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Embracing HR

Boards at some of the most respected organizations are taking a new interest in human capital and finding new ways to work with HR, according to a study based on a special HRE recalibration of Fortune's "Most Admired Companies."

Saturday, December 1, 2007
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Will corporate boards ever wake up and smell the coffee -- and recognize the link between human capital strategy and long-term financial success?

 

Fresh national survey data and feedback from HR executives and board members at some of the nation's most respected companies, such as Starbucks, suggest that after decades of people-are-our-most-important-asset lip service, an epiphany may be at hand. Or at least substantial progress is being made in some corners, yielding practical insights to help HR leadership maximize the effectiveness of interaction with board members.

 

The recent evidence comes from research conducted by the Philadelphia-based Hay Group management consulting firm, carried out in conjunction with Hay's statistical support for Fortune magazine's annual "Most Admired Companies" rankings.

 

Nearly three-quarters of the corporate executives and board members surveyed by Hay concurred with the statement, "In the last several years, our board has become more involved in the oversight and management of human capital," according to Beverly Behan, managing director of Hay Group's board effectiveness practice, who consults regularly with corporate board members on HR strategy matters. (See related article by Behan.)

 

Hay also teamed up for the third year with Human Resource Executive® magazine to recalibrate the Fortune "Most Admired" list to create a "Most Admired for HR" ranking by isolating and tabulating HR-oriented survey elements, known as "attributes of reputation," that make up the overall survey.

 

Perhaps not surprisingly, companies on Hay's overall "Most Admired" list were even more likely than those not on the list (84 percent versus 74 percent) to report that their board is engaged in human capital issues.

 

In a related finding, 82 percent of companies on the overall "Most Admired" list report their board is regularly fed human capital performance metrics, and the same percentage reported the board has reviewed and approved a human capital strategy for the company.

 

To find out what's behind the numbers, HRE explored the nature and structure of HR-board interactions at companies at or near the top of the "Most Admired for HR" list (see methodology).

 

To broaden the perspective, the magazine also sought the independent views of Edward Lawler, distinguished professor of business at the University of Southern California's Marshall School of Business and founder and director of that university's Center for Effective Organizations. Lawler, a pioneering researcher and author of numerous management books, believes corporations need to rethink who they put on their boards.

 

"Typically," he says, "they don't have anyone with serious skills in human capital management, organization design and all those [areas]."

CEOs themselves are still often reluctant to wrap their arms around basic HR concerns, Lawler says, including the very issue of the effectiveness of their own governing boards. He recalls a conversation with a Fortune 100 company CEO who recoiled at the suggestion that his company establish a peer-assessment process for board members. "He said, 'That would be insulting to them. They're doing us a favor by serving on the board,' " Lawler recalls.

Knowing Their Roles

Whatever directors' motivations are for serving on boards, what is their most fundamental responsibility in overseeing human capital and other corporate strategy? And what are their expectations of HR leadership? The view of several HR leaders and directors of companies high on the "Most Admired for HR" ranking is that directors should not stray too deeply into the weeds.

 

"You could argue," says Richard L. Antoine, global human resource officer for Cincinnati-based Procter & Gamble, "that the board has two basic functions: picking the CEO and assuring that corporate governance is of the highest standards." (Antoine, a 39-year P&G veteran, will retire at the end of March.)

 

Or, in the words of David Pace, executive vice president of partner resources at Seattle-based Starbucks Corp., his board "wants to give us [executives] their best thinking, and ask, 'What do you think about this?' " He says he appreciates the fact that Starbucks' directors "understand the fine line between being a board member and being part of management." (Pace also plans to retire from his position at Starbucks in the near future, though no official date has been given.)

 

Pace considers himself fortunate that Starbucks has a veteran board member, Olden Lee, whose professional career was primarily that of an HR professional at PepsiCo, a company Pace also worked for prior to joining Starbucks in 2002. (At one point, Lee was Pace's boss at PepsiCo.)

 

"The good news," says Lee, "is that we [directors] are listened to quite well."

