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HR professionals are providing some much-needed expertise as members of boards of directors.
Bill McLaughlin had set a pretty ambitious goal for himself. As president and CEO of Select Comfort in Minneapolis, Minn., a bedding retailer with 1,800 employees and annual net sales of $336 million, McLaughlin needed to add a new board member.
But not just any business leader would do. McLaughlin wanted a seasoned businessperson who had a global perspective, was a knowledgeable strategist, was savvy in consumer markets and could understand a balance sheet.
He also wanted someone with whom the other board members—mostly CEOs from other companies—could feel comfortable, someone whose contributions they would value and whom they would welcome as a peer.
A tall order indeed—but there was more. With an outside financial expert already in the fold, McLaughlin—whose background is in sales and management—wanted an HR voice to round out his team. “We had a lot of CEOs and business leaders, but none really knew compensation,” he says. “And we knew that creative compensation policies are crucial to incenting our executives and improving overall retention.
“A lot of companies don’t appreciate how important HR can be,” McLaughlin adds, “but I’ve seen firsthand how it can make a difference. I’ve had the good fortune of working at Pepsico, where HR was very strong.”
After a careful search, the board at Select Comfort chose Mike Peel, senior vice president of HR and corporate services at General Mills. Peel assisted General Mills’ board and its compensation committee for 12 years, and brings a wide variety of business skills to the table.
“Select Comfort is growing 30 percent each year, and one of the great challenges is having sufficient human capital and leadership,” Peel says. “I’m able to provide a broad business perspective, and I have areas of expertise that add synergy,” such as compensation, succession planning and international business.
McLaughlin says Peel, who chairs Select Comfort’s Management Development/Compensation Committee, has had an immediate impact. “In people issues, we’ve become more analytical, more fact-based, in developing alternatives. Before, we were relying on consulting for our HR input; now we’re more participative and planful in our decision-making.” Peel’s antenna is attuned to things others miss, like when the board considered moving manufacturing offshore where labor is cheaper. “He helped us understand the advantages of staying local, that we have a real strategic advantage in our domestic workers’ dedication and participation in improvement,” McLaughlin says.
Peel is one of a growing list of elite HR executives proving their mettle in both corporate and nonprofit boardrooms. Along with contributing to overall board policy and strategy, these HR pros typically provide leadership on board committees responsible for compensation, succession planning, executive assessment, ethics and recruiting.
Perhaps more important, they serve as the vanguard, leading the way for others to follow as their boards learn firsthand just how much directors with comprehensive HR expertise add to corporate governance.
Governance Under Scrutiny
Since the spate of corporate scandals in the past few years, the roles and responsibilities of boards—and the selection of directors—have become major issues.
With board performance facing greater scrutiny, Congress and regulators have moved to make sure that boards are more accountable and independent. For example, the Sarbanes-Oxley Act, which applies to all publicly traded companies, requires audit committees to be completely independent and to have at least one financial expert.
And Wall Street is paying more attention too. Both the New York Stock Exchange and National Association of Securities Dealers recommend that a majority of board directors come from outside the company, and that nominating, audit and compensation committees be composed entirely of independent directors. The National Association of Corporate Directors (NACD), a Washington, D.C.-based membership association for boards, directors and their advisers, also suggests that compensation committees be staffed only by outside directors.
The push for outside directors underscores the increasing scrutiny placed on these positions, as well as the need for new kinds of individuals to fill these roles. At the same time, a debate is forming regarding the skill sets directors should possess: Should these individuals be generalists, or should they specialize in certain skill areas, such as HR?
Some academics—including Jeffrey Sonnenfeld, associate dean of the Yale School of Management—believe that specialists are unnecessary. “Boards don’t need HR specialists or other narrow experts,” says Sonnenfeld. “CEOs or other experienced generalists with big-picture expertise are sufficient.”
Indeed, roughly 60 percent of all directors in the Standard & Poor’s (S&P) 500 are current CEOs—and many of the remaining 40 percent are retired CEOs—according to Chris Plath, associate director of the Global Corporate Governance Research Center at The Conference Board, a nonprofit business research and educational organization in New York.
