Tackling Human Capital in the Boardroom

Effective board oversight of human capital is critical for organisational success. By prioritising talent management, fostering a strong corporate culture and aligning workforce capabilities with strategic goals, boards can drive long-term sustainability and competitive advantage.

In the boardroom, the human resource (HR) function is often overlooked despite its critical role in shaping strategic direction and influencing corporate outcomes. HR is essential for the smooth running of the organisation. This oversight can be a missed opportunity for leveraging human capital as a strategic business strategy that can significantly impact the organisation’s trajectory.

Take the real-life case of a local company in luxury retail with a strategic plan to expand in Asia with 60 additional stores over three years. The board had approved the plans but HR was not part of the planning process. After the plans were approved, management was told to “go hire and train the people we need to achieve our business plan”. The head of HR – a 20-year company veteran – felt that market conditions where the company was looking to expand made it impossible to hire and train staff in the timeframe given. She countered with a five-year window but was passed over and had to resign under pressure. In the end, the company did not achieve its three-year target and missed the five-year mark as well.

Strategic importance of HR

From a board perspective, HR should have strategic parity with other key business functions. Human capital is the backbone of day-to-day operations. By incorporating HR into strategic plans, boards must have a broad understanding of workforce capabilities, motivations and dynamics. Beyond the traditional activities of recruitment, compensation and employee engagement, HR has the key to unlock the potential of the organisation’s most valuable asset – its people.

A business strategy is only words and numbers on presentation decks unless it is executed properly by the people in the organisation. This implies a shift in the perception of HR from a primarily administrative support function to that of an enabler of strategy. Organisational culture, leadership development and talent management are part of corporate governance. Strategic HR management can help realise business objectives and achieve competitive advantage.

Central to strategic HR management is the oversight of people-related risks. This includes the potential loss of key personnel (individuals whose expertise and leadership drive the organisation forward) to reputational risks (such as compliance lapses or ethical breaches). If left unaddressed, these issues can erode the trust upon which companies are built.

Effective HR risk management practices encompass a broad spectrum as shown in the box, “HR Risk Management”. HR risk management should be integrated into HR practices across the business lifecycle, from talent acquisition through to development and retention strategies. This approach ensures that HR functions strengthen the organisation’s ability to face challenges and seize opportunities.

Mercer’s People Risk 2024 report looks at health and safety, governance, financial risks and the challenges posed by accelerated digital transformation. Each of these areas presents its own set of challenges and opportunities for HR to contribute strategically to the organisation’s resilience and adaptability.

An effective HR strategy can help an organisation foresee, mitigate and manage the many risks associated with human capital. This includes ensuring the health and safety of the workforce to fostering a culture of innovation and adaptability in the face of digital upheavals. Proper management of these risks can significantly impact long-term business sustainability.

Embedding HR oversight in the boardroom

Where and when should discussions of HR matters happen within the board? Traditionally, the oversight of HR functions has been fragmented, with responsibilities scattered across various board committees, ranging from the remuneration committee handling compensation issues to the audit committee overseeing compliance and risk management. This often leads to a dilution of focus and a potential underestimation of HR’s strategic impact. Such a segmented approach may compartmentalise aspects of HR and may not lead to a holistic view necessary for integrating human capital considerations into overall strategic decisions.

The establishment of a dedicated HR or human capital committee can consolidate HR-related discussions at board deliberations. The box, “Strategic Considerations Involving HR,” covers some key areas of HR-related board responsibilities. The establishment of an HR committee underscores the board’s commitment to the strategic management of human capital. This signals to investors, employees, and other stakeholders the organisation’s commitment to foster an empowered and strategically-aligned workforce.

Another approach is for the different people-related committees in the board to have at least one joint session a year, where broader topics of HR strategy and implementation are discussed. Regardless of whether the board has a single HR committee, or separate nominating and remuneration committees plus other committees where people risks are assessed, it is important for the board to discuss these matters. The results of such deliberations should be shared and debated among all board members.

The future of HR in the boardroom

Boards can no longer ignore the growing importance of human capital. The impact of AI on the workforce, the rise of hybrid work models, and the importance of corporate culture on strategic values bring human capital to the fore. These emerging trends are reshaping the workplace and, by extension, the strategic considerations of the board.

The advent of AI and automation is a two-edged sword, offering opportunities for unprecedented efficiency and productivity while also posing challenges related to workforce displacement and skills obsolescence. Boards must proactively address these challenges by fostering a culture of continuous learning and adaptation.

The emergence of hybrid work models, accelerated by the global pandemic, has redefined the concept of the workplace. This shift towards a blend of remote and in-office work demands a reevaluation of traditional HR policies and practices. Boards must work closely with HR to reinforce corporate culture across dispersed teams.

Boards, in conjunction with HR, should prioritise the cultivation and preservation of a positive and dynamic corporate culture as a core driver of corporate success. Reframing the view that HR is not merely a functional department but a strategic partner means redefining HR’s role within the corporate hierarchy.

By bringing HR into the fold of strategic boardroom discussions, companies can ensure that their strategies are implementable. The alignment between strategic goals and HR capabilities can facilitate a more agile, responsive, and resilient organisational structure. As a catalyst for change and a driver of sustained organisational success, human capital must be embedded in strategic decision-making.