A company’s human capital can be a complicated area of oversight for any board, especially when attentions must be turned to the top spot in the C-suite. Here, directors must ensure that the company is attracting and retaining the next generation of leading talent that will realize the company’s future success while setting a tone that promotes integrity throughout the organization.
A daunting task, yes, but one that’s not insurmountable.
The National Association of Corporate Directors (NACD) invited Blair Jones, a managing director at Semler Brossy Consulting Group, and Craig Woodfield, a partner at Grant Thornton and leader of the firm’s audit services practice, to offer their insights on these issues as part of a larger panel discussion at the Leading Minds of Governance–Southwest event.
Highlights from their conversation with NACD Directorship Publisher Christopher Y. Clark follow.
What is the compensation committee’s role in succession planning and talent development?
Blair Jones: While responsibility for succession planning ultimately rests with the full board, there are a number of things the compensation committee can do from a process perspective to support this objective.
First, the committee can look at leadership competencies and the overall leadership development process. The succession plan needs to be supported by a pipeline of talent throughout the organization. And the committee needs to know how that pipeline is developed—be it on-the-job mentoring, developmental role assignments, action learning programs, individual coaching, or relationships with business schools. Consider bringing in a leader who has been involved in these leadership development programs to speak about their experiences.
Second, the compensation committee can spend time with high potential candidates at board dinners and through individual meetings. When the committee is determining end-of-year pay decisions, the CEO typically reviews people. Having met some of these individuals, it’s easier to participate in a discussion of what’s being done to take them to the next level. The committee can also make sure that the pay decisions actually fit the directions coming out of the succession planning process.
Compensation committees should also consider following results from employee engagement surveys. Ask: What do these results say about our ability to motivate talent and to retain them in the organization? This will help you get a better feel for the tone and culture of the company.
Look at diversity and inclusion initiatives. Understand the statistics and how those are changing over time throughout the organization. Also, spend time with talent management and succession planning the next level down. The board primarily works with the senior level, but the company’s future leaders are going to come from another level in the organization and the compensation committee can help with succession planning by taking an initial look at the next generation.
What are the best practices for the board to make sure the company has the right tone at the top?
Craig Woodfield: I look at this from an auditor’s perspective, which defaults to the financial reporting side. The appropriate tone at the top deals with every risk of significance that could face a company.
Directors who are in a public company environment are probably familiar with the Committee of Sponsoring Organization of the Treadway Commission’s framework for internal controls and I would encourage private and nonprofit company directors to familiarize themselves with it. The revised framework from 2013 really is the gold standard and it applies to every company and every board. There are seventeen principles listed in that framework and the first five all deal with tone at the top issues. If you look at them, none of them are focused specifically on financial reporting.
As directors, we need to take these criteria seriously to ensure that there are structures in place that create a tone that promotes ethical values. The chief executive is the key here. As an auditor, I have a lot of exposure to public companies, and while most of them have a good tone, there are exceptions. The commonality among those exceptions is a chief executive who doesn’t have the right approach combined with a board that doesn’t have the right level of oversight.
Here are a couple warning signs: a chief executive who has a very domineering personality, that doesn’t take feedback well, or doesn’t respect the board’s responsibility to protect him or her. On the other side, if you have a weak leader and there’s a power vacuum at the top where there is no system of checks and balances, that’s an even greater warning sign because the board becomes dependent on each individual leader of each group within the organization. That situation is much more difficult to control.
We all want strong leadership in the companies we serve. One of the things that boards can do is help educate the chief executive about the nature of that relationship. And the role of the board is to help control that. A warning sign that that balance isn’t there is if we as board members don’t have access to the direct reports. And you want to empower the CEO—you don’t want to undermine or go around them. From an audit standpoint, it’s a real warning sign when the CEO or CFO tries to get in the way of the auditor or audit partner’s direct relationship with the board.
Want more? A panel of Fortune 500 company directors and subject matter experts will offer their insights on issues ranging from cyber resilience to the latest regulatory trends at Leading Minds of Governance–Southeast. Join us on March 16 in New Orleans, LA. Space is limited—register today.
Next week, coverage of the Leading Minds of Governance–Southwest event continues with highlights from a discussion on cyber risk and the legal liabilities of international companies.
Last week in Washington, D.C., directors convened at the National Association of Corporate Directors’ Spring Forum to hear experts discuss how boards can prepare for the future of American business. Panel topics ranged from oversight of emerging risks to talent development and even advertising. The common thread was clear: directors will continue to be confronted with nontraditional challenges.
Case in point: The aftermath of the cyber attack at Target has made the challenge of effectively overseeing cybersecurity risk a priority. ISS recently recommended voting against seven of Target’s ten board members, alleging that those directors inadequately prepared for data risks. Many are looking to the retailer’s tribulations as a sign of things to come: Directors may face additional scrutiny when efforts to oversee quickly evolving, highly technical risks fall short.
