Features of Human Capital Governance-

What we can learn from the research on Japanese and US companies -March 2024

BoardHR Initiative
World Intellectual Capital /Assets Initiative1

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Table of Contents
1 Executive Summary .......................................................................................... 3
1-1 Key Recommendations for Japanese Boards .......................................................... 3
1-2 Key Recommendations for North American Boards ................................................ 4

2 Introduction ..................................................................................................... 5
2-1 Background ......................................................................................................... 5
2-2 Purpose .............................................................................................................. 5
2-3 Methodology ....................................................................................................... 5

3 The Situation in Japan ....................................................................................... 6
3-1 The organizational context.................................................................................... 6
3-2 Interview results and insights ............................................................................... 6
3-3 Notable comments from interviews ...................................................................... 7

4 The Situation in North America ........................................................................ 10
4-1 The organizational context................................................................................... 10
4-2 Interview results and insights .............................................................................. 10
4-3 Notable comments from interviews ..................................................................... 11

5 Quantitative Results of the Questionnaire ........................................................ 12
5-1 Survey overview.................................................................................................. 12
5-2 Lessons from the results ..................................................................................... 12

6 The Important Differences between Japan and North America .......................... 14
7 Summary & Recommendations ....................................................................... 16
7-1 Best practices & issues observed in Japan ............................................................ 17
7-2 Key Recommendations for Japanese Boards ......................................................... 18
7-3 Key Recommendations for North America Boards ................................................. 19

8 Appendices .................................................................................................... 20
Appendix 1: Human Capital Topics of Interest to the Board ......................................... 20
Appendix 2: Investor Critiques of Alphabet HR ........................................................... 21
Appendix 3: Are Boards Ready for AI? ........................................................................ 22
Appendix 4: Role of the board in “pivotal roles” .......................................................... 23
Appendix 5: Redefining the Role of HR Leaders .......................................................... 24

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1 Executive Summary
Our study showed that boards in both Japan and North America are taking an increased interestin human capital. This is appropriate, human capital is one of the main drivers of organizational
value.
While Boards in Japan and North America have similar goals: leverage human capital
opportunity and mitigate human capital risk, the context is quite different. The following two
findings from our study illustrate the differences:••

Average time head of HR has been in their current organizationo Japan: 30+ yearso North America: 4 years
Degree of specialization the head of HR has in the field of HR
o Japan: limited specialist expertise, heads of HR have typically worked in many
functions in their career.
o North America: high specialist expertise, heads of HR have typically worked for
decades in HR roles.

More generally, board governance of HR in North America is quite mature. Practices acrossdifferent organizations are similar. The primary focus is on executive compensation with asecondary focus on succession.
On the other hand, the style of human capital governance in Japan is less standardized than in
North America. This suggests that there is more room in Japan than in North America to explore
a style of human capital governance that meets the needs of individual companies. However,since there is no standard approach, there is a risk of poor governance. The above-mentioned
differences in the backgrounds of human resources leaders between Japanese and Americancompanies suggest that the board of directors plays an extremely important role in humancapital management in Japanese companies.
In both geographies, HR leaders value the input of the board, especially when they raise
thoughtful questions and share insights based on their experiences with other organizations.
However, there was also some frustration with Board members who appeared to lack theexpertise to add value and may even create an unwanted distraction by asking scattered orirrelevant questions.

1-1 Key Recommendations for Japanese Boards•

Define the roles. In Japan, organizations need to define the roles of the board of
directors and human resources leaders in appropriately supervising and supporting
human capital management. Although the level of appropriate intervention andsupervision by the board in human capital governance differs from company tocompany, we must reaffirm the importance of "discussion" as well as"approval/decision" in the board’s role. Additionally, top management needs to discuss
how HR leaders should be creating corporate value through human capital, drawing on
ideas that go beyond traditional HR functions. (Please refer to Appendix 5.)

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Create the right platform for oversight. Organize an appropriate platform for having
strategic human capital discussions at the board level by establishing a board
committee whose members have expertise relevant to human capital.

