Talent experts should be given a seat in the boardroom.
Alan Guarino does not only chair the compensation and human capital committee for The Chefs’ Warehouse, a specialty food company. He’s also the talent expert in the boardroom.
It’s all part of the proactive role Guarino believes boards should be playing in the hunt for the best employee talent. Since The Chefs’ Warehouse went public three years ago, the company has begun to put detailed HR analytics in place that allow the board to monitor revenue per employee to get a sense of how productively the workforce is operating and the costs per hire, says Guarino, who is also a vice-chairman in Korn Ferry’s CEO and board services practice in New York.
“Many boards still have HR committees sitting under nominating and governance, because most of the focus was on CEO succession,” he explains. “And boards need to make human capital a quarterly agenda item, at a minimum.”
Guarino co-authored a Korn Ferry study called “The Global Talent Crunch,” published in May, that sounds an alarm, about how unready most companies around the world are for the human capital needs of the next two to 12 years.
Korn Ferry estimated the talent gap between future talent supply and demand in 20 major economies in 2020, 2025 and 2030, across three knowledge-intensive sectors: financial and business services; technology, media and telecommunications; and manufacturing. The study found that there could be a shortage of 1.7 million workers in the U.S. financial and business services sector by 2030, resulting in an opportunity cost of nearly $436 billion in annual sector revenue by 2030.
On the one hand, those are average figures that by no means tell the whole story. The greatest shortages will be among highly skilled professionals. Most companies recognize that need, and will pay top salaries for highly qualified people. Then, however, there is the question of supply and demand for mid-skilled and low-skilled employees. Overall, the survey finds that there will be a sizable cohort of less-skilled workers by 2030 as automation and artificial intelligence eliminate many jobs.
Yet rather than considering these employees expendable, says Guarino, “the board should be aware of how the company is going to repurpose that talent, maybe through training and education, so that they can take advantage of that talent moving up the talent supply chain.”
Boards, recommends Guarino, should have a talent expert who makes sure the company is managing its human capital in a way that addresses future needs and mitigates risks that include losing key people and being unprepared for change, as well as reputation damage. He likens the talent expert to the audit expert; he or she should be someone whose career has revolved around talent competency and talent supply chains, most likely from a leadership advisory practice at a major consulting firm, with a master’s and/or PhD in organizational development.
Considering that all of Fortune magazine’s 10 Biggest Business Scandals of 2017 can be attributed to some form of human failing, it makes sense for boards to institute a more formalized review of workforce management.
“If the annual report says the workforce is the company’s most important asset, the board should be asking senior management for evidence that they’re actually managing the workforce as an asset,” says Haig R. Nalbantian, a senior partner and co-leader at Mercer Workforce Sciences Institute in New York.
Nalbantian is the author of a chapter about human capital management (HCM) in the National Association of Corporate Directors’ (NACD) annual governance challenges study for 2018, in which he writes that while effective HCM is often a major driver of productivity advantages, “meaningful information about the workforce and how it is managed remains remarkably sparse.”
There are examples, however, of companies taking this seriously.
One large tech firm that was going through a significant transformation, says Nalbantian, used workforce planning to avert the significant risk that their workforce would be inadequate to support their new business model and technology.
Nalbantian knows of another company going through a similar transformation that launched new product lines, a rebranding campaign, and a new sales model — but when those efforts failed to boost their sales and share price, a management team investigated and found that their workforce wasn’t adequately trained for the transformation. “Their stock price virtually evaporated, and to this day the company is a pale shadow of what it once was,” he says.
Boards should create a formal structure for overseeing human capital management, Guarino advises. “The human resources committee activity should be the responsibility of the compensation committee,” he says. Directors “should have a succession plan for the whole organization, and the board needs to determine if people on the succession chart are really capable of moving forward with what’s needed.”
In the NACD report, Nalbantian presents a list of questions that directors and investors should be asking management about their workforce strategy: Does the organization have an explicit workforce strategy that defines the talent requirement it needs to achieve its goals? What measures are in place to track whether the strategy is being executed effectively? Is there a planning process to identify looming talent gaps and other risks associated with business or technological changes?
When boards do address human capital management they tend to approach it as a risk management exercise, says Nalbantian. Often that is appropriate, but he says in some cases it makes more sense to think of it as an opportunity to maximize value.
A large healthcare company, for example, studied its workforce at the urging of a new HR leader, and found that a series of cutbacks in full-time jobs and middle management had actually brought productivity down and labor costs up. Keeping a highly skilled full-time staff intact turned out to be a competitive advantage. Every company’s needs are unique, and that’s all the more reason boards, says Nalbantian, “should bring the same kind of discipline and rigor to decisions about people that they bring to proposed investments in physical capital, financial capital and branding.”
Jan Alexander has written about financial markets, management strategy and the global economy for Strategy+Business, Institutional Investors, Forbes, Worth and Money.