that executive pay EY’s 2020 Climate Change and Sustainability is reflective of the experience of the 9 overall workforce, particularly if staff Services Institutional Investor survey found have been subject to redundancies, over 70% of respondents would see independent furlough, reductions in pay/bonus or the company has sought additional assurance as ‘valuable’ or ‘very valuable’ with capital from shareholders. regards to third-party assurance across the ESG We also note investors are increasingly spectrum of activities. This is an area we explore interested in whether and how companies incorporate ESG targets further in Part 1 of this publication. into executive pay, though there isn’t
9 2020 Climate Change and Sustainability Services Institutional Investor survey.
Soaring to new heights | Governance considerations for nomination and remuneration committees 9 3.3 Governance — oversight over D&I
Below are considerations for boards to accelerate firms’ progress on D&I, consistent with many of the recommendations set out by the research, Board Diversity and Effectiveness in FT350 Companies10, published in July 2021 by the FRC in conjunction with London Business School, Leadership Institute and SQW.
3.3.1 Cognitive diversity its assessment of technical skills to exercise (a behavioural test to on boards include D&I, Customer Relations and understand strengths and support Environment. It also discloses the the establishment of high-performing Cognitive diversity is defined as gradated outcomes of the board skills teams) which facilitated a greater the differences in perspectives or assessment process to help decide understanding of each other and how 11 information processing styles . It is whether the board should buy in to enhance communications among intrinsically linked, although different, expertise, build expertise from them. Greggs’ board (2020 ARA, to demographic diversity and has within, or recruit expertise. p63) participated in the Heidrick & been associated with teams who Struggles’ Culture Signature review For the positive impact of cognitive solve problems faster. While there are and disclosed findings, including diversity to be felt on boardroom important initiatives on demographic areas for improvement. diversity such as gender, age and discussions, enough representation ethnicity, it is important that boards is needed to avoid falling into the Board evaluations, when done well, do not lose focus on the ultimate goal ‘one and done’ trap. For example, should incorporate an assessment i.e., to achieve diversity of thought. studies have shown that a critical of board culture and dynamics. mass of at least 30% women is Spirax-Sarco (2020 ARA, p92) will Cognitive strengths must therefore required for them to have influence undertake an externally facilitated be factored into succession planning at the board table. It is therefore board dynamics assessment (as and from the disclosures we have not enough to look simply at the part of the external board review) reviewed there are signs that some diversity of individuals, but also to look at the most efficient companies are attempting to reflect consider the board as a group. structure of the board committees this in board skill matrices. However, and the inter-relationship with the We have seen some transparent too often, these take a 'tick-box' executive committee. approach and sometimes raise disclosures on what boards are concerns about their completeness doing in this area. Jupiter Fund Diversity cannot be effective without and accuracy. For example, one FTSE Management’s (2020 ARA, p68) inclusion and the board chair has a 250 board skills matrix indicated directors undertook a Belbin key role in facilitating this. the lack of 'business leadership' skills for two directors, though their career histories disclosed in the ARA indicate otherwise. In such cases, it can be difficult to gauge the depth of a director’s skills relative to those Diverse boards need to be actively facilitated of other board members and/or to “by an able Chair who is a good listener, an expert in that field. But when done well and if combined with which involves developing a collaborative tenure and demographic diversity mindset and practices in the boardroom information and linked to succession that explicitly recognise and build director planning, these can provide a more nuanced assessment of board skills, capability to work with the uniqueness especially if a rating/ranking scale that each individual brings. is used. Noteworthy is Henry Boot (2020 ARA, p95), which expanded FRC Board Diversity and Effectiveness in FTSE 350 companies
10 Board Diversity and Effectiveness in FT350 Companies. 11 Harvard Business Review, Teams Solve Problems Faster When They’re More Cognitively Diverse, March 2017.
10 3.3.2 Nomination and functional roles such as chairs, Authority (FCA) is consulting on in succession planning Senior Independent Directors (SIDs), CP21/24. The slow pace of change processes for board and Chief Financial Officers (CFOs) and is also echoed by the recent Women Chief Executive Officers (CEOs). Count 2021 report which highlights executive appointments The latter suggestion is aligned with that COVID-19 pandemic added four The lack of diversity can be attributed the Hampton-Alexander Review’s years to the projected moment when to many factors, but a lack of talent recommendation that companies women achieve parity with men on in minority groups is not one of them. should as a matter of best practice executive committees, taking it from Many a time it is a reflection of the have a woman in at least one of 2032 to 2036. limitations of traditional recruitment these four roles, and this is now a and selection processes, as discussed proposal that the Financial Conduct in ILN’s report on D&I practices (see section 3.2.1). It is encouraging to see boards are trying to address this issue by making their nomination and succession planning processes To build on the progress achieved so far under more inclusive and transparent. SSE (2021 ARA, p124) discloses existing initiatives to improve diversity on the the gender diversity of the long and boards of the largest UK companies, in July 2021 short list of candidates that were in the running for the board chair the FCA issued a consultation on a change to the role. HSBC Holdings (2020 ARA, Listing Rules. p215) added social backgrounds to the board diversity policy as a factor for consideration when considering Under these new proposals, • At least one member of candidates for future appointments in-scope companies, including the board should be from a as directors. premium listed reporters but non-white ethnic minority excluding open-ended investment background (as referenced in The focus on socio-economic companies and ‘shell companies’, categories recommended by the backgrounds is welcome to help would be required to disclose Office for National Statistics). overcome stereotypes around in their annual financial report the 'old boys' networks and the Alongside this, the FCA is whether they meet specific board 'boardroom atmosphere' which proposing that in-scope companies diversity targets relating to gender Warren Buffett famously attributed publish standardised data on the and ethnicity on a 'comply or for the governance failures of composition of their board and explain' basis. otherwise 'intelligent and decent most senior level of executive directors12'. At the 2014 Berkshire The targets the FCA is consulting management by gender and Hathaway meeting, he stated: on are: ethnic background. This would “The nature of boards is they are part be produced in a standardised • At least 40% of the board business organisations and part social table format. The FCA is also should be women (including organisations. People behave part seeking views on whether in those self-identifying with their business brain and part with future the disclosure should cover as women). their social brain.” It is harder to avoid data on representation by sexual groupthink and exercise objectivity • At least one of the senior orientation at these levels, and/ when senior leadership belong to the board positions (Chair, CEO, or whether to extend the diversity same personal networks. SID or CFO) should be a woman data reporting to capture one level (including those self-identifying below executive-level management. To move the dial on diversity, as a woman). considering overall board composition alone is insufficient. Boards should CP21/24: Diversity and inclusion on company boards and also consider diversity of the NC executive committees | FCA itself, as well as key leadership and
