Boards of directors are increasingly prioritizing their role in the oversight and governance of human capital. They’re focusing on developments in labor markets, skill shortages, succession planning, retention, employee wellbeing and costs. And they’re watching new technologies such as AI, quantum computing and geopolitical risks. They view these efforts as critical to effective business judgment and necessary to company strategy and creating competitive advantage.
Following the global pandemic and the Great Resignation, tightening labor markets, inflation and recession concerns, remote work and technological disruption, effective boards today view addressing people issues as fundamental to strong stewardship – how companies create and preserve long-term value.
A survey of global board members conducted by WTW and Nasdaq found that board members view human capital as a high-priority topic. WTW's 2024 Global Directors’ and Officers’ Survey Report also found that boards and executives see employee health and safety as a top organizational risk. More than 90% of S&P 100 companies have broadened their compensation committee's charter to include broader human capital management. This may include succession planning, leadership development, broad-based compensation and benefits programs, and diversity, equity and inclusion efforts. Human capital governance is now also a core element of the enterprise risk management framework in a growing number of organizations.
With thanks to a collaboration with Directors & Boards and WTW’s Don Delves and Ken Kuk, effective boards take the following actions regarding human capital governance:
01
Effective boards are broad in their discussions of human capital without getting bogged down by an overwhelming amount of data or narrow topics that have caught media attention.
They review human capital updates and scorecards from management, asking key questions around context – such as historical trends and market benchmarks. They ask about connections to business priorities and whether there are material data gaps and what would it take to close them. They ensure management receives tangible and actionable feedback from the board. They encourage executives to vet materials cross-functionally in the organization and the C-suite before board and committee meetings.
02
Effective boards clarify the board's role versus management's role and what human capital issues are dealt with at the committee level versus with the full board. Committee and board charters reflect these accountabilities, with formulated processes for the board's and management's partnership.
Effective charters include a meaningful level of detail covered regularly at the committee level while focusing full board deliberations on the most strategic human capital matters as appropriate. They also define accountabilities across committees for overlapping areas with audit and risk committees (for example, human capital disclosure, human impact on cyber risks and broader human capital risks).
03
Effective boards focus on outcome-based metrics that evaluate how people contribute to the business, with metrics and reporting that are simple and contextualized. Such metrics demonstrate a clear connection to key business priorities and align with the risk profile and growth ambitions of the organization.
Metrics reflect the areas with the greatest risk exposure and materiality; some human capital risks may be considered worth taking as long as they deliver commensurate upside opportunity and are aligned with the business's risk tolerance. Effective board-level human capital dashboards comprise data such as workforce demographics, turnover, leadership succession plans, employee engagement and snapshots of compensation and benefits programs. Increasingly, boards focus on talent management and development, skill gaps, pay and career equity, and/or employee financial, physical, emotional and social wellbeing.
04
Effective boards create regular touch points with the chief human resources officer (CHRO) and chief risk officer (CRO) to align how people risks fit into the overall enterprise risk management framework. Prior to each committee meeting where human capital updates are presented, the CHRO reviews materials with appropriate C-suite peers (e.g., CFO, CRO, COO, group presidents) and then the CEO and CHRO review them with the committee chair to confirm management's narrative and objectives of the discussion.
05
Effective boards conduct one-on-one conversations with the CHRO, allowing for candid discussion about the organization's people strategy. These conversations reinforce the partnership between the board and management in advancing the company's talent strategy. Board members recognize that such conversations can be important complements to attendance at formal meetings to ensure the right conversations are happening in the right forum at the right time.
06
Effective board members understand the business-judgment rule presumes that directors make good-faith judgments in material corporate decisions in the best interests of the stakeholders to whom they owe fiduciary duties. Such legal protection to directors stems from the core principle that separation of roles between management and the board is a core tenet of effective corporate governance.
The dynamic business landscape requires boards’ increasing focus on human capital governance and risk. Effective boards recognize that addressing human capital issues is fundamental to long-term value creation. By leading strategic discussions, clarifying accountabilities, considering relevant metrics, involving the right stakeholders and maintaining a clear distinction between governance and management, boards can ensure that human capital management aligns with the company's overarching priorities. This holistic approach enhances organizational resilience and drives competitive advantage.
A version of this article originally appeared on Forbes on September 16, 2024.
