While boards have many important roles, it is often said that “The board's most important role is hiring and firing the CEO.” You most likely have not heard anyone say, “The board's most important role is extending their attention deeper into the executive pipeline, and even into areas like culture and overall learning and development.” There are likely two reasons for this. First, “the board's most important role is hiring and firing the CEO” rolls off the tongue way easier. But much more importantly, you probably have not heard that saying because, until recent times, it wasn't true.
According to Fran Skinner, a director of Peoples Bank and Fenimore Asset Management and a partner of AUM Partners LLC, “Prior to about 2012, the board's role in talent management and assessment was limited to asking about alignment between compensation and performance for only the most highly compensated employees. Was the company getting top-quartile performance for top-quartile pay? The main emphasis was on justifying compensation.”
Jane Wasman, former chair of the boards of Sellas Life Sciences and Athersys Inc. and current chair of the board nominations and governance committees of Sellas and Rigel Pharmaceuticals Inc., concurs, stating that boards' focus on talent management generally had been limited to CEO and sometimes CFO succession.
“Compensation committees focused mostly on annual management compensation matters and parameters relating to the size of equity pools and the like, but often mainly with an eye toward ensuring executive packages were consistent with peers,” says Wasman. “The impact of company culture may have been discussed, but boards generally shied away from in-depth involvement with what were deemed ‘HR matters.'”
Times – and Boards – Are A-Changin'
Daria Walls Torres, director of Columbia Bank New Jersey and managing partner of Walls Torres Group, indicates that the days of directors limiting their involvement in talent matters beyond the executive level are long gone.
“Boards are increasingly expected to ensure that their companies are fostering leadership potential at all levels and employee wellness across all dimensions,” she says. For support, she points to a 2023 PwC report that found 71% of directors stating that they were more deeply involved in talent strategy than they had been five years earlier.
Similarly, Skinner says that in the last five years the board's role in talent management assessment has expanded to encompass “philosophies and processes related to broader employee-related topics,” including performance management, recruiting, recognition and rewards, remote work, firm culture and, especially in the last two years, implementation of AI solutions.
It's a change that has directors expecting more from management. Wasman says, “Boards now expect to have regular succession planning reviews with CEOs that cover not just the CEO's potential successor, but the strength of the whole C-suite ‘bench,' as well as other important leaders.”
Among the important leaders who have found themselves getting more attention from boards are CHROs, who are being asked to address boards more frequently, Wasman says.
“CHROs are being asked regularly to discuss talent-related issues at board meetings, covering issues ranging from gaps in turnover and retention to employee satisfaction and development plans to comprehensive compensation program approaches.”
Factors Driving the Board's Talent Evolution
So, the board's approach to talent management assessment is changing, but what is driving the change? Skinner believes it comes down to the board and management developing a much better appreciation of the risk related to talent management. Based on her vast experience in the financial services industry, which includes leadership positions with Diamond Hill Capital Management and Allstate Insurance, she points to two factors that have played a role in this increased understanding: the financial crisis of 2008 and the rise of social media.
“After various firms' headline-making missteps during and after the financial crisis, boards realized they needed to have a deeper understanding of the risks embedded in talent management,” says Skinner. “Directors are asking a lot of questions about the philosophy and process of measurements and rewards that are hopefully incenting the right behaviors.”
As for social media, directors are now much more aware that one negative comment on LinkedIn can impact a firm's reputation. “Reputation risk is much greater now than it was 10 or 15 years ago. It's made topics like succession planning, training, recruitment and firm culture regular topics in the boardroom,” says Skinner.
Wasman says that boards are now expected to be more engaged in all areas, a result of evolving best practices as well as the more prominent involvement of activist investors, corporate governance watchdogs and other stakeholders. But for a flashpoint for the uptick in director involvement in talent management assessment, she points to the impact of the COVID pandemic, which she calls a “game-changer” for boards.
“It not only legitimized the viability of work-from-home and other hybrid work models, but it created an expectation among many that such options are a core employee right,” says Wasman. “Changing demographics and a tight job market, as well as generational differences in expectations regarding corporate life, have made employee retention and development, along with attraction of new talent, both more difficult and a higher priority.”
