Insight

Board oversight of human capital management

Compensation committees and boards are paying greater attention to human resources issues, as workplace issues such as diversity, culture, and talent strategy become a greater focus of investors.

Board oversight of human capital management

On our March 19, 2020, webcast, Carol Goode, director at Science Applications International Corporation (SAIC) and a former chief human resources officer (CHRO), joined KPMG Board Leadership Center Senior Advisor Annalisa Barrett to discuss trends in board oversight of human capital management (HCM), both in light of challenges related to COVID-19 and with respect to broader expectations of companies and boards.

Even prior to the outbreak, the focus on board oversight of HCM had been growing for several years as business strategies shifted to rely more on services and intellectual capital and as investors became more attentive to workplace issues beyond the executive suite, such as gender pay equity, talent development, and workforce diversity. Compensation committee charters (and titles) have been expanding to include oversight related to non-executive employees and broader human resources (HR) topics. Additionally, more directors with HR backgrounds are being considered for board service.

In fact, 72 percent of the 292 board directors, C-level executives, and HR officers surveyed during the webcast reported that the time spent by the compensation committee on HCM issues had increased moderately or significantly over the last three years. This sentiment is indicative of the recent elevation of this issue into boardrooms, and it is likely to be considered even more important by many boards going forward. 

Following are insights discussed during the webcast: 

COVID–19: Human capital issues for boards to consider

What policies are in place to protect and support employees (e.g., hygiene programs, restrictions on travel and congregation, flexible and remote work policies, healthcare)?

  • How frequently do we reassess these policies as the crisis evolves and based on guidance from the CDC and other medical experts?
  • What are the plans to minimize transmission at work? Are there high-risk facilities where transmission of the virus would be more likely?
Do we communicate these policies clearly and frequently to employees?
  • Is there confusion about the policies? Have we addressed employee needs? What resources are available to minimize stress and concern?
  • How are we maintaining employee morale and corporate culture?
Is the board confident in the company’s business continuity plan?
  • What if a key executive becomes ill?
  • Should we modify role descriptions, performance objectives, and/or organization structure?
  • What are the implications of employees working remotely?
  • Will layoffs or furloughs become necessary?

 

The views and opinions expressed herein are those of the interviewee and do not necessarily represent the views and opinions of KPMG LLP

Impact of COVID-19 on human capital

As businesses face the challenges presented by COVID-19, they must ensure that employees are top of mind at all times. Goode and Barrett discussed the questions and issues for boards to consider to help ensure that management is sufficiently mindful of the workforce.

As management focuses on the health and safety of employees, virtual work environments, business continuity planning, and staffing levels with potential furloughs and layoffs looming, compensation committees will have to think carefully over the short term and long term when setting incentive compensation. “This year, we’re going to be faced with a tremendous amount of uncertainty for an indefinite period of time,” said Goode. “It’s unprecedented.”

Board oversight of human capital management

The scope of HCM challenges in the boardroom

Whether handled by the compensation committee or the full board, the scope of human capital management oversight has expanded. “Boards historically looked at HCM purely through a financial lens, which for many companies can approach half of the operating expenses of the company,” said Goode. “The change we’re seeing now is that boards aren’t just looking at HCM as a financial investment, but as a living entity. How does the talent strategy directly connect to and enhance the business strategy?”

Goode said that it’s also helpful for directors to consider the progression of the talent strategy, starting with the CEO. Does the board understand how the company attracts, retains, and motivates talent? Linking culture, employee engagement, and compensation “really gives a competitive edge to the business,” says Goode. 

Investors are requesting disclosure on key HCM metrics

 

Workforce demographics

  • # of full-time, part-time, and contingent workers
  • Policies on and use of subcontracting and outsourcing

Workforce stability

  • Turnover (voluntary and involuntary)
  • Internal hire rate

Workforce composition

  • Diversity
  • Pay equity policies/audits/ratios

Workforce skills and capabilities

  • Training
  • Alignment with business strategy
  • Skills gaps

Workforce culture and empowerment

  • Employee engagement
  • Union representation
  • Work-life initiatives

 

Workforce health and safety

  • Work-related injuries and fatalities
  • Lost day rate

Workforce productivity

  • Return on cost of workforce
  • Profit/revenue per full-time employee

Human rights commitments and their implementation

  • Principles used to evaluate risk
  • Constituency consultation processes
  • Supplier due diligence

Workforce compensation and incentives

  • Bonus metrics used for employees below the named executive officer level
  • Measures to counterbalance risks created by incentives

Source: Human Capital Management Coalition

Investor expectations for disclosure are increasing

The Human Capital Management Coalition of institutional investors, representing over $4 trillion in assets, is engaging with boards regarding their oversight of HCM and calling for enhanced disclosure of metrics related to human capital. The U.S. Securities and Exchange Commission has proposed an expansion of HCM metrics to be disclosed under Regulation S-K. “It’s very early days in this discussion of reporting to investors,” said Goode, “and I think this will unfold similarly to the CEO pay ratio discussion. We need a standardized definition of how to calculate a metric or explain it in narrative. There’s wide variability, even in something that seems as straightforward as attrition or turnover.”

Goode says the challenge of meeting investor requests for disclosure lies in management’s ability to gather the data and calculate the metrics. “It creates an excellent opportunity for dialogue between the board and management, including the limitations around access to data and the timeline to build those metrics,” she said. “I would focus the highest priority in terms of getting more concrete and measurable information around the riskiest parts of the talent strategy.”

Human resources expertise in the boardroom

While oversight of talent is a full board responsibility, in the last few years, some Russell 3000 companies have added directors with significant HR expertise. Of 169 current or former CHROs serving on 198 boards, roughly half were added in the last three years, according to preliminary findings from a KPMG Board Leadership Center study. “I think many boards will find that a director who is a current or former CHRO can provide a lot of value as a mentor and coach for the [company’s own] CHRO, as well as enhance oversight of the talent strategy,” said Goode.
 

Board tenure of CHRO-directors
n=198

Board committees on which CHRO-directors serve
n=198

Source: Preliminary findings from a KPMG study of 169 current and former senior human resources executives (i.e., CHRO, VP Human Resources, etc.) serving on 198 Russell 3000 boards (“CHRO-directors”)

Board oversight of human capital management webcast survey results*

Over the past three years, how has the time devoted to human capital management issues by the compensation committee changed?

Aside from executive compensation, which of the following human capital management issues has been the greatest focus of your compensation committee’s attention?

In assessing culture and organizational health, does your company utilize third-party culture assessments?

How satisfied are you that your company, in response to coronavirus, is clearly and frequently communicating its policies to protect and support employees—for example, hygiene programs, restrictions on travel and congregation, and flexible and remote work policies?

*Of 292 board directors, C-level executives, and human resources officers surveyed during the March 19, 2020, KPMG Board Leadership Center webcast. Percentages may not equal 100 due to rounding.

Board oversight of human capital management

Webcast replay is now available

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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