Human Capital Governance: A Guide for Boards  

Human capital management is increasingly recognized as a critical strategic lever for organizational performance, value creation, and stakeholder engagement. Once a topic that was peripheral to boardroom discussions, it has become increasingly core, as it is essential for delivery on strategic objectives, especially over the longer-term. What is the role of the board in ensuring this strategic asset is appropriately nurtured, valued and managed for long-term success? The board has a key role to play in when it comes to human capital governance. 

The Strategic Role of Human Capital Management 

Human capital management (HCM) has risen to the top of corporate agendas, as demonstrated by the Human Capital Management Coalition a coalition of 36 institutional investors with assets exceeding $10 trillion, which aims to improve how human capital management leads to the creation and protection of long-term shareholder value. Boards are responsible for overseeing human capital risks and opportunities to deliver long-term value across various dimensions, including performance, safety, engagement, culture, diversity, equity, and inclusion (DEI), compensation, retention, and gender pay equity. 

Board Responsibility in Human Capital Management 

The board’s responsibility in HCM is multifaceted, encompassing both strategic and oversight roles. Boards must understand where strategy intersects with human capital and map out the implications over different time horizons. Setting priorities and ensuring the availability of relevant data to understand the current state and future roadmap is crucial. Additionally, there is growing pressure from investors and regulatory bodies to disclose where human capital creates risk for the organization. 

Some companies address this responsibility by expanding the remit of their compensation committees to include HCM, explicitly incorporating DEI and employee engagement into their charters. The compensation committee plays a vital role in linking HCM strategy to management by translating strategic objectives into performance incentives and succession plans. However, HCM is ultimately the responsibility of the full board, which must consider key questions such as mapping strategy intersections with human capital, setting ambitions, and establishing meaningful metrics. 

The Evolving Nature of Work and Workforce 

The nature of work and the workforce is radically transforming, driven by physical, societal, and digital forces. Speed, agility, and adaptability are increasingly sought after, leading to a more fluid, digital, and human-centric workplace.  

Investors and regulators are becoming more vocal about the need for firm disclosure on the value of their human capital assets. Shareholders increasingly seek information about company leadership, talent, and culture. For example, Norges Bank Investment Management (NBIM), managing Norway’s $1.2 trillion Government Pension Fund Global, has set expectations for companies to integrate HCM into policies and strategy, manage material HCM risks, and to disclose material information. 

Growing Stakeholder Demands for HCM Disclosure 

In 2019, BlackRock and State Street Global Advisors urged businesses to strengthen their focus on corporate purpose, workforce strategy, and culture. The SEC recommends that companies provide a narrative about how labor practices, compensation incentives, and staffing fit within the broader firm strategy. Companies are also encouraged to disclose the number of employees, employee turnover data, total cost of employees, workforce demographic data, and effectiveness of recruiting and developing talent. 

Setting the Right Metrics 

Comprehensive ESG disclosure requirements and standardized ESG reporting frameworks have made it easier to benchmark companies’ HCM performance. HCM reporting focuses on compensation and benefits, corporate culture and values, talent, DEI, and health and safety. Emerging HCM financial metrics that boards should track include human capital return on investment, gross profit per dollar of direct costs of human capital, human economic value added, economic value created per employee, human capital value added, operating profit per full-time employee equivalent, human capital market value, contribution of one full-time employee equivalent to economic value creation, and revenue generated per full-time employee. 

Integrating HCM Risks into the Risk Process 

Investors increasingly expect the integration of material HCM risks into the risk process, including DEI and health and safety considerations. This applies not only to employees, but also to contractors and temporary workers. The responsibility of overseeing broader talent risk – as it relates to strategy, culture, purpose, and values – is within the board remit and needs to be regularly on its agenda. 

Culture as a Safeguard of Long-Term Value Creation 

Boards have a unique role in shaping value-creating human resources practices, including culture. By setting the right tone at the top and probing key dimensions of culture, boards can assess whether the company’s culture reinforces or detracts from strategic execution. Some boards encourage direct interaction of board members with employees, such as lunches with younger employees, to garner insights into the company’s culture. 

Staying Current with Emerging Expectations 

From championing inclusive hiring practices to nurturing a culture of continuous learning and development, boards play a vital role in steering companies towards a future where human capital is not just an asset but a lever for innovation and long-term success. This requires rethinking how individuals contribute their physical, cognitive, and emotional resources to organizations and ensuring practices evolve to stay relevant in a competitive employer landscape. 

By understanding the strategic role of HCM, setting the right metrics, integrating HCM risks into risk management, and fostering a positive culture, boards can play a key role in both overseeing and supporting the organization’s human capital assets to safeguard long-term organizational health. 

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Article by Didier Cossin, IMD Professor of Governance and Sophie Coughlan, Associate Director, IMD Global Board Center. Didier Cossin is the author of High Performance Boards: A Practical Guide to Improving and Energizing Your Governance (2^nd edition) out now, published by Wiley.