Overseeing "Our Greatest Asset"
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.?
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.
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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.
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, satis?ed, 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!
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Thank you.
Scott
Scott Baldwin is a certified corporate director (ICD.D) and co-founder of?DirectorPrep.com?– an online hub with hundreds of guideline questions and resources to help prepare for your next board meeting.