Addressing Human Capital Risks—The Board’s Role in Safeguarding Talent and Culture

One of the most critical responsibilities of a board is overseeing risk management. But while boards often focus on financial, legal, and operational risks, human capital risks—those involving the workforce—are sometimes given less attention. This can be a costly oversight. The success of any business plan depends on having a capable, motivated workforce aligned with the company’s vision, values, and strategic direction. 

Human capital risks are diverse and complex, ranging from talent shortages to cultural misalignment and ethical lapses, and they have the potential to impact a company’s reputation and operational stability.

Recent board assessments indicate that directors score consistently lower in HR competencies compared to other areas. This gap reflects a need for greater awareness and education on human capital risks and an opportunity for boards to make workforce risk management a priority.

Understanding Human Capital Risks

Human capital risks encompass several areas, including:

• Retention of Key Talent: Losing high-performing employees in critical roles can disrupt operations and set back strategic initiatives.

• Leadership and Succession Planning: Without a strong pipeline of future leaders, organizations may struggle to maintain stability and continuity.

• Culture and Ethical Standards: A misaligned culture or ethical violations can erode trust, tarnish a company’s reputation, and lead to significant financial losses.

• Workforce Adaptability: With rapid changes in technology, boards must ensure the workforce is prepared to upskill and adapt.

Each of these areas carries the potential to impact long-term growth and value, which is why they require proactive board oversight.

Practical Steps for Boards to Manage Human Capital Risks

To effectively address human capital risks, boards should approach workforce risk management as they would any other strategic risk—through structured oversight, regular evaluation, and accountability. Here are some practical steps boards can take:

1. Develop a Human Capital Risk Framework: Just as financial or operational risks are assessed through formal frameworks, boards should work with the HR leadership to establish a human capital risk framework. This framework should outline key risk areas, measurement metrics, and escalation procedures. For example, HR could provide regular reports on retention rates for critical and hard-to-fill roles, succession plan progress, and ethical compliance metrics, enabling the board to track these risks with data.

2. Request Regular Human Capital Risk Assessments: Ask the HR head to conduct annual assessments of human capital risks and present the findings to the board. For instance, an assessment might reveal potential vulnerabilities, such as a high turnover rate in roles crucial for executing a growth plan. By identifying such risks early, the board can work with management to address them before they impact strategic objectives.

3. Integrate Human Capital Risks into the Broader Risk Management Process: Rather than viewing human capital risks as a separate concern, boards should ensure they are integrated into the organization’s broader risk management strategy. This could involve HR collaborating with the risk committee to discuss how workforce challenges intersect with operational risks, especially in areas like digital transformation, where skills shortages might impede progress.

4. Promote a Culture of Ethical Accountability and Inclusivity: Culture is a core component of human capital risk. Boards should ensure that the organization’s culture aligns with its strategic goals and values and that it fosters accountability, inclusivity, and ethical behavior. A practical approach is to periodically review employee engagement and cultural alignment through surveys and other feedback tools. The board can also set the expectation that management will take corrective action when cultural misalignment or ethical issues emerge.

Real-World Example: Safeguarding Culture in a Merger

Consider a mid-sized technology firm that embarked on a merger to scale its capabilities and expand into new markets. The board was aware of the potential for a cultural clash but initially focused its oversight on financial and operational integration. When the company saw a spike in employee turnover and disengagement—particularly among the acquired company’s key talent—the board recognized that a deeper focus on cultural alignment was needed. The board requested that HR conduct a cultural risk assessment. The results showed significant differences in management styles, communication norms, and values. By suggesting that the company embark on a culture alignment program, the board helped to mitigate the risk, stabilize morale, and retain critical talent.

Why This Matters

Human capital risks can have ripple effects across the organization, from operations to brand reputation. Boards that engage in proactive human capital risk management position the organization to retain top talent, cultivate a strong culture, and respond effectively to workforce challenges. Neglecting this oversight can leave companies vulnerable to preventable setbacks and missed opportunities.

In the next blog, I’ll explore the evolving expectations for HR leaders to become “board-ready”, and how HR professionals can equip themselves with the skills and knowledge necessary to serve effectively in board roles. Meanwhile, by embedding human capital risks within the board’s broader risk management agenda, we can enhance resilience and safeguard the organization’s most valuable asset—its people.