 

HR executives, both former and current, serving on large company boards are still a scarce commodity and chance occurrence. "I'd guess it's in the single digits," says Lawler (see sidebar). But for Starbucks, having Lee on the board was well-plotted. Faced with exponential growth, both present and future, Howard Schultz, Starbucks' 53-year-old founder and board chairman, and fellow board members had "a conscious desire to go out and find that skill set," Pace says.

 

When Lee was recruited in 2003, the company had about 50,000 "partners."

 

Today, Starbucks employs 175,000, and "we're on our way to 300,000 to 400,000," Pace says.

 

"When you're trying to prepare yourself for that level of growth, you really want as much [HR] experience and expertise as you can get, helping you and your team to think through those issues." In other words, the urgency at Starbucks wasn't just about the standard hot-button board-level HR issues such as executive compensation and succession planning, though those issues are still important matters routinely addressed at board meetings.

 

The decision to recruit an HR professional such as Lee, Pace says, "was largely about what we need to do to grow the corporation in the operating environment that we have, and who can best help us [with this]."

 

Open Relationship

Lee isn't the only Starbucks board member concerned with human resources, however; Pace says he has "great dialogue" and a "very open relationship" with the entire board. Nevertheless, he has forged a particularly close link with Lee, occasionally meeting outside board meetings to talk through pressing issues.

 

Far from worrying about being second-guessed by another HR professional, Pace says he highly values Lee's position as a director. At board meetings, also attended by both Starbucks' general counsel and the CFO, Pace says he often sits next to Lee "because we might want to compare notes from an HR perspective on some of the discussion."

 

One ongoing subject of board discussion is the critical need to aggressively develop Starbucks' workforce.

 

Lee says the board is "putting a lot of pressure" on Pace to "stay ahead of the curve" in this critical area. That's because, as Lee and his board colleagues see it, Starbucks' growth potential is largely a function of "whether there are qualified people to do the job for us in the manner in which we want it done."

 

Pace takes such pressure in stride. "When Olden and his board colleagues push us and say, 'You may be ready for the next six months, but you are not ready for the next two years,' inevitably that's good advice," he says.

 

Pace tries not to overwhelm the board with HR metrics, but keeps members apprised on numbers relating to health-benefit enrollment, expenditures and utilization, as well as an engagement measurement based on Starbucks' "partner view" survey, conducted every 18 months, with interim updates.

 

One HR metric near and dear to board members of another Most Admired company that ranked highly on the Most Admired for HR list, Zeeland, Mich.-based office furniture maker Herman Miller Inc., relates to the company's ability to innovate. Like Starbucks, Herman Miller has an HR expert on its board -- David Ulrich, the well-known University of Michigan business school professor and management consultant.

 

Ulrich, a member of the company's board since 2001, says he and his fellow directors have always paid close attention to an HR-related "vitality" measure -- revenue from new products, along with numbers relating to "inclusiveness" and other diversity efforts within the employee population and supplier base.

 

Beyond simply reviewing numbers, Herman Miller's board spends a lot of time on the question, "What are the capabilities we need to continue the thing we're good at -- innovation?" Ulrich says. The standard board-meeting agenda covers not only finances and business strategy, but how Herman Miller is doing as an organization, a topic that "gets us into people, culture and capabilities," he says.

 

Ulrich stays in close contact with Andy Locke, the company's executive vice president of HR and administration. Locke may tap Ulrich for advice, or Ulrich might call Locke with a question. For example, Ulrich recently asked Locke how the company was tracking against new SEC standards on transparency of executive compensation.

(HR executives say it's always better to anticipate board-member questions on high-visibility issues such as the SEC's new executive-compensation disclosure and analysis-filing requirements and brief the members pre-emptively, before the phone starts ringing off the hook following a critical newspaper article on such a topic.)

 

Although Ulrich has served on the Herman Miller board's compensation committee, a logical assignment for an HR expert, he is shifting to its governance committee. Ulrich insists that board members should not be "pigeonholed" for committee assignments based on their professional backgrounds. "When I contribute to the board, I hope it isn't just on the HR side. We all have a common agenda to help the company reach its strategic and financial goals."