12 Warren E. Buffett, 2002 Chairman’s Letter, Berkshire Hathaway, February 2003.
Soaring to new heights | Governance considerations for nomination and remuneration committees 11 3.3.3 Oversight of D&I appointed its first Head of D&I in Our findings indicate that few strategy across the 2019 and National Grid (2021 ARA, companies disclose ambitious wider workforce p80) appointed a CDO in January diversity targets beyond the board. 2021 to work towards the creation Of those that do, most are in the Based on our engagement with of a Global Diversity, Equality and financial services (FS) sector and companies and our review of Inclusion function which while part of are signatories of the Women in disclosures, some boards are the People function will have elevated Finance Charter (which requires enhancing their oversight of D&I reporting lines, independence the setting and publishing of own strategies across the wider workforce. and importance. Whilst there are gender diversity targets in senior Derwent (2020 ARA, p128) discloses concerns that the CDO position management). Some FS companies the board’s diversity focus areas could largely be window dressing which set diversity targets include from attracting diverse and talented and is subject to high turnover M&G Investments (2020 ARA, p61) employees through to retention and (average tenure for CDOs is under which references its commitment for promotion. Taylor Wimpey (2020 three years), the creation of such 40% of senior leaders to be women ARA, p86) explains the objectives a role can help elevate the focus on and 20% to be from a Black, Asian of the D&I strategy and provides D&I, instead of potentially falling or minority ethnic background by an update of progress. For more through the cracks in HR/People 2025, Lloyds Banking Group (2020 examples see section 3.4.3. departments that may not have ARA, p25) which states its goal to There is also a growing trend for the resources or skills to give it increase Black representation in boards to appoint a chief diversity the attention it deserves. senior roles from 0.6% at senior roles to at least 3% by 2025, and officer (CDO) at executive level to In addition, several companies, Barclays (2020 ARA, p11) which lead on diversity initiatives relating like Derwent (2020 ARA, p35) and aims to achieve 28% female Managing to the workforce, suppliers, and Greggs (2020 ARA, p39) are seeking Directors and Directors globally by strategic partners. LinkedIn data third-party specialist input and/or end of 2021. One company outside shows diversity roles are up 71% seeking independent accreditation of FS is Rio Tinto (2020 ARA, p67) over the last five years, with twice on D&I, e.g., National Equality which discloses targets of improving as many D&I positions (per 10,000 Standard (NES), to assess progress, diversity by increasing women in employees) in the UK compared benchmark against peers and senior leadership by 2% each year; to any other country. Monzo Bank enhance D&I strategies. and for 50% women in its graduate intake with 30% from places where it is developing new businesses. As D&I strategies mature, the focus will need to shift from viewing facets of diversity in silos to considering intersectionality i.e., how different elements of a person’s identity (e.g., origin, gender, disability etc.) overlap and impact their life. While nascent, there is some reporting on this. United Utilities (2021 ARA, p137) discusses and provides data on the intersection between gender and ethnicity in its executive team and its direct reports.
Examples of companies disclosing in their ARA how they lead on D&I initiatives
National Grid, Aveva, Unilever, Bellway — Designated Euromoney Future — Inclusion Informa — CDO Standard Life Aberdeen D&I champions in all Institutional Investor, and diversity forum — Head of D&I operating divisions Meggitt — D&I council
12 Improving how companies devise, implement and measure the impact of their D&I strategies — how EY can help
All organisations should ensure EY has helped over 300 organisations minimum standards in a way which they are working to identify the improve their approach to devising, balances global alignment with local barriers which are unique to their implementing and measuring the context and provides a detailed business in order to develop tailored impact of their D&I strategies using roadmap with recommendations recommendations which will drive the National and Global Equality to help organisations improve the most change. Boards seeking Standards (NES/GES) framework their outcomes. to enhance their D&I should refer which set clear criteria to guide The assessment framework is a to The Directors’ Resource Toolkit a leading practice approach. The 35-competency model that has (see “An update report from NES takes a holistic approach, been developed by industry and The Parker Review” (pp72-79), incorporating all aspects of D&I government to drive change and February 2020) that we developed. covered into a single national increase representation (see below). The toolkit sets out key questions standard. It addresses all nine To find out more on how EY can companies and boards should ask protected characteristics covered provide assessments visit: www. to accelerate progress in diversity in the UK Equality Act 2010 as nationalequalitystandard.com. and drive long-term change. well as broader D&I considerations EY has also launched the Supplier While the toolkit focusses on ethnic (e.g. social mobility) and enables Equality Standard (SES) which is a diversity, its contents could broadly organisations to measure D&I across light-touch version of the NES for be used in addressing other their regions, business units and organisations to assess D&I maturity diversity dimensions, such as departments. The Global Equality across their supplier base. gender and disability. Standard drives consistency of
Overview of the NES framework
The NES is a holistic framework designed to enable progression in D&I in a structured and methodical way. Using the 35 competency model, we can help drive change across all parts of business, for organisations at all stages of their D&I journey. 1 2 3 4 5 6 7 Core components Your Your Your Your Your Review and of DEI talent business people leadership relationships measurement
1.1 Culture 2.1 Talent 3.1 Strategy 4.1 Feedback 5.1 Commitment 6.1 External 7.1 Pay gap attraction mechanism and accountability relationships and CSR
1.2 Policies and 2.2 Recruitment 3.2 Bias 4.2 Mental health 5.2 Visibility 6.2 Supplier 7.2 Data analysis practices and on-boarding and wellbeing and messaging relationships
1.3 Engagement 2.3 Appraisal 3.3 Business 4.3 Flexible 5.3 Inclusive 6.3 Customer 7.3 Action survey and performance case working leadership insight planning and monitoring implementation
1.4 Targeted 2.4 Career 3.4 Governance 4.4 Adjustments 5.4 Senior level 6.4 Industry 7.4 Review training progression and accessibility scrutiny insight and regulations
1.5 Communications 2.5 Learning and 3.5 Setting 4.5 Caring 5.5 Middle 6.5 Human 7.5 Measurement development priorities responsibilities management rights and modern slavery
Arun Batra OBE, EY Partner, Culture, Diversity and Inclusion Advisory, as well as Founder and CEO of NES/GES/SES [email protected]
Soaring to new heights | Governance considerations for nomination and remuneration committees 13 Driving change on diversity and inclusion in the financial sector The primary conclusion of “DP 21/12 is that there is no The FCA, PRA and Bank of • Making senior leaders one-size-fits-all approach England issued Discussion directly accountable for to improving D&I. It strikes Paper 21/2 in July 2021 to D&I in their firms akin to engage financial firms and other Senior Manager Certification the right balance between stakeholders in a debate on Regime requirements. minimum standards and how the pace of change can be • Setting more explicit guidance flexibility, but I think where accelerated and to discuss their on linkages of D&I in executive firms will struggle will be regulatory approach and the remuneration policy. role they can play to support this in collecting and reporting • Requiring RCs to have oversight change. Their research shows on diversity data. It is also of how obstacles that give evidence of correlations between rise to pay gaps and other important for firms to D&I and positive outcomes in adverse D&I outcomes are consider publicising their risk management, good conduct, being managed. healthy working cultures, and targets to show that they innovation. These outcomes • Having regulatory requirements are really trying to make directly contribute to the stability, or expectations for firms to have D&I targets for some a difference. Without the fairness and effectiveness of the metrics, targets and data, firms, markets and infrastructure or all of their boards, senior that together make up the management population and we will not achieve change financial sector. the wider firm. as we can't hold people • Encouraging the use of D&I accountable. As to how those Their suggestions to help drive audits to ensure actions are accountability and change include: in line with the organisation’s accountability mechanisms • Asking firms to collect D&I values, ethics, risk appetite might work and how much data with the view it may lead and D&I policies. director pay is at risk if to regulatory reporting. Whilst these proposals are still targets are not met, that is for • Expecting firms to develop formative, they signal the direction individual boards to consider. metrics that enable monitoring of travel for companies both in of their D&I initiatives. financial services and outside. Amarjit Singh, EY Partner, • Clarifying how D&I is considered Financial Services [email protected] in board recruitment and succession planning.
14 3.4 Strategy — HC priorities and culture
Boards need to assess which HC matters are material, consider whether these should be elevated to being a strategic objective, and when that is the case, choose the right key performance indicators (KPIs) to monitor performance.
Despite the increasing focus 3.4.1 Monitoring culture — 63% of organisations that are on HC matters, less than half progress on last year classified as 'developing' in their risk management approach of companies in our sample The EY Global Board Risk Survey do the same. 80% of boards of (44%) disclosed a strategic 2021 found that 80% of companies organisations that lead on risk objective that explicitly leading on risk management often or management (as opposed to 40% always talk about the culture needed referenced their workforce of those considered developing) to support the organisation’s strategy discuss the metrics needed to and not all of those had a at board meetings. In comparison, assess talent and culture risks. KPI(s) associated with that objective. A fifth of those that did failed to articulate Companies with HC related strategic objectives and KPIs why the chosen KPI was an effective measure of strategic progress. In summary, only Strategic objective KPI 28% of companies within our sample had an HC related 34% 9% 35% 22% strategic objective, with a meaningful KPI tracking progress against it.
