Boards of directors are being called on to help identify where their company’s true value lies and help determine how it will drive innovation, create new products and services, and future-proof the business before market signals show missed opportunities.
Leading boards are recognizing that when it comes to growth and innovation, the risks and rewards associated with an organization’s talent may be the most critical area of all. Talent strategies and the ability to transform an organization’s workforce play a critical role in positioning companies to successfully navigate market and technology changes.
From building a culture where innovation thrives, to defining the company’s purpose, to investing in retraining workers to meet the demands of evolving business models, a company’s people strategy is increasingly emerging as critical to competitive strength and long-term value creation.
How are boards responding?
Many forward-thinking boards are adopting a broader view of understanding a company’s talent strategy and mitigating human-capital risk. While these boards and, in particular, compensation committees remain focused on developing senior leaders and building a diverse talent pipeline to fill key executive roles, many are also expanding their oversight to key talent indicators for the overall workforce.
For example, directors seek to understand and challenge:
- Whether the company’s culture truly represents its values and promotes ethical behavior
- Whether compensation programs are equitable, balance risk and reward, and align with company culture
- How companies are investing in employee development, growth, wellness and engagement
- How companies are upholding diversity and inclusion goals at the board and executive management level
Talent-related opportunities and risks
Organizations confront a variety of risks associated with securing the talent necessary to achieve business objectives. For instance, alternative workforce models and the increased usage of contingent workers are having a growing impact on how businesses operate.
In response to these changes, we are seeing some boards expand their view of the talent strategy to identify and oversee the associated opportunities and risks. The appropriate alignment of a company’s workforce demographics to ever-evolving business strategies is critical. It is also essential to understand the value of the company’s labor force and returns on human capital investments. Leading boards find that competitive advantage is now created through strategic workforce management and how it is allocated and aligned to the company’s strategy and ability to create new products, services and businesses.
This is where investment in employee training — and retraining — comes into play. Having a flexible, well-trained workforce is key to an organization’s ability to capitalize on changes in customer buying patterns and emerging technology. Companies must be able to pivot quickly in response to new technologies or competitive disruption. Some organizations have addressed this need by partnering with either local or online universities to retrain their current talent pool in new skills. This training allows the company to retain high-performing employees whose current skill set may be becoming obsolete, and it may provide a higher return on investment than having to hire and onboard a new workforce.
Employee turnover presents a significant cost for any organization. Between termination costs, costs to cover the vacancy including overtime or staffing agencies, and lost productivity as new employees get up to speed, turnover can be a big risk. As a result, many boards want to be aware of the company’s engagement and retention strategies.
Many boards are also focused on how the organization’s governance, protocols and compensation structures incentivize ethical behavior and support the company’s culture and values. Employee experience and culture can have both direct and indirect financial impacts on talent attrition costs and employer brand value. Recent high-profile cases related to pay incentive structures are potent reminders of what is at stake. A healthy corporate culture built on integrity, engagement, diversity and inclusivity is a foundational catalyst of growth, innovation and talent retention. Furthermore, today’s employees are three times more likely to stay with a purpose-driven company. People want to work for a company they can believe in, so organizations that clearly state and pursue their purpose are at an advantage in the talent marketplace.
In addition, technology and new workforce models centered around contingent workers are driving new types of compliance risks, including privacy, cybersecurity and pay equity. The “gig economy” is driving a growth in new types of labor arrangements, some of which regulators have not fully addressed. Beyond regulatory concerns, this model presents more immediate concerns, such as how organizations protect their intellectual property from the chance a contingent worker will share it with a competitor.
Investors are focused on the people agenda as well. More than a quarter of the 55 institutional investors we talked to in late 2016 cited workforce management (or some aspect thereof) as an engagement priority heading into 2017. As a result, boards should anticipate questions from investors in this area.
For these investors, how a company manages and values human capital speaks to the company’s culture and represents potential competitive advantages as well as potential litigation, operational and reputational risks. Investors are looking at a broad range of practices (e.g., employee development, compensation and engagement, health and safety, diversity, labor relations, and supply-chain labor standards). They are engaging companies directly to better understand how companies are assessing and prioritizing human capital as a long-term-value driver – and how boards are overseeing related performance.
Additionally, in an economy of monetary capital abundance, growth strategies are increasingly important, and long-term oriented investors will likely be looking for future growth prospects and a high return on patient investments, rather than immediate monetary returns. Long-term investors understand that human capital enabled by a strong culture will facilitate a long-term competitive advantage, and that investing in a company’s workforce may yield stronger returns over the long run than other short-term means of deploying cash.
Workforce management and the people agenda have become fundamental differentiators for long-term success. Today’s businesses face a considerable risk related to their human capital investments, which could grant them the flexibility to adjust to market and competitive forces – or cause them to fall behind. Leading boards recognize this as a strategic opportunity and are expanding their oversight accordingly to help position their organizations to both survive and thrive for years to come.
Questions for the board to consider
- Does the company have a clear purpose that will drive both employee engagement and customer loyalty?
- Does the company have the right culture to enable its people? And how is the compensation program supporting that culture?
- What are the company’s talent needs now and in the future? And what is management’s plan to meet those needs?
- How does the board and C-suite set the tone at the top for embracing diversity? And does the company support recruiting, developing and promoting a diverse workforce?
- Does the board’s skill set include talent management? How is responsibility for talent oversight assigned?
- How informed is the board regarding key talent indicators, such as employee engagement, access to training and development, workforce diversity, and key employee turnover?