Human Capability and Boards of Directors

Increasingly, human capability (talent + leadership + organization + HR) delivers value to all stakeholders both inside (employees, senior executives, HR professionals) and outside (customers, investors, communities) (see figure 1).

Traditionally, shareholder interests are best served by boards paying attention to strategic and financial considerations. Boards attend to strategy by examining external environmental trends (e.g., technology, regulation, globalization), competitors, and customers to advise management on how to best position the organization to win. Boards attend to financial issues by regularly and rigorously attending to capital structure, costs, cash flow, and financial covenants.

But increasingly, boards recognize that strategic and financial considerations are necessary but not sufficient content areas for board consideration. Strategy is not just about where an organization is going but how it gets there. Financial performance is not a single event but a sustained pattern. Competitors may copy strategic and financial initiatives, but they have a more difficult time copying the less tangible, but increasingly relevant, human capital initiatives. To ensure sustained value creation, boards need to pay increased attention to human capability issues (see the?UK’s CIPD,?The value of people expertise on corporate boards) through three board considerations.

Board Consideration of Human Capability

Most boards operate both as a whole board and through committees. Each entire board quarterly meeting often starts with a financial review and strategic overview, then the board focuses on targeted issues such as product innovation, capital structure, risk management, market and technology trends, and leadership succession. In this logic, human capital is often an annual review of succession for senior positions and a review of targeted initiatives. With the increased attention to human capability, every full board meeting is likely to include three (not two) regular topics: finance, strategy,?and human capability.?

The human capability regular review is broader than leadership succession and might include discussions about:

Individual competence (human capital): What are talent requirements to deliver strategy and financial goals? This discussion might include:

• Workforce and?worktask?requirements to deliver on strategic initiatives including risk assessment of available talent.
• Employee engagement or?experience?data including regrettable losses and productivity information.

Organization capability: What organization capabilities are required to deliver strategic and financial goals? This discussion might include reports on organization capabilities required for success such as:?

• Agility?and the ability to respond to market changes.
• Culture?and the ability to turn external brand promises into internal behaviors and processes.
• Technology and?AI solutions?for sharing information that leads to decision making.

Leadership: What leaders need to be good at to deliver strategic and financial goals? This discussion might include:

• Leadership competencies?required for future strategy (e.g., harnessing uncertainty, empowering others, using analytics).
• Leadership depth beyond succession for executive positions.

Human resource practices: What are the targeted HR practice areas that need oversight? This discussion might include:

• Executive compensation as part of total reward philosophy.
• Diversity?and belonging initiatives that signal social citizenship.
• Employee?learning and development?initiatives to upgrade employee skills.

Including these human capability discussions in?every?board meeting improves the likelihood of strategic realization, financial success, and improved investor confidence.

In addition to full board meetings, committees may evolve to take advantage of human capability issues. Executive Compensation Committee generally focuses extensively on compensation and rewards issues; the charter for this committee may be broadened to an “organization guidance” committee (see figure 2). Internal HR experts (CHRO, head of total rewards, chief learning officer, and others) can serve as advisors to the board and organization committee.

Board Consideration of Membership

Generally,?board members?are selected because of their credibility and reputation (highly visible community leaders), relationships with key stakeholders (customers, investors relationships), and/or expertise (industry, technology, financial). For example, all boards have certified financial experts who oversee and audit financial results.?

As human capability becomes relevant and material, boards should seek members with deep human capability expertise. In our (and other)?research, CHROs understand business context, accelerate business results, and prioritize human capability investments. As board members, human capability experts ensure that boards know latest trends and practices that management might adapt to deliver stakeholder value. In a recent?study of 350?UK FTSE boards, 100 percent had finance/accounting expertise and 25 percent HR/people expertise. This is likely to change.?

Governance Considerations for the Board

Governance is about how boards operate as a?high-performing team?to model human capability. We have found that high-performing teams have?five characteristics?(figure 3). These characteristics can be part of a regular (annual) board governance audit where board members independently rate the board on the five characteristics (figure 4).?

Conclusion: Now What?

As human capability becomes more relevant and material, board consideration for expertise, membership, and governance becomes a contributing factor for stakeholder value.?

..………

Dave Ulrich?is the Rensis Likert Professor at the Ross School of Business, University of Michigan, and a partner at The RBL Group, a consulting firm focused on helping organizations and leaders deliver value.