Exceptions include Taylor Wimpey (see Figure 3.2). The company’s Best practice is for there to be a clear alignment between strategic priority to ‘Be the employer “strategic objective and KPIs. Having a KPI, but no of choice in our industry’ is objective to map it against, or vice versa, undermines underpinned by four KPIs: voluntary employee turnover, directly employed the consistency of the strategic narrative. key tradespeople, number recruited into early talent programmes and Our analysis might indicate that companies are elevating health and safety annual injury the strategic importance of HC in incremental steps, incidence rate. Taylor Wimpey but it will take time until this is fully integrated into the explains why these are key for their strategy, provides insight on the strategic approach. performance during the year and Mala Shah-Coulon, EY, Head of Corporate Governance discusses priorities going forward.
Soaring to new heights | Governance considerations for nomination and remuneration committees 15 In our 2020 review “From intent to disclosure (2020 ARA, p65) is an • SSE (2021 ARA, p113) discloses action” we noted that the majority example of the variety of methods the board’s culture dashboard, of companies made some reference through which the board and its the maturity of which was to monitoring culture, but very few committees monitor aspects of furthered in 2020/21, with included any detail on exactly how its culture framework. Similarly, work undertaken to enhance they do this or the resulting actions. ITV (see Figure 3.3) and Experian the linkage of data to From our analysis we made three (2021 ARA, p92) set out the key accompanying observations. proposals to enhance the narrative: ways in which the board and/or • Spectris (2020 ARA, p66) committees monitored culture during • Explain why the desired states that it is developing a 2020 and how these contributed to behaviours are critical culture dashboard that will delivering insights on their culture. to the achievement of be monitored by the NC and strategic objectives. The lack of a compelling narrative will include metrics such as engagement, values adoption, • Lift the bonnet and be may also be due to limited board the employees’ experience of transparent about the metrics involvement in culture monitoring business culture; progress on D&I, used to assess the actual culture. beyond workforce engagement. Given the requirement has only been ethical business management • Articulate the actions that need in place for two reporting cycles, and behaviours through reporting to be taken to close any identified boards’ approaches are still evolving. from the confidential Spectris gaps and report on progress. This is partly evident from the Helpline, ethics training etc. A year on, our analysis indicates little number of companies that reference • IAG (2020 ARA, pp91 and 100) progress. Whilst there are increased plans to build on or enhance culture references a study undertaken references to culture across the related activities. For example: with the help of McKinsey to Strategic Report and companies evaluate culture for each business • ITV’s 2021 internal audit plan have continued to emphasise its unit and an internal audit of will include a standalone review importance, the narrative regarding culture at IAG Tech scheduled of management’s approach governance over culture remains for 2021. to monitoring culture and sparse. Based on our engagement assessment against ITV’s Whilst we are seeing some more with companies, to some extent values (see Figure 3.3). detail in ARAs about the data/ this is because many boards do not sources of information that approach culture monitoring as a • Lloyds Banking Group (2020 boards are reviewing to get insights standalone task, but rather rely on ARA, p92) makes reference to on culture (e.g., Synthomer — see insights gained from discharging a proposed 2021 Culture Figure 3.4 — discloses numerous other duties. This may make Change Acceleration Plan to cultural aspects that the board capturing the activities and outcomes embed improvements and monitors and maps these against more difficult. National Express’ accelerate transition towards its desired culture. relevant sources of information),
16 there is still very little that is being Irrespective of which approach a disclosed about outcomes and company takes, noting that they are actions. Similar statements about not mutually exclusive, a commitment Five culture archetypes plans for the upcoming year were to D&I requires careful oversight of made in some prior year ARAs, diversity initiatives together with a Companies generally fall into however very few of those companies roadmap for how targets are going one of five culture archetypes: followed through with enhanced to be achieved. Moreover, through disclosures explaining progress or their monitoring activities, boards • Innovation — We are insights from the new initiatives/ also have to ensure that their entrepreneurial, focus monitoring mechanisms in the current ultimate aims e.g., creating and on anticipating market cycle. Whether this is due to the retaining a diverse pool of talent, needs, encourage and complexity of interpreting findings are not hampered by poor company recognise ideas, and support from monitoring activities and turning behaviours and norms and that prudent risks. them into action plans or whether inclusion is firmly embedded within • Brand — We build strong plans failed to come to fruition company culture. AstraZeneca commitment and pride in e.g., due to COVID-19 is unknown. (2020 ARA, pp8, 68) updated its our products and services corporate values to clearly reflect while operating with Monitoring and managing corporate its commitment to D&I. integrity and respect. culture is further complicated by the increasing use of contractors, Too often, organisations discuss • Customer — We gear outsourcing and zero-hours contract D&I strategies solely or mostly in everything we do to the workers. There is limited narrative the context of talent management, customer, are relationship in annual reports to suggest that without considering broader links to -based and empower boards monitor the culture of such the company’s strategy. However, our people locally to outside workers, and, in fact, this is slowly changing, e.g., we have drive success. although the Code refers to seen a few companies applying an • Efficiency — We optimise engagement with the ‘workforce,’ inclusive lens to product and service and are productive the focus of such interactions remains development. HSBC Holdings (2020 through a formal structure, on employees. Some argue that a ARA, p65) discloses that its insurance defined roles and effective change to the section 172 duty, business uses a D&I framework to organisation-wide replacing the word ‘employees’ with ensure product development and coordination. ‘workforce’ is needed to elevate the engagement opportunities are • Quality — We strive for issue and bring non-employees firmly designed to address needs across precision and excellence into the scope of an organisation’s HC. different customer groups. GSK through continuous explains (2020 ARA, p5) that it is improvement, collaboration 3.4.2 Diversity and inclusion focussed on improving diversity in and a long-term view. as a key dimension clinical trials to ensure that they of culture represent — and its medicines are safe and effective — in real-world The extent of D&I-related disclosures patient communities. within ARAs has been growing steadily over the last few reporting cycles. One of the trends we noticed reviewing 2020 ARAs was that a very significant portion of the narrative regarding culture, and often its monitoring, was dedicated to this important dimension of culture, sometimes at the expense Strong governance is needed to translate of other aspects. “easy corporate rhetoric into tangible An increasing number of companies action through clearly defined goals. are attempting to articulate why D&I is critical to the success of their At a tipping point, Andrew Parry, Newton Investment Management. business, often linking this to their cultural archetype of innovation. Others are not attempting to articulate a business case for diversity, focussing rather on it being the right and moral stance to take.
Soaring to new heights | Governance considerations for nomination and remuneration committees 17 3.4.3 Committee trends It is clear from our analysis that Around boards will need to determine a There are differing approaches to bespoke approach that is appropriate allocating responsibilities for HC for their organisation. But in matters and culture monitoring. order to be effective, the various 12% Majority retain responsibility at sources of insights and outcomes of board level (in line with the Code). of NCs within our monitoring will need to be collated, However, given the complexity and sample are now explicitly compared and analysed at board breadth of the topics, we are seeing level. AstraZeneca (see Figure 3.6) tasked with oversight of the mandatory committees (under explains how the various sources are diversity initiatives in the the Code) expand their focus on HC summarised in a workforce culture more broadly and specifically on broader organisation. report and supplementary reports culture. Also, committees whose collated within a board portal. responsibilities cover sustainability or ESG matters often include people matters in their remit, including oversight over workforce engagement (e.g., Centrica) or diversity and inclusion (e.g., Direct Line and GSK).
