Human capital governance has emerged as a timely and relevant topic to board members, given new regulations in many countries; the impact of the pandemic and climate events on talent availability, mobility and cost; employee well-being and productivity; and labor action, as well as recognition of the role of intangible assets in corporate valuations and the link between people and performance (as well as risk). Human capital has become a focal point of board governance and one of the essential pillars of strong corporate stewardship.
To better understand direct perspectives from board members, WTW partnered with Directors & Boards to conduct a survey focused on exploring key themes in the evolution of stewardship and human capital governance. Here are a few key findings.
- Boards do not spend enough time on long-term strategic planning.
- Succession planning and leadership development is the most important human capital priority for the board, followed by talent attraction and retention and workforce development and skills for the future.
- Only one-third of board members agree that human capital governance is effective on their boards.
- Boards do not spend enough time, nor do they receive the right level of information, to engage in meaningful and strategic discussions about human capital governance.
Do Board Members Think They Are Spending Their Time Effectively?
The two areas board members spend the most time discussing are financial performance monitoring and reporting and purpose and strategy development. Within the human capital category, leadership succession and development are top-of-mind. Interestingly, despite the significant focus in the market on AI and cybersecurity, board members do not rate it highly in terms of materiality to business. One explanation for this observation could be that these discussions fall under other categories such as enterprise risk management (ERM) and innovation and transformation.
As important as financial performance monitoring and reporting is to the business, board members feel that they are spending too much time on the topic relative to its materiality to the business. By contrast, board members would prefer to spend more time in three areas material to the business: leadership succession and development, purpose and strategy development, and innovation and transformation.
Board members also make it clear that they would prefer to spend more time on longer-term strategic planning, as more than 40% of surveyed board members feel that they spend too little time on strategic planning for the next 10 years. However, boardroom discussions often get bogged down on business results and issues for the next quarter or next year, leaving the board with limited time to focus on sustainable long-term value creation.
Human Capital Themes in the Boardroom
Often, the full board has limited capacity to give human capital governance its due attention. WTW found that more than 90% of S&P 100 companies have either changed their compensation committee's name and/or revised the committee's charter to include broader remit over talent and culture. This aligns with findings from the survey, as shown in Exhibit 3, as more than 40% of board members think that the compensation committee has primary responsibility over human capital. Among those who provided a write-in response, a majority noted “HR committee,” which has evolved from the compensation committee.
Human capital governance can be an overwhelming subject for the board. There is a lot of ground to cover, and boards do not want to get stuck with minute detail about HR policies or programs. Best practice is for the board to focus their oversight on human capital areas most material to the business, either because they pose a significant risk or are a differentiator for competitive advantage.
As shown in Exhibit 4, succession planning and leadership development are by far the most important human capital topics to board members. Ensuring that their company and its assets are managed by a qualified executive management team — and that there is a plan in case any role is vacated — is one of the most essential elements of the board's fiduciary duties. Attracting and retaining talent and maintaining a future-proof workforce are both top-of-mind for board members as well.
Despite its materiality to the business, boards do not spend sufficient time on what they believe to be their top-priority human capital topics. In addition, boards also find information provided by management lacking at times. This is particularly the case in four areas:
- Workforce planning and skills for the future
- Succession planning and leadership development
- Labor cost optimization
- Employee performance and productivity.
This does not necessarily mean that management withholds information from the board. Instead, boards often find information they receive overwhelming and that there isn't sufficient context to interpret the data and provide appropriate guidance to management.
Where Will DEI Go?
The only two human capital areas more than 10% of board members feel they are spending too much time on are work strategy (e.g., remote work, return to office) and DEI. While the former was a key strategic topic as an aftermath of the pandemic, most companies have since found the work policy that best balances between productivity and employee needs. However, the recent high-profile announcement from Amazon of a return to office five days per week may trigger further boardroom discussions.
With a series of high-profile stories of companies publicly backtracking their DEI initiatives (e.g., Tractor Supply, John Deere and Harley-Davidson), DEI is one of the most controversial employee-related topics. The fact that DEI programs can be dismantled over an activist's or influencer's comment is proof that these programs were built on weak foundation. The connection to business materiality has not been clearly articulated. Boards should expect that the recent backlash will force companies to avoid making empty commitments to DEI.
Effectiveness of Human Capital Governance
Data show that boards believe there is room for improvement in how their role of human capital governance is carried out. Only about one-third of surveyed board members agree that their companies have a robust process to identify, assess and monitor human capital-related risks. Additionally, a similar percentage of board members agrees that human capital risks are effectively captured within their companies' enterprise risk management framework. When human capital risks are disconnected from other business risks, it makes the board's job (and their stewardship role) much harder.
Key Takeaways
Overall, the results validated the hypotheses that shaped the design of the survey. Boards consider human capital a key area of focus in their stewardship role and often feel that they are not spending enough time on the human capital areas most material to the business. The reporting they receive is often too overwhelming and not contextualized enough to allow for a robust and strategic discussion. And, unlike other business risks, human capital risks are not always effectively assessed and tracked.
Building on the practical guide on human capital governance published in the Quarter 3 2024 edition of Directors & Boards, consider the following checklist to enrich boardroom discussions about human capital.
- Ask for a story, so that reporting on human capital metrics is not just a data dump but a narrative that connects with business priorities, shows progress over time, references competitive benchmarks, and contextualizes to business drivers like performance and productivity.
- Set a cadence. Expect an update from management on a regular basis and hold management accountable to following up on the board's feedback.
- Build trust with management and give them the space to be transparent, as oftentimes the real story is hidden behind the data.
- Foster a relationship with your CHRO outside the boardroom. Ask your CEO to include partnership with other functional leaders — like legal finance and risk — in the CHRO's development plan so they can build a more business-oriented narrative about human capital risks and opportunities through a multidisciplinary lens.
- Break the committee silos and find a common voice about human capital risks and opportunities across board committees.
- Formalize process to periodically review board effectiveness and incorporate a broader perspective on the board's role in stewardship.
- Ensure that the board has the right profile to engage in a meaningful discussion about talent and the business.