Instead of leaving directors anxious, panel discussions throughout the forum honed in on the following actions directors can take to prepare their companies to capitalize rather than capitulate to disruptors:
Leverage Big Data. With massive data collection becoming common practice, former White House CIO Theresa Payton and other speakers suggested using data from your company’s regular web traffic in order to cull anomalous and potentially malicious network activity from baseline data traffic.
Find a Cyber Risk Tolerance. Futurist Edie Weiner said that we can only exist in a state of “cyber insecurity.” Pragmatically speaking, companies cannot fend off every attack, but they can identify their most important assets and ensure they are safeguarded. Insecurity, to some degree, has to be accepted.
Look for Long-Term Trends. Focusing on quarter-to-quarter changes might obscure the large sea-change entire industries may be facing. Erwann Michel-Kerjan, executive director at the Wharton Risk Management and Decision Processes Center, challenged attendees to do their homework before pursuing a strategy, saying that the term “black swan” is too frequently used to describe predictable catastrophes. When given appropriate thought, he said risks can be teased out, analyzed, and planned for.
Secure the Necessary Talent. A powerhouse panel — Tucker Baily, partner at McKinsey & Co.; Earl Crane, former White House director for Federal Cybersecurity Policy; Linda Medler, former director for the capabilities and resource integration at the U.S. Cyber Command; and Krishnan Rajagopalan, managing partner at the global technology and services practice at Heidrick & Struggles—agreed on at least one point: the gravity of having not only those talented in understanding the cyber and IT worlds within the company, but also that those employees are able to discuss these topics with the board in simple and actionable terms.
Transparency is Here to Stay. Jeff Rosenblum, co-founder of Questus, looked through the lens of advertising to show how the connectivity of the social media age is making the machinations of every company more visible. For him, companies in the future ought to be more transparent, disclosing their thinking, actions, and the effects of those actions.
Undoubtedly, the best responses to these rising changes are evolving, becoming more efficient and effective. NACD, through its Directorship 2020 initiative and other programs, remains committed to sharing insights from thought leaders while providing a framework in which directors can better understand a world permeated with risk.
As the marketplace grows in complexity and turbulence, it is increasingly clear that true success depends on people. As boards face more disruptions, they will need to ensure the company has the right skills and agility in the talent pipeline to meet these challenges. This topic—talent development—was the subject of this year’s Blue Ribbon Commission (BRC) report. In the second session of Tuesday’s Board Leadership Conference, NACD’s Managing Director and CFO Peter Gleason was joined by the chairs of the 2013 Report of the NACD Blue Ribbon Commission on Talent Development: A Boardroom Imperative Gregory Lau, managing director of the board of directors practice at RSR Partners, and Mary Pat McCarthy, director of Mutual of Omaha and Tesoro, to discuss the commission’s findings and examine the “next” practices in executive talent development.
Why Talent Development?
The reasons for the board to prioritize talent development are obvious. Over 50 percent of a company’s expenses are related to talent and people. “With the right talent,” observed McCarthy, “you can take on more risk than you might otherwise be able to do.” And yet, for the first time in decades, the talent pool is shrinking. When companies do find themselves at an inflection point, they may not easily have the necessary talent on deck.
Both chairs observed that traditionally, the board has focused on CEO succession. One of the report’s recommendations, however, is to have a multi-level, multi-year talent pipeline overseen by the full board. “Directors,” according to McCarthy, “need to think beyond the CEO and the current year.”
Building vs. Buying Talent
Directors need to take a critical look at the organization’s hiring philosophy. Does the company develop and promote from within, or hire from outside? Although there are situations that may require a significant external recruitment strategy—for example, a turnaround situation—internal hires are often less expensive and on average more successful.
Further, oversight of the talent pipeline should not be a “start and stop” process. The chairs recommended that the board continuously monitor the talent pipeline. Directors should spend time as a board thinking about strategy and the skills the company is going to need, and actually allocate time to do a deep dive. Going beyond the company, Lau recommended looking at competitors’ talent to figure out how they are developing their pipeline. A red flag for directors should in fact be that their competitors are consistently recruiting talent from them.
Strategic Human Resources Function
At BRC meetings, a significant portion of the debate was where the authority of talent development should rest in the company. The commission came to the conclusion that the human resources function should serve as a “strategic architect” to the company. The chief human resources officer or equivalent position, in fact, should make sure that the talent development process is “constant, moving, with good results,” according to Lau. “That person should have time on the board agenda, throughout the year, talking to the directors on talent.”
The Report of the NACD Blue Ribbon Commission on Talent Development: A Boardroom Imperative is available at the NACD Bookstore and free to download for all NACD Full Board Members.