DISCOVERY LEADERSHIP MASTERCLASS SERIES: ESG Compliance (Part III)… a performance impact strategy for Human Capital advantage

While the spotlight has been on environmental issues so far, the coronavirus pandemic has turned the focus firmly on the “S” in ESG, with COVID-19 having the greatest impact on people and employment. There is a public expectation for companies to support their workers during this crisis.

Another developing and interesting concern that equally has become an urgent and pressing pivot around flexible and homeworking, mental health and employee engagement during and after the extended lockdown period calling for and requiring swift attention. These have landed the HR agenda squarely on the list of boardroom priorities and provide an opportunity for HR leaders to take the lead in recovering the efforts. How companies do this in a way that embarks resilience for long term performance will be part of what investors will be looking at when making their assessments under the ESG lens.

ESG performance as a driver of employee satisfaction is an important piece of what makes a company a great place to work. Research has proven that employers that have high employee satisfaction are attractive employment destinations. This is making ESG performance a competitive advantage for engaging and attracting employees.

Unsurprisingly, a large number of the people who work for companies are enormously driven by their passion for sustainability and the drive to see change. Hence, it is advised that, companies take certain steps to authenticate or implement measures that could ensure workplace security and reliability. This obviously would call for leadership vision and the clarity on what companies intend doing to forestall hope for the future. This vision for the future and the immediate action towards it creates engagement and support.

However, the driven concern and the passion for sustainability and change by all employers must be pivotal to Human resource agenda. To transform and build effective HR policy decision for a sustainable future means that, it aligns its policy framework for the purpose of a more successful people and happier lives. By this, this series looks into the strategic impact of ESG as a Human capital advantage. Let’s talk ESG compliance and the role of HR.

Compliance Challenges that Businesses Face:

Organizations are now making the shift to having clearly defined compliance departments that have dedicated software and tools to manage risk and regulatory compliance. Ideally, such departments are intended to safeguard against risks such as Safety deficiencies, Money laundering, Cyber breaches, Compliance lapses, Bribery and Corruption.

These targeted effort goes a long way in assuring stakeholders that all operations are within regulatory norms. However, these programs often fail to protect against the very transgressions they were meant to protect. Top reasons for this could include the gap between occurrences of such incidents, implying a false sense of compliance or a random assessment by a regulator that provides the existing program ineffective. Having said that, the very specific reason for compliance failure are often grouped under the following:

That Leaders that do not lead by Example

Whether an organization is going to stay compliant, be it by its own internal policies, industry-specific regulations or other standards, it is unmistaken rule that the administration remains a greater contributor. This may require the CEO and the board members having to champion and be responsible for all compliance issues.

In many cases however, a company’s administration employs an uncommitted approach to compliance. When leadership or key members only talk and take no ownership of the compliance program in place, they essentially create a culture that normalizes regulation’s undervaluing. Senior management’s responsibility to build and nurture a culture of compliance and failing to do this is one of the most common reasons for compliance failure.

Misaligned Compliance and Organizational Goals

Every organization operates with certain operational or business culture. This may be how the organization speaks to the world, how it is identified with branding and so on. These attributes inevitably speak to the grand scheme of things when defining such organizations goals. Therefore, formulating any compliance rule must seek to consider these parameters as essential keys for the organizations success. Moreover, a conducive and supportive compliance framework aligned with the organizational goals bring harmony and avoid the herculean task of the organization remaining non-compliant.

Misguided Incentives

When the organization use incentives as tools to promote desirable, optimal behavior, growth and professional gain, the intension is good but not sustainable. The unsustainability of this objective may breed misconduct in any form which may violate compliance regulations resulting in severe implications.

Lack of Compliance Culture

Compliance failure is also a product of an incorrect understanding of the compliance program’s function by many organizations. If a company views its compliance program as just another mechanic or obligation among the many legal requirements in place, a gap is created. This disconnect affects education and compliance training all through the institution thereby increasing its risk exposure. For this reason, it is important to instill compliance culture for without it, employees are not regularly trained or taught how to navigate real-life situations while operating within regulation.