Examples of committee trends
Employee engagement Policy, procedure and compliance Research commissioned on workforce engagement Many aspects of culture monitoring have found a home by the FRC (conducted by Royal Holloway, University on the AC’s agenda. This is not surprising given there are of London and the Involvement and Participation aspects of policy, procedure and compliance associated Association) notes that 56% of 280 FTSE350 companies with sources of culture insights, and these tend to fit into had appointed a designated non-executive director the broader risk management and internal controls remit of (NED) or a combination of a designated NED and the AC. Similarly, whistleblowing/speaking up mechanisms an advisory panel. Some companies, however, have are often monitored by the AC for the same reasons. allocated allocated this responsibility to a board level As more companies involve internal audit in performing committee, e.g., Spirax-Sarco (2020 ARA, p96) culture reviews, the role might expand further. has a dedicated Employee Engagement Committee; Fresnillo’s AC monitors and discloses granular information at BAE (2020 ARA, pp116-177) the Corporate on whistleblowing cases (2020 ARA, p84). ITV’s AC Responsibility Committee is responsible. (see Figure 3.3) reviewed the company’s duty of care Diversity and inclusion processes and performed a deep dive into wellbeing during COVID-19 for its people, talent and programme participants. Around 12% of NCs within our sample are now explicitly tasked with oversight of diversity initiatives in the Health and safety broader organisation (e.g., Capita, Prudential, ITV Within the extractive industries sector, monitoring (see Figure 3.3)). adherence to a safety culture is very often in the remit Where this is the case, some committees have indicated of a specific committee, often constituted as a Health, a broadening of their HC remit going forward to Safety and Sustainability committee (e.g., BP, Polymetal extend beyond D&I, for example Rentokil’s NC in 2021 International, Glencore (see Figure 3.5)). The pandemic will additionally focus on monitoring and fostering a has also raised awareness of mental illness, with more successful performance culture (2020 ARA, p107).
18 Historically, oversight over whistleblowing was an “AC duty, being seen predominantly as a means of raising concerns in relation to financial improprieties and therefore within the traditional remit of the AC. However, the 2018 Code introduced a clear link between whistleblowing arrangements and the board’s role in ensuring that behaviours align with culture, hence elevating whistleblowing oversight to the board and for it to cover matters beyond financial. Nonetheless, many ACs have continued to review these arrangements and report on them to the board. In such circumstances, boards might want to consider whether committees with a delegated HC focus should share the AC’s responsibilities in respect of cases that relate to matters of diversity, inclusion, harassment etc.
Maria Kępa, Director, EY Corporate Governance Team
companies acknowledging that mental wellbeing needs to Glencore has a dedicated Ethics, Compliance and Culture be managed in the same way as physical health and safety. committee (see Figure 3.5). Its main responsibilities Morgan Sindall’s (2020 ARA, pp77-78) Health, Safety and include overseeing the implementation of the ethics Environment committee monitors each division’s progress and compliance programme; assessing and monitoring against the health and safety framework, of which mental culture to ensure alignment with purpose and values health is a key aspect. The committee noted that mental and monitoring the Group’s stakeholder, including health was one of its key focus areas and recognised workforce, engagement. the importance of having put in place employee mental Standard Chartered has a Brand, Values and Conduct health support programmes in previous years. committee (2020 ARA, pp121-124) with responsibility for Ethics and conduct overseeing the Board’s engagement framework with the workforce and ensuring workforce policies and practices Some boards have set up committees with a specific remain consistent with the Group’s valued behaviours. focus on compliance, conduct and ethical culture, In respect of culture and values, it reviewed: often combined with corporate social responsibility. These committees are often tasked with oversight • the culture transformation progress. of how well embedded a company’s code of conduct • key insights from the Brand and Culture Dashboard, is and of the effectiveness of the speak-up mechanisms including developments to the dashboard to increase (e.g., Reckitt, Aggreko). its adoption across the Group, aiming to drive Values and culture discussion and action on culture change. • employee survey results and interpretation, A few boards have set up committees with a specific assessing and monitoring the Group’s culture reference to culture or values in their name. These often and valued behaviours. cover conduct and compliance matters, but have a more holistic remit in respect of culture and include workforce • the Group’s approach to D&I. engagement oversight.
Soaring to new heights | Governance considerations for nomination and remuneration committees 19 3.5 Risk management
Given the extent of investor and public scrutiny on the outputs of the RC and the volume and detail of regulatory disclosure requirements in remuneration reports, it is important that new members of RCs undergo a thorough induction process and refresher training is undertaken on an ongoing basis for all members. Further pressure on this could come from the BEIS proposals for the full annual report including the Directors’ Remuneration Report to fall within the scope of the new regulator’s corporate reporting review powers.
3.5.1 Flexibility, discretion apply malus and clawback to short increases and short-term incentive and judgement and long-term incentives. plan payments for 2020 owing to the overall financial performance To date, there have been few cases Designing executive remuneration and to reflect the wider stakeholder of RCs invoking malus and clawback schemes to incentivise desired impact of COVID-19. behaviours and outcomes and provisions, with the governance minimise excessive risk taking is a narrative more commonly referring to RCs have perhaps been reluctant to key facet of risk management. There the exercise of downward discretion. invoke these punitive and perhaps is little tolerance for 'pay for failure', This has been more common recently impossible (i.e., attempts to clawback and this is why RCs must have the as a result of COVID-19, for example, monies already paid) powers except ability to exercise discretion and to protect against windfall gains as in the highest profile cases. WPP a result of rebounding share prices blocked pay outs of share awards to or to adjust salary levels in line with its former group chief executive Sir wider employee compensation. Martin Sorrell following media leaks13; Quilter’s RC (2020 ARA, p124) at and Rio Tinto’s (2020 ARA, p143) Malus — refers to action to forfeit the recommendation of the executive former CEO had a malus adjustment all or part of incentive awards directors reduced their short- of £1m applied to his 2016 long- before they have vested and term incentive awards to zero and term incentive plan (LTIP) as a result been paid to an individual. redirected this funding to employees; of the Juukan Gorge event. A noted Clawback — refers to the similarly Meggitt’s (2020 ARA, p116) case of clawback is Volkswagen AG, recovery of amounts of monies RC cancelled salary increases, fee whose supervisory board announced already paid to an individual Typically, incentive plan rules will set out the triggers that may result in the application of malus or clawback, and these There is often confusion regarding discretion, malus will usually include misconduct “and clawback — in which situations should each apply? and material misstatement of accounts. Companies define these differently and sometimes discretion and malus are used interchangeably — the Discretion — refers to the ability of the RC to override formulaic definitions alongside should help clarify this. Typically, remuneration outcomes in a companies have specific triggers for malus and clawback positive or negative manner which may be narrowly defined. The BEIS consultation due to significant factors which aims to change this by setting out a broader list of triggers may have been unforeseen, and which are not otherwise factored and also suggests a minimum period of application. into remuneration design. Caroline Johnson, Director, EY People Advisory Services [email protected]
13 Martin Sorrell in legal battle with former employer WPP over payout, The Guardian, April 2021.
20 agreements to recover compensation in material reputational damage for p143) following the Juukan Gorge from former executives following the the company and Yorkshire Building event, in addition to the exercise Dieselgate emissions scandal14. Society’s remuneration policy (2020 of malus, the RC designed a new ARA, p99) sets out clear aims and remuneration policy to safeguard Despite what is already in existing principles of reward helping to align against rewarding executives in law and the 2018 Code, the BEIS actions with the organisation’s values. the future where there have been consultation includes proposals events that materially impact to further strengthen clawback RCs may consider the following to the company’s social licence to and malus provisions in directors’ ensure that incentives are aligned operate. Remuneration has been remuneration arrangements. to an organisation’s culture: re-designed to recognise the The proposal suggests this will be • Metrics — are there key cultural importance of culture and the implemented by recommending indicators that should be reputational impacts of failures. RCs include a broader list of specific incorporated in incentive plans conditions or ‘trigger points’ such as • Engagement — with stakeholders e.g., net promoter score or reputational damage or misconduct. to explain how decisions taken ESG measures. Such measures, Many companies have already are aligned e.g., minimum wage if sufficiently weighted, could disclosed their own ‘discretion or pension contribution levels. help to reinforce the company’s frameworks’, including Croda (2020 Our research last year showed culture and values. ARA, p83) and John Wood Group it is challenging to engage (see Figure 3.7) or how they intend • Malus, clawback or discretion — the workforce on the topic of to operate malus such as Weir Group ensuring the RC makes the right executive remuneration. This (2020 ARA, p111), but the proposals decisions appropriate to the remains the case, but some seek to broaden the specific cultural and social context e.g., companies explain their efforts. circumstances in which malus and considering how remuneration The RC chair of DS Smith clawback should be considered. design supports the governance (see Figure 3.8) discusses their agenda on issues such as diversity approach to reward-related If implemented, these changes or societal contributions. In the feedback from employees. will strengthen the position of the case of Rio Tinto (2020 ARA, RC when considering whether to exercise malus or clawback, with the expectation that investors will have better reassurance against rewards for failure.
