Why boards need a head of human governance

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Andrew, as the Chair of the Maturity Institute (MI), which is founded on the principle of being evidence-based, I would suggest that you need to come up with some convincing evidence to support your ...


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Is the HRD no longer enough? Do boards need a head of human governance?

This article was written before the recent VW corporate scandal, which serves as yet another timely reminder of how people management systems create the most serious business risk for all stakeholders and wider society, and for which most organisations remain completely unprepared.

Last month, the FT reported how global consumer goods firm Unilever found itself having to deal with a major environmental problem that had allegedly caused serious health outcomes for both employees and the local community. The severity of the problem gave rise to questions about the credibility of Unilever’s well-publicised global business strategy called 'sustainable living'.

Unilever’s problem is far from an isolated one for the business world. It provides yet another page in a fairly constant narrative of corporate problems and major crises arising since the Enron scandal. It also highlights how these crises are almost always rooted in people management. From bribery to trading to accounting, and in myriad other ways, it is an organisation’s human capital – how it is led, managed, and then how it acts – that typically creates its single biggest area of risk.

It is evident that sustainably successful companies understand that their organisation comprises a whole human system, and is managed accordingly. That system includes all the people connected to it in the production and supply of goods and services. For example, the human capital value and risk that arises from corporate supply chains. Simply put, an organisation cannot maximise its value if it fails to maximise the value created by all the human capital connected to it.

Yet, in the analysis of companies in our global human capital management index, we have found virtually no organisation with someone at board level that has responsibility for the business risk and value creation that arises from its human capital. In fact, the closest person we found having any responsibility for this job was actually the CEO, and there are only a few who have articulated the importance of their people in this context.

For most public companies, human capital issues are often categorised, considered, and reported through the lens of a separated ‘corporate responsibility’, rather than mainstream corporate strategy. It is perhaps unsurprising then that such firms view effective people management as peripheral to day-to-day ‘business’. HCM measures tend to be simplistic and aligned with improving PR, rather than linked to true value creation. Company reports often contain information on areas such as diversity & inclusion demographics, health & safety, and employee engagement scores but only in rare cases provide any insight into how human capital management drives innovation, quality, productivity and financial performance.

A new role that focuses on holistic human governance is absolutely critical and is needed now. It is also increasingly recognised by many other stakeholders that human governance issues must become a priority.

For the Maturity Institute this human governance role has emerged from work with both the corporate world and the investment management sector. It is neither conventional HR nor that of a conventional executive, but a broader role that should appeal to people who have a particular interest in and exceptional understanding of the human dimension of organisational management.

The role of ‘head of human [capital] governance’ is one where the post-holder would chair a board-level committee of the same name. Given that human capital can only be managed effectively on a whole system basis, the role should also assume responsibility for remuneration and work closely with the corporate risk committee to facilitate better understanding and management of people risk. The head of human governance should also be tasked with producing a cohesive and meaningful human capital report – something that is currently absent from annual corporate reporting.

Such dramatic changes cannot happen overnight. However, this will not stop us striving to move companies in this direction. Many stakeholders are desperately calling for a new direction and substantial change from organisations. There is also room for optimism that some organisations are ready for this kind of change.

The Maturity Institute's view is that, regardless of experience, there are precious few HRDs immediately capable of doing such a job. However, with the right development and support, they should be able to grow quickly into the role and fulfil all requirements.

Stuart Woollard is managing partner at OMS LLP and council member at the Maturity Institute

Comments

A good headline, but let’s get into the practical realities First, as regards HR leaders. The best of them do play an active role in corporate governance... but too many do not – and it is correct to observe that capability and orientation badly need addressing. It should be part of the job description (see "Configuring HR for tomorrow's challenges", CRF, 2009), but this requires chairmen and CEOs to appreciate what a ‘healthy triangle’ looks like in terms of who they hire as HR leader and how they should operate. (See "The Board and HR", Creelman Lambert, 2013). Again this happens too rarely – and is even trickier where CEO and chairman roles are combined. Second, as regards board committees, people-related issues are typically spread across at least three committees (and HRDs have to spend increasing time with these) – most usually remuneration, appointments and risk. Creating just one committee sounds nice (and in the US some companies have gone partly in this direction with their equivalents of RemCos), but has consequences in terms of workload and focus. Adding another, competing, committee would be daft. Yes, human capital understanding among committee chairmen (and board members generally) is a real issue; it won’t be solved overnight. Incidentally, putting more HR people on boards has so far not paid the governance quality dividends one might like. Third, moving towards a more integrated approach is the way forward. And incidentally this puts pressure on HR to improve greatly its metrics and analytics and technology backbone. However, again this is an area where HR has been pitifully slow in the uptake and companies have made halting progress (see "The Smarter Annual Report", Creelman Lambert & McBassi, 2014), despite all that Katie Jacobs at HR Magazine has done to draw attention to the issue. In sum, to make progress one has to grapple with a series of issues in rather more detail. Andrew Lambert


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Andrew, as the Chair of the Maturity Institute (MI), which is founded on the principle of being evidence-based, I would suggest that you need to come up with some convincing evidence to support your contention that "The best of them do play an active role in corporate governance.." In my 35 years working in HR, including consulting with many of the largest organizations, running senior level HR workshops and speaking at conferences around the world, I can say with some authority that I have yet to meet an HR director who has a governance role in the way Stuart has delineated here. If you come on one of our Orientations (next is on 21/22 October) I think you will realise that this is indeed a brand new role with a much greater reach and significantly more value than you imply. Paul Kearns Chair MI


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Your recent article by Stuart Woollard of the Maturity Institute raises some interesting, yet not entirely new points. His perspective identifies the ever broadening remit of HRD in organisations. He does so through the lens of human capital – an area where the profession has singularly failed to grasp moving from attempting to produce metrics, any metrics in some cases, to understanding and generating value. Another angle to view this proposition would be through that of risk. Very often the role of chief risk officer sits somewhere between the murky depths of accountants in finance or corporate ‘governance’. Risk ownership and leadership, like anything else (if we do organisational design properly) should sit where it is most effective and of most value. The proposition therefore could actually be widened to include the within the role of an HRD the need to own and lead risk for the organisation as a whole – both opportunity risk and potentially damaging risk. Organisations dependent on their people to deliver their strategy will need to quantify and articulate the risk that is held collectively and individually. This will require more sophisticated methods of quantifying the workforce. Human capital springs to mind – now there’s a novelty. Risk is quantifiable and measureable, human capital metrics also set out to provide insight into both value and cost, as well as growth and the ability to understand causal effects of both positive and negative operations within organisations. I don’t entirely agree with the notion that workforce metrics are currently produced for PR purposes…. If only there was a purpose to most of them! It is more serious the notion that HRDs have not, and are not (yet) capable of undertaking the function of human governance. This based purely by a lack of sophistication in evidence based human capital management. What this demonstrates is, less and less, the need for HRD’s to necessarily come up through the human resources or development ranks and more and more an operator who is able to organisation utilise data for value creation, understand risk, transcend traditional board-level tendencies to focus on a few things and have the ability to look beyond the norm and understand both the current and forecast the future environments. So what the hell, if human governance and organisational risk is the hat that fits – let’s wear it.


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