But consultants and headhunters—including those at Spencer Stuart and Heidrick & Struggles, two leading recruiters of board talent—are challenging the assumption that CEO-level generalists make the best directors. General knowledge and big-picture experience are not always enough, they suggest. Some directors should be experts as well, steeped in the particular business and in the two all-encompassing functions that are the lifeblood of all organizations: finance and human resources.
“It would be hugely helpful for a board to have a repository of experience and credibility on the HR issues that impact organizations in a massive way,” says Claudia Kelly, head of Spencer Stuart’s HR practice.
Why HR? Because strategically managing change, culture, ethics, compensation, succession and labor relations is essential, according to research from Heidrick & Struggles. So essential, in fact, that when the recruiting firm studied the differences between top-performing boards and also-rans, it found that the best—like those at Pepsico and GE—never lost sight of HR’s significance. Those boards:
CEOs and other generalists—unless they also have an HR background—can’t provide the strategic focus and oversight needed to give these critical tasks their due, says Hal Johnson, global managing partner of HR practice at Heidrick & Struggles in Denver.
Howard Knicely agrees. A director at Agilysys Inc. and former top HR executive at TRW, Knicely points out that boards have been criticized for numerous HR-related failings—including poor management of mergers, succession, ethics, values and governance—and that no other executive pool is better equipped to handle these challenges than HR professionals. “All of these issues play into the set of competencies that senior HR executives have had to deal with in their careers.”
But boards don’t always recognize that HR issues already play a prominent role in their activities, says Bruce Carswell, who until March served on the board for AT&T Latin America.
While on the board, Carswell was “constantly being asked questions on HR-related issues even though they [were] not identified as people issues,” he says. “On the typical board agenda, 50 percent of the issues have people implications. That being the case, someone with broad HR experience has much to offer. A financial person cannot answer the same questions I can.”
Strategic HR, similar to law or auditing, is not easily mastered by nonpractitioners, says Susan Bowick, who headed the HR function at Hewlett-Packard from 1997 until she retired last year. “The HR background gives you specific skill sets for managing change, organizational culture and global operations,” she says.
At Hewlett-Packard, Bowick worked through the massive merger with Compaq (she is credited with helping to blend the workforces of the two companies), tackled post-merger integration issues, led the succession process and helped with the orientation of CEO Carly Fiorina.
The expertise gap often shows most glaringly in compensation, observes Terry Shepherd, chairman and CEO of St. Jude Medical, a 6,000-employee global medical device manufacturer in St. Paul, Minn., with annual revenues of $1.5 billion. “Compensation is incredibly complicated and is more of a lightning rod than anything else a board encounters. That’s why someone on the committee has to know it in-depth.”
“For my fellow committee members who are not steeped in HR, comp is a little like Chinese,” agrees Wendy Yarno, chair of St. Jude’s Compensation Committee and executive vice president of worldwide marketing for Merck & Co. “My knowing how these things should and shouldn’t work is important. HR expertise on the committee is insurance against having things come back to bite you.”
Knicely’s compensation know-how also helps him play an important role in board discussions at Agilysys Co. “We’re evaluating performance of the CEO and senior officers to determine what compensation is appropriate,” he says. “With my background around incentive plans and long-term awards, I add lots of value.”
In addition to sitting on the compensation committee, Knicely chairs the nominating and governance committee, where he’s helping set up formal governance principles and establishing criteria for selecting and evaluating directors.
Adding value: Fuzzy Focus
At St. Jude Medical, Yarno often finds herself guiding the board toward discussions of HR issues her peers would prefer to avoid. “They’d rather deal with the numbers and areas that are more easily measurable, where there’s more clarity, only a certain number of options,” she says.
“But in HR it’s harder, like when you’re talking about how to transform an organization, how to manage emotions or ways to set up performance management systems. Ultimately, they’re all judgment calls.”
