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HR Magazine: HR and the Board

Robert J. Grossman  1/1/2007

HR Magazine, January 2007

Vol. 52, No. 1

Boards are seeking more input from HR, which raises the professions profile but also generates political and other risks. 

It wasn’t that long ago that many corporate boards served essentially as bystanders in the business, rubber-stamping whatever initiatives CEOs laid down.

But that was before scandals at Enron and other companies came to light, before the passage of the Sarbanes-Oxley (SOX) Act and the implementation of regulations from the Securities and Exchange Commission (SEC) mandating clearer and more-detailed disclosure of top executive pay.

Now, in response to these developments, boards are more actively involved in overseeing businesses, says Beverly Behan, who serves as managing director of the Hay Group’s Board Effectiveness Practice and has consulted with nearly 70 boards in the United States and Canada. “Pre-SOX, the vast majority of boards were very ritualistic; the CEO ran them imperial-style,” says Behan. “Today, boards are more independent and engaged. They’re asking more questions, getting heavily involved in key decisions.”

Jill Kanin-Lovers, a former HR executive at Avon who now serves as a director on three corporate boards, also sees an increase in board activity and oversight. “I can’t believe some of the compensation proposals we got approved on the management side when I was vice president of HR at Avon,” she recalls. “Today, as a board member, I would never approve stuff like that without more detail and analysis.”

Like Kanin-Lovers, other corporate directors also are seeking more data and analysis—in many cases from top HR professionals. For HR executives hungry for access to the board, this trend can be good news. But it also can bring challenges that top HR executives should be aware of. For example, increased interaction with board members can put HR in a politically sensitive position with regard to the CEO. Partly in response to such pressures, boards often hire outside HR consultants to advise them—a situation that may or may not work to an HR executive’s advantage.

HR Arrives on the Boards Radar

Immediately following passage of SOX, audit and other financial matters became corporate boards’ top priorities. Now, HR concerns appear to be moving up the list, according to some experts.

To be sure, not everyone sees this trend. For example, Ed Lawler, distinguished professor at the Marshall School of Business at the University of Southern California, has studied board involvement and believes that most still don’t ask for significant corporate HR data—perhaps because many boards don’t have members who possess enough HR-specific expertise to know what to request. (See sidebar “More HR Expertise Needed”.)

But there is evidence that at least some boards are grabbing hold of key strategic HR issues, such as succession planning, talent management and especially executive compensation. This trend likely will be spurred to new heights by recent SEC regulations that took effect Dec. 15 and that impose more-stringent standards for disclosing executive pay.

“The new regulations are focused on making sure there is coherent disclosure of total compensation—including salary, benefits and stock options paid to key executives,” says Allan J. Reich, chair of the National Corporate and Finance Practice Group at law firm Seyfarth Shaw in Chicago. (For more information on these rules, see the cover story in the November 2006 issue of HR Magazine.)

The new standard will make things tougher for HR, predicts Kanin-Lovers. Board directors will be asking more questions and requiring more-detailed explanations about HR programs and the data HR collects, she says. As boards move to meet these requirements, she believes HR will be under pressure to justify the plans. This new pressure for information and interaction will add to the involvement that HR executives already have in board activities.

In general, chief HR officers are allotted time at board meetings to report on key human capital issues. They sit in with other members of the executive team at board meetings to offer counsel, then leave when the board moves into executive session. At the committee level, HR usually is linked with the compensation committee, but there are opportunities with other committees as well, including governance, nominations and even audit.

“There’s a role for HR working with every board committee,” says Kanin-Lovers, whose background also includes 17 years as a consultant for Towers Perrin. “Boards have had some scares with compensation out of control, as well as with ethics issues, and are seeing the advantages of having HR in the room. Years ago, when I worked as a consultant, you didn’t see the connections you do now. There’s more reliance on the HR function for input and staff report work.”

One HR executive who can attest to board members’ reliance on HR is John Gordon, senior HR executive at Methanex of Vancouver, British Columbia, the world’s largest producer and distributor of methanol. Gordon, along with the CEO, plays a key role in staffing and prepping the board and all of its committees. “We prepare and present them with all the information they use to make their decisions,” says Gordon.

In the wake of new regulations (the company is governed by both the SEC and Canadian securities laws), Gordon says his board has been more demanding. “As corporate governance has evolved, the agendas have changed. The board has greater expectations of its involvement in every aspect of our business. It’s requesting more information and wanting to get deeper into [HR and other] issues.”