3.5.2 Impact of remuneration on culture Executive remuneration can be used as a tool for rewarding executives who demonstrate values and behaviours that embed the desired culture. Whilst the RC does not have responsibility to determine cultural strategy or drive cultural change, the RC should ensure (as per Code Provision 40) that the overall remuneration philosophy, as well as the specific design of incentive plans supports and reinforces desired values and behaviours. BT (2021 ARA, p96) applies an underpin in their restricted share plan awards that states there must have been no ESG issues which have resulted
14 Volkswagen secures $21.7m in executive clawbacks for Dieselgate roles, Compliance Week, June 2021.
Soaring to new heights | Governance considerations for nomination and remuneration committees 21 3.6 Metrics and targets
3.6.1 HC metrics HC metrics that are material to with a framework to increase the investors’ understanding of the quality and comprehensiveness of Collection and monitoring of data is company’s business. Neither of their workforce reporting). Others key to the success of HC programmes these requirements, however, simply use their own internally and necessary to satisfy investor includes a list of metrics to disclose defined indicators. expectations. Disclosure of HC and are instead qualitative. matters is also a legal requirement. The absence of a common standard UK Companies Act 2006 requires Some companies, therefore, turn by which companies measure certain companies to publish a Non- to the Sustainability Accounting and report on HC matters makes Financial Information statement Standards Board (SASB), which benchmarking companies’ HC with information relating to the provides a variety of HC related performance challenging for investors company’s employees, social matters metrics by industry or various Global and also creates uncertainty for and respect for human rights. Since Reporting Initiative (GRI) standards. companies on what to report. Some disclose data to the Workforce August 2020, the U.S. Securities and This lack of consistency has prompted Disclosure Initiative (an investor Exchange Commission (SEC) requires some international organisations coalition which provides companies companies filing 10-Ks to report on to develop common standards for non-financial information, including or dedicated to HC: • ISO (International Organization for Standardization) has issued guidelines15 on how to measure and report HC contribution to the organisation, including in respect of diversity, culture, recruitment and succession planning. • One of the four pillars of the World Economic Forum’s (WEF's) International Business Council (IBC) common metrics built on the basis of SDGs is ’people’. • The European Commission (EC) has recently issued a Proposal16 for a Corporate Sustainability Reporting Directive (CSRD), which would amend the Non- Financial Reporting Directive17 (NFRD) requiring all companies within the scope of the NFRD to report non-financial information (including HC related) in accordance with a common EU standard18.
15 30414 Human Resource Management — Guidelines for Human Capital Reporting for Internal and External Stakeholders is the world’s first global standard focussed specifically on how to measure and report HC contribution to the organisation in order to support sustainability of the workforce. 16 Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting. 17 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups Text with EEA relevance. 18 If the Proposal is approved EU companies would have to apply the standards for the first time in 2024. Although the UK would not fall within scope, UK companies may eventually end up making similar disclosures given investor demand.
22 • In December 2020, SASB employees gender diversity and the introduction of new principles released its preliminary HC ethnic origin, response rate to their for senior-level recruitment to framework which may develop stuff survey, staff satisfaction or help protect from bias. In our view, into a set of industry-agnostic employee retention rate). disclosing the plans to achieve targets HC metrics. and the progress made during the But collecting and reporting data is year as done by these companies is • The International Financial just part of the equation. Directors, key to increasing confidence in the Reporting Standards (IFRS) as part of their oversight, need to company’s preparedness to achieve Foundation issued a consultation ensure that management analyses them and creates much needed setting out constitutional changes the information (i.e., identifies root accountability. This is particularly to allow for the introduction of causes of the issues/variances), important for those companies which an International Sustainability assesses progress against targets, include HC matters as part of the Standards Board to support and proposes actions to be taken in strategy (see Taylor Wimpey example the development of a global set response, in line with the approach in section 3.4). of standards intended to drive discussed earlier for culture high-quality, consistent and monitoring. Antofagasta (2020 ARA, The Society for Human Resource comparable reporting. pp19, 121 and 122) acknowledges Management estimates the average The practice across UK companies as the difficulty in attracting female replacement cost of a salaried regards to non-financial metrics more talent in mining and identified that employee to be six to nine months broadly, and therefore as they related in Chile female participation in the of salary. Regardless of the cost, to HC metrics, varies. According to a workforce remains well behind more the reasons behind turnover may recent FRC report, the UK is among developed economies such as the UK. highlight issues regarding culture the top three countries by number In response it has various initiatives or employee satisfaction. Many of companies, with 54 reporters including sponsoring the creation companies disclose voluntary adopting the SASB standards. Other of a Chilean equivalent of the 30% employee turnover in their ARAs, frameworks used by UK companies Club, including metrics related to including ITV (2020 ARA, p105) include Carbon Disclosure Project D&I in its bonus plan etc, to act on Bunzl (2020 ARA, p90) and Taylor (CDP), TCFD and GRI. Persimmon its commitment to doubling the Wimpey (2020 ARA, p25). Not all (2020 ARA, pp20-21) and Pearson percentage of women in its workforce companies, however, track turnover (see Figure 3.9) incorporate SASB by 2022 from a 2018 baseline. in a manner that is decision- metrics within their ARAs. IAG It reports progress monthly to the useful; especially in large, complex (see Figure 3.10) includes a table Executive Committee and discloses organisations a rate that has been showing alignment with external the progress made during the year. averaged out across business units/ frameworks and GRI standards in Developments are monitored by the divisions and geographies might the sustainability section of its ARA. board. Direct Line (see Figure 3.11) disguise issues and not serve as a risk Barclays (2020 ESG Report, p12) completed an analysis of ethnicity indicator alerting management or incorporates SASB disclosures and data and identified a gap in the the board of the need to understand GRI standards into its sustainability experiences of different colleagues the root causes and take corrective report. Croda’s 2020 Sustainability (i.e., for Black, mixed ethnicity, actions. Directors should set Report has been prepared in or those from one of the smaller clear targets at an appropriately accordance with the GRI standards. ethnic groups, it wasn’t as positive disaggregated level and have a The company also issues a separate to work for the Group as it was for variance threshold for information to GRI report. In January 2021, other colleagues). In response, the be reported to them. Management Shell (2020 ARA, p85) and HSBC company has signed up to Business should also identify critical roles for Holdings (2020 ARA, p43) agreed in the Community’s Race at Work which retention is key and boards to adopt the WEF IBC stakeholder charter and has introduced new may want to consider a different capitalism metrics. targets to hold itself to account for reporting threshold for these. improving Black, Asian and Minority Similarly, an increasing number of Other companies like Derwent Ethnic representation in leadership companies disclose employee survey London (2020 ARA, p129) do not roles by the end of 2022. During participation and results (see section align their HC reporting to any the year, Direct Line has several 3.6.2). However, there is seldom common standards but instead initiatives such as launching an reference to any arising actions disclose a wide range of metrics awareness and education programme or director views. relevant for its business across to build a greater understanding and its ARA (e.g., employees by age,
Soaring to new heights | Governance considerations for nomination and remuneration committees 23 Determining metrics which help companies to measure and demonstrate long-term value creation to investors and other key stakeholders — how EY can help
Any given general metric may not be relevant to all companies. The Long-Term Value Framework, a concept originally created by EY, working with Cambridge University, and further developed in collaboration with Coalition for Inclusive Capitalism and validated by Embankment Project for Inclusive Capitalism (EPIC) participants, provides a four-step approach to identifying and evaluating company-relevant key value drivers and to developing non-financial metrics that can help identify, measure and clarify value and value creation. EY’s cross-service line teams work with companies in applying this approach to determine the most relevant metrics of value creation. EY Long-term value teams also help companies shape their strategy, drive transformation and measure progress in providing sustainable value. Building on the work with EPIC, EY also played a leading role in the development of the metrics in the WEF IBC initiative. We are therefore uniquely placed to advise on their adoption.