•

Set aside sufficient time. Set the agenda for the HR committee and realistically assess
the time required for a value-added discussion. Additionally, ensure there is time forboard members to visit locations, customers, and suppliers as part of their preparation
for the human capital discussions.

•

Make more sophisticated use of HR analytics. The board should ask for a variety of HR
information, not limiting themselves to standard metrics such as turnover andengagement. HR analytics should provide insight into human capital matters that are
key to value creation, risk mitigation, and business success.

1-2 Key Recommendations for North American Boards•

Have more HR committee meetings. Consider having more HR Committee meetings
so that there is time to adequately cover topics beyond executive compensation andsuccession.

•

Be clear about where the HR Committee is likely to be able to add value. In
particular, the committee can work on ensuring HR strategy aligns with the businessstrategy, identifying human capital risk, ensuring there isn’t an unduly short-term focus,
and ensuring that the nature of financial reporting doesn’t lead the organization toundervalue human capital.

•

Make more sophisticated use of HR analytics. Take advantage of the organization’s
people analytics capability to get evidence-based answers to strategic questions (e.g.
which jobs are pivotal, see Appendix 4).

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2 Introduction
2-1 Background
Human capital is one of the key drivers of an organization’s value.
••

Management should understand how the company's human capital connects to value
creation, and create mechanisms to facilitate more effective use of human capital toenhance value creation and motivate employees.1
The board should play a role in ensuring the organization is making wise strategic
decisions about human capital and mitigating human capital risk.

Are boards doing this in Japan or North America? How could they do it better?

2-2 Purpose
The purpose of this study is to gain insight into what is currently happening with respect toboard oversight of human capital in Japan and North America. Following those comparative
insights, we suggest what boards and HR leaders might do differently in both Japan and North
America.

2-3 Methodology
This study focused primarily on qualitative insights based on interviews with HR leaders andboard members in Japan and North America. The interviews were supplemented with several
Likert-scale questions to gather a small amount of quantitative data.
In Japan, we interviewed six HR function leaders in the food, retailing, non-iron metal, finance,
heavy machinery, and fiber product sectors. Most of the companies had between 10-40k
employees. (One was smaller with fewer than 2k employees.)
In North America, we interviewed four HR function leaders and two board members in thefinance, health care, car rental, and distribution sectors. Most of the companies had between
1k and 25k employees. (One was smaller with fewer than 1k employees).

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3 The Situation in Japan
3-1 The organizational context
The relationship between the board and HR will be affected by the organization's structure.
There were some important differences among the companies interviewed; the various
structures are shown in the figure below. The most common structure has the head of HR
reporting to the President but is not on the board (pattern 1); in one case the head of HR is on
the board (pattern 2), in another case the head of HR is further down in the organization anddoes not report directly to the President (pattern 3), and there was one unusual structure(pattern 1’) where HR strategy was managed by the head of group strategy rather than the headof HR.
Irrespective of the structure, there needs to be good communication between HR and the Boardon human capital strategy and risks; if the head of HR is several layers removed from the board
then it’s up to the board to ensure those layers are not barriers to a good flow ofcommunication.
Figure 1: Organizational patterns in Japan

3-2 Interview results and insights
Key Finding: There is no consistent approach to human capital governance
There is no universally accepted best practice for board oversight of human capital in Japaneseorganizations. Some companies engage in strategic discussions at the board level, addressing
issues such as the connection between long-term company growth and HR strategies, theinvestment in and return on human capital, and shifts in company culture. However, othercompanies have yet to bring these strategic matters to the board level.

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HR leaders in these organizations have multiple points of contact with board members beyond
formal Board of Directors (BOD) meetings. These include HR strategy committees,compensation and nomination committees, sustainability committees, pre-reporting sessions
prior to official BOD meetings, BOD member participation in executive officer meetings, and offsite meetings. On average, HR leaders interact with BOD members over eight times annually.
Our observations indicate a positive correlation: the more frequent the contact between HR
leaders and BOD members, the more strategic discussions about human capital occur at theboard level.

