With increased pressure being placed on Irish plcs to improve their human capital reporting practices, Anthony Wall, Martin McCracken, Professor Ronan McIvor and Raymond Treacy look into why Irish companies’ reporting is coming up short compared to the UK.
For many years there have been attempts to place a value on an organisation’s employees, either for financial statements or for internal purposes. Despite a plethora of suggestions, no method has gained universal approval. More recently, though, the focus has switched from placing a value on an organisation’s workforce to understanding and leveraging human capital (HC) effectively. The term ‘human capital’ has been defined by Gary Becker, an American economist Nobel Prize winner, as the knowledge, information, ideas, skills, and health of individuals. In 2016, we developed a framework to ascertain the HC reporting practices of UK companies (see Table 1).
- The KSA area includes items that employees need to participate effectively in the workplace, and, therefore, contains elements that an employee either brings with them when they start working for an organisation or that they can subsequently develop.
- ‘HRD’ is concerned with how organisations develop and enhance the KSA of their employees.
- ‘Employee welfare’ is the notion that the organisation will act as a good citizen, within its environment, and how well it treats its employees.
- ‘Organisational justice and equity’ involves organisations treating employees in a fair and equitable way, and offering equal access to opportunities.
This framework has been used to investigate the reporting practices of the 53 companies currently quoted on the Irish Stock Exchange (Euronext) by examining their latest annual reports. Any sentence within the annual reports containing the items listed in the HC framework was counted. Subsequently, the sentence count for each element was aggregated for all of the Euronext companies in order to analyse the current standard of HC reporting.
The overall sentence count for each of the four areas can be seen in Table 2 below.
The first thing to note is the relatively low sentence count for HC items. A study of the FTSE 100 companies in 2018 by the Chartered Institute of Personnel and Development (CIPD), ascertained that the total sentence count for UK plcs was 18,162, compared to the Irish 3,142. This works out at an average of 182 items per UK company to the 59 items for each Irish plc, a difference of 68%.
You can see that Irish plcs attach the most importance to HRD, followed by KSA, employee welfare and organisational justice and equity. Three Irish plcs did not report on any HC items, and 15 reported on ten or less. The highest overall sentence count for an Irish plc was 211.
KSA
Of all the framework items listed, ‘leadership’ was the most reported item followed by ‘expertise’, with these two items accounting for 80% of all HC elements reported in this category. The remainder of the KSA items had relatively low levels of reporting, ‘flexibility’ in particular. Other related workforce flexibility concepts such as ‘entrepreneurship’ and ‘innovation’ also had low sentence counts. This is an important area in an era of flexible working arrangements. However, a study by the Economic and Social Research Institute in 2018 found that Ireland lags behind the EU average when it comes to contingent employment (McGuinness et al, 2018). Therefore, it is perhaps not surprising that reporting levels are low.
HRD
Table 4 shows that training was the highest reported HRD item, with ‘talent management’ and ‘succession planning’ in second and third place respectively. The high level of references to training is expected, as unemployment has decreased in Ireland to its lowest level in 10 years (Central Statistics Office, 2018). With more people re-entering the workforce, the demand for training programmes will be high. In terms of talent management, key skills gaps in certain areas of Irish business have emerged in recent years.
Employee welfare
‘Health and safety’ made up over a third of the employee welfare items in annual reports. However, a reference to ‘ethics’ was fairly low. It was found that while Irish firms tended to report broadly on issues such as employee codes of conduct and whistleblowing policies, disclosures relating to specific ethical issues, such as corruption, bullying and harassment, were quite rare.
‘CSR’ and ‘employee engagement’ both had reasonable levels of reporting but everything else in this category dipped into the one digits. However, one might have expected more references to employee wellbeing given the prominence of mental health awareness campaigns.
Given the recent emphasis on diversity, the levels of reporting of this is not surprising (see Table 6). However, the relatively few referrals to ‘equality’ are unexpected. This low level of reporting may be down to firms’ tendency to report equality issues under the heading of ‘diversity’, as there is invariably some overlap between the two. Nevertheless, as Ireland now requires companies to report on any gender pay gaps, reporting in this area may improve.
‘Employee rewards’ were also referred to quite frequently, while ‘human rights’ had fairly low levels of reporting even though EU legislation requires more reporting of such issues.
This study shed some light on the HC items that Irish firms value most, while also identifying areas where HC reporting can be improved. Compared to the UK, the disclosure of HC items by Irish plcs is quite low, and there was generally far less information included in the Irish companies’ annual reports. Irish firms could and should disclose more HC information. The lack of information provided suggests that the EU directive may not be enough on its own, and Ireland could benefit from amending its own 2014 Companies Act to encourage more comprehensive and in-depth HC reporting.
Martin McCracken is a Research Director of business and management at Ulster University.
Professor Ronan McIvor is a Professor of operations management at Ulster University.
Raymond Treacy is a Research Consultant at Ulster University.
The authors would like to thank the Chartered Accountants Ireland Educational Trust (CAIET) for funding this research.
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