1 3
First, companies establish the Third, companies identify business context by (i) examining the resources and strategic relevant externalities, such as social, capabilities that will enable technological, political and market them to deliver on the factors, that may affect the company outcomes necessary to meet and its stakeholders over time and stakeholder expectations and (ii) reviewing their purpose, strategy Context map how execution will impact and governance to understand the risk and value. major drivers of corporate value. Stakeholders Companies then ask whether Strategy their leadership and governance Stakeholder outcomes structures, policies and incentives are designed so the company can achieve its purpose and strategy. Purpose
Metrics 4
Fourth, based on the strategic 2 Value Value capabilities leveraged to meet creation protection stakeholder expectations, companies Second, companies assess stakeholder work on identifying metrics indicative Strategic capabilities outcomes by (i) identifying those of long-term value creation based, in part, on analysis of any metrics stakeholders at the core of the Governance company's value creation strategy, currently used and data collected in which may include customers, investors, the prior steps. Companies should employees, communities, suppliers also look at external sources, such as and regulators, (ii) examining how peer practices and relevant studies, to the company creates value for those assess and validate developing metrics. stakeholders that, in turn, creates corporate value and (iii) identifying, confirming and prioritising, through interaction with stakeholders, the actual outcomes necessary to meet stakeholders expectations. Barend van Bergen, Partner, EY, Global LTV Methodology Lead [email protected]
24 According to the World 19 Health Organization , Employee engagement is not the same as engaging depression and anxiety “employees. Employee engagement is the outcome of will cost global economy actively engaging employees through a strategy that $1 trillion a year in lost drives improved performance — achieving engagement is simply not as easy as putting together a survey to measure productivity and has employees’ level of engagement. Organizations miss urged companies to take a the mark on engaging employees when they emphasize central role in addressing moving the overall engagement number but overlook the mental health issue. tactical elements that lead to improved business outcomes. Make no mistake about it: Measurement does matter. But companies that base their engagement strategy on 3.6.2 Employee surveys a survey or metrics-only solution can get caught up in a 'rinse and repeat' pattern that does nothing to improve Surveying the workforce remains the most common way for companies their business. They focus on engagement periodically to measure employee engagement. — usually around survey time. As a result, these In our publication “From intent to organizations make false promises to employees, action” we noted that companies pledging change through intensive communication were being more transparent about their annual employee survey results, campaigns but providing little actual follow-through. including reporting different metrics Gallup, State of the American Workplace 2017 with historical trends. Leading practice disclosures include actions being taken in response to the This year, many conducted shorter programmes and tailor the next survey results as done by Pearson but more frequent pulse surveys. For intervention in light of the latest (2020 ARA, p28). Its first quarter example, Landsec (2021 ARA, p63) results. It also allows companies to employee pulse survey found that adapted its approach to surveys by report back quickly to their workforce employees wanted more support conducting a full survey in May 2020 on the actions they are taking. Just in understanding career pathways, in response to the first lockdown, as boards do not wait for the ARA navigating learning resources and followed by quarterly surveys in to be issued to get an update on making learning part of their work. June, September and December. ITV financial results, directors should In response, Pearson held its first (2020 ARA, p7) undertook a number not be satisfied with once-a-year Global Learning at Work week, where of employee pulse surveys to help updates on strategic progress on HC it delivered 70+ hours of learning monitor wellbeing. Smith+Nephew issues. We expect the trend above to to 11,000 employees. (2020 ARA, p13) launched a survey continue. Wellbeing needs and new to better understand what flexibility working models will require ongoing Our analysis shows that the meant to its employees. considerations and agile responses. pandemic prompted companies to Continuous listening and reporting engage more frequently with their Checking in with employees and findings to the board regularly employees, especially on what they soliciting their views more regularly will be critical as the long-term could do to improve wellbeing on targeted aspects can help consequences of the pandemic and understand their employees' organisation respond to employee on the workforce unfold. needs regarding the future of work. concerns more promptly, adapt HC
More than half (54%) of employees surveyed from around the world would consider leaving their job post-COVID-19 pandemic if they are not afforded some form of flexibility in where and when they work, according to the EY 2021 Work Reimagined Employee Survey20.
19 World Health Organization. 20 EY 2021 Work Reimagined Employee Survey.
Soaring to new heights | Governance considerations for nomination and remuneration committees 25 Introducing ESG metrics in executive incentive plans — how EY can help
Investors and other stakeholders expect companies to give proper consideration to ESG risk for their business, and to report in a clear and concise manner so that they can make informed investment decisions. Many companies have previously focussed on statements of intent, but there is now a need to demonstrate action, and assessment and measurement are key enablers to show progress in this area. One lever which can be used to demonstrate action is reward, and, in particular, incorporating ESG measures into short and long-term incentive plans. EY helps companies navigate the current corporate governance environment and diverse investor expectations when considering non-financial metrics for incentive plans, providing insight from the strategic planning through design to reporting and engagement. We have outlined below a framework to support RC consideration of ESG metrics.
Reporting and Strategy Structure engagement
• The RC should consider the board • If key ESG metrics are identified, • Is the narrative across the approved strategy and KPIs and what are the timescales Strategic Report and the the role of ESG within this. If ESG associated with these? Directors' Remuneration metrics are linked to incentives • If long-term, are there key Report cohesive? then there needs to be clear milestones? • Do the messages reflect and alignment with strategic goals. • Can broader goals be broken support the organisation’s • If the strategy does not include down into operational must-dos? culture and purpose? clear ESG KPIs and timelines then • Are targets clearly articulated or • Can the approach be easily perhaps now is not the right time are they more general statements explained to investors, employees to incorporate such measures into of intent? and other stakeholders? incentive plans. • Which metrics are viewed as being business critical? • Does the approach demonstrate commitment (specified targets) or is it window-dressing (e.g., general discretion)?
