GOVERNANCE EXCELLENCE THROUGH HUMAN CAPITAL

By Dr. Ramon Segismundo, FICD, DBA

Fellow

Institute of Corporate Directors

(This is the first of a series of 3 articles on advancing Governance Excellence across the private, public sector, and nonprofits in the Philippines)

Having recently run a Masterclass session for the Institute of Corporate Directors on

“Turbocharging Talent at the Top: The Board’s Role in Succession, Leadership, and Rewards” targeted at experienced, new and aspiring board directors and similar sessions for the boards of publicly listed organizations, the key reflection question that popped in my mind is as follows:

“How much have Philippine boards really leveraged Human Capital Governance in unleashing the performance and potential of an organization’s leadership, talent, and workforce?”

HUMAN CAPITAL GOVERNANCE

Just what is Human Capital Governance? In a nutshell, it is essentially corporate governance applied to people. If you believe that talent is the company’s most important asset and a key driver of long-term value, then attention should be paid by the boards and senior management to develop and implement an optimum oversight and decision-making

framework to ensure that the organization’s leadership, talent, and workforce are effectively managed, developed, and aligned with corporate strategy.

In the sessions that I have run, I asked the question of whether there is a board committee particularly devoted to human capital in their organizations. These are my observations:

• Some do not have one entirely leaving it to the Human Resources function and the chief executive officer to identify and resolve human capital issues and challenges.

  
  

• Some have it, diluted in some way, in combination with other board responsibilities, for

  example, nomination and governance committee, remuneration and nomination committee, etc.

• The more progressive ones have a dedicated committee covering the key levers of human capital governance (which I will discuss later in this article) and name the committee distinctively and appropriately such as People and Culture Committee, Remuneration and Leadership Development Committee, Personnel and Compensation Committee, etc.

What are the consequences of sub-optimum human capital governance? As I have mentioned in my sessions, A panel consisting of Gallup, Bain, McKinsey, BCG, and Deloitte indicated that 60 per cent to 80 per cent of business problems are people related. This causes “strategy execution failure”- certainly a major board concern.

ONCE YOU HAVE SET IT UP, NOW WHAT?

Developing and implementing an optimum human capital oversight and decision-making

board framework entails identifying what are the “hot button areas” that the Board needs to have stewardship of to ensure that the leadership, talent, and workforce of the organization provides maximum value to all stakeholders.

In my view, there are four pillars of effective human resources governance at the board level: Succession Planning, Leadership Development, Rewards Management, and Culture. Pillars may be added, modified, or deleted depending on the industry and company strategy priorities. Each of these pillars are discussed in the following sections.

Succession Planning

A sustainably successful company has a robust pipeline of executive and leadership talent, and it is the Board’s responsibility to ensure that this happens. This will manage the risks of:

• Not having a ready now candidate when incumbent senior executives unexpectedly leave.

• Prized senior executives “jumping ship” as their career future is not spelled out.

• The organization placing executive development at the back burner, thereby not seizing on the opportunity for the executive cadre to build capacity.

In succession planning, a robust succession analysis is undertaken. This involves evaluating

the readiness and availability of internal (and external) talent to fill key senior leadership and critical roles.

A tool that is used is the 9-box grid (a 3 x 3 matrix) that classifies executive and leadership talent according to low, moderate, and high performance and low, moderate and high

potential. Every succession candidate for executive and leadership positions will have to be in the board’s radar in terms of their aspirations, strengths, development needs, and

development actions for the next 12 months.

When the above analysis is done in relation to target positions such as the CEO, COO, CFO and CXO roles, the Board and management will be able to establish the succession candidates who are ready now, ready in 1-3 years, ready in 3-5 years and “high potential” over the long term.

Leadership Development

A robust succession plan needs to have an accompanying leadership development plan built around a leadership brand, a competency model and a program.

Just what is a leadership brand? A distinct and consistent leadership identity that

differentiates the company in the marketplace. By having this brand, the company can differentiate itself and utilize this to drive leadership attraction and retention.

On the other hand, a leadership competency model serves as a foundation for the

leadership development program of the company. Communicated to all leaders, the model outlines the required knowledge, skills, abilities, styles, mindsets, and habits of the

organization’s leaders.

Based on the above model, a leadership program is designed, regularly delivered and

continuously evaluated to enhance the effectiveness of leaders in the company while staying in their respective roles. Therefore, from the standpoint of each individual leader, personal growth and development could happen “on the job” without waiting for the next

organizational opportunity to open up.

Rewards Management

Typically, Boards approve merit increase budgets for the next year. They may also approve bonuses and other rewards programs as presented by operating management on their own or through a committee.

The question is how much time is devoted to reviewing the rewards recommendations presented to ensure that we get “the biggest bang for the rewards” bucks and maximize human capital performance, productivity, and morale.

Boards could also look at innovative rewards management practices. To drive long term value creation, the Board could also look at compensation plans designed to reward employees- especially senior executives and key talents- for achieving performance goals that create sustained value over multiple years (usually 3-5 years). This will align employee interests with the long-term success of the company and shareholder value creation.

Organizational Culture

Peter Drucker’s famous quote: “Strategy eats culture for breakfast” resonates well in boards.

Typically, boards spend a lot of time discussing strategy, but very little time is spent on

culture. These two sides of the same coin ensure sustainable success- yet only one side (strategy) is given attention.

In short, the Board- working with executive management and the company’s CHRO- must be active in designing and shaping the culture that will help achieve strategy. If this is left to chance, you may not want to see the culture that evolves.

As a starting point, the Board looks at both the espoused culture (what the company says it values) and the lived culture (what the leaders and the people do in reality).

Examples of areas to review include leadership behaviors, risk orientation, incentives and rewards, decision making norms, employee communications, innovation mindset, change readiness, to name several.

Designing the culture aligned with the strategy involves ensuring that:

• The organization’s leaders serve as the cultural role models and champions.

• The company’s processes and practices “walk the talk” in terms of the culture.

This forms the foundation for a comprehensive roadmap to build and develop a culture that ensures governance excellence.

(My next two articles over the next four weeks will focus on transformational directorship and what does it take. Please watch out for this)