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Boards Increase Oversight of Human Capital Issues

Saturday, December 1, 2007
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Over the past decade, boards have stepped up their oversight of the companies they govern. While Sarbanes-Oxley transformed the board's oversight of financial reporting, a recent study by the Philadelphia-based Hay Group of 150 of the world's leading companies found that human capital issues have also gained greater boardroom focus, a finding with important implications for senior HR executives who now truly have a voice in their company's strategic direction -- whether they're ready to be heard or not.

The study, conducted in conjunction with Hay Group's annual research for Fortune's "Most Admired Companies," surveyed, at each company, four board members and four senior executives who regularly communicate with their board.

When responses came in from 150 of the largest companies from around the world, they were divided between those who made the 2007 list of the "World's Most Admired Companies" and all other respondents.

Analysis was then undertaken to determine if there were any areas where the boards of the "World's Most Admired Companies" differed in their approach to governance of human capital from those of other companies. (See chart.)

More than three-quarters of all respondents indicated that their boards had become more involved in the oversight and management of human capital in the last several years. Moreover, more than two-thirds indicated that the CEO and management regularly draw on the experience of their board members on human capital issues.

Nearly three-quarters of all 150 companies surveyed indicated that their boards regularly received metrics relating to human capital, such as employee-turnover rates, job-acceptance rates, diversity statistics, employee-survey results and the like. Providing this type of data to the board on a regular basis was even more prevalent at the World's Most Admired Companies.

In addition, more than 80 percent of the World's Most Admired Companies had developed a human capital strategy corresponding to their corporate strategy that had been reviewed by their boards. Nearly 70 percent of other company boards also followed this practice. (See chart.)

The Hay Group study asked respondents which areas their boards focused on in their annual performance evaluation of the CEO. Not surprisingly, more than 90 percent of all boards included both financial success and success in strategy implementation as elements of their CEO's performance review.

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Of interest, however, was the approach taken by the boards of the World's Most Admired Companies, more than 80 percent of which included "success in developing human capital" as a factor in CEO performance evaluation (66 percent of other boards also included this factor in their CEO's review).

Bottom line: If your CEO's evaluation only includes financial metrics and strategic milestones, it may be time for some modifications to incorporate leadership development and other HR factors into his or her annual assessment.

One of the most notable differentiators between the boards of the World's Most Admired Companies and all the rest was in the area of emergency succession planning. More than 90 percent of the boards of the World's Most Admired firms actually had an emergency succession plan for their CEO that they reviewed once a year; and more than 80 percent had plans to cover the emergency loss of other top corporate officers.

Beverly Behan is the managing director of the board effectiveness practice for Philadelphia-based Hay Group. She consults regularly with corporate board members on HR strategy matters.

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