In general, board members also want HR executives to share their analysis and speak their minds. “The HR executive has to be able to look me in the eye and tell me the baby is ugly,” says Stuart Levine, lead board director of Gentiva Health Services, a 17,000-employee health services provider. “Give me the facts and move on. If you have a different opinion, I want to hear it.” Levine relies on HR executive Brian Silva, who staffs the compensation committee, as a sounding board.

“It’s the senior HR guy’s job to anticipate; HR has to dig a little deeper, giving more information as well as filtering out the unnecessary data,” says Peter Gleason, COO and director of research at the National Association of Corporate Directors, a 15,500-member nonprofit membership organization for corporate boards and individual board members in Washington, D.C. “They’re looking for your analysis as well as the numbers.”

The Fine Line

Greater involvement with the board can raise the profile of the HR profession, but it also can put select HR executives into dicey situations.

One possible risk is that board members will lose sight of strategic issues and become too involved in operational ones. Even though the commonly accepted mantra for board members is “noses in, fingers out”—meaning members should learn what they can but refrain from touching the business—the temptation to step over the line is always there.

Levine says board members must strike a balance between micromanaging and asking intelligent questions to get the information they need. The danger, he says, is that board members may become disruptive to management. “If you’re too intrusive,” he believes, “you can undermine the CEO.”

“You don’t want the board mired in the day-to-day—that’s management’s job,” agrees Gleason. “You want them to think strategically and to be in a position to advise management on big-picture issues.”

But, Kanin-Lovers acknowledges, it can be a struggle for board members to stay out of operational concerns. “It takes a lot of discipline not to get involved, partly because of what you’re required to know,” she says. “It leads you closer and closer to operations. But you’re not the one who’s supposed to be implementing strategy.”

This is a lesson learned slowly for newly appointed board members, says John Cecil, chief human resource officer at Lee Memorial Health System in Cape Coral, Fla. “It takes a good deal of time to educate board members when they’re first elected,” he says. “The new members may go down the road of trying to micromanage, but they quickly discover how complex our business is. Eventually they settle in to their role as fiduciaries, focusing on setting policies.” (Lee Memorial is a public health care system with 8,000 employees in 60 locations in southwest Florida.)

In some cases, HR and other executives believe they are being micromanaged because they misconstrue board members’ intent, says Paula Cholmondeley, a full-time independent director who serves on five boards. “We have to know more, so we have to engage in dialogue and ask more questions,” she says. “People interpret our questions and comments as things they should be doing.”

More Info = More Strategy?

There also is concern that the increased interaction between board members and HR executives is resulting only in the hurried passing of data—not in greater strategic thinking about human capital management.

Constance Dierickx, senior consultant at RHR International in Atlanta, has numerous contacts with senior HR leaders and is unimpressed with the dialogue between HR and the board. “I’m hearing that [HR is] running around like crazy responding to requests from the board, having to produce information and documentation,” she says. “They feel pressure to produce the right information at the right time—and do it fast. They say things like ‘the board needs and wants to know these things, but I get 30 minutes on their agenda. I can’t be thorough and that rapid.’ ”

But Steve Ford, managing partner of OI Partners in Concord, Mass., has extensive contact with many senior HR executives who report that, since SOX, their relationships with the board have expanded greatly.

“They say they’re working more with boards on leadership development, talking about succession planning and company culture,” Ford says. “They’re reporting to the board regularly and meeting with independent directors who are interested in issues particularly around culture and diversity.”

At Lee Memorial Health System, Cecil provides a quarterly report to the board summarizing key HR data with detailed explanations. He works with a liaison on the board, who is his primary contact in between meetings, “as often as five times a month.”

HR/CEO Diplomacy

Another potential risk for HR professionals is that they may be caught in the middle of the demands of the board and the loyalty expected from the CEO.

Charles Elson, director of the Center for Corporate Governance at the University of Delaware in Newark, and a member of three boards, notes that “HR reports to the CEO and also to the board. What happens when the CEO confides in him, or he learns information critical of the CEO? Does he keep quiet or go to the board?”

Dierickx cites a senior HR executive in a Fortune 500 company who hedges when questioned by the board about C-suite executives. “He does not want to put information on the table about someone that conflicts with the CEO’s view, even though he knows the board needs to know it. He’s afraid of the CEO and how he’ll react. Here’s where the directors could do a better job. They’re not sufficiently building a [business] relationship with the executive so that he feels encouraged to disclose.”

