Why Now Is the Time to Have a CHRO on Your Board

White Papers | April, 2019

By Mike Magsig
And Jerry McGrath

Introduction

Few would argue against the vital importance of a robust business strategy in establishing direction and planning growth for a company. Strategy, however, represents only half the formula for corporate success. Without a forward-looking human resources plan, a subset of the business strategy designed to maintain and engage the people required to execute the strategy at every level, even the best strategy is of little use.   

Carefully folded into that human resources plan, if done properly, is a thoughtfully constructed compensation plan that will provide incentives geared to attracting new talent as well as developing, rewarding, and retaining current talent.

Given the rapid transformational change occurring in business today and the need to adapt quickly, the best human resources plans also entail ongoing succession planning for all mission-critical positions, including at the top of the house for the CEO and the executive team most closely linked to the overall corporate strategy.

Culture drives performance, leadership drives culture

If this sounds something like a position description for a chief human resources officer (CHRO), that’s not mere coincidence; it’s what CHROs focus on daily. But these duties are also increasingly deemed crucial aspects of board oversight and at the heart of the board’s responsibilities. Yes, they are that important now, because success in executing the human side of the business will ultimately determine how successful the strategy is. And that is the reason boards should consider adding a CHRO to their ranks.

“The need for a CHRO on a board often has to compete with the requirement for other experts, such as for industry knowledge or financial acumen. Many board members lack experience in executive succession and rely on the skills of a director with a CHRO background to bring deep expertise to the CEO succession process. That’s where the CHRO can add tremendous value.” –Laurie Siegel, Director & Chair of Compensation Committee at CenturyLink, FactSet, and Volt

Boards have traditionally focused on financial performance, easily quantifiable, rather than the harder-to-grasp people issues described above. But corporate disasters of the last several years–peaking in 2018–have changed all that. Just ask companies like Uber and Wells Fargo about lessons learned on the importance of these human, cultural issues in the CHRO’s bailiwick in driving performance and maintaining or destroying reputation and shareholder value. A culture that yields desired results starts at the top–with the board and the CEO–with a focus on promoting a workforce philosophy and practices that appropriately reward and motivate employees and reassure shareholders.

Making the essential culture connection

Among directors, the company CEO, as the top operating executive, should have his or her arms around these issues that make a company an attractive employer and impact the bottom line. For directors to get a complete picture, however, especially of any potentially serious issues, many boards would benefit from having a CHRO on the team. That’s because CHROs are trained to maintain a holistic view of culture, even more than the CEO, and to keep a finger on the corporate pulse day in and day out.

The right culture for a particular company undergirds strong performance while the wrong culture can derail it. Boards should increasingly be seeking the guidance of CHROs, not merely as advisers on these matters, but as full-fledged team members on the board. Ensuring boards have an ongoing connection to cultural issues should now be considered essential to the board’s role in overseeing and managing risk.

“Strategy and culture are among the primary levers at leaders’ disposal in their never-ending quest to maintain organizational viability and effectiveness … When aligned with strategy and leadership, a strong culture drives positive organizational outcomes.” –Harvard Business Review

“The clear logic is to elevate the importance of culture and to address the competition for high-quality talent on a global scale. We want to develop best-in-class HR practices especially as we pursue our goals for diversity and pay equity. Shareholders and customers benefit when employees are engaged and feel a culture of respect and purpose.” –Richard DeWolfe, Chair, ManuLife

But apparently not every board member has had exposure to top-performing CHROs, who likely play a more integral role in crucial, enterprise-wide issues than anyone else in the organization, with the exception of the CEO. In-depth understanding of company strategy and larger industry shifts are givens. Leading CHROs today are businesspeople at their core who have knowledge and access to all the levers known to accelerate performance. They are experts on shaping a culture conducive to performance excellence aligned with the strategy, including everything from CEO succession to building bench strength at all levels. They must also possess state-of-the-art knowledge on effective compensation practices designed to reward desired outcomes, as well as recruiting and branding practices geared to attracting top talent. Having a CHRO as a director would help ensure that these critical issues are addressed and managed regularly by the board.

Why still so few CHRO directors?

It’s not difficult to make a logical argument for having CHROs on boards in a time of rapid business and corporate cultural transformation, but it is still rare to see a CHRO director.

According to DHR’s own research, only twenty-eight active CHROs are currently serving on the boards of Fortune 1000 companies.

There are a number of reasons for that, both historical and practical. Since their inception in the early twentieth century and until fairly recently, boards have been an exclusive club dominated by CEO members. But that picture has changed dramatically in recent years. For one thing, there are not enough CEOs to populate every board, and for another, as valuable as CEOs still are as directors–prized for their broad knowledge and operating experience–leading boards have learned to appreciate the value of functional expertise on their team. Just as any baseball team could not be successful if all members were pitchers or third basemen, no matter how talented, similarly, boards that perform most effectively and provide the greatest value cover a number of functional bases.

Another reason there are still so few CHRO directors is a lack of appreciation for the professional contribution the best HR executives make to an organization. HR has certainly evolved as a function in recent years, yet many CEOs and directors still see HR as the chiefly administrative function it once was–one viewed as impeding rather than enabling progress, as opposed to the proactive, strategic, visionary role the best CHROs now play in their organizations. 

