Board members often lack experience in executive succession and rely on the skills of a director with a CHRO background to bring that expertise to the CEO recruitment process. That’s where a top HR leader can add tremendous value to boards, says a new report by DHR International. Mike Magsig and Jerry McGrath join Hunt Scanlon to discuss why boards have so few CHROs – and how to recruit them.
Few would argue against the vital importance of a strong business strategy in establishing direction and planning growth for a company. Strategy, however, represents only half the formula for corporate success. Without a forward-looking human resources plan – a subset of the business strategy designed to maintain and engage the people required to execute the strategy at every level – even the best strategy is of little use.
“Given the rapid transformational change occurring in business today and the need to adapt quickly, the best human resources plans also entail ongoing succession planning for all mission-critical positions, including at the top of the house for the CEO and the executive team most closely linked to the overall corporate strategy,” concluded a just released report by DHR International.
“If this sounds something like a position description for a chief human resources officer, that’s not mere coincidence; it’s what CHROs focus on daily,” said the report. But these duties are also increasingly deemed crucial aspects of board oversight and at the heart of the board’s responsibilities. “Yes, they are that important now, because success in executing the human side of the business will ultimately determine how successful the strategy is. And that is the reason boards should consider adding a CHRO to their ranks,” it noted.
The report was authored by veteran search consultants Mike Magsig and Jerry McGrath.
“The need for a CHRO on a board often has to compete with the requirement for other experts, such as for industry knowledge or financial acumen,” said Laurie Siegel, director and chair of compensation committee at CenturyLink, FactSet and Volt. “Many board members lack experience in executive succession and rely on the skills of a director with a CHRO background to bring deep expertise to the CEO succession process. That’s where the CHRO can add tremendous value.”
Boards have traditionally focused on financial performance, easily quantifiable, rather than the harder-to-grasp people issues described above. “But corporate disasters of the last several years – peaking in 2018 – have changed all that,” said Mr. Magsig, who leads the global board & CEO practice at DHR.
“Just ask companies like Uber and Wells Fargo about lessons learned on the importance of these human, cultural issues in the CHRO’s bailiwick in driving performance and maintaining or destroying reputation and shareholder value. A culture that yields desired results starts at the top – with the board and the CEO – with a focus on promoting a workforce philosophy and practices that appropriately reward and motivate employees and reassure shareholders.”
“Among directors, the company CEO, as the top operating executive, should have his or her arms around these issues that make a company an attractive employer and impact the bottom line,” said Mr. McGrath, who serves as managing partner of DHR’s global human resources practice. “For directors to get a complete picture, however, especially of any potentially serious issues, many boards would benefit from having a CHRO on the team. That’s because CHROs are trained to maintain a holistic view of culture, even more than the CEO, and to keep a finger on the corporate pulse day in and day out.”
The right culture for a particular company undergirds strong performance while the wrong culture can derail it. “Boards should increasingly be seeking the guidance of CHROs, not merely as advisers on these matters, but as full-fledged team members on the board,” said Mr. Magsig. “Ensuring boards have an ongoing connection to cultural issues should now be considered essential to the board’s role in overseeing and managing risk.”
Not every board member, however, has had exposure to top-performing CHROs, who likely play a more integral role in crucial, enterprise-wide issues than anyone else in the organization, with the exception of the CEO, said the report. In-depth understanding of company strategy and larger industry shifts are givens. Leading CHROs today are business-people at their core who have knowledge and access to all the levers known to accelerate performance. They are experts on shaping a culture conducive to performance excellence aligned with the strategy, including everything from CEO succession to building bench strength at all levels.
They must also possess state-of-the-art knowledge on effective compensation practices designed to reward desired outcomes, as well as recruiting and branding practices geared to attracting top talent, said DHR International. Having a CHRO as a director would help ensure that these critical issues are addressed and managed regularly by the board.
Why so Few CHRO Directors?
It’s not difficult to make a logical argument for having CHROs on boards in a time of rapid business and corporate cultural transformation, but it is still rare to see a CHRO director. According to DHR research, only 28 active CHROs are currently serving on the boards of Fortune 1000 companies.
“There are a number of reasons for that, both historical and practical,” Mr. McGrath said. “Since their inception in the early 20th century and until fairly recently, boards have been an exclusive club dominated by CEO members. But that picture has changed dramatically in recent years.”
“For one thing, there are not enough CEOs to populate every board, and for another, as valuable as CEOs still are as directors – prized for their broad knowledge and operating experience – leading boards have learned to appreciate the value of functional expertise on their team,” he said. “Just as any baseball team could not be successful if all members were pitchers or third basemen, no matter how talented, similarly, boards that perform most effectively and provide the greatest value cover a number of functional bases.”