Takeaway: The absence of a standardized approach to human capital governance presents asignificant opportunity. Leaders have the freedom to tailor governance processes to align with
their organizational culture and the importance of human capital in driving organizational value.
Crucial decisions include determining the frequency of meetings, who sets the agenda, andtypical agenda items.
Key Finding: The lack of good governance troubles some heads of HR
Several HR leaders have expressed difficulty in discussing serious HR challenges with their
Boards of Directors, citing the lack of established platforms for such strategic conversations.
Some of these leaders face critical issues in acquiring the top talent necessary for executing
company strategies. They are eager to engage with their boards on topics such as recruiting
strategies, employee compensation policies, and the promotion of gender diversity in roleassignments.
Takeaway: It is essential for boards to proactively inquire about strategic HR issues that needaddressing. In cases where the board does not initiate these discussions, it falls upon the headof HR to devise an approach for bringing these matters to the board's attention in a manner thataligns with the board's interests and time constraints.

Key Finding: Some boards take an active role in guiding communication about humancapital to investors
Some company boards guide decisions about reporting on human capital to investors (such asa unique definition of human capital investment and return, and a unique analysis of theengagement survey). In other companies, boards are not much involved in human capital
reporting.
Takeaway: While it’s not essential that the Board directly comment on how to communicate
about human capital to investors, they should at least be fully aligned with the approachinvestor relations is taking.

3-3 Notable comments from interviews
There were a number of specific comments from interviewees that shed light on how the board
was working with HR on human capital issues.
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Comments about the agenda
The engagement survey is the starting point for the BOD discussion; “In the annual BOD agenda,
we have a report on engagement survey results, and from there overall HR strategy is set.”
The nomination committee covers broad human capital issues; “In the Nomination committee
meeting, the D&I objectives and targets are discussed. Succession planning is also discussed.”
Requests and questions from the BOD are not organized; “Requests and questions from BOD
members range from small details to big topics”
There are issues about the lack of clarity in the BOD’s viewpoint on human capital; “The BOD
members' views are not organized at all, each individual has different interests in human capital.
So, we need to prepare an appropriate platform for an organized discussion”
HR leaders struggle in reporting to BOD members; “Since BOD members don’t necessarily have
HR experiences, I sometimes wonder how detailed reports should be.”Takeaway: Much like North America, engagement, diversity, talent development, andsuccession will likely be key agenda items. However, there will likely be some unique agenda
items for Japanese companies such as the linkage between business strategy and HR strategy,
and organizational culture change. Because many traditional major Japanese companies still
keep a seniority-based HR system, this kind of issue should not be discussed just as a changeof HR practices but should be discussed as a long-term company-wide transformation, andshould be a key agenda item at the board level. Note that there may be times when the board
asks poor (e.g. unnecessarily detailed) questions, so not all board interest in human capital ishelpful. This suggests HR has a role in guiding board members on where they should focus theirattention.

The standard BOD meetings are not enough to address all the important issues
Interviewees mentioned their organization has created opportunities for discussions besides
the official BOD meetings; “The HR strategy committee was established for deep discussions.”“Broad issues about human capital (such as HR strategy) are discussed in the sustainability
committee.” “Pre-reporting to the outside BOD members before the official BOD meeting is agood place for open discussion, rather than in the official BOD meetings.”
Takeaway: Board meetings are often taken up with reporting and approvals rather than freeflowing discussions. Since these discussions are valuable, the board needs to create otheropportunities for deeper conversations.

The Board adds value by providing insights from outside the company
HR leaders welcome outside viewpoints from the BOD; “Outside BOD members pointed out thecommunication gap between headquarters and production sites, It’s valuable for us to hear this,since internal members are unaware of the issue.” “The BOD is concerned about the shortage ofhuman capital investment in Japan, and they see our company from this viewpoint.” “The BOD
thinks in terms of human capital investment and return, rather than in terms of the HR function
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Takeaway: Board members should recognize the value they can provide to HR simply by sharing
their insights based on their experiences with other organizations; what may be obvious to aboard member may not be obvious to someone within the company.

