Financial expertise is heavily emphasised on company boards, yet today HR knowledge is just as critical in navigating workforce-related challenges. Boards need to tap into the potential of senior HR practitioners if they want to reduce risk and increase business performance
Boardrooms are typically packed with individuals boasting expertise in finance but today's corporate world calls for a balance between financial acumen and the insight of human resources (HR) professionals. To truly excel businesses need to leverage the knowledge of seasoned HR practitioners, mitigating risk and boosting performance.
Yet many organisations are failing to fully capitalise on the rich value that their workforces hold, due to an unfortunate 'people insight' void at the highest level of governance. The UK’s Chartered Institute of Personnel and Development (CIPD) suggests that there's a disconnect between the skill and knowledge on corporate boards and those needed to navigate intricate people-related risks. These risks include sexual harassment, discrimination, bullying and poor working conditions.
If a board is ill-equipped to handle these issues the company could be in for a reputation blow. The CIPD's report, The Value of People Expertise on Corporate Boards, says that failing to prioritise matters like diversity, equity and inclusion (DEI) initiatives can lead to companies struggling to attract or retain valuable talent.
Visual: Most common people errors on boards
The clues are in the numbers. Falling investments in workforce training and stagnant productivity growth rates indicate a missing people perspective. As organisational change becomes more important, boards need to show competency in handling people-related matters.
However, most UK boards are found wanting in this respect. Few directors have professional backgrounds in HR and people development. The UK Corporate Governance Code emphasises financial expertise, with 100% of FTSE 350 company boards having members with finance or accounting backgrounds.
On the other hand, only 25% of these boards have a member (both executive and non-executive) with professional HR experience, and a mere 2% have an HR director as an executive board member. In stark contrast, 99% of boards have a chief financial officer or finance director.
Even remuneration (RemCos) and nomination committees (NomCos), where people issues are the heart of the matter, display a striking lack of HR representation, at 23% and 20% respectively.
“Finance used to be the limiting factor for strategy; now the limiting factor is people. It is no good coming up with a great strategy on paper if you can’t then hire the people to deliver it. I am really seeing that issue in the boards I sit on" – Chair
Interestingly, professionals from banking, tech, marketing and scientific backgrounds are seen more frequently on boards than HR experts, although only 16% of companies include an executive role other than the CEO and CFO on the board.
But when people management professionals do make it onto boards, they overwhelmingly sit on RemCos. While this isn't necessarily a problem, it does raise the possibility that people management professionals are being pigeon-holed and that hiring chairs may not be aware of the profession’s potential to input into other strategic issues, says the CIPD.
However, this doesn't mean every board should automatically include a chief people officer (CPO) or HR director. But the CIPD argues that boards should be obliged to incorporate formal processes to utilise the expertise of senior HR practitioners on matters requiring in-depth insights on workforce issues.
In a world where environmental, social, and governance (ESG) issues are under the microscope, regulatory bodies are beginning to acknowledge the significance of workforce- and people-related matters.
“Six years ago we probably had about five investor calls. Last year we did 27 calls with investors wanting to have discussions about people – what we’re doing with talent, the diversity piece… more and more of the investors want to see you linking rewards, long and short term, to ESG” – FTSE-listed CPO.
Yet, despite the growing importance of these issues, current regulatory material doesn’t note the role of the CPO or HR function in contributing to better governance or boards.
Workforce reporting: too focused on the positive
The CIPD finds that workforce-related issues are getting more airtime in corporate reports. However reporting is inadequate, it says, with the balance tilting heavily towards unsubstantiated narratives over concrete data .
Almost every report now contains a section dedicated to key stakeholders, with the workforce being the most prominent. Nearly nine in 10 firms (89%) included employee-related risks, such as the failure to attract and retain key staff, the challenge of meeting future skills needs and the regulatory or reputational risks resulting from employees’ conduct on their risk register. Meanwhile 80% included key performance indicators related to the workforce, including employee engagement and health and safety measures.
Yet only a minority of FTSE 100 companies provide data on skills investment, staff diversity or the size of the contingent workforce and the reporting was generally uncritical and presented only positive information.
The varied quality in reporting might hint at a lack of expertise at the board level, potentially leading to serious implications for business and economic performance.
In response, the CIPD is pushing for a refresh of the UK Corporate Governance Code, signalling to boards the importance of input, support and advice from senior-level HR practitioners on critical workforce issues.
It has four recommendations:
- CPOs should have the right of access to the remuneration and nomination committees, in the same way that finance directors do to audit committees. In listed companies this tends to be the case already, but in the public sector or smaller organisations it may not be
- The chair of the remuneration committee or the non-executive director responsible for employee voice should have recent and relevant people experience so that there is the same expectation of professionalism as for the audit committee. It does not mean that only those with professional qualifications can apply but that people expertise needs to be taken as seriously as financial expertise
- The board, supported by the HRD (if not represented on the board), should ensure that it has the necessary knowledge of workforce policies, practices, behaviours and data to inform its understanding of people risks, in the same way that the board is expected to have sufficient understanding of the financial risks
- The Financial Reporting Council should consider whether the current structure of UK boards is imbalanced, with too few executive directors. While the UK Corporate Governance Code says there needs to be an appropriate balance of executive and non-executive directors, in practice this has meant the number of executive directors is mostly reduced down to the CEO and CFO.
To conduct its research the CIPD examined the career histories of the boards of all the FTSE 350 companies required to publish a pay ratio disclosure (meaning they have more than 250 UK employees and are thus categorised as a large business in the UK). Download the report here.