A closer look at human capital management
The past two years have opened boardroom doors to beneficial change. Boards faced an extraordinary convergence of events – a global pandemic, shrinking labor markets, volatile economic markets, state-sponsored cyber-attacks, unstable geopolitical conditions and civil unrest – that brought in their wake a more inclusive, stakeholder-centric perspective to creating shareholder value.
Shareholder primacy is yielding to more robust stakeholder-oriented capitalism. The Business Roundtable’s 2019 Statement on the Purpose of a Corporation marked the beginning of the era of stakeholder governance in the US. The European Commission made stakeholder governance the foundation of the 2021 Sustainable Corporate Governance Initiative.
The UK led in legislating the concept of ‘enlightened shareholder value’, or consideration of stakeholder impact in decision-making, as early as 2006 through Section 172 of the Companies Act. Reporting on how these considerations have been evaluated is now firm practice in the UK and influencing governance trends around the world.
As 2021 was ending and 2022 beginning, a new variant of Covid-19 precipitated yet another global wave of infection that continues to strain the capacity of businesses and healthcare systems and fatigue an already battered and weary workforce. While the challenges remain daunting, the global economy is maintaining resilience.
We have learned that stakeholder-centric corporations may wield greater influence and have a more trusted role to play in crisis response and societal stability than was previously thought.
The past two years demonstrated that directors are more than prepared to answer the call to stakeholder-oriented governance. As a cohort, boards around the globe appear to be exhibiting more agility, tech-savviness, risk awareness, forward-looking perspective and resilience.
As they continue to steer their companies through current and emerging challenges and find opportunities in evolving markets, these battle-tested boards will sharpen their focus on four key corporate governance areas, including human capital management (HCM).
Increasing focus on DE&I and talent acquisition Employees have emerged as key stakeholders requiring the board’s attention. One of the biggest concerns we heard from CEOs and directors during the initial wave of the pandemic was for the overall well-being of the workforce. Directors have become deeply concerned with diversity, equity & inclusion (DE&I) and talent acquisition, as the ability to attract and retain the best talent at all levels of the company has become a competitive differentiator.
Boards are being pressured by investors and regulators alike to enhance oversight of and, by extension, disclosures around HCM issues. Where once boards may have received a cursory annual report on human resources matters, directors now want to acquire literacy on the full range of issues that comprise HCM. Many firms are elevating the profile of the human resources function by creating C-suite human resources roles that more frequently and substantively report to the board, which helps improve the oversight of HCM and related discussions in the boardroom. This enables the board to proactively work with management on HCM.
Key HCM areas expected to be in focus during the year include:
Enhancing HCM disclosures HCM programs impact every stakeholder and are increasingly important to the board in terms of facilitating healthy corporate culture, mapping strategy and achieving business goals.
Accordingly, regulators and investors are demanding information that brings visibility to employee demographics, working conditions and talent-acquisition strategies to better assess the ‘people risk’ companies face.
This year will be only the second proxy season since the SEC requested that companies enhance HCM disclosures in Form 10K. We expect HCM disclosures to evolve rapidly during the next several years as boards and management teams work together to define which HCM matters are material to their companies and industries, to establish frameworks and metrics for assessing material HCM initiatives and to benchmark HCM disclosures.
HCM disclosures should be the tip of a very large iceberg of dialogue at the board level on a host of topics that can include talent acquisition and retention, DE&I, employee health and safety, employee satisfaction, culture, training and pay equity. Companies can bring structure and consistency to these discussions by developing frameworks – or aligning with existing frameworks – to aid in the assessment of HCM strategies, practices and policies. This includes the identification of relevant metrics.
The boardroom of the future Disruption is impacting every aspect of business, from technology and delivery of goods and services to human capital. Boardroom governance is also facing disruption. The boardroom of the future is populated with directors from a variety of disciplines, who have an insatiable appetite for learning, and who have the stamina to remain relevant in a rapidly changing world. Successful boards dive deeply into emerging relevant areas, update their governance frameworks to meet the needs of stakeholders and drive long-term profitability that creates shareholder value.
As you reflect on your responsibilities as a governance professional, consider human capital management and three other corporate governance areas through a lens of both enterprise risk and opportunity management. To find out what the three other key areas are, download the Nasdaq Center for Board Excellence white paper.