Insight

Sharpening the board’s oversight of human capital management

Directors must look beyond the C-suite when evaluating opportunities and risks associated with the firm’s human capital.

Sharpening the board’s oversight of human capital management

In today’s boardrooms, directors are expected to have a good understanding of the circumstances facing the workers who contribute to the company’s long-term success. Whether it is corporate culture, workforce satisfaction, or developing high-potential employees, directors must look beyond the C-suite when evaluating opportunities and risks associated with the firm’s human capital. However, many boards are still determining the best way to execute oversight of the company’s most important resource. In addition, investors are seeking confirmation that boards are exercising robust oversight of human capital, just as they do over financial capital.

Annalisa Barrett

Annalisa Barrett

Senior Advisor, Board Leadership Center, KPMG US

Given the importance of the company’s workforce to its financial success, many boards have assigned responsibility for monitoring human capital matters to the compensation committee, and some have renamed their committees to reference their expanded roles (e.g., human resources and compensation committee, compensation and human capital committee). An August 2019 study by Willis Towers Watson found that nearly 40 percent of S&P 500 companies have renamed the committee responsible for compensation to better reflect its broadened scope to include matters not historically overseen at the board level, such as corporate culture, diversity and inclusion, employee engagement, and succession planning below the C-suite.

In addition to focused committee oversight of human capital management, all directors may spend time talking with the employees on the front lines of the business (e.g., customer service representatives, factory workers, engineers) to gain comfort that workers are engaged and their contributions to the company are maximized. Indeed, the compensation committee can be the catalyst for monitoring metrics such as employee turnover, workplace safety, and retention of high-potential leaders; however, face-to-face discussions with people who represent the company to customers and the public may help directors gain comfort that the company’s investments in human capital are protected and maximized.

Similarly, institutional investors are keenly interested in ensuring that funds allocated to human capital by their portfolio companies are used wisely. According to its website, the Human Capital Management Coalition (HCMC), a group of 28 institutional investors representing over $4 trillion in assets led by the UAW Retiree Medical Benefits Trust, engages with “companies and other market participants with the aim of understanding and improving how human capital management contributes to the creation of long-term shareholder value.” In addition to engagement with companies, investors are seeking consistent disclosure of meaningful human capital metrics. In July 2017, the HCMC petitioned the US Securities and Exchange Commission (SEC) to require companies to provide workforce disclosures within nine categories: workforce demographics, stability, composition, skills and capabilities, culture and empowerment, health and safety, productivity, compensation and incentives, and human rights commitments and their implementation.

Additionally, in March 2019, the SEC’s Investor Advisory Committee recommended that as the agency endeavors to modernize required disclosures, it should consider the important role human capital management plays in today’s companies, which, according to the committee, are “increasingly dependent on their workforces as a source of value creation.” In response to these and other requests, the SEC included requirements for disclosure on human capital management practices in an August 2019 rule proposal. Under the proposal, companies would have to disclose material “human capital resources, including any human capital measures or objectives that management focuses on in managing the business” using a principles-based approach.

No matter the outcome of the SEC’s proposed changes, it is clear that investors are increasing their efforts to understand how companies are managing their human capital and that boards are expanding their oversight of workforce contributions to long-term value creation.

This article was written prior to the COVID-19 pandemic and was originally published in the March/April 2020 issue of NACD Directorship magazine.

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Sharpening the board’s oversight of human capital management
Boards are expanding their oversight of workforce contributions to long-term value creation.

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