Conference Board Sees Need for Human Capital Management; Are Boards Beginning to Wake Up?

A recently published report from the Conference Board argues that the time for board- and CEO-level commitment to human capital management and reporting has arrived. At the same time, a New York University study indicates that boards have only just begun to catch on and that many members lack sufficient experience in Environmental, Social, and Governance (ESG) practices.

"Now, the workforce is not only recognized as a valuable intangible asset for companies but regarded as a critical stakeholder; enhancing the welfare of the workforce is part of the purpose of the corporation," says Rebecca Ray, Ph.D., Executive Vice President, Human Capital at The Conference Board, which recently published the white paper: Brave New World: Creating Long-Term Value through Human Capital Management and Disclosure. "Given this—and the clear relationship between HCM (human capital management) and corporate performance—it stands to reason that HCM should be front and center for boards and management and viewed as a fundamental driver of economic value for organizations."

The challenge is that boards have just begun to identify ESG factors as relevant to business and many lack the background to fully understanding the connection to financial results, according to the report, “US Corporate Boards Suffer From Inadequate Expertise in Financially Material ESG Matters,” by Tensie Whelan, Professor & Director, New York University Stern Center for Sustainable Business, supported by researchers Jamie Friedland and Ellen Knuti.

“Many boards have little related oversight or expertise,” the NYU report finds. “Many directors do not even recognize the need; PWC’s (Price Waterhouse Cooper) Annual Corporate Directors Survey found that only 38% of board members think ESG issues have a financial impact on the company. Some 56% of directors complain that investors are giving too much focus to ESG--nearly twice those with that viewpoint in 2018. Just 34% said there needed to be more racial/ethnic diversity on their boards. However, in 2020, as societies have been slammed with the health and economic impacts of COVID and the mass protests associated with racism, corporate boards are rethinking this cavalier approach. Six in 10 directors now believe that environmental/sustainability expertise is important for a board, according to PWC. According to Ernst and Young’s Center for Board Matters 2020 report, the focus on human capital issues through reporting and board oversight has more than doubled from 2017, with companies more likely to report on gender and racial diversity, pay gaps, and so on, as well as to include oversight of those issues in a board committee.”

Here is a summary of key findings from the Conference Board report:

Boards and management should allocate the time necessary to manager their strategies, practices, and disclosures over time. This includes the following observations:

• An understanding that human capital management is complex and needs to be tailored to the needs of each organization.

• Boards should evaluate their firm's current human capital capabilities and future needs to support the company's broader business strategy.

• HCM disclosures should reflect business and human capital strategies, with reporting frameworks and regulations as a starting point for their discussion.

• Companies need “to have a robust process for updating their disclosures as their understanding of HCM evolves, board practices mature, and industry practices and investor expectations change over time.”

Boards have an increasingly important role to play.

• Boards can shape the workforce strategies through “hiring, firing, promoting, and compensating executives; approving key human resources and compliance policies; and exercising their oversight powers.”

• Organizations will “need to clarify and codify the roles of its board and its committees with respect to HCM, but also ensure that boards exercise their multiple powers in a coordinated manner.”

• Boards will need to have a true understanding of the corporate culture and its link to the HCM strategy.

• Companies should use both quantitative and qualitative measures for measuring performance.

• Companies should ensure that boards have, or have access to, HCM expertise.

• "Workforce issues have often been an episodic priority for boards—particularly after mergers, scandals such as #MeToo, or during the current pandemic," says Paul Washington, Executive Director of The Conference Board ESG Center. "The workforce now needs to be a sustained strategic priority for corporate directors. That requires taking a fresh look at the board's governance practices, the information it receives, the disclosures the company makes, and how the board can leverage its multiple powers to help drive the company's workforce strategy."

Other findings:

• “While companies are moving quickly to increase their HCM disclosures in their Annual Reports on Form 10-K, the new SEC rules are not the only compelling driver.

• Intangible assets such as workforce capabilities are an increasingly large part of a company's market value, and research establishes a clear connection between strong HCM practices—and good HCM disclosure—with shareholder value.

• HCM matters to many other constituents, including investors who see HCM issues as essential to sustainable long-term value creation, as well as employees, consumers, and the public.”

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