 

Ulrich and his fellow board members try to be consistent with their preaching on the importance of sound HR practices by rating each other on their own performances. He says he's "right in the middle of the pack," a position he finds disconcerting because, as a competitive over-achiever used to being first in his class, "I'm not used to being in the middle."

 

Work Requirements

Having the rich resource of directors such as Ulrich and Lee at hand may be highly advantageous to an HR executive. But is it really essential for effective HR-board interaction? Fortunately (given the scarcity of such people on corporate boards), the answer seems to be "no," according to HR experts.

 

What, then, is required for good oversight, and what do (or should) more typical boards, often dominated by retired CEOs, expect from HR? That's a subject Hay Group's Behan often takes up with her board-member clients.

 

The broad answer, she says, is straightforward enough: "What top HR people do," she says, "is to take the corporate strategy and develop a human capital strategy which covers a wide range of things, including the challenges and opportunities on the HR side that can facilitate or impede execution of corporate strategy."

 

That HR strategy, she adds, is laid out for board members in terms of the building blocks of recruitment, compensation, leadership development and so on. The relative attention paid to each component at any given time will vary according to individual company dynamics and circumstances.

 

The board's job, in turn, is to decide whether that HR strategy is comprehensive, feasible and consistent with the overall corporate strategy. If the HR strategy as articulated by its chief architect has withstood board scrutiny, "this tells the board that the company has the people infrastructure to make the corporate strategy work -- or will take steps to make it work, and [define] what those steps are," Behan says.

 

But Behan's tidy framework presupposes that the board is, indeed, paying attention to HR strategy -- or is even aware that one exists. Where that isn't the case, says Lawler, "HR people need to look for a teaching moment, or a moment of exposure or truth, when it comes to their role with the board."

 

A prime topic for such teaching would be executive compensation, something Lawler says boards are always highly attuned to. P&G's Antoine says his board is particularly attentive to the topic, in part because "they don't want to pick up the paper and read some criticism [of the company] because of something that was stupid or excessive."

If left to their own devices, Lawler adds, many boards will look at executive compensation as a neat, self-contained business issue. The "teaching moment" in a discussion about executive compensation would be the broader dialogue about "the chain of internal capability, [when board members would] start talking more broadly about talent management and executive talent. That's one inroad, if you can put that package together," Lawler says.

 

Most corporate boards, he adds, have absorbed the "war for talent" message. Therefore, "the trick is to leverage your moments in front of the board into a broader look, where you talk from data and analytics, and not just from wishes and hopes and promises."

 

Appetite for Analytics

But how wide an attention span do boards have for HR analytics? As noted before, it's important to use numbers judiciously.

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Still, one would hope that all directors might hold the view of one board member who is a client of Behan's.

 

He recently told her that he considers HR metrics a leading indicator of corporate performance, as contrasted with basic financial metrics, which he considers a lagging indicator.

 

"If he sees employee turnover increasing or employee satisfaction scores diminishing, he knows that sooner or later, this will likely play out in financial results, and it gives him an early warning that something's wrong," Behan says.

 

But a smart board won't take metrics served up by HR at face value, Behan warns. Ideally, HR will provide metrics that provide insight -- and put the data in an appropriate context.

 

"For example, is 15 percent turnover a big problem? Or the low for your industry?" Behan asks.

 

Lawler, who urges boards to pay as much attention to HR metrics as other numeric indicators of corporate performance, admits that most companies are only just beginning to amass detailed HR data.

 

As a result, he concedes, it's not always possible to feed board members the kind of perspective-adding historical and intra-industry comparative data that's available to CFOs when they conduct their board presentations.

 

Still, Lawler urges HR executives to brief board members on "classic attraction, retention, cost-of-turnover kinds of numbers, which say, 'Here's how we're doing in competing for talent. Here's what it's doing to the bottom line. Here's how it might be better.' And frame that in terms of financial impact. That's how people who go for capital projects get attention. HR has to play in that same world if you expect the board to listen."

