The increasingly important role boards play in corporate governance should be a signal to functional experts, such as HR executives, to consider a board career.
Sylvia Chrominska, former Scotiabank global head of human resources, who sits on the board of the FP500 utility Emera, and Bonnie DuPont, former Enbridge group vice-president of corporate resources, who sits on the FP500 boards of Bird Construction, NavCanada and Viterra, are two excellent examples of HR professionals whose expertise has been sought by boards here in Canada recently.
Boards play an essential role in providing guidance and oversight. We have come a long way from the comment made by Irving Olds, then chairman of U.S. Steel, who quipped: “Directors are like parsley on fish — decorative but useless.”
A good example of the importance of boards and oversight can be drawn from the 2008 financial crisis. A 2009 study by the Organisation for Economic Co-operation and Development (OECD), Corporate Governance Lessons from the Financial Crisis, found that, among financial institutions, there were incentive systems that encouraged and rewarded high levels of risk.
In addition to structural problems at a firm level (such as unclear strategy, poor risk management and improper incentives), boards often failed in their personal responsibility for oversight.
Certainly, both among financial firms as well as non-financial companies, relevant information had not been made available to the board. As a result, decision-making did not properly address risk in the company.
However, in other instances, boards failed in spite of clear warnings that decisions by the firm posed a medium or even high risk to market confidence and, ultimately, to customers, found the OECD.
The statement that boards are a “retirement home for the great and the good” may be a cruel oversimplification but at Lehman Brothers — perhaps the most notorious casualty of the financial crisis in the United States — four of the 10-member board were over 75 and only one had knowledge of the financial sector, said the OECD.
“Behind the CEO of every Freddie Mac, Bear Stearns or Lehman Brothers who led their company down a path toward financial ruin, there was a board of directors that sat by silently and let it happen,” wrote John Schnatter, founder, chairman and CEO of Papa John’s, in a 2008 article in the Wall Street Journal.
All of this is to say that both the roles and purpose of boards is in a state of change, with a view that every part of a firm has to be prepared to tackle the emerging challenges of the global economy.
And the Canadian Board Diversity Council (CBDC) believes firms need to expand their traditional industry definition of diversity (which typically involves industry experience, management experience, functional area of expertise, education, geography and age) to include considerations such as ethnicity, gender and Aboriginal status.
Canada’s future competitiveness depends on ensuring more boards are comprised of directors who are the most qualified in a greatly expanded talent pool.
In Canada, that representation has been woefully low. Council research in 2012 found only 14.4 per cent of FP500 corporate directors were women. Based on self-reported results, we also found only 4.6 per cent of directors were visible minorities, 2.7 per cent were peoples with disabilities and 1.1 per cent were Aboriginal peoples. Those numbers reflect neither the demographic makeup of Canada nor — I would suspect — the customers and workforce of the companies in question.
At a policy level, there is hopeful progress in this area. In Canada, under Status of Women Minister Rona Ambrose, the federal government recently established an Advisory Council (the CBDC is an ex officio member) looking at “comply or explain” policies that have worked well in other jurisdictions, such as the United Kingdom and Australia.
The Ontario government similarly promised to work with the Ontario Securities Commission in 2013-14 to implement a “comply or explain” policy in the province.
Firms also have a direct responsibility for the healthy composition of their boards.
“Organizations are looking for more specific capabilities that will complement their existing board expertise, such as specific sector experience, functional expertise, committee leadership experience, gender or ethnic diversity, or all of the above,” said Odgers Berndston, a founding member of the CBDC, in a March 2012 publication of the Director Journal.
Time for HR to get on board
This is, therefore, a good time for both board candidates with specialized skills — such as HR executives — and firms to review opportunities for board appointments. The depth of knowledge in such important issues as executive compensation and pay for performance will continue to be an important focus of directors. Boards are now realizing HR professionals with this knowledge can add considerable value for shareholders in addressing these issues.
Unquestionably, the most important role of the board is to hire (and fire if necessary) the CEO. HR professionals bring their experience (and wisdom) in designing and implementing executive recruiting processes, compensation negotiations, diversity strategy, succession planning, termination and corporate culture.
As the recent experience of many large organizations shows, institutional investors in particular are demanding boards pay greater attention to many of these issues to address corporate performance and corporate social responsibility.
While the growing need for HR executives on boards tends to be an under-explored area of study in North America, an emerging trend in the United Kingdom appears to show that while having board members who have managed profit and loss is still important, boards are seizing an opportunity to broaden their experience base.
Among the 2012 appointments to the boards of FTSE350 companies in the U.K., the percentage of first-time board appointments of individuals with backgrounds in human resources, marketing and law was 11 per cent versus five per cent in 2007, according to executive search firm Korn/Ferry.
Multiple studies have shown the positive benefits diverse leadership and boards can have on a company’s bottom line. It is up to everyone — professionals, shareholders and firms — to change the composition of Canada’s boards so shareholders can benefit from the directors who are most qualified in a greatly expanded talent pool.
This is HR’s opportunity to seize.
Pamela Jeffery is founder of the Canadian Board Diversity Council which provides tools boards need to execute a diversity strategy and corporate governance training for individuals interested in board service. She can be reached at (416) 361-1475 ext. 224 or firstname.lastname@example.org.