The board has an interest in high-level HR topics, HR would like to see additional topics
discussed
There is a need for a platform for HR-related strategic discussion; “We (top management) needto have deep discussions about the company’s long-term direction and HR strategy at the board
level, but we have not yet prepared the discussion platform (such as creating an appropriate
agenda). For such a strategic discussion, we may have to form a focus team that consists of a
selected small number of executives.”
HR leaders observe that the BOD is interested in a variety of high-level topics; “Whether current
HR practices align with the long-term company growth strategy” “The BOD’s consider issues interms of human capital investment and return”, “The BOD is concerned about the linkage
between business strategy and HR strategy”, “The BOD asks how we should change company
culture”
There are some topics that HR leaders would like the BOD to be interested in; “ I would like tohave BOD much more interest in issues such as recruiting and employee pay policy.” “From an
executive perspective, one issue I want to share with the board is the need to be more ambitious
in utilizing women, beyond our medium-term goals.".”Takeaway: HR leaders should have an opportunity to raise issues where they believe board
input would be valuable.

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4 The Situation in North America
4-1 The organizational context
Whereas we saw a variety of organizational structures in Japan, in North America ourinterviewees all had a common structure. The head of HR, usually called the CHRO, reported to
the CEO and was not on the board. Even though the CHRO was not on the board, they had asignificant amount of contact with the board and in particular with the HR committee of theboard.

4-2 Interview results and insights
Key Finding: The is consistency in the approach to governance
Overall there was a great deal of consistency between all the organizations we spoke to. The
approach to governance of human capital is well-established in North America.

Takeaway: In North America, the question isn’t so much how to approach the Board’s role inoverseeing human capital, it’s more a matter of ensuring the people on the HR committee are
qualified and disciplined in handling their responsibilities, in other words, a focus on execution,
not design.

Key Finding: Boards have limited time and executive compensation issues take up much ofthat time
Most organizations have an HR Committee of the Board but in a few cases, it is combined with
the Governance Committee. It typically meets 4 times a year for 2-3 hours in addition to the 4
full board meetings. Additional meetings are held if required. An executive compensation
consultant we spoke to estimates that 65% of the HR committee’s time is spent on mattersrelating to compensation, limiting the time available to consider other topics.
Unlike Japan, none of the companies scored 1, Strongly disagree, in Q2: The Board is mainly
concerned about executive compensation and succession, not broader human capital issues.
The average score was 3.7 (between Neutral and Agree). This aligns with the conversations thatindicated that executive compensation and succession planning weigh heavily on the minds of
US/Canadian boards.
There is flexibility in how often the HR Committee meets and what it focuses on. The HR
Committee will have special meetings in response to significant events such as a major
restructuring
Takeaway: If Boards want to take a broader role in providing oversight of human capital and its
role in driving organizational value, then they will have to have more meetings since there simply
isn’t time to take on much more in the current set of meetings.

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Key Finding: Boards tend to avoid digging too deeply into HR matters
HR Committees usually only look at basic HR metrics. Most HR committees keep an eye on
engagement and turnover metrics but do not look more deeply than that and typically do not
ask the people analytics team for special research.
The Board wants an overview of HR, not too much detail. Usually, the CHRO prepares asummary of key HR initiatives that is presented to the HR Committee and/or full Board.
Takeaway: There may be a missed opportunity for the Board to dig deeper, and help uncoverstrategic opportunities and risks.

4-3 Notable comments from interviews
Insight: Boards need to make an effort to ensure they are getting good insights about humancapital, they cannot take this for granted.
●

Boards need to trust leadership is being open: An HR leader admitted, “I can use themetrics to tell any story I want; the board depends on me telling it straight.”. A board
member lamented, “We only know what management decides to tell us, so they need to
be open about the business situation.”●

Good board members do their own research: “Board members visit customers,
partners, and branches…and are very curious when they do.”●Hotlines provide a way for employees to get information directly to the board: “We
pay attention to hotline complaints that present a risk of litigation, a failure to comply
with regulations or reputation risk.” The hotline provides an important source of
information to the board.

●

In the US, leaders are reluctant to share any more detail than they are required to.
“Reporting human capital information to investors is a risk to the company.”

