HR's Increasing Impact on Corporate Governance
By Lawrence Krema, Managing Director, Allegis Partners
Corporate governance is not what it once was. For decades, corporate governance centered on internal auditing, controls, legal disclosures, and similar matters. While those items remain elemental to corporate governance, today’s governance hot spots now center on the issues of diversity, racial justice, equity and inclusion; equitable pay; and environmental and societal issues. Even political viewpoints are on the boardroom table now.
In their oversight role, boards have long collaborated with senior leadership in the finance, accounting, and legal departments of an organization. But in order to meet today’s evolving demands on boards —many of which fall squarely into the domain of human resources — there is a need for increased board collaboration with HR leadership, perhaps in concert with the General Counsel. This represents both an opportunity, and a mandate, for HR leadership to serve as a greater resource for the board while taking the reins of these corporate governance priorities.
Many HR touchpoints have a corporate governance impact, making them of interest to the board including:
While Diversity, Equity and Inclusion have more recently come to the forefront in boardrooms, these issues have been leading priorities for HR teams for much longer across organizations of all sizes. For years, HR leaders have been trumpeting these goals with varying degrees of success. Then the spring of 2020 brought a sea change. Societal influences became primary drivers of this change within organizations, as customers, investors, regulators, and other external stakeholders elevated the DEI issue for corporations in a way that was previously unseen.
Now, HR is positioned to continue in its role as champion of the issue, but with more internal leadership support and engagement than before. Boards will be well-served by engaging with HR, to understand the perspectives and insights HR leaders have gained over the years, while addressing these important topics.
Beyond providing information to the board regarding the company’s current diversity status, HR can also characterize the diversity of the available talent pool, at all levels of hiring. Similarly, HR can bring the board up-to-speed on any equity issues that have arisen at the company, as well as inclusion programs that have been undertaken, describing the internal feedback on those programs. The board might ask about the appetite for DEI initiatives within the company, and the response to such initiatives. And HR leaders would be the board’s best resource for shaping and advising on future DEI initiatives, outlining their goals and the actions to be taken. More broadly, HR can provide the board with macro and industry trends relative to DEI, compensation, culture and how other social trends may impact the company, its industry, brand, and employee engagement.
Equitable pay policies have long been a must-have for management teams and boards, as a matter of fairness and principle, as well as a legal matter. Consistent and equitable pay practices tend to demand disclosures and transparency. Reviews for inconsistencies by gender, race, and other measures of equity have been the norm for decades. Even so, this issue has percolated to the top for stakeholders, and is one where the board can be assisted by HR experience in this area.
The increasing emphasis on ESG principles might be best understood as a building crescendo. Initially driven by investors applying non-financial factors to assess risk and opportunity in potential investments, the impact of ESG priorities has been growing in prominence for a decade or more. In Europe, the trend is even further engrained than in the U.S. And while some of the application of these assessments might have felt perfunctory in the early days—more a matter of checking-the-box with disclosures and filings—that is certainly no longer the case. As boards are now well aware, investors and other stakeholders expect meaningful action, rather than lip service.
Integrating Change in Corporate Culture
Employees are also active change agents today especially in industries with a younger employee base, such as technology and consumer products. And HR leaders have been active in keeping a finger on the pulse of changing attitudes in the organization. During the summer and fall of 2020, amid increasing social unrest across the U.S., HR leaders were conducting focus groups, engaging in listening tours, and having one-on-one conversations to learn how employee viewpoints have changed, what is most important to them, and to understand their feelings regarding these events.
Employees want to see their employer participate in meaningful community impact efforts. HR has long been involved in organizing volunteer work-project days. While doing good in the community, the company enjoyed the benefit of building employee engagement. Today, those sorts of activities are table stakes. To capture the hearts and minds of employees, companies have to do that, and more.
Companies also feel increasingly compelled by consumers, employees, potential hires, and the array of other stakeholders to take a stand on pressing social and political issues. While so-called responsible capitalism was not a mainstream topic five years ago, today it receives serious debate in C-Suites and boardrooms. Yet, how do companies move forward in a way that demonstrates earnest intent for a positive impact on society versus simply protection of business interests? When addressing these challenging questions, an informed understanding of employee and talent market sentiments, as provided by HR, could be valuable to the board.
The HR Role
While the responsibility of corporate governance rests squarely with the board, HR leadership should be executing these desired initiatives, making them natural partners with the board on these matters. If the HR team is not in the leadership role for diversity, pay policy, and ESG initiatives, corporate leadership might need to ask why and whether there’s a need for an HR leadership upgrade.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.