It used to be “employee management,” and then “HR;” now with the Great Resignation, the shrinking of the labor force, the reshaping of “work” via pandemic, and the inflation of wages, it is re-named “human capital” and it has become a major business problem, disclosure issue and board of directors focus.
And the subject of a two-hour deep dive by a panel convened this morning by the New England Chapter of the National Association of Corporate Directors, at which BU Professor Charles Tharp coordinated a panel discussion with Independent Director Cynthia Egan, Eastern Bank President Quincy Miller, and Melisa Means of Pearl Meyer’s Boston consultancy. Below, some important director take-aways:
There is little doubt but that the SEC will propose enhanced disclosure requirements; given the schedule for rule-making, it is likely that change will become effective in 2023 after debate of drafts in 2022. Emphasis will be on disclosing demographics, costs (salary and wages being a huge burner of corporate capital), DEI, succession and enterprise risk.
Disclosure also likely will track board work on strategy, now widely ongoing in many companies. Will disclosure of strategy serve to inform competitors to detriment of the discloser? The panel thought not, as strategy depends on skill of execution and depth of adherence to that strategy within the culture and ethos of a company; indeed, general disclosure of approaches ought to assist all companies.
Structurally many companies are remaking their organizational approach to human capital, given both the business imperative and the reputational risk of failing to address the growing corporate awareness of the perceived obligations of business to cohorts other than shareholders, e.g. customers and society. Board Committees are being renamed from “HR” to capture the concept of human capital. The predicate for success is whether an enterprise philosophically embraces this shift by empowering relevant committees in terms of resources, recognition when fixing corporate strategy, and evaluating entity risk.
How will companies deal with driving equity in the new workplace? Classic approach is to key executive compensation to success, often effective but much depends on corporate culture and on finding a metric to which management compensation responds. Some companies use management of human capital as part of a holistic checklist in evaluating and compensating management; larger companies often specifically key part of compensation (particularly bonuses) to demonstration of meeting identified targets. Of these companies, 10% weight (of executive comp) typically has been given, although it was suggested that something like 20% is required to really attract management focus. On the other hand, since this metric often only affects bonus and not base, it was noted that even at 20% the impact on total executive comp may not be huge. Further, making progress in pay, sex and racial equity is a slow process, and such metrics should be placed in the longer-term corporate plan (as is done for example by Pru and Starbucks).
How do you measure success, to trigger rewards to management? One measure is simple headcount of employee population, but that is not alone sufficient. With respect to employee compensation, there are two statistics: the “raw” number (women earn 74 cents to each dollar earned by men) or the “adjusted” number (looking at each department, as they have differing natural pay scales and turnover rates affecting seniority). Eastern Bank also measures success by measuring employee engagement: charitable engagement, community engagement, turnover, number of calls to the ethics hotline.
Another heads-up for boards: add to the report on risk management an analysis of risk presented by human capital management: defections, inability to hire, shortage of staff, payroll cost increases to be competitive.
Finally there was discussion of dealing with remote workers, who are anticipated to be a constant even when the pandemic is wholly quashed. Seemingly the push for human contact is less powerful than had been assumed, and can be addressed by modest in-office attendance. Can there be equal promotion when people do not come to the office? And, it was noted that remote workers tend to over-work and suffer mental stress. (I note that there are contrary view in terms of which employee cohort needs the most attention– those who commute have more expense, commuting time and stress, greater child-care an elder-care burdens….)