“We are now getting a generation of CEOs and board chairs who have experienced the new class of CHROs and have a deeper appreciation of HR as a blend of art and science.” –Pamela Kimmet, CHRO, Manulife

Other functional experts are now common, valued members of the board team. No board could properly, or legally, function without financial experts as members and on audit committees, making CFOs much-sought-after directors. But CHRO board candidates may be harder to identify, and, further, it is often harder to “sell” these candidates to boards, especially if they are perceived as lacking the crucial broad business experience and acumen required in any director, as well as prior board experience. Needless to say, any director filling a needed functional expertise spot on the board must bring the same level of business judgment to the table as others on the board, as they will be weighing in on myriad issues and decisions, not merely those that touch specifically on their expertise.

Recruiting a CHRO for the board

Finding a CHRO for your board who is a good fit and will add value to the company and existing board takes some work and a strategy carefully tailored to your individual board. The best place to start when considering adding directors to the board, including a CHRO, is with the company strategy.

Begin by trying to isolate specific challenges that the strategy suggests down the road. Perhaps a merger, acquisition, or spin-off is planned, where having the right people matched with key roles will be paramount to success. Perhaps there’s something else that will require organizational change and the cultural expertise to make it work. Or perhaps it’s the now perennial board priorities of CEO succession planning and executive compensation–more complex than ever with recent changes in the law.

“The most important investment we make is in our people. Outstanding recruiting, training and development, and incentives contribute significantly to growth in our most important asset. An exceptional director with an HR background is invaluable to the board in ensuring we maximize the investment.” –Jerry Jurgensen, Chair, Lamb Weston

Look to other companies, whether in the same industry or an industry that has previously dealt successfully with similar challenges, and examine the background and experience of the CHRO. Further investigation may help reveal how valuable a resource the CHRO was to his or her own board and whether external board experience is documented. In most cases, however, there won’t be prior board experience given the still small number of CHROs serving on boards.

Functional diversity, part of a wider spectrum

1.jpg

             

 

Boards have operated as closed societies for generations. Even when there are established, valid reasons for expanding membership, change may take time. In reality, adding CHROs and their needed expertise to boards is yet another aspect of a broader diversity challenge boards are facing. The underlying premise of that broader diversity, which many have referred to as diversity of thought, is that boards that comprise diverse teams–by ethnicity, geography, gender, age, and functional expertise–are far more effective and provide greater value than those where members are more homogeneous. Diversity of thought leads to richer discussions, more creative solutions, and better decision-making.

That doesn’t mean this change is easy. One corporate governance expert likened change on corporate boards to watching a glacier melt at thirty-two degrees. Even assuming the temperature has been cranked up to thirty-eight degrees, change is happening, albeit somewhat more slowly than many would hope.

Acceptance and embracing of all shades of diversity are accelerating. It’s here to stay, not merely because of external pressure, but because boards themselves now realize what an asset true diversity represents.

Culture is the board's business

“Culture matters,” according to a recent article in the Harvard Law School Forum on Corporate Governance and Financial Regulation, “because a strong, positive culture provides a framework not only for risk mitigation, but also for both short- and long-term value creation … On the other hand, a damaged or broken culture can create dysfunction throughout the organization and create risk to critical assets, including brand reputation, intellectual property, and talent. As recent developments demonstrate, these and other impacts can destroy value and, ultimately, the organization itself.”

Serving as a director is not a full-time job, even on the best boards, and with fewer than a dozen board meetings a year, much can happen between meetings to erode culture, greatly elevating risk. There has traditionally not been a natural “keeper of the culture” on the board, the way financial risk is monitored by the audit committee, for example. Culture is elusive, unlike numbers, and harder to quantify and grasp.

A CHRO on the board can oversee internal resources and ensure proper systems and safeguards are in place to foster an effective culture. Moreover, this individual can make sure all relevant information filters directly up to the board and is represented in real time on the board’s risk oversight dashboard. The CHRO director should also be able to recommend direct board actions to model and communicate the desired culture.

 2.jpg 

No better time

We acknowledge the risk of adding directors who often have no proven track record of previous board service, but that risk can be greatly mitigated both before and after recruitment. During the recruitment process, through rigorous interviewing and referencing, the nominating committee and board chair can thoroughly vet candidates, including for fit with both company and board culture.

Once recruited, to ensure a new director–particularly a first-time director–gets off to a good start, build in adequate orientation and training, including the possibility of a veteran director as mentor. That acceptance of a new director, who may be different from previously recruited directors, is an important message to send to both prospective additions and to the current board. Some CHROs we’ve spoken to are sensitive about being pigeonholed merely as HR experts when they hope to contribute more broadly alongside those they anticipate will be director peers. And we have heard from directors that it is often the newest member of the board team, viewing information through a fresh set of eyes with no assumptions, who asks the most important questions at board meetings.

It’s surprising how few boards as yet are leveraging the expertise of CHROs. It’s especially surprising given the multitude of organizational and cultural challenges companies must increasingly deal with, as well as primary board duties of succession planning and executive compensation. Wise boards will turn this to their advantage, attracting top CHRO talent as directors while there is still a plentiful supply. And because the HR function has served as a route up for many women, it’s not unlikely that in recruiting a CHRO, boards can simultaneously enhance desired gender diversity. 

Admittedly, there may be a learning curve for any board to accept new directors from other fields and functions, but that expertise will make the board stronger and more effective, from which the company and its entire array of stakeholders will benefit. With the help of a CHRO director, boards can more effectively provide oversight of crucial culture issues and prevent the sort of corporate derailments that have been all too frequent in recent years. Finally, with greater attention paid to cultivating and overseeing a productive culture, directors will have to worry less about irreparable damage to corporate and personal reputation, including responding to the dreaded question, “Where was the board?”