Why boards need a head of human governance
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