Insight: Boards can theoretically add value by having a long-term focus but in practice, they
focus on tangible short-term issues●

The HR Committee has a short-term focus: “The HR committee looks at what HRneeds to do in 3, 6, and 12 months. There is not much point in looking beyond that
because the world changes so quickly.”

Insight: HR leaders have a role to play in adapting to the styles and strengths of their board
members●

Different boards have different styles. “Some boards are much more aggressive thanothers in influencing how the business is running. The CHRO needs to understand thepersonality of the board.”●

Some board members are very effective, but not all. “Some board members ask
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5 Quantitative Results of the Questionnaire
5-1 Survey overview
To get a different angle on what interviewees felt about board-HR relations we asked a series ofLikert-scale questions to be answered on the familiar Strongly Disagree…Strongly Agree
spectrum. While the number of people interviewed was small, the results provided some hints
on differences between Japan and North America.
The table below highlights the results; Strongly Disagree was coded as “1” and Strongly Agree as“5”, so for question 1 “The Board has taken an increased interest in human capital in the last 5
years”, the result of 4.5 for Japan and 4.3 for North America reveals that in both casesinterviewees agree or strongly agree that this is the case.
Table 1: Quantitative results

5-2 Lessons from the results•••

Overall findings from Japan and North America indicate an increased interest in humancapital among boards. Board members offer insights into HR issues and processes,
drawing on their experiences from other companies. Moreover, boards play a role indetermining what human capital information is reported to investors.
In Japan, HR leaders perceive some board members as having significant expertise in
HR. This contrasts with the situation in North America. We speculate that the varying
levels of HR professionalism in Japan and North America influence this disparity.
While Japanese boards are focused on broader aspects of human capital, boards inNorth America primarily concentrate on executive compensation and succession
planning. We surmise that the differing CEO pay ratios between Japan and North
America might explain this variance.
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HR leaders in North America observe that their boards show interest in meeting withhigh-potential mid-level managers. This differs from the situation in Japan. We
hypothesize that this difference may be due to the varying tenure of HR leaders in Japan
and North America.

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6 The Important Differences between Japan and North America
There are many important differences between Japanese and North American organizations
that affect board-HR relations. We summarize some of the issues to be considered in the figure
below:
Figure 2: Differences between Japanese and North American organizations•

Average CEO Pay Ratios are entirely different between Japan and the US
According to Mercer Japan, while the CEO Pay Ratio in the US is 100-400, it in Japan is20-30 https://www.mercer.com/ja-jp/insights/consultant-column/888/. Furthermore,most of the pay of US CEOs is in the form of a variety of short and long-term incentives
that need to be carefully designed. The size and complexity of US CEO pay schemes
mean that the HR committees of US boards need to devote the majority of their time to
executive pay issues.

•

C-suite leaders in North America are more likely to leave for another company thanin Japan.
In the US, it’s common for C-suite leaders to have a short tenure, which means NA
boards need to pay extra attention to succession planning. (Please see the differentialof the score between Japan and NA in Q4 of the questionnaire.)•

NA boards generally strongly adhere to the principle of “oversee but don’t meddle
in management”.
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In Japan, there is an opportunity to be more flexible in finding the appropriate level ofintervention by boards.
●

Our dataset, while small, suggests the NA HR leaders have had far, far less time inthe company on average than Japanese HR leaders.
This means the NA HR leaders likely won’t have the same depth of understanding of
their organization.

●

NA HR leaders are HR specialists, while Japan HR leaders are generalists.
This reflects the relationship between boards and HR leaders from the viewpoint of
which has deeper professionalism. (Please see the differential of the score between JP
and NA in Q9 of the questionnaire. Japanese HR leaders respect the HR-related
experiences outside the company of the board members.)