 

That sermon is preaching to the choir at the companies atop the "Most Admired for HR" list. Antoine, for example, says he uses such metrics in briefing his P&G board on issues such as employee productivity, diversity, retention and innovation.

 

The latter is particularly critical at P&G, he says, in the hyper-competitive, fast-moving global consumer-products world. Antoine gauges innovation by measuring the percentage of corporate initiatives that come from ideas "generated wholly or partly from outside the company," he says.

 

The higher that number (considered a quantification of the company's "external connection"), the better. The goal -- almost reached -- is 50 percent, he says. That's crucial to P&G, Antoine says, due to its strong promote-from-within culture; the company is sensitive to the hazard of creeping insularity.

Indeed, Antoine says P&G's board recently has stepped up the pressure to make sure the company's senior executives (and future CEOs) are building a healthy "external view of the world."

 

Healthcare is another issue of significant interest to boards, including the one at Memphis, Tenn.-based FedEx Corp. (the top-ranked "Most Admired for HR" company).

 

"The expense is high, and the inflation on that number is high, so, of course, it has the board's attention," says Judith Edge, who became the $34-billion company's corporate vice president of human resources in June. She has attended two board meetings since her appointment.

 

Edge maintains an elaborate "healthcare dashboard" covering costs, employee health status and education levels, both at FedEx and on a comparative basis with peer companies.

 

The data is always available to board members, she says, but it is not always formally presented at their meetings.

 

Succession planning and leadership development are the other top traditional subjects of HR-board interaction. Edge says her role, working through the FedEx board's nominating and governance committee, recently has involved developing an assessment process for prospective senior leaders "by which people would be evaluated on a consistent basis against a set of competencies."

 

Using succession charts that are updated by Edge, the committee is equipped to identify and plug any perceived gaps in the leadership pipeline.

 

Succession Planning

Antoine also reports that a high proportion of his interaction with the P&G board involves keeping members apprised of the career progress of the company's senior executive leadership.

 

And, working with the board's governance and nominating committee, Antoine helps to identify and recruit prospective corporate board members.

 

Overall, his time dedicated to attending full board and committee meetings, and maintaining conversations with board members between meetings, has steadily grown since he became the company's HR leader nine years ago. The main reason, he guesses, is "by now, I know most of the board members quite well, and they know me" -- and evidently have come to value his input.

 

With CEO and board chairman A.G. Lafley about five years away from the company's mandatory CEO retirement age, the board's focus on succession planning is intensifying, and, hence, Antoine's involvement, he adds -- despite the fact that he, too, will be leaving soon.

 

Of course, Antoine won't personally be recommending a specific successor CEO. It would be very rare for an HR executive to do such a thing.

 

The kinds of board-level corporate strategic actions involving significant HR input aren't often so singular in nature.

 

More typical would be HR's role in Herman Miller's ongoing wrestling with the management of its growing manufacturing and distribution operations in Asia, or Starbucks' ambitious global-expansion plans.

 

Sometimes, however, guidance or a recommendation from HR -- when its leader has a lot of credibility with the board -- can directly lead to a major corporate event.

 

"I know of an instance," says Hay Group's Behan, "where a board approved a strategy to spin off one of its largest business units because of challenges involving attracting and retaining talent."

 

Specifically, the company's HR leader successfully made the case that the best way to attract the kind of talent the division needed was to morph it into an entrepreneurial start-up company, via an initial public offering.

 

It might be tempting to assume that human resource leaders can only have such an impact on strategic decision-making if the corporate DNA is compatible.

 

FedEx's Edge, for example, says she considers herself fortunate because "I have the advantage of a 'people-first' CEO," company founder Fred Smith.

 

While a company's commitment to the human element may certainly offer HR a head start, it is not determinative, says Starbucks' Pace. Although he, too, serves a company whose founder makes a dedication to human capital part of the "fundamental philosophical grounding of the company," Pace insists that such a spirit and approach to business "can happen anywhere."

 

"You just have to have that commitment" to pull it off.

 

 

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