Why boards prioritize human capital

Corporate boards are shifting their focus to a critical yet often overlooked aspect of organizational success: human capital. As companies navigate complex challenges and opportunities, the strategic management of workforce-related issues has become a top priority for board members. This article explores the growing emphasis on human capital governance and risk management at the board level, examining key drivers, best practices, and implications for the future of corporate leadership.

The Rising Importance of Human Capital in Corporate Strategy

Human capital, encompassing the collective skills, knowledge, and experience of an organization's workforce, has emerged as a crucial differentiator in today's competitive business environment. Boards are recognizing that effective human capital management is essential for driving innovation, productivity, and long-term value creation.

As John Bremen, Vice Chair, Executive Committee Member, and Managing Director at WTW, points out:

"Human capital governance and risk management have become top priorities for boards of directors. Boards are increasingly focused on human capital issues, including workforce strategy, culture, diversity, equity and inclusion (DEI), pay equity, and employee wellbeing."

This heightened focus reflects a broader shift in corporate priorities, with stakeholders demanding greater transparency and accountability around workforce-related issues.

Key Drivers of Board Focus on Human Capital

Several factors are contributing to the increased attention on human capital governance at the board level:

Changing Workforce Dynamics: The rise of remote work, gig economy trends, and evolving employee expectations are reshaping the traditional employment landscape.

Talent Scarcity: Many industries face significant skills gaps and talent shortages, making workforce planning and retention critical strategic concerns.

Regulatory Pressures: New disclosure requirements and stakeholder demands are pushing companies to provide more comprehensive reporting on human capital metrics.

Technology Disruption: Rapid technological advancements are transforming job roles and skill requirements, necessitating proactive workforce development strategies.

ESG Considerations: Environmental, Social, and Governance (ESG) factors, including workforce-related issues, are increasingly influencing investor decisions and corporate reputations.

Key Areas of Human Capital Governance

Boards are focusing on several critical aspects of human capital governance:

Workforce Strategy and Planning

Effective workforce planning involves aligning human capital resources with long-term business objectives. Boards are working closely with management to ensure robust strategies for talent acquisition, development, and retention.

Culture and Employee Engagement

Organizational culture plays a vital role in attracting and retaining top talent. Boards are prioritizing the cultivation of positive workplace cultures that foster innovation, collaboration, and employee satisfaction.

Diversity, Equity, and Inclusion (DEI)

DEI initiatives have become a central focus for many boards, recognizing the business benefits of diverse perspectives and inclusive work environments. Companies are setting ambitious DEI goals and implementing programs to drive meaningful change.

Pay Equity and Compensation

Fair and competitive compensation practices are essential for attracting and retaining talent. Boards are scrutinizing pay structures to ensure equity across all levels of the organization and alignment with performance objectives.

Employee Wellbeing and Mental Health

The COVID-19 pandemic has highlighted the importance of employee wellbeing. Boards are prioritizing initiatives to support physical and mental health, work-life balance, and overall employee wellness.

Human Capital Risk Management

Alongside governance, boards are placing increased emphasis on identifying and mitigating human capital-related risks. Key areas of focus include:

Talent Retention: Developing strategies to retain high-performing employees and critical skill sets.

Succession Planning: Ensuring smooth leadership transitions and continuity of key roles.

Cybersecurity and Data Privacy: Addressing human-related vulnerabilities in information security.

Compliance and Ethics: Mitigating risks associated with employee misconduct or regulatory violations.

Workforce Disruption: Preparing for potential disruptions due to technological changes, economic shifts, or global events.

Best Practices for Board Oversight of Human Capital

To effectively govern human capital issues, boards can adopt several best practices:

Regular Reporting: Establish key performance indicators (KPIs) for human capital and review them regularly at board meetings.

Board Composition: Ensure the board includes members with relevant HR and talent management expertise.

Committee Structure: Consider creating a dedicated human capital or people committee to provide focused oversight.

Management Engagement: Foster open dialogue with senior leadership on workforce-related challenges and opportunities.

Stakeholder Engagement: Seek input from employees, investors, and other stakeholders on human capital priorities.

Continuous Education: Stay informed about emerging trends and best practices in human capital management.

The Future of Human Capital Governance

As the business landscape continues to evolve, boards will likely face new challenges and opportunities in human capital governance. Some key trends to watch include:

AI and Automation: Balancing technological advancements with workforce impact and reskilling needs.

Gig Economy Integration: Developing strategies to effectively manage and leverage contingent workforces.

Global Talent Mobility: Navigating complex cross-border talent management issues in an increasingly interconnected world.

Personalized Employee Experiences: Leveraging data and technology to create tailored work environments and career paths.

Purpose-Driven Organizations: Aligning corporate purpose with employee values and societal expectations.

John Bremen emphasizes the ongoing importance of human capital governance:

"As boards continue to focus on human capital governance and risk management, they will likely expand their oversight to include additional areas such as workforce strategy, culture, DEI, pay equity, and employee wellbeing. This expanded focus will help ensure that organizations are well-positioned to attract, retain, and engage the talent needed to drive long-term success."

The increasing focus on human capital governance and risk management at the board level reflects a fundamental shift in how organizations view their workforce. By prioritizing strategic workforce planning, fostering positive cultures, and addressing key human capital risks, boards can position their companies for sustainable success in an ever-changing business landscape.

As boards continue to evolve their approach to human capital governance, they must remain agile and responsive to emerging trends and challenges. By embracing best practices and maintaining a proactive stance on workforce-related issues, corporate leaders can unlock the full potential of their human capital and drive long-term value creation for all stakeholders.