The Tools of the Trade
When bringing on a new CEO, C-suite member or other key executive, boards and management are under pressure to get it right. And they use a range of processes to make sure they do so. In Torres's experience, these tools have ranged from “formal evaluations, such as 360-degree feedback and leadership assessments, to more unstructured methods, like informal interactions designed to observe candidates in action.” Torres, who holds faculty appointments at four business schools, including her alma mater The Wharton School, adds, “Beyond assessing individuals on their own merits, there is an increasing focus on how each candidate's leadership style and cultural fit will support the broader talent ecosystem.”
Wasman says that when dealing with senior-level assessments, “Who a person is can be even more important than their experience and expertise.” Therefore, she stresses the value of detailed interview processes. For the CEO and board roles, that means starting with a recruiter (if one is retained) and moving to the current CEO, the nom/gov chair and/or board chair, and other board members (with all board members speaking to final candidates in an ideal situation). For an executive role other than the CEO, Wasman states that the CEO will typically run the process, while making sure that the board is sufficiently updated. And then, depending on the role, selected board members are asked to interview final candidates. (The example she points to is the audit committee and chair's involvement with interviewing a CFO candidate.)
“Some companies also utilize skills and personality assessment tools, often personalizing them to incorporate real-life scenarios that an executive might encounter at the company.”
Skinner, too, has seen a rise in “psychometric assessment tools” for evaluation of a candidate's skills, traits and behaviors. She says these tools are used “pretty much 100% of the time for senior management candidates.”
“These may be tools used by a recruiter to compare candidates they bring to the table, or it may be tools the firm has adopted to provide objective data that can be explored in the interviewing process.”
A Quickly Emerging Risk
When it comes to risks affecting companies and their boards, talent may not be as attention-grabbing as topics such as AI or geopolitical concerns — but, as Skinner suggests, it is one that is quickly emerging, and directors must be aware of its impacts. Wasman reports that her boards see acquiring and retaining appropriate, skilled talent as an important priority for continuous oversight.
“Loss of key personnel and gaps in needed talent are, and should be, considered a significant potential risk for all companies,” says Wasman. “The attention paid to this varies, in part depending on the depth of talent at the company, management performance, CEO longevity, the competitiveness of the job market and other factors.”
As for the amount of time her boards spend on talent management at their meetings, Wasman says it has “clearly increased over the past few years.”
Torres says companies that do not rank talent near the top of their personal list of biggest risks can expect to begin losing the ever-competitive “war for talent.” Pointing to a 2023 report by EY that noted 58% of surveyed directors ranking talent management among their top three strategic priorities, she says, “Placing and keeping the right people in the right roles is not just a strategic advantage, but also a critical risk mitigation factor.”
The Future of Talent Management
The last five years — and especially the year 2020 — have had a major impact on how boards approach talent management. What can be expected in the next half-decade? Skinner believes that the use of talent data — both internally generated data and comparisons against peers in the boardroom — will only continue to expand.
“As tools to provide this data to boards becomes more prevalent, it should allow for continued expansion of available objective data to help everyone understand where they're at, where they want to be and what is their progress in getting there.”
Wasman expects boards to continue their involvement in talent management, resulting in pressure on directors to display a commitment in the area. She believes it will affect not only board agendas, but also the way boards divide responsibilities.
“Given that there are a number of other competing priorities for boards' attention, we can expect boards to look for and adopt efficient ways of implementing increased oversight while respecting management's responsibilities,” says Wasman. “This includes turfing some responsibilities to committees, who then report back to the full board, providing greater background in written board materials, and having special meetings to cover specific topics.”
And for directors challenged by the need to learn more about the many (and increasing) risks that confront themselves, their boards and their companies daily, Torres sees the next five years as a pivotal opportunity for them to grow their knowledge and their value-add.
“I expect the pressures from disruption and change to intensify, driving a need for greater leadership agility and resilience,” says Torres. “As leaders ourselves, directors need to accelerate the climb along our learning curves and become more proactive in the talent realm, both to see further over the horizon and to navigate faster around corners.
“We have to prepare for the increasingly unpredictable and fluid future landscape by focusing on more dynamic, forward-thinking talent strategies today.”