Abstract
Because human capital increasingly serves as a critical determinant of companies’ success, you would expect both CEOs and boards of directors (BODs) to have some level of HR expertise.
Our research finds that while few CEOs and BODs have experience of working in HR, they do seem knowledgeable about and supportive of HR, and this is associated with whether or not companies appear on lists such as Best Companies to Work For.
What’s new
As human capital has emerged as a competitive advantage, it has gained the attention of CEOs and BODs. Talent, executive compensation, executive succession and culture have all risen up the agenda for CEOs and BODs, requiring them to have at least some level of expertise in HR practices and the HR function to effectively manage and govern organisations.
In addition, the importance of human capital means boards have been increasing the number of CHROs who serve as directors to ensure that at least one human capital expert is part of the mix.
One would hope that having HR expertise on the board would ultimately have a positive impact on firm performance. However, because the trend is so new, we do not yet know whether having such expertise on the board actually makes a difference.
One of my colleagues, Frank Mullins, conducted a study examining the impact of HR expertise within BODs on firms’ engagement in a broad range of diversity management activities, including hiring CEOs and managers from underrepresented groups and creating inclusive workforce policies. He found that firms with HR expertise on their boards were 8% more likely to engage in these diversity-related activities.
The 2018 HR@Moore Survey of CHROs attempted to go beyond his original work by providing a more detailed assessment of the HR expertise that exists at the top (among CEOs and BODs), and seeing if it has any impact on human capital outcomes.
Key findings
Each year the Center for Executive Succession in the Darla Moore School of Business at the University of South Carolina conducts a survey of over 400 CHROs at large and mostly multinational companies.
Every year this HR@Moore Survey of CHROs examines how CHROs allocate their time to different aspects of the role, and each year the survey focuses on three to four additional areas of interest.
In 2018 one of those topics entailed a more extensive study of the level of HR expertise, knowledge and appreciation that exists among CEOs and BODs.
CEO expertise in and support for HR
First we asked CHROs whether or not the CEO had a bachelor’s degree in an HR-related topic. Only five (4%) of 116 CHROs reported that their CEO had such a degree. We also asked CHROs to indicate if their CEO had any significant prior work experience in HR. Our results showed that few – four CEOs, 3% – did.
As a last measure of HR expertise, we asked CHROs to indicate the extent to which the CEO was knowledgeable about the HR practices in both their firm and their competitors’ firms. We found that CHROs perceive their CEOs to have relatively strong knowledge of what their own firm is doing, but much less knowledge regarding the HR practice of competitors.
While we did not expect CEOs to be strongly grounded in HR degrees or HR roles as part of their careers, we did expect to see greater variation in the attitudes that CEOs hold about HR as a function. We first asked CHROs to indicate which statement best described how their CEO perceives HR and its importance to the firm, and gave six potential answers.
We found that the vast majority (82%) reported that their CEOs consider HR a vital part of competitive strategy, but only 4% view HR as the single most critical factor. Of the remaining 14%, most (9%) still have a somewhat positive view of the function, seeing it as vital for the smooth functioning of the organisation.
Because financials are the language of business and a large focus for CEOs, we asked another question that framed HR in terms of its financial cost. We asked CHROs to indicate which of three statements best described how the CEO perceives HR and its importance or role in their firm (see box below). Only 3% of CHROs reported that their CEOs view HR as an expense. In contrast, 78% view HR as a strategic investment, and 18% view it as a resource to be allocated fairly.
While not quite as positive as the previous result, this suggests that CEOs who do not view HR as a strategic investment constitute a small minority (21%).
BOD HR expertise and support
We also sought to assess the extent to which the board possessed HR expertise and their attitudes toward HR. We assessed it the same way as with the CEOs, and found that the vast majority of board members have zero experience in HR (95%), 2% were career HR professionals, and around 3% fell into different categories of some experience.
Of course one need not be a career HR professional or even have experience in HR to have depth and breadth of knowledge of HR, so we asked the CHROs to allocate board members based on their knowledge of HR.
