50% of Australia’s largest companies ignore people as a key business risk: New Cognology research

Through my work at Cognology I spend most of my life thinking about talent management and employee risk. But I wanted to understand how much time other Australian CEOs and CFOs spend thinking about their key employee and people risks. So with my team of helpers here at Cognology HQ we’ve spent the past few weeks investigating how the largest companies in Australia recognise people risks.

To do this, we compiled the most recent annual reports for each of the ASX 100 (the largest 100 companies in Australia). We were looking at the section where each of these companies declare key business and investment risks. Broadly, this section is meant to describe all the critical risks that investors need to think about when choosing whether to invest money into the company or not.

We wanted to see which companies recognised people as a key business risk – and which didn’t. I suspected we’d get some variance, and that we’d find some outliers who ignored their people all together. But the truth was more astounding. It’s worth remembering here that we’re dealing with the 100 largest, most sophisticated companies in Australia. And when documenting their key business risks, just half declare ANY key business risk that’s related to their employees.

Just 50% of ASX Top 100 listed companies mention ANY employee related risk in the key business risks section of their latest annual report.

Remember that companies are required to disclose all key business risks to investors. And we’re talking about Australia’s largest and most sophisticated organisations. Yet people risks receive no mention at all for half of these companies.

I’d argue that for just about all of these companies, people are the most complex and unpredictable single part of the business. Which is exactly why I believe that people are the most valuable resource, and the biggest risk, to any organization. We’ll get back to my talent rant in a minute – but first some more context around the data.

The key employee risks that we were looking for

In working through these 100 or so annual reports, we classified employee and people risk into 5 common categories:

• Employee injury or safety. Here’s a good example from Dulux’s 2013 Report ”A death or major injury in the workplace would be devastating for employees and families and could jeopardise the group’s reputation as a first-choice employer.” 
• Industrial relations risks. Risks like this one from Asciano’s 2013 report: ”[The risk of] Industrial relations activity that impacts the Company’s ability to meet its contractual and customer expectations”
• Retention and attraction of key personnel. For example from Brambles 2014 Annual Report: ”Brambles is subject to the risk of not attracting, developing and retaining high-performing individuals. Furthermore, succession planning may not be managed effectively, so that talented individuals are able to be developed and promoted within the Group, rather than sourced externally. This could result in Brambles not having sufficient quality and quantity of people to meet its growth and business objectives.”
• Inability to execute strategy or innovate. Here’s an example from Worley Parsons 2013 Annual Report: ”The risk of failing to develop and implement an effective business strategy. Failure to do so may over time lead to a loss of market share, damage to our reputation and negatively impact our financial performance.”
• Non-compliance with regulation or unethical practice. For example from Woolworths 2013 Annual Report: “There is a risk of non-compliance with, or additional obligations relating to, legal and regulatory obligations and expectations which may have a negative impact on Woolworths’ performance”.

Of these risks, employee injury was the most commonly cited

Just under a third of the largest companies in Australia mention employee safety and injury as a key business risk. It’s quite incredible just how many companies (especially in the resources sector) open up the annual report by stating: “safety is our #1 priority”, but then completely ignore safety in the key investment/business risks.

Of the other people risks, “non-compliance” was the second most common, followed by “retention and attraction of key personnel” and “Inability to execute strategy or innovate”. “Industrial relations risks” were least commonly cited, with just over 1 in 10 companies describing this risk in their annual report.

Only one in five companies makes the connection between talent and the share price!

I was shocked that “retention and attraction of key personnel” is cited by just one in five companies. I simply can’t believe this – based on the HR departments I’m talking to, this is a key concern for nearly 100% of large Australian companies. As these CHRO’s know, there’s a real war for top talent (whether that means building it or buying it).

But clearly the CFO is struggling to make the connection to the impact on the share price. So maybe the alternative way we should present this stat is: “only one in five Australian CFOs recognizes the risk of poor talent management on the future share price”.

People are the most valuable resource (and the biggest risk) to any company.

I’m still astounded by these results. Based on the large number of Australian companies who ignore people risk, I’m left wondering if some of these companies are secretly run by robots?
That said, I can understand how this happens. The CFO and the lawyers sit around in a room brainstorming investment risks. And they probably copy and paste from last year’s report most of the time.
But, why I’m so concerned is failure to recognize a risk is failure to plan for the risk. Because for most of these companies – talent and people are by far the biggest risk to the future share price. And perpetuating the illusion to shareholders that people are “all under control” is a massive mistake.
Personally, I’m looking forward to the day when the ASX makes it mandatory to report on your talent management strategy. I think it will be a great win for investors, and force CFOs to confront the talent challenge from a dollars and cents perspective. And I have no doubt that over the next 15 years we’ll see it happen. But we’ve got a long way to go yet. And getting more than one in five of the largest, most sophisticated companies in Australia to recognize the direct connection between attracting and retaining key people and the future share price is the first step.
When I look through the ASX 100 annual reports next year I hope to see more declarations of people risks. I’m also looking forward to monitoring the 50% of companies that don’t declare people risks. You can bet they’ll struggle in the coming years if the perspective in the c-suite doesn’t change.

And finally, make sure you stay tuned to the Cognology blog – we’ll release more detail from this research including an industry-by-industry breakdown over the coming weeks. Any guesses on how your industry shapes up?

About the data

This data uses the latest annual report publically available on the company website as at late September 2014.