- A renewed focus. After the COVID-19 pandemic and the Black Lives Matter movement, investors and boards of directors across industries are increasingly focused on initiatives that address the “S” — social or societal inequities — in ESG.
- Putting words into action. Investors and board members are demanding more than mere lip service and baseline legal compliance when reviewing a company’s efforts with respect to workplace social issues, such as diversity, inclusion and pay equity.
- No one-size-fits-all approach. Disclosures should include a discussion of the specific concrete initiatives the organization has undertaken to enhance the employee experience.
- Pay equity is pertinent. Prepare for pay data reporting, whether in the form of a voluntary public wage gap report, possible EEOC required reporting, or state reporting obligations.
The COVID-19 pandemic and the Black Lives Matter movement sparked a renewed focus on diversity and inclusion, non-discrimination and pay equity, moving workplace culture and compliance to the top of investors’ priority list.
While environmental, social and governance (ESG) reporting obligations are not new, investors and boards of directors across industries are increasingly focused on initiatives that address the “S” — social or societal inequities.
Organizations subject to social reporting requirements must prepare to disclose wage gaps, federal EEO-1 reports, and state pay date reports. Those entities with a unionized workforce should expect a demand for more transparency around labor relations, including unfair labor practice charges.
Investors and board members are demanding more than mere lip service and baseline legal compliance when reviewing a company’s efforts with respect to workplace social issues, such as diversity, inclusion and pay equity. The New York Law Journal recently reported “[a] record number of 39 environmental and social (E&S) related shareholder proposals won majority support in 2021, almost double the number in 2020 and almost triple the number in 2019.” The article also noted that 13 of the 39 proposals were related to “board diversity, workforce diversity, and other human capital matters.”
Additionally, investors and boards of directors are not the only constituents evaluating companies’ ESG disclosures. Employees, labor unions and the federal enforcement agencies, specifically the U.S. Securities and Exchange Commission (SEC), are also closely tracking ESG disclosures. Indeed, the SEC has the authority to accept and investigate whistleblower complaints related to alleged fraudulent statements under both the Sarbanes-Oxley Act and the Dodd-Frank Act. Additionally, the SEC recently implemented a taskforce within its Division of Enforcement to identify false ESG reporting.
Companies are under intense pressure to make progress on identified social metrics but overstating a company’s achievements in this area can lead to significant legal liability and reputational harm. Thus, organizations should partner with an interdisciplinary team, including representatives from compliance, compensation, recruiting and legal. ESG reporting is closely linked to a company’s labor and employment compliance efforts. When implementing initiatives and metrics to address the social in ESG reporting, involve in-house and outside employment counsel at the initial planning stages.
How to Report on Social Measurements
The “S” in ESG reporting focuses primarily on workplace culture. Investors and boards of directors have expanded their focus beyond training and diversity recruiting initiatives. (Although both are still important.)
Investors and directors expect the companies they invest in and govern to have an inclusive environment, high rate of compliance with legal and regulatory requirements, diverse representation at all levels within the organization and high employee satisfaction ratings.
While there is no one-size-fits-all approach to ESG reporting, disclosures should include a discussion of the specific concrete initiatives the organization has undertaken to enhance the employee experience and how the organization measures progress toward a more diverse and inclusive workforce.
Implementation of a code of conduct that clearly communicates the organization’s expectations of its workforce, including leadership, and the repercussions for violating the policy is typically an area of focus. The code must apply to all levels within the organization from entry-level roles to the C-Suite. Executives should be held to at least the same standard as all other employees. The policy should be reissued periodically as a reminder of the organization’s values and commitment to a respectful workplace where all employees can develop and advance. Ensure that employees are aware of the avenues for reporting concerns.
Other areas for reporting include:
- Evaluation of periodic employee satisfaction surveys. Report out on the positive findings and evaluate stated concerns or criticisms and implement an action plan to address legitimate concerns.
- Focus on employee wellness. Periodically review the organization’s benefits package to ensure it is competitive.
- Employee resource groups. Empower employee resource groups to raise concerns and recommendations for improvements to senior management.
- Demonstrated compliance with employment laws, including non-discrimination obligations and workplace safety regulations, is a baseline expectation. While a positive compliance record alone is not enough to satisfy investors’ expectations, a series of cause findings by federal or state regulators will certainly affect investors’ view of a company’s commitment to equal employment opportunity.
Organizations should also implement concrete and specific action plans for creating a more diverse and inclusive workplace at all levels within the organization, including the C-Suite. Implementation of a DEIA plan that includes voluntary representation goals or, for companies that are federal contractors, affirmative action plan goals, coupled with specific strategies for attracting, retaining and advancing diverse talent.
For example, implementation of an annual assessment of the organization’s recruiting efforts and an action plan for updating those efforts; identification of community and industry partners, who may be effective recruiting resources; and implementation of mentoring and employee development programs to prepare high performing employees for promotion opportunities. The plan must also include criteria for measuring success and a demonstrated ability to retool and shift gears when initiatives do not yield the desired results.
A focus on pay equity is also pertinent. Prepare for pay data reporting, whether in the form of a voluntary public wage gap report, possible EEOC required reporting, or state reporting obligations. Boards and investors, in addition to federal and state legislatures and employees, want more transparency with respect to pay.
Annual pay equity assessments conducted under legal privilege are more important than ever. Work with legal counsel, public relations, compensation and human resources to determine when, how and what to say about the organization’s pay equity status.
The demand for a more aggressive and transparent approach to social issues in the workplace is not going away any time soon. And even the best plans could lead to legal liability if they are not executed properly.