ESG, a case for HR Compliance?

Compliance is among the critical functions of any HR department. The Human resource unit is tasked with making sure that hiring practices, workplace rules, treatment of employees and variety of other factors all comply with the relevant laws. One key role of HR department is bridging the gap between the company’s growth trajectory and objectives and compliance practices that influence activities such as hiring, employee development and retention. Striking the balance between strategy and compliance may start with a clearly defined set of goals.

In addition, policy setup, enforcing practices to follow these policies daily remain compliance imperatives for HR as well. HR compliance admittedly defines the process of formulating policies and procedures to ensure all employment and work-related practices demonstrate a thorough understanding of applicable laws and regulations while also being aware of the company’s larger human capital resources objectives. HR-related compliance issues center around employee-related matters, including when and how to pay overtime, employee documentation that must be maintained, administering benefits, hiring procedures and separation policies.

Arguably, companies of all sizes face increasingly HR complexities as the number of employment laws and regulations keep rising and the risk of penalties for non-compliance also perhaps never remain the same but greater. As such, whenever developing HR policies and procedures, business owners should know that, the business may be subjected to an audit from an enforcing agency that may levy fines and penalties for non-compliance. Not knowing or understanding compliance obligations is not an acceptable legal defense. The greatest challenge is that failure to comply with applicable employment compliance can lead to penalties, loss of business license, lawsuits from employees. Outsourcing HR functions to a trusted provider can equally help business owners better understand the laws and regulations that apply to them.

ESG Compliance and Impact on HR

Indeed, research indicates that, top employer by employee satisfaction and attractiveness to talent have significant higher ESG score. These findings suggest that ESG performance can help companies both improve employee satisfaction and attract prospective employees. By this, it is indicative that, satisfied employees work harder, stay longer with their employers and seek to produce better results for the company. Equally important are that, enthusiastic prospective employees strengthen a company’s talent pipeline and ensure the availability of crucial human capital. These guarantee the call for HR function to embrace ESG compliant culture for competitive HR advantage. Because remaining ESG compliant has its own benefits to companies as boosting:

Reputation

Businesses which are failing to meet the expected ESG performance standards should expect to see an adverse impact on their reputation in the long run. Typically are the issues of sexual harassment, race discrimination, gender imbalance, health and disability and their adverse impact on share value of companies. Again, as workforce strategy, ESG has become a competitive advantage in attracting and retaining talent and this is backed by studies that, when weighing up potential employers, millennials are hugely influenced by how a business responds to and tackles social issues.

Productivity

Companies with a strong ESG and labor relation propositions have better productivity. Addressing the widening gap between executive and workforce pay is directly linked to productivity. Fairer incentive structures can help drive an inclusive culture and employee engagement, which in turn can boost productivity.

Value

Research suggests that, by aligning all HR policies and rules in cognizance of ESG compliant parameters eventually promotes and enhances the value of the company. By this, almost all investors and stakeholders remaining keen to ESG performance and their expectation to see not just short-term plans but also how the core business model incorporates and deals with HR issues in the long term have advocated strong ESG compliance by all companies through a constructive HR policies to address human capital issues. By this, businesses that do not have an ESG and labor relations agenda will soon find themselves struggling to find investors, who recognize the need to manage these risks and promote compliance for the advancement and satisfaction of the human needs.

International Standards

As companies seek to expand and operate in other jurisdictions from where it started, they may be subjected to different operating labor laws for compliance. This feature or development may require companies to strengthen or adopt different sets of policy rules relative to employee warefare and well-being. Notably, while many countries operate in markets with labor laws that provide relatively low levels of protection to employees, businesses will no longer be able to rely on their geographical location and the laws that apply there. This is because, there are international frameworks that set out expected employment standards across the world by which non-governmental organizations, investors and other stakeholders and their media are now judging businesses. These include UN Global Compact, the international Labor Organization Conventions and Declarations, the international bill of Human Rights just to mention a few.