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7 Summary & Recommendations
Boards in Japan and North America have the same goal with respect to human capital: create
value and mitigate risk. However, the organizational context is sufficiently different such that wesee substantial differences in how boards work with HR. Those differences are summarized in
the table below:
Comparison of HR Governance in Japan and North America
Topic
GovernanceStyle

Findings

Implication✔ Japanese organizations
have various
approaches to humancapital governance✔ The US –approach tohuman capital
governance is fairly
standard

CEO Pay Ratio

HR Leaders
Tenure✔ The Japan – CEO Pay
Ratio is small✔ Japanese boards have time to focus on a
range of HR issues.

✔ The US – CEO Pay Ratio
is high and pay is largely
based on incentives✔ US boards have to spend a lot of time
determining CEO compensation.

✔ Japan –HR leaders havespent a long time intheir company✔ Japanese HR leaders know the company
very well but do not have otherperspectives. The board should
complement the HR leader by providing
outside views.

✔ US – HR leaders havespent a short time intheir company

Professionalismof HR✔ Japanese boards have the opportunity totune the governance approach to theirown situation, but if they fail to do so thenthere could be mistakes and missed
opportunities.

✔ Japan – HR leaders arebusiness generalists

16✔ US CHROs have an outside perspective
because they have typically worked inseveral organizations but may not know
the company as deeply as Japaneseleaders. They may import ideas thatworked elsewhere but are not appropriate
in the current organization. Boards shouldbe alert to a CHRO who over-relies onwhat worked elsewhere.
✔ Japanese boards should support HR
leaders by sharing HR expertise.

BoardHR Initiative✔ US – HR leaders are HR
specialists✔ US boards should support HR leaders by
ensuring HR activities are aligned with thebusiness priorities.

While human capital governance in North America is more mature, which can be an advantage,
there is less flexibility than in Japan. In particular, the need to devote so much time to executive
compensation in North America limits the time spent on other human capital issues. It’s also
the case that boards in North America are generally careful to avoid “meddling” inmanagement. This can be a good thing, however, there may be times when more active board
involvement would help overcome short-term thinking. Hence, in Japan, there is an opportunity
for the board to have a greater impact on human capital management, which is a good thing if it
is handled well.
Japanese boards have a potential advantage over North American ones in that their HR leaders
likely have spent decades in the organization and know it inside out. One of the disadvantagesof Japanese companies is that HR leaders who have been in their organizations for a long timeoften play a coordinating role within the organization, making it difficult to make changes on
their own. In situations where fundamental organizational change is required, it may benecessary for the board of directors to invite a transformational HR leader from outside.
Secondly, in Japan HR leaders are not necessarily specialists in the HR field. Boards cannot rely
on HR leaders to have years of experience in HR. The Japanese HR leaders targeted in thisresearch hope that board members will offer different perspectives based on their experience inthe HR field and that they will participate in discussions about whether human capital strategies
are on track.
Based on the above considerations, it may be safe to assume that the board of directors has anopportunity to play a greater role in human capital management in Japanese companies than in
North American companies.

7-1 Best practices & issues observed in JapanThe table below summarizes some of the best practices observed in Japan, along with somecommon issues. At a high level, the best practices can be summarized as a highly engaged
board that spends plenty of time discussing human capital management. At a high level, theissues relate to boards not having those discussions, or not having an effective collaboration
with HR.
Best Practice

Issues✔ In some Japanese companies, HR leaders
felt that their board of directors was
effectively governing human capital froma broad perspective. These companies
had multiple platforms for strategic
discussions between HR leaders and17✔ Some HR leaders feel thatstrategic discussion at theboard level is necessary, butthey have no appropriate
opportunity for such a
discussion. (HR leaders feelthe full Board meeting isn’t aBoardHR Initiative

board members. Some specific practices
included:◆ Annual agenda setting for the board of
directors and discussions before andafter◆ An HR strategy committee as an advisorycommittee to the board of directors◆ Retreats involving board members andexecutive officers◆ Collaboration between HR department
leaders and external HR experts◆ Disclosure of human capital information
at the sustainability committee◆ Discussions on D&I in the nominationcommittee.
✔ Some companies create opportunities foroutside board members to meet highpotential middle managers.

good fit for such strategic
discussions).
✔ Some HR leaders mentioned
serious HR risks (especially inthe area of recruiting andemployee pay design), but theycannot share such risks withthe board.
✔ Through the interviews, itappeared that some HR
leaders were trapped in themindset that the main role ofthe board is to approve rather
than discuss.
✔ Some HR leaders struggledwith deciding how muchdetailed HR-related data wasnecessary to report to theboard, while others werechallenged by the wide rangeof data requests from theboard.