We found that few board members lack knowledge of HR. Less than 25% fell into the bottom two categories (no or little knowledge), approximately two-thirds fell into the next two categories (some knowledge of a few or most aspects of HR), and 8% had deep knowledge of most aspects of HR.
Finally, we asked CHROs to allocate their board members into different categorisations regarding their appreciation for what the CHRO/HR can do to help the board. Only 3% were in the ‘no appreciation’ categories. Nearly half (47%) fell into the ‘deep appreciation’ category, with 38% having ‘some appreciation’. So while board members have little HR experience, they seem to have reasonable knowledge of and strong appreciation for HR.
HR expertise and outcomes
The above results provide a snapshot of the level of expertise in and support for HR that exists among CEOs and BODs. However, the major purpose of this study was to explore whether or not such expertise was related to outcomes that might be relevant to organisations. To do this we explored two categories of potential outcomes.
First, we asked in the survey about the diversity of the board relative to their goals for the overall organisation (‘How does the diversity of the board compare to the goals the board has for the organisation’s diversity?’), and about the diversity of the CEO successor pool.
The second measure was whether firms appeared on any of the following lists: 2018 Fortune Best Companies to Work For, 2018 Forbes Best Employer, or 2018 Glassdoor Best Places to Work.
The ‘diversity’ measure within this was determined by whether or not a company appeared on any of the following lists: 2017 Military Times Best Employers for Vets, 2018 Disability Equality Index – Best Place to Work for Disability Inclusion, 2017 Working Mother Best Companies, 2018 DiversityInc. Top 50 Companies for Diversity, or 2017 Fortune Best Workplaces for Diversity. The ‘compensation and benefits’ measure assessed whether or not the firm appeared in Indeed’s 2018 Top Rated Companies for Compensation and Benefits list.
For the CEOs we used two measures. First, we used the measure of experience in HR noted above. Second, we developed a ‘CEO HR Involvement’ index that consisted of answers to four of the items discussed above: the CEO’s knowledge of the firm’s HR practices and of competitor firms’ HR practices, the extent to which the CEO values HR in the firm, and the extent to which the CEO views HR as a strategic investment.
Regarding the BOD, we developed a ‘Board HR Involvement’ index consisting of: board experience in HR, board knowledge of HR, and the board’s appreciation for the CHRO/HR.
The results regarding CEOs are quite encouraging. The CEO HR Involvement index (as well as most of the measures making up the index) was found to be related to board diversity, CEO succession pool diversity, and the overall reputation measures. However, the CEO’s experience in HR was unrelated to every measure except the compensation and benefits reputational measure.
The results regarding the board were not nearly as encouraging. While many argue that having human capital experts on the board is necessary given the way firms compete today, we found very few significant relationships between HR expertise/appreciation on the board and the outcomes we studied. (But the board HR index did correlate significantly with the diversity of the board, the overall reputation of the firm and the diversity reputation of the firm.)
Even more discouraging, perhaps, the presence of a current or former CHRO on the board was completely unrelated to any of the measures noted.
From research to reality
Our study indicates that CEOs seem to understand and value HR, and that when they do they build more diverse boards, more diverse CEO succession pools and organisations with strong reputations. CEOs bear responsibility for the overall performance of the firm, and this focus on HR indicates the importance of HR in leveraging human capital for firm success.
However, despite calls for HR expertise (and HR practitioners) on boards, our data does not suggest that HR at board level has significant positive impact yet.
This could be due to the fact that human capital’s importance has only emerged over the past 10-15 years, and boards are only beginning to recognise that their governance responsibility might require deeper HR expertise.
Thus, while our findings do not prove the value of HR expertise on boards, they do suggest that such expertise can help. We suspect that in future, boards will recognise the need to have such expertise, and that over time those without it will lead organisations who find it difficult to succeed.
Patrick Wright is Thomas C. Vandiver bicentennial chair in the Darla Moore School of Business at the University of South Carolina and founder and director of the Center for Executive Succession
This piece appears in the December 2019 print issue. Subscribe today to have all our latest articles delivered right to your desk