Legal Compliance

It is an obvious fact, the heightened level of compliance breaches among many companies in terms of gender pay issues alone in our Ghanaian context. That notwithstanding, elsewhere in many international companies, reporting issues of gap omissions is compulsory and non-negotiable. Understanding the company’s strategic priorities lays the foundation for a better understanding of different scenarios and how compliance concerns may impact decisions of HR. Hence, HR goals and policies should be designed to support company strategy with consideration for compliance implications. It is noteworthy to emphasize that, the benefits of getting HR compliant helps potential cost savings, drive employee efforts on core business functions as well as eliminating administrative burdens.

ESG and Employee engagement:

ESG performance as a driver of employee satisfaction is an important piece of what makes a company a great place to work. How does the company treat its people? How does the company interact with stakeholders? What is the culture? And does the company’s culture fit with its purpose?

Employees are fast becoming sensitive to discrepancies between what a company says and the way it acts. The benefits of committed workplace ESG practice show up directly in results. More satisfied employees work harder, stay longer, produce better results and are more committed to an organization. The halo effect therefore is that, people who work there and leave there speak well of it, so it becomes a self-perpetuating thing.

On the other front, investors want a clear plan that looks at all aspects of ESG especially the social element which is becoming a bigger focus. They want companies to have a program in place that looks at what they do to support employees at present, how well they are managing the wellbeing of staff and whether there is a roadmap to improve and develop this in future. Businesses that analyses how ESG principles affect their workforce and take steps to anticipate and control associated risks, will be better placed to improve profitability and reputation in the long run. As already intimated, ESG is a tool for business to measure sustainability using environmental, social and governance factors. Besides, businesses now are being scrutinzed by their ability to drive and shape policy changes that promote a positive human development, wellbeing and a better work environment.

ESG, the role of HR and Investor Requirements:

Key ESG HR issues concern how a company engages with its workforce with a strong focus on culture incorporating inclusion and diversity and how it looks at issues of pay and equality among others. The table makes reference to some benchmarks for HR ESG compliance:

Key HR Roadmap to Embrace ESG

HR leaders must design structures and policies around priority and objective areas that satisfy the greater good cross all functional teams and employees of their organizations. Proactive employers who want to reshape their workforce and develop a more sustainable business model have an opportunity to look at their employment framework and labor agenda to push for:

  1. The implementation of financial wellness initiatives, not just to help employees, but to meet investor’s demands as well. Financial Literacy Programs in the workplace are a good start to assist the workers to be more financially secured whiles it seeks to impact the bottom line effect for employee productivity and investor satisfaction.
  1. Communicate and Track impacts of Benefits

Employers should clearly communicate to workers through a well-designed benefits launches, straightforward sign-up processes and on-going messaging to help improve utilization and positive impact for workers on all benefits that they seek to promote and implement.

  1. Include all workers

Employers should pay attention to workers who have low to moderate incomes by offering liquid emergency savings solutions, hardship funds, child savings accounts and employee stock purchase plans. Other plans or benefits that could as well go for the high paying workers should include retirement plans and health savings accounts.

  1. Shaping an inclusion and diversity model to enable recruitment and retention of more diverse talent.
  2. Looking at variable remuneration and linking it with ESG driven goals
  3. Placing employee welfare and training and development at the heart of HR decisions.
  4. Reshaping some employer policies and procedures with greater focus on ESG.

In summary, it must be emphasized that, businesses that analyze how ESG principles affect their workforce and take steps to anticipate and control associated ricks through effective HR policy framework and guide will be better placed to improve profitability band, reputation and investor support for its advantage in the long run.

Discovery…. Thinking solutions, shaping visions.

Written By:

Frank Adu Anim in Collaboration Dr. Genevieve Pearl Duncan Obuobi (Banker/SME Consultant and Leadership Strategist)

ABOUT THE AUTHOR

Frank is the CEO and Strategic Partner of AQUABEV Investment and Discovery Consulting Group. He is an Executive Director and the Lead Coach in Leadership Development and best Business Management practices for Discovery Leadership Masterclass.

Email: frankanimgh@yahoo.com or aquabevinvestments@gmail.com