But efforts to build better relationships with HR and other executives are not always encouraged by CEOs. Cholmondeley describes a situation where the vice president of HR asked her to have lunch with someone they recently recruited; she accepted the invitation. She later received a call from the CEO asking her why she was talking to this person without his approval.

Dierickx says it is a fallacy to believe that changing the structure of the board and stacking it with outsiders will automatically change something within an organization’s structure. “You take the CEO out of the room and assume the discussion will be different,” she says. “That may be true among directors who are peers, but when the HR director is in the room, HR and the directors are not peers; it’s incumbent on the board members to create the climate that encourages HR to speak out.”

Attorney Reich says HR should be cautious when it decides to speak critically about the CEO to the board. “I represented the executive VP and CFO at an airline company who told the board they didn’t believe the CEO was doing a good job,” he recalls. “The board sided with the CEO. Soon after, the executives were gone.”

Independent Consultants

To further complicate matters, as boards take their responsibilities more seriously, they are seeking independent advice as a check on the information they’re receiving from management. “We’re hiring our own consultants to advise us on compensation for the senior management group,” says Warren Batts, an adjunct professor of strategic management, University of Chicago Graduate School of Business at the University of Chicago, former CEO of Tupperware and Premark International, and currently a director on three boards.

Whereas before an HR executive had one or two masters to serve—the CEO and the board—now you have to convince an independent consultant to approve a proposal.

“We might ask HR for feedback, but we don’t include them in discussions at the top,” says Batts. “We don’t want to put the HR person at risk with his boss in discussions over how much compensation to offer a key player. We bring the HR person in when we’ve decided what we’re going to do to help with the implementation.”

The hiring of outsiders could work in HR’s favor for sensitive matters. “Legally and from a fiduciary standpoint, HR works for the company and has an obligation to come forward with any information that will have an impact on company performance,” says Elson. “But boards realize that HR executives are human, so from a practical standpoint, it makes sense to hire independent consultants.”

And, on occasion, independent consultants help HR’s effort. They can initiate or quash actions that would be political bombshells for HR to take on itself. “They strengthen you,” Kanin-Lovers observes. “Sometimes management wants to implement something that in your heart you have a problem with. Outside consultants can help put on the brakes.”

Kanin-Lovers chairs the compensation committee at executive recruitment firm Heidrick & Struggles and points out the change in the way independent consultants are selected. Before SOX, it was common for consultants to be hired by management—giving HR say in the selection. Now, the selection is the board’s.

But HR can still play a role in the selection process, says Kanin-Lovers. She warns that some consultants have their own agendas, such as trying to impose their proprietary compensation systems on client companies. She recommends HR offer its expertise to board members to vet potential consultants before hiring them.

Working It Out

Once HR figures out its place and role with the board in this regulatory climate, it can start to capitalize on the opportunity.

No question, the new climate in corporate governance will be giving HR more opportunities to shine. “The door is slowly opening,” says Lawler. “The question is: Does HR have the personal credibility and analytical ability to go through it?”

Kanin-Lovers says you gain credibility by building relationships. A good beginning is to be all over the information—retention, recruitment, succession documents, lists of high-potential employees and salary surveys—that you provide. Get it there and do it on time, she says. “What drives me nuts is when I don’t get the stuff in advance with enough time to understand and analyze [it]. And speak in plain English. Remember, most directors don’t have the same kind of background as you.”

Kanin-Lovers also says HR directors can benefit greatly from independent board members and their savvy. “It’s like the cheapest advice that a company can get,” she says.

Silva, who formerly served as chief HR officer at Linens ’n Things, says HR executives must understand the nuances of their business; you can’t help with strategy if you’re not up to speed. “At Linens ’n Things, when board members called me to ask an HR question, they would always ask me how the company was doing—not just HR. They expected me to know, and I did.”

Robert J. Grossman, a contributing editor of HR Magazine , is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.

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 Web Extras

 
SHRM articles:
Educating the Board
(HR Magazine)

HR's New Role in Executive Pay
(HR Magazine)

Press release:
Majority of Board Directors Feel Sarbanes-Oxley Regulations Should be Repealed or Overhauled
(Korn/Ferry)

Web sites:
National Association of Corporate Directors

The Corporate Library

Corporate board ratings:
GovernanceMetrics International

Survey:
2006 Corporate Board Survey
(Marshall School of Business, University of Southern California)

 

 

 

More HR Expertise Needed

Executive recruiters who staff corporate boards are looking for candidates with HR expertise, especially on compensation committees.

