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Overseeing “Our Greatest Asset”

prepare for meetings Jan 13, 2024

This is the first of three articles dealing with Human Capital Management. The next two will deal with Talent Management and Organizational Culture.

Historically, organizations have viewed their workforce through a financial lens. The well-worn phrase “our people are our greatest asset” marked a transition from viewing people as just another operating expense to considering them as intangible assets that represent a fundamental component of the organization’s economic value.

But more recently, many organizations have taken another step forward to begin looking at their workforce as a living entity. This trend started before the global pandemic, and it’s only continued to intensify throughout this period of social and economic upheaval that we’re all living through.

It’s more obvious every day – if there was ever any doubt – that an organization’s long-term success is dependent on attracting, retaining, and engaging talented people. And so Human Capital Management (HCM) has become a top-of-mind concern for management.

It’s also a concern for the board of directors, of course. But, when it comes to HCM, where exactly is the bright line between management’s role and that of the board?

The Board’s Evolving Role in Human Capital

Human Capital Management – or HCM - refers to how an organization manages its workforce through the recruitment, development, engagement, and retention of employees. While the acronym may be new to you, HCM’s underlying concepts – such as diversity, inclusion, health and safety, fair compensation, talent development, succession planning, and workplace culture – are likely familiar concepts that you’ve already been discussing in your boardroom.

But many boards are wondering how deeply they should be involved in HCM without overstepping into management’s role. After all, workforce issues are firmly planted in the “S” of “ESG” (Environmental, Social, Governance) and there’s clearly a role for the board to play in ESG. Does that imply that the board should also play a greater role in HCM?

Publicly-traded boards may find they no longer have the luxury of keeping their distance from HCM issues – they are facing growing investor pressure to disclose how they are handling human capital issues. In fact, the Securities and Exchange Commission (SEC) now requires companies to disclose human capital measures such as talent development, attraction, and retention. The rationale is that human capital represents an essential asset and a key driver of performance. And that makes it an issue that needs board oversight.

External forces like economic and social factors, investor demands, regulatory requirements – all these pressures are a catalyst for boards to make the workforce a sustained strategic focus. Even in the absence of these forces, many organizations are finding that HCM has become as important to long-term success as product and service strategies.

Attracting, recruiting, and retaining talented people is a key concern for organizations in all sectors – not just public boards, but private, non-profit, and governmental organizations.

Many boards have already moved to place a higher priority on HCM, taking actions such as revisiting policies, identifying metrics, expanding committee mandates, enhancing oversight, and sometimes hiring a third party for an independent perspective. And they’re finding that, if they stay focused on HCM strategy and key drivers, they can help drive long-term value.

Enhancing Board Oversight of HCM

“Human capital has moved beyond being a strategic asset to become a strategic imperative. Boards should embrace this change and seize the opportunity to help make the company’s people a greater strategic priority.” – EY Center for Board Matters

When a board opts to make HCM a greater strategic priority, there are several areas where it might choose to enhance its oversight work.

Compensation. Many boards have restricted their compensation oversight to setting the CEO’s compensation, and perhaps that of the executive team, and approving the compensation philosophy - a statement of the organization’s approach to compensation. To make HCM a greater strategic priority, the board might now consider tying executive incentive programs to achievement of HCM performance goals. Or, in response to “the great resignation,” board-level discussions might address potentially adjusting compensation to add retention mechanisms.
Policies. The board could increase its oversight of HR-related policies such as codes of conduct, whistleblowing, and sexual harassment, as well as policies that promote retention - such as a remote work policy - or support employee engagement. Having assured themselves that the policies are in place, directors might ask to see evidence that they are working as intended.
DEI (Diversity, Equity, and Inclusion). The board could oversee outcomes of DEI practices by reviewing statistics on diversity characteristics, as well as promotion rates for and compensation gaps across different demographics. The board’s own composition, and that of senior management, should be a particular focus.
Systems and processes. Many boards have, until now, restricted their oversight of succession planning to the CEO position. Now they might choose to broaden their view to include succession planning for senior management and other key positions. Other significant processes for board oversight include talent management (stay tuned for next week’s article on this topic), leadership development, training programs, health, safety, and wellness, and supply chain.
Culture. Finally, the board shouldn’t be shy about understanding the organization’s culture — the unwritten rules about how things get done, including reviewing the results of employee surveys and audits on what behaviors are rewarded, punished, or tolerated. (Make sure to read the upcoming Savvy Director article about organizational culture.)

The Board’s HCM Journey

“Strengthening board oversight of human capital and talent will be a journey, and a starting point for many boards may be to rethink their views on the board’s fundamental role in this area.” – EY Center for Board Matters

HCM issues are evolving quickly. They're no longer narrow operational concerns — if they ever were. But how involved should the board be? As usual, the answer is, “It depends.” The appropriate level of board involvement is the one that’s right for the size and type of organization, taking into consideration the experience of the CEO and of the board.

