Putting people and culture at the heart of corporate governance

When I returned to the world of HR after two years in the non-HR wilderness, many of my former contacts asked me what had changed about the profession in my time away. My answer: materially not that much, but what had shifted hugely was the context.

External factors like new regulation around reporting (see gender pay gap and pay ratios), the #metoo movement, and increasing noise and interest around organisational cultures put people workplace issues front and centre of the national debate. This provides a very real opportunity for the profession to step up and make a positive difference at the highest levels – what a time to be leading in the people profession.

It is against this backdrop that the CIPD recently convened another CHRO meeting on corporate governance, in partnership with the Financial Reporting Council, the corporate governance regulator. (We also held an HR leader meeting about this topic in Edinburgh in September.) Bringing together a group of CHROs from a range of sectors, from financial services to engineering, travel to media, the aim was to discuss the impact of recent changes to the Corporate Governance Code, which requires PLCs to report on issues like employee voice and culture, and the opportunity for HRDs to take more of a lead on governance.

Here are some of the key areas to come out of the discussion:

  • Many HR leaders are trying to innovate, with more people- and culture-focused metrics used in tandem with financial and sustainability ones for setting executive pay packets, for example. The potential value of doing so is clear, in raising people, culture and sustainability issues higher up the agenda and thinking beyond often short-term financial metrics. However, those HR leaders in PLCs found the broader governance system in which they are working incompatible with this approach. Even if ethical or ESG (Environmental, Social and Governance) investment houses and regulators like the FRC talk about wanting to move to a longer term and more principles-led approach, ISS (Institutional Shareholder Services, a proxy advisory firm) rejects it. This forces companies into a ‘tick box’ approach, as they need to comply to move forward.
  • One organisation had collapsed its RemCo and NomCo into a broader people and culture committee, a project led by the CPO with support from a NED. This committee discusses all people issues, from succession to talent and skills planning to reward. It is complemented by a ‘shadow’ executive committee, with key executive sponsors (including the CPO) but with the rest of positions filled by colleagues from throughout the business. This committee debates key strategic people and culture issues and has been a valuable sounding board, said the CPO. As above, the CHROs from listed organisations felt the context in which they work would make emulating such an approach all-but-impossible without wider systemic change. There were  questions as to the selection process, skills requirements and support offered to workers such ‘shadow committees’, given the potentially strategic and sensitive nature of the discussions. This is a common critique of the ‘employee on boards’ concept.
  • Culture can be challenging to define, but many around the table acknowledged it is all too-easy to destroy. Leaders often welcome a focus on culture in good financial times, but when your share price is underperforming, it slips down the agenda. HR needs to be alive to the business context, yet also willing to challenge where appropriate. Transparency is also increasingly critical when it comes to assessing culture: HR leaders had clearly built cultural markers into leadership assessment criteria and one organisation has established an ethics committee which includes ‘blue collar’ workers and project directors, and which publishes the calls made to its ethics hotline (once anonymised) to help hold it to account. It was felt that increasing visibility of the content of ethical issues was seen to be an important driver of trust in leadership, and promoted action for the benefit of workers.
  • To report on employee voice, most organisations in the room where opting to have a NED responsible for voice, and the HR leaders welcomed board members ‘walking the floor’ – although they acknowledged this is more natural for some than others. There is the potential for some emergent tension in this space, with a lack of clarity over where accountability lies for voice and culture – the lines between exec and non-exec responsibilities can blur
  • The relationship between the HRD and the chair is incredibly important – they will often need to work closely on CEO succession, for instance –  but can bring inherent tensions if the CHRO needs to go around the CEO on cultural issues, or if the chair and CEO are not in agreement. The CHRO needs a dotted line into the chair, and has to be a skilled influencer and political operator to be able to work in this way.
  • Increasing interest around people and culture governance provides a huge opportunity for HR to influence at the most senior level. However executive representation at board level tends to be the CEO and CFO only. Do we, as one CHRO suggested, need to “break” that duopoly at the top, with the HR lead aiming for a seat on the board. Or, as others agreed, is it more about professionalising HR and enhancing the CHRO’s ability to influence more effectively, wielding soft power.

In a 90-minute conversation, we barely scratched the surface of this complex and timely topic. It’s something we will be continuing to discuss, aiming to create change in how organisations are assessed and valued.

Next steps include more CHRO roundtables and conversations with the FRC. The CIPD will publish a whitepaper on this topic next spring. To express interest in getting involved in this agenda, email Katie Jacobs (k.jacobs@cipd.co.uk).

Katie Jacobs is senior stakeholder at the CIPD and a former business and HR journalist.

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