Boards gravitate away from the people side because it’s so difficult, agrees Michele Hunt, who has served on Hewitt Associates’ board for eight years and previously was the VP for people at Herman Miller Inc. “Most of the time, boards are focused on the traditional things—the financials, the plan, the forecast—not the people. But if you don’t drill down to see if the people are aligned, you’ll get in trouble. If your compensation gets out of whack, if you’re not doing succession planning, you’re looking for trouble.”
“Having an HR expert on the board makes a real contribution to the discussion that otherwise might not happen,” sums up Madelyn Jennings, chairman of the Executive Committee of the Freedom Forum, formerly senior VP of HR at Gannett Co., and a director at Personnel Decisions International, the Hanes Corp. and Harte-Hanks Communications.
Sometimes boards benefit from an HR executive’s sixth sense, an ability to pick up subtle indications of misalignment or discord others may miss. Bemis Co. director Barbara Johnson, who oversees HR as vice president and treasurer at Carleton College in Northfield, Minn., is an example.
Recently, observing the dynamics of board encounters with management, Johnson sensed an undercurrent of discontent and brought it to the attention of her colleagues. “My intense HR background and experience working with other managers made it obvious that something was going on with the staff that was impeding a smooth transition on the management team,” she says. Johnson raised the issue with other board members, and the CEO took action to resolve the problem.
James Evans, SPHR, now an independent consultant, recalls his contribution as an inside director at Laitram Corp. in New Orleans. “I was a barometer; when we were looking at restructuring or implementing a policy change, I was able to warn where we were about to step in it and where it wouldn’t be a big deal.”
Evans’ presence was a blessing for Laitram, says general counsel Barry LaCour. “If he hadn’t been there, we would have lacked an important perspective on the nature of the policy decisions we were making, how they could be implemented and received in the workforce.”
In LaCour’s view, having an HR professional on the board just makes sense. “If the company views people as their most valuable asset, as we do, shouldn’t a person with top responsibility for managing it have a seat at the table?”
While some organizations seem to agree, overall, change is happening very slowly. Julie Daum, who heads Spencer Stuart’s corporate practice, estimates that the percentage of HR executives on S&P 500 boards is “minuscule.” Still some, like Yvonne Jackson, senior vice president of corporate human resources at Pfizer and board chair at Spelman College in Atlanta, are flooded with offers. She estimates receiving 10 to 15 in the past year alone.
Many more HR executives are waiting in the wings or serving on nonprofits, itching for a chance to demonstrate their value. Spencer Stuart’s Kelly estimates there are 300 to 400 well-suited candidates. But even with governance changes that encourage boards to engage more outside directors, and sitting directors stepping down because of increased time constraints and liability exposure, changing the cast of characters is a ponderous process.
Daum estimates 400 total vacancies among the S&P 500 boards each year. When a position opens, board chairs and nominating committees look for a combination of qualities including top-level management and functional experience, reputation, gender, and racial diversity. Given all the needs, adding HR expertise may not emerge as a priority when there is only one seat to fill.
There are more opportunities when new boards are created, either from startups, spin-offs or after Chapter 11 bankruptcies.
“When we’ve recruited HR people for boards, it’s almost always been where there’s a new board, with seven to nine positions to fill,” Daum says. “If you’re working with a board with only one opening, HR doesn’t make the cut.”
Considering everything known about the benefits these executives add, the mystery remains, why so few? “It’s unfortunate that more board chairmen haven’t put two and two together and figured that out,” Jennings says.
Instead, many are resisting, trapped by stereotypes. Recently, when a client was looking for someone for its compensation committee, Daum hit a roadblock when she recommended HR candidates. “It’s a prejudice; they still can’t get comfortable with it,” she says. “It’s not that they meet them and decide they’re not right; they just decide not to go in that direction. Instead, they choose general managers who have a reputation of being facile. We all say people are the most important asset, but it hasn’t been treated so in the boardroom.”
Attuned to People
Brown tapped Fred Foulkes, professor of organizational behavior and director of the HR Policy Institute at Boston University. Now, after six years, Brown says Foulkes’ HR specialization and general knowledge have helped the board keep on course.
“He brings an integrated perspective that ensures the finance types never lose sight of the importance of maintaining a great culture,” says Brown.
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