October 19, 2023

TPL Insights #193 – Do You Need a Chief Human Resources Officer on Your Board?

By Rob Andrews

By Rob Andrews with italicized content from the Directors & Boards article “Do You Need a Chief Human Resources Officer on Your Board?” by John Borneman and Kathryn Neel published on July 31, 2023

Recently, while launching an engagement to help a middle-market engineering firm that had converted to 100% ESOP build a new fiduciary board from the ground up, I asked members of the board composition committee about the strength of their CHRO. Their response was fairly common. What does the HR function have to do with a board of directors? As it turns out, maybe a great deal. We believe that a strong culture is the only sustainable competitive advantage. As such, having board members who understand the human dimensions of organizations is crucial, a point that Borneman and Neel make here.

When a company needs more financial expertise on the board, a former or sitting CFO is an obvious candidate. When a company needs to enhance its human capital strategies and oversight, why shouldn’t it turn to a former or current chief human resources officer (CHRO)? With the expanding board mandate to oversee corporate talent strategies, more companies will likely consider adding the capabilities and expertise of human resources executives to their boards.

Over the last five years, board oversight responsibilities for human capital management (HCM) has increased rapidly. Although this trend is linked to heightened shareholder focus on ESG and DEI in particular, board involvement goes beyond ESG and DEI reporting and compliance. Many examples of governance failures are linked to culture. Additionally, the cumulative impact of economic crises on talent markets (e.g., the 2008 financial crisis, the pandemic, ongoing “wars for talent”) have heightened the importance of attracting, retaining and rewarding people for company success — and the need for greater board oversight of talent-related programs.

Companies in every industry are paying closer attention to their talent, and boards are becoming more interested in understanding how people strategies work and how they affect business performance.

What Are the Human Capital Committee’s Responsibilities?

As a result of this increased need for oversight, the role of the board and, more specifically, the traditional compensation committee is changing. As of 2022, Semler Brossy’s research found that over 40% of S&P 500 companies had already renamed the compensation committee to convey its expanded mandate. The new “human capital committees” cover topics such as talent acquisition and retention; incentive and reward strategies; leadership development and succession planning; diversity in the workforce; pay equity; employee morale and engagement; corporate culture; and health and safety.

Examples of recent committee discussions have included:

  1. A 30-minute session on a company’s new leadership development program and how it supports enhanced diversity over time.
  2. How new technologies and pipeline development initiatives are needed to attract hard-to-find frontline employees.
  3. The improved retention of targeted employee groups following years of investments to tackle pay inequity.
  4. How the launch of an incentive program to attract and retain key people with technology expertise has helped to propel the company’s digital strategy.
  5. Turnover trends by level and the impact of hourly turnover on operations (and what management has done to counteract these trends).

In each of these cases, the committee had the opportunity to ask questions, get a deeper understanding of the company’s talent differentiators and risks, and offer suggestions or perspectives based on their own experience and what worked at their companies.

Every human capital committee will focus on different HCM topics based on the business’s priorities, needs and risks. But in each case, the level of depth and time dedicated to HCM topics is more intensive today than ever.

What Does an Experienced CHRO Bring to a Board?

While some boards have functioned without a human capital expert, the changing business and talent landscape suggests that having one is becoming increasingly valuable. The shift from HR administration to a more strategic focus on HCM has elevated the importance of CHROs for corporate board positions.

Semler Brossy found that only 8% of S&P 500 boards have a current or former CHRO on their board today. There is an opportunity to expand that expertise. Board members who are sitting or former CHROs bring significant strengths to boardroom discussions, including:

A holistic view of the company’s human assets and liabilities. Just as a CFO manages the financial assets and liabilities of an entire business, the CHRO manages human capital across a portfolio of business lines and management functions. In this role, they can offer a holistic perspective on an organization’s employee capabilities and needs — at different levels, in different roles — that can be useful to identify talent gaps and process issues. They can also offer practical advice and alternative approaches.

Shaping the depth and tone of the discussion. CHRO board members can facilitate strategic discussion of HCM goals, accomplishments or problems with a high degree of credibility. A CHRO board member might be better equipped than other board members to ask pointed questions about HCM issues. For example, is the management team actively managing the corporation’s culture? And, if they’re not, what can the board ask to ascertain whether the current culture is a strong asset (or a liability) for the company?

A critical view of the metrics that matter. A CHRO board member is also uniquely positioned to evaluate the meaning and mechanics behind the numbers. If it appears that talent development and leadership pipeline processes are not working as intended, the CHRO will have many questions: How are skills being assessed? Should skill profiles be updated? If employee turnover is increasing, are there better ways to analyze the data or seek additional information to help identify the root causes?

Strategic and practical experience on an issue. An experienced CHRO can ask more targeted questions and offer guidance and advice to a management team seeking to transform their own approach to key talent issues. For example, they can identify programs that work — and those that don’t — to improve employee morale and engagement in a more flexible work environment.

The hypercompetitive labor market, fueled by pandemic-era growth, dramatically underscored what has become increasingly apparent over the past several decades: Human capital is a critical underpinning of business success. To attract, retain and support top talent, a company’s entire leadership team must be aligned on and engaged in human capital strategy. Human capital expertise on boards is a critical addition to ensure effective oversight. Even as economic uncertainty threatens to ease the war for talent, the composition of boards is likely to remain permanently changed by recognizing the importance of human capital expertise.

I sincerely hope this article has been helpful. Here is a link to our resource guide, which will help you understand the principles we’ve identified in peak performing organizations that have built strong cultures.

Warmest Regards,

Rob