Uber, Wells Fargo, #MeToo, historically low unemployment—not to mention an increasing focus by large institutional investors—have all made people issues front and center for U.S. companies in the past few years.
America’s boardrooms appear to have gotten the memo.
That’s the key finding of a recent study by Corporate Board Member and the EY Center for Board Members. In a survey of 378 U.S. public company board members fielded in the fall of 2019, 78 percent of the directors we polled say the time they devote to human capital management in the boardroom has increased over the past five years, and 70 percent say these issues are either a regular agenda item on their own or embedded throughout their discussions.
The reason is hardly a secret. “If you look at when bad things happen to what seem like good companies, when you peel back the onion, it usually comes down to a cultural issue,” says Dawn Zier, the former CEO and president of Nutrisystem, who serves on the board of The Hain Celestial Group and Spirit Airlines.
“I look at a company like Uber,” says Dr. Susan Fleming, former senior lecturer at Cornell and a director at RLI Corp. and Virtus Investment Partners, “where they were growing like crazy but because they didn’t pay attention to culture and ethics and how those interplay, which goes to their strategy, to the way they deal with cities on regulation, to the way in which they promote people, the way in which they compensate people, the way in which they deal with their drivers…when a lot of that stuff became more visible, they lost a ton of clients, customers got rid of their app. So, if you don’t get that right, you’re dead in the water in terms of executing on your strategy.”
Our study found increasing sophistication among directors when it comes to keeping tabs on a range of human capital management issues—as well as a very high level of confidence in their understanding of the seismic shifts in the workplace and their impact on business.
But there was also a surprising amount of dissent, at least anecdotally, when it came to the overall question of whose job it is—ultimately—to oversee the workforce. “It’s a very important subject for successful management teams to execute on and keep the board apprised,” Craig Macnab, director at REITs American Tower Corporation and VICI Properties, told us, echoing similar comments from multiple directors who completed the survey. “But I think a public company board would do well to narrowly focus on strategy, measuring performance against budget, things like succession planning, acquisitions, financings, divestitures, etc. I think it’s too easy for boards to get caught up in having a cyber committee and this and that when I believe those are management’s job.”
Nonetheless, few disputed the idea that culture has a place in boardroom discussions, even if it is vexing to oversee. Henry Nasella, lead director and chair of the nom/gov committee at PVH Corporation, says the Wells Fargo story got his board’s attention. “All of us began asking, ‘Okay, where is our culture? How do we monitor it? Where are the risks? Do we have compensation plans that encourage the wrong kind of behavior?’ For us, it was a giant wake-up call and really it was about, ‘Okay, what are we doing, how do we know when we have a problem?’”
Nasella, who, as the first president of Staples, built the company from a startup into a global leader in office-supply retailing, understands how this all takes time and why some directors may want to focus their time on strategy instead. Don’t do it, he warns. “I’ve been a CEO and I’ve been an investor, and one of the things that I’ve learned consistently is that sure, strategy is really, really important, but if you don’t have the right human capital to implement the strategy and execute it properly, I don’t care how great the strategy is, that isn’t going to work… Many of the most well-thought-out strategies either fail or are less effective because the human capital that’s required to implement it and sustain it and build resiliency isn’t at the company. And I think that’s a failing of the board as well as management.”
Gary Cowger, CEO of GLC Ventures, director of Delphi Technologies and Titan International and the former president of GM North America, says he doesn’t think directors can ever be completely satisfied on the issue. “I’m always sending other members all this stuff on culture, which, by the way, is very hard to measure. You can look at hotlines, you can look at turnover ratios. You can look at a lot of things, but it’s very difficult to get down on the floor and understand what the culture truly is. That’s why, and maybe we are a more active board than most, but we would travel around to all these tech centers and go in and meet the scientists and the engineers and have lunch and dinner with selected ones. And you start to get more of a feel for culture at that level.”
Most directors we talked with agree that to get an honest view and understanding of what’s happening in the company, board members must be able to see beyond the CEO. “As a director, one of the things I like to look at is what access the CEO encourages the board to have with his or her team,” says Zier. She urges directors to look beyond identifying red flags to look at culture as an opportunity for growth and attracting talent. “There’s a strategy behind it: How do you attract talent? How do you work with the new generation of workers? How do you enable your people to take the company to the next level? And how do individual leaders build upon or erode the corporate culture?”
External advisers, independent experts and direct access to CHROs are all avenues for boards to get and stay up to speed on talent issues, according to survey respondents, more than half of whom report getting regular talent-related briefings from CHROs (see p. 46). “The CHRO should be a strategic resource for the board on matters of talent and culture, keeping the board apprised of the talent agenda in the same way that the CFO keeps the board apprised of the financial agenda,” says Steve Klemash, leader of the EY Americas Center for Board Matters.
Despite the consensus in attitude, directors we surveyed were all over the map when it comes to what elements of human capital management they actually measure. Among directors we polled, only leadership succession/bench strength is monitored by an overwhelming majority of boards (89 percent). Monitoring of other key areas was far less ubiquitous, with just 61 percent of directors saying their boards monitored diversity and inclusion, followed by attrition (59 percent), employee engagement (52 percent) and future workforce requirements (36 percent).
“The more complicated and the bigger the company is, sometimes the more distant the board is from understanding these things,” says Fleming, “[But] I don’t think that is a fair reason to give them a free pass.” She says that her board holds an annual two-day strategy session at which one of the topics discussed is human capital, culture, the changing workforce and how to improve diversity.
Klemash agrees. “Boards should embrace a ‘trust but verify’ oversight approach using analysis of direct and indirect metrics for culture and human capital intelligence,” he says. “Overseeing a broader scope of human capital elements and regularly monitoring related metrics can help all boards obtain a comprehensive picture of the company’s human capital and its enablement of (or risks to) business objectives.”
Adam Crescenzi, a veteran of the financial services industry and nom/gov chair at both Clough Global Allocation Fund and Clough Global Opportunities Fund, says with technology transforming the traditional model of all industries, keeping tabs is absolutely a board function. And that will only grow in the years to come. “[The new generations] seem to be having very different attitudes about work, play, philanthropy,” he says. “And that, plus technology, is what’s really going to re-engineer what businesses look like over the next 10 to 20 years.”
With the exception of workforce compensation and pay equity, most conversations about talent take place at the full board level, reported survey respondents. That may be a missed opportunity, noted Nasella, who suggested that boards struggling to fit talent into their agendas consider how the issue might fall within the scope of committees. “We can do really thorough, deep dives because we have more time and more focus to do that,” he says speaking of his nom/gov committee work, adding “It may be a half-hour conversation around developmental things that we’re working on for high-talent people, [where management] is just briefing the committee. It could be about what we need to think about, doing different things… Whatever it might be, out of every nom/gov agenda, there’s some topic around human capital.”
Delegating human capital to a committee for ongoing reviews and analyses is an efficient way to tackle the issue, he adds, as long as committee findings and conclusions are then reviewed and discussed at the full board level “because we believe that every board member is responsible for this and needs to be briefed and understand it, and their input is valuable.”