Caroline Johnson, Director, EY People Advisory Services, [email protected]
26 3.6.3 Non-financial value, rebalance excessive focus Setting targets on short-term performance targets metrics used in Shareholders are critical of measures and create better accountability on remuneration plans which have no clear targets to allow sustainability-related performance them to assess progress, but setting Central to the concept of delivering across management. targets for many ESG metrics can be sustainable value for stakeholders There are, however, numerous challenging and controversial. What is the need for incentivising leaders challenges with including non- are the ‘right’ or ‘acceptable’ levels to meet long-term financial and financial metrics in remuneration of diversity, inclusion or societal non-financial objectives. The EY plans and some, like Professor contributions to aim for? There is Long-Term Value and Corporate Alex Edmans, London Business also a danger that targets could lead Governance Survey found the School, caution that many to quick fixes which do not address internal factor that had the greatest ESG measures omit important the heart of the matter. negative impact on an organisation’s qualitative dimensions21. ability to generate long-term value It is also worth noting that ESG was that a significant portion of Choosing the right metrics targets are not necessarily always CEO and executive compensation long term in nature and, hence, There should be a clear correlation is tied to short-term performance. incorporating ESG metrics within between the KPIs set out in the This indicates that change is remuneration is not a panacea Strategic Report and the metrics needed in how remuneration for short-termism. used in incentive plans, closely policies are designed. linking strategic achievement to Reliability of data To combat the focus on traditional remuneration and setting the tone A key consideration when metrics financial, profit-driven metrics of what is strategically important. have been chosen is determining the that are insufficiently linked to The choice of metrics is complicated reliability of the data. Although we strategic objectives, many are by the proliferation of benchmarks note currently levels of assurance for linking executive remuneration and standards on non-financial over non-financial information, to ESG targets. The UN Principles information referred to in section especially beyond greenhouse gas for Responsible Investment 3.6.1. and the challenge of emissions, remain low, the RC may have even stated that, if determining which ESG issues should find value in having key non-financial appropriately structured and take precedence. Those metrics that metrics assured, particularly if the effectively implemented, ESG- influence executive remuneration metric is complex to determine, linked pay could increase firm should relate to material issues only. highly judgemental or there is significant investor interest in the issue e.g., environmental metrics. The number of companies in the FTSE 100 which use an ESG These considerations should factor measure has increased to c.70% from less than 50% three years ago: into discussions about the audit and assurance policy, which we discuss 2016 2019 in Part 2 of this publication. Current trends 60 Despite the challenges noted above, 55 companies are increasingly linking 50 remuneration to strategic ESG objectives. Linking environmental 39 objectives, particularly net zero 40 commitments, is more prevalent as compared to social or governance 30 objectives. Environmental measures, though, have a noted concentration across the extractive, consumer 20 13 and financial industries; in line with expectations driven by TCFD. 10 6 4 3 Lloyds Banking Group (2020 ARA, p119) discusses the shift in the 2021 0 Annual LTIP Both Annual LTIP Both approach to reduce the number bonus only only bonus only only of reward measures, rebalance the scorecard to ensure a clear weighting between financial Source: ESG metrics in executive incentive plans, EY People Advisory Services, March 2021
21 Why Companies Shouldn’t Tie CEO Pay to ESG Metrics, Alex Edmans, The Wall Street Journal, June 2021.
Soaring to new heights | Governance considerations for nomination and remuneration committees 27 and non-financial metrics while appropriately capturing ESG Overall, the higher prevalence of ESG metrics suggests dimensions such as reducing “that companies increasingly recognise the importance of operational carbon emissions and increasing gender and ethnic considering a definition of value beyond just financial. representation in senior roles. However, a closer look at the way in which these metrics are Henry Boot (2021 ARA, p97) being used demonstrates that for the majority of companies introduces equality and diversity- either the weighting attached to the metric is relatively low, related personal objectives for each executive director. London or they are simply incorporated into a broader scorecard of Stock Exchange Group (2020 personal or discretionary measures and no specific targets ARA, p106) includes a range of are disclosed. Investors have expressed a clear view that strategic deliverables, including financial performance should remain the primary driver of the completion of transactions, gender representation, measures payments under annual and long-term incentive plans and related to improved cyber security current practice suggests that the inclusion of ESG may, etc. Experian’s (see Figure 3.12) for some companies, have been more of a communication RC set out remuneration reporting exercise rather than a real driver of behaviour. in the context of the experiences of their stakeholders and discusses There is no doubt that this is a topic at the forefront of its considerations on whether ESG remuneration committees’ minds. There are early signs from metrics will be incorporated reporting in 2021 that practice is continuing to evolve with more into executive incentive plans. detailed targets being set and disclosed by some companies. Companies are starting to demonstrate more holistic Caroline Johnson, Director, EY People Advisory Services approaches to how ESG metrics [email protected] used in remuneration link to broader company strategy. Rotork (see Figure 3.13) includes sustainability as a strategic objective, which is deconstructed into three pillars, each tracked by non-financial Examples of use of D&I metrics in remuneration schemes metrics aligned to management’s incentives. Two of the metrics are • Prudential (2020 ARA, p189) made against SSE’s Inclusion strategic KPIs. Data underpinning has a diversity measure Strategy, including progress the carbon emissions KPI disclosed included in the LTIP, weighted on Return on Inclusion. in its sustainability report has been between 6.25-7.5%. It is • Barclays (2020 ARA, independently verified. Rotork measured as the percentage pp120-133) has weighted also provides a good explanation of the leadership team that measures for the annual of how non-financial metrics are is female at the end of 2020. bonus and LTIP, between calculated. This goes some way to Prudential set a target of 30% 3.5-5%, as well as weighted addressing concerns highlighted in females by the end of 2021 personal objectives that the FRC’s 2020 Review of Corporate in line with the goal it set incorporate diversity matters. Governance Reporting around the when it signed the Women These are noted as strategically lack of clarity on selection and in Finance Charter. important non-financial matters, calculation of non-financial KPIs • SSE (2021 ARA, p152) including targets for women used in remuneration decisions. includes diversity and inclusion in senior leadership positions Whilst some companies have taken measures, with a weighting of and initiatives such as steps to shift remuneration design 2.5%, to assess performance for establishing a Race at to incorporate longer-term thinking, the annual incentive plan and Work Steering Committee. it is still early days. The answer performance share plan. The • Diageo (2021 ARA, p120) has is not just a quick introduction of measure is based on progress targets for the percentage of a few ESG metrics rather a made closing SSE’s median UK female leaders and percentage transition to understanding how gender pay gap and progress of ethnically diverse leaders in non-financial considerations can be its LTIP, weighted at 2.5%. incorporated to incentivise creation of sustainable organisations.
28 Soaring to new heights | Governance considerations for nomination and remuneration committees 29 Shaping the ‘employee deal’ — how EY can help
COVID-19 has transformed the employer-employee relationship and, as companies emerge post-pandemic, they will quickly need to adapt to changing employees’ preferences and behaviours. In this context, the need for employee- centric reward models and retention strategies becomes even more critical. Attracting and retaining critical talent depends not only on financial rewards but the aggregate value of everything an employee receives or experiences from their organisation in exchange for their work, which we have termed the ‘employee deal’. We expect that going forward RCs will take a more prominent oversight role over wider reward matters and employee value proposition. All organisations have an employee deal and for the lucky few, this will have naturally become something which plays to their strengths, distinguishes them from their competition and allows them to attract, retain and motivate critical talent. For others, a more holistic and considered approach is required. To help companies design and communicate their employee deal, we have developed the framework below which considers six key elements of the employee deal.
• Employers are increasingly moving towards a skills-based • COVID-19 has seen employees approach to talent management re-evaluate where and how they that includes greater flexibility in want to work. Understanding the compensation package at a these views is critical to getting talent segment or individual level. the best out of your talent.
• Research tells us that non- financial rewards are valued • The accessibility and visibility Financial highly by employees. Environment of leadership has never been • We have also seen a shift in what rewards more valued by employees. benefits employees value as a • Companies should define key result of COVID-19, including leadership behaviours and an increased focus on physical, value statements that feed social and emotional wellbeing, Brand into leader recruitment and/or as well as other allowances. induction materials.
Non-financial Employee Leadership rewards deal
Culture
Career Identity and development purpose
• Does your pay and grading • Articulating a common identity framework provide the flexibility and purpose can be a challenge. to recruit critical roles? Culture and values should be • Are common career paths suitably embedded across defined and articulated? the organisation as well as promoted more externally. • Are managers comfortable in having development conversations with their team?