Another reason there are still so few CHRO directors is a lack of appreciation for the professional contribution the best HR executives make to an organization, said Mr. Magsig. “HR has certainly evolved as a function in recent years, yet many CEOs and directors still see HR as the chiefly administrative function it once was – one viewed as impeding rather than enabling progress, as opposed to the proactive, strategic, visionary role the best CHROs now play in their organizations,” he said.
Other functional experts are now common, valued members of the board team. No board could properly, or legally, function without financial experts as members and on audit committees, making CFOs much-sought-after directors. “But CHRO board candidates may be harder to identify, and, further, it is often harder to sell these candidates to boards, especially if they are perceived as lacking the crucial broad business experience and acumen required in any director, as well as prior board experience,” Mr. Magsig said. “Needless to say, any director filling a needed functional expertise spot on the board must bring the same level of business judgment to the table as others on the board, as they will be weighing in on myriad issues and decisions, not merely those that touch specifically on their expertise.
Recruiting CHROs to Boards
Finding a CHRO for your board who is a good fit and will add value to the company and existing board takes work and a strategy carefully tailored to your individual board, said the report. The best place to start when considering adding directors to the board, including a CHRO, is with the company strategy.
“Begin by trying to isolate specific challenges that the strategy suggests down the road,” Mr. McGrath said. “Perhaps a merger, acquisition, or spin-off is planned, where having the right people matched with key roles will be paramount to success. Perhaps there’s something else that will require organizational change and the cultural expertise to make it work. Or perhaps it’s the now perennial board priorities of CEO succession planning and executive compensation–more complex than ever with recent changes in the law.”
Look to other companies, be they in the same industry or an industry that has already dealt with similar challenges, and examine the background and experience of the CHRO, said Mr. Magsig. “Further investigation may help reveal how valuable a resource the CHRO was to his or her own board and whether external board experience is documented,” he said. “In most cases, however, there won’t be prior board experience given the still small number of CHROs serving on boards.”
In reality, adding CHROs to boards is yet another aspect of a broader diversity challenge boards are facing. “The underlying premise of that broader diversity, which many have referred to as diversity of thought, is that boards that comprise diverse teams – by ethnicity, geography, gender, age, and functional expertise–are far more effective and provide greater value than those where members are more homogeneous,” said Mr. Magsig. “Diversity of thought leads to richer discussions, more creative solutions and better decision-making.”
That doesn’t mean change is easy. “One corporate governance expert likened change on corporate boards to watching a glacier melt at 32 degrees,” said Mr. McGrath. “Even assuming the temperature has been cranked up to 38 degrees, change is happening, albeit somewhat more slowly than many would hope.
Suddenly, HR performance is positioned to influence a company’s overall performance. HR leaders find themselves under heavy pressure, which calls for new skills, competencies and profiles across the practice. There is also a special focus on HR senior management in charge of driving organizational changes medium and long term. Find out what human resources abilities and competencies need to be in place within your company and what HR leaders should be doing to support those competencies
Acceptance and embracing of all shades of diversity are accelerating. It’s here to stay, not merely because of external pressure, but because boards themselves now realize what an asset true diversity represents.”
No Better Time
It can be risky, of course, to add directors who may have no proven track record of previous board service, but that risk can be greatly mitigated both before and after recruitment. “During the recruitment process, through rigorous interviewing and referencing, the nominating committee and board chair can thoroughly vet candidates, including for fit with both company and board culture,” said Mr. Magsig.
“Once recruited, to ensure a new director – particularly a first-time director–gets off to a good start, build in adequate orientation and training, including the possibility of a veteran director as mentor,” he said. “That acceptance of a new director, who may be different from previously recruited directors, is an important message to send to both prospective additions and to the current board. Some CHROs we’ve spoken to are sensitive about being pigeonholed merely as HR experts when they hope to contribute more broadly alongside those they anticipate will be director peers. And we have heard from directors that it is often the newest member of the board team, viewing information through a fresh set of eyes with no assumptions, who asks the most important questions at board meetings.”
The authors said it is surprising how few boards as yet are leveraging the expertise of CHROs, especially given the many organizational and cultural challenges companies must increasingly deal with, as well as primary board duties of succession planning and executive compensation. “Wise boards will turn this to their advantage, attracting top CHRO talent as directors while there is still a plentiful supply,” said Mr. McGrath. “And because the HR function has served as a route up for many women, it’s not unlikely that in recruiting a CHRO, boards can simultaneously enhance desired gender diversity.”
“Admittedly, there may be a learning curve for any board to accept new directors from other fields and functions, but that expertise will make the board stronger and more effective, from which the company and its entire array of stakeholders will benefit,” Mr. McGrath said. “With the help of a CHRO director, boards can more effectively provide oversight of crucial culture issues and prevent the sort of corporate derailments that have been all too frequent in recent years.”