How the governance of human capital and talent is shifting

Key findings from a survey of public company directors.

The focus on human capital and talent in corporate governance is intensifying, as more stakeholders—led by large institutional investors—seek to understand how companies are integrating human capital considerations into the overarching strategy to create long-term value. After all, a company’s intangible assets, which include human capital and culture, are now estimated to comprise a significant portion of a company’s market value.

Many influential groups have identified human capital as a key driver of long-term value. Recent developments reflect a clear and growing market appetite to understand how companies are managing and measuring human capital. This includes influential investors making human capital an engagement priority with directors, as well as comment letters from various stakeholders to the U.S. Securities and Exchange Commission supporting greater human capital disclosure and asserting the importance of human capital management in assessing the potential value and performance of a company over the long term.

At the same time, there is an ongoing cultural shift brought about by new generations of workers, digitization, automation and other megatrends related to the future of work. In this new era, it is critical for management teams and boards to keep pace with this transformation and consider redefining long-term value and corporate purpose. Creating value for multiple stakeholders, including employees, will ultimately help build and sustain shareholder value over the long term.

To better understand where companies are on this journey, Corporate Board Member, in partnership with the EY Center for Board Matters, surveyed 378 U.S. public company board members in the fall of 2019. Our key findings are outlined below.

The findings in this report are based on a survey conducted prior to the coronavirus pandemic, which has intensified the focus of key stakeholders’ on how companies value, invest in and protect their people, culture and communities. The rise in virtual working requires management teams and boards to keep pace with rapid transformation while considering the potential human capital-related risks and opportunities that may arise from this shift.

As companies emerge from this crisis, so will the workforce. Companies can look to enhance people engagement and productivity together with corporate long-term value. They can do this by designing a more skilled and nimble workforce and a flexible reward framework that includes not only financial compensation, but also benefits that promote financial, physical, social and emotional well-being.

There is a discrepancy between directors who view human capital and talent issues as important topics for the board and those who believe these issues are beyond the board’s purview.

Some directors believe the issue of talent is one that belongs at the HR or management level and not within the board’s oversight responsibility, with some citing the “eyes in, nose out” governance mantra as a justification for their viewpoint.

Conversely, other directors argue not only that the generational shift taking place, the transformation of the traditional employer-employee relationship and the elevation of corporate culture as a key strategic enabler carry significant new risks, but also that a well-thought-out and executed talent strategy serves as a competitive differentiator, thus giving human capital matters relevance in the boardroom.

Directors stay current on human capital and talent trends primarily through management briefings; yet, nearly half say the Chief Human Resources Officer (or equivalent) does not regularly report on human capital to the board.

When asked about their level of knowledge pertaining to the various trends and elements affecting the workforce (e.g., digitization and the impact of automation, changes to the makeup of labor markets, megatrends related to the future of work), on average 27% of directors say their understanding of those elements needs improvement. At the same time, nearly half of them say their Chief Human Resources Officer (CHRO)—or equivalent, depending on company size and structure—does not regularly report on culture and talent metrics to the board.

Nearly 80% of directors say their board spends more time discussing talent strategy than it did just five years ago, but many boards are not monitoring key talent metrics.

One of the most interesting findings of this study is that despite the increased focus on talent strategy in the boardroom, many boards are, nevertheless, not monitoring key talent metrics. Only a minority of directors reports that their boards are monitoring talent metrics related to learning and development investment and future workforce strategy and skills, and around half say their board is monitoring employee engagement scores.

Even with diversity and inclusion (D&I), which is widely recognized as imperative to talent strategy in today’s business environment, nearly 40% of directors report that their board is not monitoring D&I metrics. 

Nearly 85% of directors support investments in employee training and reskilling to secure long-term value benefits even if they may not deliver short-term returns.

According to the survey 51% of directors say their board has not discussed the impact of technological disruption on the company’s workforce. Still 85% say they would support management’s decision to invest in employee training and reskilling to secure long-term value benefits even if they may not deliver short-term returns.

Board support for long-term talent investments—and deeper board understanding of how technological disruption is impacting the workforce—is critical.

Boards should help their companies strategize for challenges beyond the horizon while driving current business results, even—and perhaps particularly—during times of economic uncertainty and challenge.

When companies prioritize employees—through purpose, culture, development and leadership—and deploy technology and automation as tools to support their capabilities, the true human potential for agility, creativity and innovation can soar. Each organization has to define how it can best manage its human capital risks and priorities, and there is no one-size-fits-all solution. What is clear, though, is that many directors are looking for ways to provide insight, foresight and oversight in matters of talent and culture, and many boards are actively enhancing their governance in this area.

Strengthening board oversight of human capital and talent will be a journey, and a starting point for many boards may be to rethink their views on the board’s fundamental role in this area. In today’s disruptive information age, human capital and culture are essential to helping companies adapt, problem-solve, innovate and increase productivity. Human capital has moved beyond being a strategic asset to become a strategic imperative. Boards should embrace this change and seize the opportunity to help make the company’s people a greater strategic priority.