Tony Gilbert, Associate Partner, EY People Advisory Services [email protected]
30 3.6.4 CEO pay ratio It can be misleading to look at one number, measure or sentence from the Directors’ Remuneration Report in isolation. With numerous regulatory disclosures on pay, we recommend that the upfront narrative in the Directors' Remuneration Report holistically discusses remuneration policy and approach across the company rather than taking a piecemeal disclosure-by-disclosure approach against each requirement. The focus on the supporting narrative is especially important for the recently introduced requirement to publish the ratio between CEO and average staff pay. Investors view the CEO pay ratio on its own as a less useful data point; not only is there no target ratio, it is also difficult to compare across companies and even across years for one company. Indeed, Aviva (2020 ARA, p115) points out the challenges of understanding movements in the ratio due to specific outcomes or circumstances of a particular year. Compounded with this are the skewed outcomes that may result due to COVID-19, such as the use of furlough. That said, investor discussion is focussing on the employee quartile data that is reported as part of the CEO pay ratio i.e., how is workforce pay changing year on year. This is in line with wider concerns of how a company treats its stakeholders rather than just blunt, headline CEO pay figures. Our research indicates that there has been limited progress in disclosure quality in the second year. SEGRO (see Figure 3.14) contrasts what is available to employees versus executive directors for each element of reward. Such transparency is positive, particularly given widening awareness of social inequality which has exacerbated in the past year as well as rising shareholder dissent on remuneration.
Soaring to new heights | Governance considerations for nomination and remuneration committees 31 3.7 Key questions to assess effectiveness
The practice for allocating responsibilities for oversight over HC matters varies and the remits of NCs and RCs continue to evolve. The questions below have therefore been structured to start with five key questions which are relevant regardless of the specific governance set up of the organisation, followed by a further five on HC oversight, remuneration and nomination considerations.
3.7.1 Key questions for the committees
obtain independent insights on 1 3 specific topics e.g., from external advisers, to allow for robust Do the committee’s terms of Are the number of meetings, challenge of management? reference reflect not just the time allocated to agenda items mandatory responsibilities as and content of the pack sufficient specified in regulations and Code, to discharge the committee’s 5 but also the de facto ones? responsibilities? Does the committee oversee the transparency of external disclosures 2 4 regarding the matters in its remit?
Is there a clear framework for Does the committee have adequate, interaction between committees regular support from management on overlapping topics, committees/internal functions e.g., where HC metrics impact to discharge of its duties? At the executive remuneration? same time, does the committee
3.7.2 Key questions specific to the oversight of HC matters
between engagement and culture? 1 3 Does the board/committee challenge how surveys complement other Are directors challenging Are directors holding management forms of engagement? management on the appropriateness to account for explaining to the of the HC metrics which are being workforce HC targets and progress, monitored by reference to the link including but not limited to planned 5 to business strategy? actions to close any gender, ethnic or other form of pay gaps? Are the sources of cultural insights used by the board/committee for culture 2 monitoring sufficiently broad? How 4 is the board/committee co-relating Are directors overseeing how the insights from different sources targets are being set and monitoring Does the board/committee oversee the to ensure that they are able to make progress against them? Is the approach to employee engagement a holistic assessment of culture, any committee ensuring actions are being surveys including their frequency, gaps that need to be addressed and taken to address the root cause for topics addressed and whether they the effectiveness of proposed actions? unsatisfactory progress? provide insights that differentiate
32 3.7.3 Key questions specific to the oversight of remuneration matters 1 3 4
Is there an effective induction Does the RC factor the stakeholder Is the RC confident that the pay programme for new members of experience when considering structures do not create undue the RC and ongoing refresher executive pay outcomes and the pressure to prioritise returns in training thereafter? application of discretion? Does the RC the short term and give adequate corroborate management’s views on weighting to long-term, non-financial the stakeholder experience with those value creation? If ESG metrics are obtained from direct engagement? included, is their link to strategy 2 clear and transparently explained?
Is the RC able to articulate to the workforce how the approach to executive pay is aligned with stated 5 values and culture and how it promotes the right behaviours at the top? Has the RC comprehensively considered the potential consequences of remuneration structures on behaviours and decision making?
3.7.4 Key questions specific to the oversight of nomination matters 1 2 4
Has the NC debated the most Has the NC considered how board and Does the NC look sufficiently appropriate allocation of new and senior management composition helps deep into the organisation to evolving responsibilities across bring the stakeholder voice into the identify future talent? Is it satisfied the board and its committees and boardroom? Are these considerations with the nature and quality of accordingly reassessed the skills, reflected in succession plans? executive and senior management diversity and capacity at both the development programmes? board and individual committee level? Does the NC have a clear approach for determining how best 3 to address skills gaps (through new 5 appointments, advisors or training)? Does the NC assess the cognitive diversity and culture of the board? Are steady-state succession plans Does it understand how the make-up regularly revisited? Is there a of the board and its culture impact contingency plan for dealing with decision making? unexpected departures?
Soaring to new heights | Governance considerations for nomination and remuneration committees 33 3.8 Reporting examples
Figure 3.1 Antofagasta: The role and activities of the Remuneration and Talent Management Committee (2020 ARA, pp118 and 134)
34 Figure 3.2 Taylor Wimpey: Discloses a strategic objective that explicitly references their workforce and has meaningful KPIs associated with that objective (2020 ARA, pp24 and 25)
Soaring to new heights | Governance considerations for nomination and remuneration committees 35 Figure 3.3 ITV: The ways in which the board and its committees monitored culture and how these contributed to insights (2020 ARA, pp106-108)
36 Soaring to new heights | Governance considerations for nomination and remuneration committees 37 Figure 3.3 continued ITV: The ways in which the board and its committees monitored culture and how these contributed to insights (2020 ARA, pp106-108)
38 Figure 3.4 Synthomer: Cultural identifiers mapped against key aspects of culture considerations (2020 ARA, p87)
Figure 3.5 Glencore: The role of the board’s Ethics, Compliance and Culture Committee and the Health, Safety, Environment & Communities Committee in oversight over culture matters (2020 ARA, pp 92, 95 and 96)
Soaring to new heights | Governance considerations for nomination and remuneration committees 39 Figure 3.5 continued Glencore: The role of the board’s Ethics, Compliance and Culture Committee and the Health, Safety, Environment & Communities Committee in oversight over culture matters (2020 ARA, pp92, 95 and 96)
40 Soaring to new heights | Governance considerations for nomination and remuneration committees 41 Figure 3.6 AstraZeneca: Sources of culture insight brought together in a workforce culture report, which includes a metrics dashboard and through the use of a board portal (2020 ARA, p113)
42 Figure 3.7 John Wood Group: Example of a discretionary matrix designed by the RC to determine remuneration outcomes (2020 ARA, p104)
Figure 3.8 DS Smith: RC chair discusses DS Smith’s approach to obtaining reward-related feedback from employees (2021 ARA, pp86 and 89)
Soaring to new heights | Governance considerations for nomination and remuneration committees 43 Figure 3.9 Pearson: Reports against SASB standards and provides an index of metrics (2020 ARA, p54)
44 Figure 3.10 IAG: Table showing alignment with external frameworks and GRI standards at the end of the sustainability section of its annual report (2020 ARA, p76)
Soaring to new heights | Governance considerations for nomination and remuneration committees 45 Figure 3.11 Direct Line: Completed an analysis of ethnicity data, discusses the key findings and discloses the actions taken in response and the progress made during the year (2020 ARA, p50)
46 Figure 3.12 Experian: Remuneration approach incorporating ESG and having regard for the stakeholder experience (2021 ARA, pp112 and 113)
Soaring to new heights | Governance considerations for nomination and remuneration committees 47 Figure 3.13 Rotork: Good explanation of how non-financial metrics are calculated and their linkage to strategy (2020 ARA, p48)
48 Figure 3.14 SEGRO: Demonstrates alignment between the remuneration of employees and executive directors (2020 ARA, p136)
Soaring to new heights | Governance considerations for nomination and remuneration committees 49 Authors EY | Building a better working world EY exists to build a better working world, helping to create long-term value for clients, people and Mala Shah-Coulon society and build trust in the capital markets.
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We thank Beatriz Diego, Vicky Johnson, Bidushee Biswas, Amarjit Singh, Simon Feeke, Arun Batra, Barend van Bergen, Lucy Godshall, Isabel Beita, Iain Harrison, Tony Gilbert, Nora Sherman, Martin Reynolds and Peter Scoffham for all their help in producing this report.