Our Phase I research identified challenges and new ways of engagement through businesses’ workforces. Two key assumptions prompted the research:
Few businesses truly integrate relevant capitals in ways that create an understanding of how value is created or destroyed (and influence decision-making).
Human capital is the capital that drives the value (positively or negatively) of all the others.
The research identified the following challenges businesses face when driving the positive value of human capital.
1.1 Inefficient workforce engagementResearch shows that only 5% of the workforce understands strategy, and 85% of executive teams spend less than an hour per month discussing strategy.1 Our research found that, despite efforts, the mainly top-down communication tools used to engage and align workforces with strategies were considered insufficient.
1.2 AccountabilityOur research showed that businesses struggle to hold employees accountable for performance outcomes. Controls in businesses conflict with desired behaviours, and fear of the consequences of failure put employees off from taking responsibility for stretching goals. In corporate cultures like this, accountability is avoided (sloping shoulder mentality) or fragmented.
An organisational culture that supports and encourages people, with enabling controls, to take responsibility is vital where net-zero or nature-positive commitments are part of corporate strategy.
1.3 Governance structures and cooperationOur research showed that all businesses we interviewed organise their workforces into functional silos of expertise rather than strategic themes. A small number of businesses have introduced a matrix concept, where leaders are responsible for both functional excellence and strategic goals. However, even in highly matrixed businesses, leaders’ primary allegiance was to their functional silos, not the strategic goals. Cooperation between functional silos of expertise was widely considered vital for coordinating efforts to execute strategy. Nonetheless, most participants said that coordination was hard to achieve despite the value placed on cross-team cooperation. This is due to a pass-the-baton approach to cooperation between functional silos; ‘we’ve done our bit; now it’s over to you’.
1.4 Incentives and environmental, social and governance (ESG) compensation schemesOnly 25% of managers have incentives linked to strategy,2 and WBCSD research shows that less than 10% of companies have ESG-related compensation schemes linking ESG performance with executive remuneration. Considering the importance of workforce engagement with strategy, incentives and connectivity between personal and corporate objectives, we expected a strong working relationship between HR and Finance but found negligible cooperation.
1.5 Metrics and data The regulatory landscape is rapidly evolving, requiring companies to disclose multi-capital approaches to business strategies. For instance, the International Financial Reporting Standards (IFRS) Foundation and the United States Securities and Exchange Commission are developing a comprehensive baseline of sustainability disclosures for companies3 that will come into effect in 2023. At the same time, businesses generally struggle with data collection and identifying reliable indicators.
Our research found that few businesses rely on metrics for ESG performance. Most finance executives recognise the importance of connecting non-financial data with financial results data. Still, most cannot do this and focus on measurements that are not always valid. This struggle pertains mainly to internal data, fully subject to their control. Unsurprisingly, data relating to relevant material ESG externalities are often not integrated into management information and decision-making. The external reporting of externalities and meaningful internal reporting of the same don’t always connect.
1.6 Risk managementOur research showed a lack of consistency in how risks are managed across roles. Some businesses are highly regulated, and risk professionals integrate risk management with opportunity management. Yet others have hybrid approaches in which the risk managers are involved in strategic meetings with senior executives.
Participants agreed that there is a low level of understanding of the effectiveness of prevailing business activities when considering new, inherently risky activities meaning that finance leaders struggle to free resources as they lack a clear understanding of the impact that changing resource allocation may incur.