7-2 Key Recommendations for Japanese Boards•

Define the roles. In Japan, organizations need to define the roles of the board of
directors and human resources leaders in appropriately supervising and supporting
human capital management. Although the level of appropriate intervention andsupervision by the board in human capital governance differs from company tocompany, we must reaffirm the importance of "discussion" as well as"approval/decision" in the board’s role. Additionally, top management needs to discuss
how HR leaders should be creating corporate value through human capital, drawing on
ideas that go beyond traditional HR functions. (Please refer to Appendix 5.)•

Create the right platform for oversight. Organize an appropriate platform for having
strategic human capital discussions at the board level by establishing a board
committee whose members have expertise relevant to human capital.

•

Set aside sufficient time. Set the agenda for the HR committee and realistically assess
the time required for a value-added discussion. Additionally, ensure there is time for18

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board members to visit locations, customers, and suppliers as part of their preparation
for the human capital discussions.
•

Make more sophisticated use of HR analytics. The board should ask for a variety of HR
information, not limiting themselves to standard metrics such as turnover andengagement. HR analytics should provide insight into human capital matters that are
key to value creation, risk mitigation, and business success.

7-3 Key Recommendations for North America Boards•

Have more HR committee meetings. Consider having more HR Committee meetings
so that there is time to adequately cover topics beyond executive compensation andsuccession.

•

Be clear about where the HR Committee is likely to be able to add value. In
particular, the committee can work on ensuring HR strategy aligns with the businessstrategy, identifying human capital risk, ensuring there isn’t an unduly short-term focus,
and ensuring that the nature of financial reporting doesn’t lead the organization toundervalue human capital.

•

Make more sophisticated use of HR analytics. Take advantage of the organization’s
people analytics capability to get evidence-based answers to strategic questions (e.g.
which jobs are pivotal, see Appendix 4).

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8 Appendices
Appendix 1: Human Capital Topics of Interest to the Board
Observed from interviews● Executive compensation● Succession planning● Core HR metrics: e.g. engagement, turnover (incl. disclosure of the metrics)● Human capital investment and return● Alignment of HR strategy and business strategy● Organization culture change
Additionally Recommended by BI● Discussion on any significant human capital risks● Review of employee complaints, ‘whistleblower’ communications● People analytics that provide insight on specific issues of concern to the board● Review of ‘pivotal role’ and ‘pivotal talent’ essential for success, not just top jobs
(see Appendix 4)● Overall compensation strategy (see Appendix 2)● Discussion on how AI impacts human capital management (see Appendix 3)● Restructuring of the role of HR leaders (please refer to Appendix 5)

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Appendix 2: Investor Critiques of Alphabet HR
What happened
A major investor, TCI Fund Management, wrote a strongly worded public letter to the CEO ofAlphabet criticizing their overall compensation policy, saying it was far too high.
Why this is interesting
It’s unusual that the investor felt they needed to go public to make their point.
It’s unusual to address an HR issue like average compensation, not just executive
compensation.
What does this tell us about the Board?
HR decisions have a material impact on results. It’s not enough for the board to focus on
executive compensation and succession. TCI Fund’s letter chastised the CEO; however, it
should also be seen as a critique of the Board for not keeping an eye on overall compensationlevels.
Source:https://www.tcifund.com/files/corporateengageement/alphabet/15th%20November%202022.p
df

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Appendix 3: Are Boards Ready for AI?
When we asked CHROs to react to the statement: “The Board has shown concern about the
impact of AI on employees” the average answer in the US was between neutral and disagree(2.6).
This is understandable given how unexpected the quick advances in AI have been. Nonethelessgiven the potentially disruptive impact AI could have on the organization and its employees, AI
should be on the board’s agenda.
AI experts are worried that advances in AI in 2024 may be even more revolutionary than what we
saw in 2023; that concern should be reflected at the board level.