There’s a continuum of involvement ranging from a complete hands-off approach at one extreme, to active participation in HR activities at the other. The board and management need to work together to find the right balance where the board can fulfill its responsibilities without diminishing the CEO’s authority.

Wherever that balance lies, it’s essential that everyone is on the same page about the lines of responsibility. Being clear on decision-making helps to reassure management that the board intends to stay in its lane and allows the board to be a resource and a sounding board to management, helping them find more robust responses to tough situations.

Finding the right balance involves meaningful discussions between management about how the board can add value. Every board’s response will be different, and their journey will be unique. Fortunately, they can follow in the footsteps of successful boards that are leading the way.

It starts with questions. It’s important for the board to focus on the strategic picture, to ensure that management has the policies, programs, processes, and systems in place to carry out the strategy. Here are a few questions for the board to consider when considering its due diligence and fiduciary duty, adapted from the EY report How the governance of human capital and talent is shifting.

How much time and attention should we dedicate to HCM topics?
How do we ensure we have the right mix of skills, expertise, perspectives, and experiences for effective oversight of human capital?
How might we learn about the trends affecting the workforce of the future?
What actions should we take to enhance our oversight of HCM strategy and risks?
How should we integrate the topic of human capital into discussions about strategy and risk?
What are the right HCM metrics and how often should we review them?

What's our HCM strategy? The HCM strategy should spell out a plan for developing the workforce that will be needed to execute the organization’s business strategy. In the short term, the HCM strategy might focus on maintaining a healthy, satisﬁed, and engaged workforce, but in the longer term it should identify the areas where the workforce drives the organization’s success and set clear goals in those areas.

What are the risks? The ”flip side” of HCM strategy is human capital risk - defined as the gap between the organization’s goals and the skills of its workforce. The board should be aware of these risks and how they are being managed, in addition to the people risks they normally monitor, such as CEO and C-suite succession.

How should we be structured? There’s no single right way to structure HCM oversight. The board might choose to centralize HCM responsibility in one committee, disperse it among various committees, or retain oversight at the board level.

What committees do we need? Many boards retain the responsibility for CEO succession as well as oversight of DEI and organizational culture at the full board, while delegating other responsibilities to a committee such as a compensation and HR committee, an HCM committee, or an ESG committee. In the non-profit sector, where compensation committees are rare, oversight of HCM is often added to the mandate of the governance committee, thus creating a governance and HR committee.

Who do we need on the board? Boards should consider adding HCM expertise to the mix of competencies at the board table. At the very least, there should be more than one director who is conversant in the topic and up-to-date on current workforce trends. Where such knowledge is lacking, outside expertise can come in handy.

What information do we need? HCM dashboards are a useful tool for tracking progress on HCM priorities. Boards should expect qualitative measures to provide context and quantitative indicators for accountability.

What should we communicate and disclose? For some boards, it’s important to provide a cohesive narrative about how the workforce is being thoughtfully and strategically managed to build long-term value. Depending on the sector where the organization operates, this kind of information may be expected or demanded by investors, regulators, and other stakeholders. The board should determine what HCM information will be provided and how it will be communicated, considering the sensitivity of the information and how its disclosure might impact employees.

Up Next

In our next two articles, we’ll be doing a deeper dive into the board’s evolving role in HCM oversight: Talent Management and Organizational Culture. Stay tuned!

Your takeaways:

An organization’s long-term success is dependent on attracting, retaining, and engaging talented people.
There is mounting pressure from investors, regulators, and other stakeholders for companies to disclose how they are handling human capital issues. This makes it a board topic.
The board’s role in Human Capital Management is still evolving.
There’s no one-size-fits-all approach to board oversight of HCM. Each board must find its own way – but the journey starts with asking the right questions to demonstrate due diligence and fulfill fiduciary duty.

Resources:

Board Oversight of Human Capital Management No Longer a Nice-to-Have for Smaller Public Companies. Ann L. Bruno. Mintz Insights Center. May 2020.
How Boards Can Approach Human Capital Management. Melissa Sawyer and Jared Snyder. Corporate Secretary. March 2019.
The HCM Mandate for Boards: Human Capital Management Front-and-Center. Blair Jones. Semler Brossy. September 2021.
How Boards Can Get Human Capital Management Right in Five (Not So) Easy Steps. Paul Washington and Rebecca Ray. Harvard Law School Forum on Corporate Governance. April 2021.

Leave a comment below to get in on the conversation.

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with practical tools for board directors who choose a growth mindset.

Originally published May 1, 2022

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