The reason: Board members are mandated by the Sarbanes-Oxley (SOX) Act to have independent expertise on the audit committee. And while HR expertise is not required by SOX for compensation committees and others that oversee HR issues, boards are trying to fill these committees with individuals who hold relevant expertise.

But HR professionals aren’t always tasked to fill these roles. Instead, CEOs and former CEOs serving on boards are often counted as HR experts—even if they aren’t, according to experts, including Ed Lawler, distinguished professor at the Marshall School of Business at the University of Southern California.

There may, however, be new opportunities arriving for HR professionals to serve on corporate boards. Changes are taking place that will limit the number of boards that CEOs and current directors can sit on.

As work expectations for board members increase, companies are restricting their CEOs from over-committing their time. Now 53 percent of companies limit the number of boards their CEOs can serve on, up from 23 percent in 2001, according to the 2006 Corporate Board Survey conducted by the University of Southern California and Heidrick & Struggles.

“All my boards have limited our CEO to one outside board assignment,” says Paula Cholmondeley, a full-time independent director who serves on five boards.

Similarly, companies are reining in outside directors. Forty percent control the number of boards they can serve on, up from just 3 percent in 2001.

This means there may be more opportunities for HR executives to serve on boards and provide that much-needed HR expertise. Cholmondeley observes that it’s “frustrating that boards are not yet a mixture of talent beyond the talent of a CEO. VPs of HR or others with expertise in compensation and talent development would be great assets. There are many organizations with thousands of employees that have no directors with actual HR backgrounds.”

—Robert J. Grossman

 

 

 

Life as a Board Director

As directors’ responsibilities have increased, so have their workloads. The average total hours spent on board- and committee-related duties in 2006 was 209.7, approximately 26 days, up from 190 hours in 2005, according to the National Association of Corporate Directors’ 2006 Public Governance Survey. Many directors are even more engaged. “I’m working significantly harder than I did as a board member five years ago,” says Paula Cholmondeley, a full-time independent director. “Before, I worked maybe 100 to 150 hours a year in each assignment; now it would be 300 hours.”

Those extra hours are paying off. Median annual compensation for directors of the 200 largest publicly traded U.S. companies surged 12 percent in 2006 to $204,000, marking the third year of double-digit growth in board pay, according to Pearl Meyer & Partners, a compensation consultancy in New York.

Overall, for companies in the Fortune 1000, according to a 2006 Korn/Ferry survey, annual compensation averaged $76,707, a 35 percent increase over compensation awarded in 2005. (Median pay for additional service on compensation committees, the committees usually staffed by the chief HR executive, was up nearly 18 percent to $6,000, while median pay for audit committee member service was up 9 percent to $10,900.)

For someone contemplating joining or continuing on a board, the specter of litigation initiated by regulators or shareholders is a sobering consideration. According to a Korn/Ferry survey, many are opting out. In 2002, the year the Sarbanes-Oxley Act took effect, 13 percent of those invited to serve on boards declined. Two years later, the percentage had more than doubled to 29 percent. In 2005, it doubled again; 59 percent said they had turned down a board position.

The legal threat may be overly hyped. If directors are appropriately careful and diligent in their work and follow accepted processes in their deliberations, and if they’re sued, judges will defer to their business judgment. They’re further protected from legal exposure because companies indemnify them and insurance policies cover them in the case of lawsuits. According to a study by Michael Klausner, a Stanford law professor who specializes in corporate governance, out of hundreds of shareholder securities lawsuits filed since 1980, only 13 have resulted in directors having to pay out-of-pocket costs for settlement or legal fees—and those 13 included Enron, WorldCom and Tyco.

But to board members, just being targeted legally is worrisome. Jill Kanin-Lovers, a member of three boards, recalls the reaction when news about Enron, WorldCom and Adelphia flooded in. Board members huddled to discuss liability and asked themselves, “ ‘Could I be held personally accountable for company wrongdoing or poor performance?’ ” she recalls. “Our legal counsel assured us if we were acting in good faith, we should be OK.”

Legal liability aside, it’s the reputation risk that scares would-be directors off. “With boards in the limelight, and directors being rated by independent watchdog groups like the Corporate Library or GovernanceMetrics International, poor ratings or bad publicity can wreck your career,” says Cholmondeley.

—Robert J. Grossman