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Appendix 4: Role of the board in “pivotal roles”
Pivotal roles are critical jobs that may be overlooked because their importance is not always
obvious. As such the Board can play a useful role in probing to ensure HR has identified theseroles and is acting accordingly. The Board may even have fresh insights on what roles are pivotal
based on their experience with other organizations. This activity, discussing pivotal roles, is agood example of how a Board can add value by focusing on human capital.
BackgroundThe definition of pivotal roles, from Dr John Boudreau, is “Roles where an increase in thequantity or quality of talent will have a significant impact on the execution of strategy.”
One example of where the quantity of talent was critical came from a telecoms company thatwas counting on the successful launch of a new product. However, each sale required a
relatively low-level technician to install the product. Without enough of these technicians, sales
could not be finalized. In this case, the easy-to-overlook low-level technicians were crucial tothe execution of the strategy.
An example of how critical the quality of talent is can be found at Apple. For their strategy theyneeded something other than good designers, they needed the best designers in the industry.
Having the best design gave a big advantage over the second-best design, and hence the best
designer was far more valuable than the really good, but second best, designer.
Understanding which roles are pivotal will affect who you hire, how much you pay, and how you
manage talent.

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Appendix 5: Redefining the Role of HR Leaders
If organizations change the role of the board in overseeing human capital, that will inevitably
have an impact on the role of HR leaders. One model of an enhanced role for HR can be found in
the book The CMO of People: Manage Employees Like Customers by Peter Navin (Chief People
Officer, US Olympic Committee) and David Creelman (CEO of Creelman Research and coauthor of this study on boards). The theme of the book is that there are useful parallels between
the Chief Marketing Officer (CMO) and the head of HR who can be seen as a kind of “CMO of
People”.
Here are four elements of the CMO of People model that may be relevant to HR leaders both inJapan and North America:•

Intensely close connection between the head of HR and other C-suite leaders. In
the CMO of People model the head of HR is very much a part of a core leadership team;
it’s not a support function that sits off to the side. In a case where the organization faceda financial crisis the CEO-CFO-Head of HR “linked arms” so that every decision about
strategy, finance, and people was aligned to get the company through the crisis quickly
and effectively. In less stressful times, the CMO said he met with the head of HR for atleast half a day per week—so it was a close collaboration, not two functions working on
their own.

•

A strategic view of HR. While HR has significant administrative and complianceresponsibilities; the conversation among C-suite and board members is not about
these, the conversation is about HR's strategic impact. One strategic concept takenfrom marketing is the “total lifetime value of an employee” (in marketing it is the “total
lifetime value of a customer”). Instead of seeing an employee as a cost, HR frames
employees as generating value over the course of their time with the organization; andHR’s role is to maximize that value over all the years.

•

An emphasis on data and analytics. Every important function comes to the C-suiteand board with data. HR needs to be able to do the same. Notably, marketing made thetransition from emphasizing opinion to emphasizing data. HR needs to make that sametransition.

•

The “End-to-End Employee Experience” as an organizing principle. Just as marketers
have developed the concept of the customer experience, so too HR needs to develop
the concept of the employee experience. The employee experience focuses on specific,
tangible events. For example, “What is it like for an employee on the first day of theirjob?” and “What is it like for the employee when they need to use a meeting room?” Thequestion is does the experience align with the company brand/culture and does it
enable productivity? The concept of employee experience takes HR from the level ofabstract concepts to specific areas where they can make improvements that ultimately
will increase the lifetime value of an employee.

There are different models for HR and the CMO of People is only one such model. However, thebroader point is clear: if the board is going to drive more value-creation through human capitalthen the role of the HR leader must be re-designed to support that.
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This research was conducted and reported by Ms. Kuniko Takahashi and Mr. David Creelman ofBoardHR Initiative with support by WICI (The world intellectual Capital/Assets Initiative).
About BoardHR Initiative and the authors, please refer to the following website;
https://www.boardhr-int.com/

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