Talent on the agenda by Korn Ferry

Talent on the agenda The perspectives of a CFO As more talent concerns rise to the board level, CEOs and CHROs master class must be prepared to deliver strategic thinking on HR by Michael O’Callaghan and Chris Campbell

By Nels Olson and Kim Shanahan

August 2012 The realization that talent shortfalls can constrain growth, impede successful mergers, or derail a strategy has boards paying closer attention to talent topics than ever before. CHROs have more visibility at the board level as a result, and they will be best positioned to use it if they get key support from the CEO.

Recognizing the competitive advantage a secure pipeline of engaged, diverse, and ready-to-lead talent provides, many corporate boards are extending their reach deep into human resources issues—leadership development, compensation, and succession planning reaching several levels below the chief executive officer. There’s a good reason: Talent scarcity is an obstacle that impacts virtually every large company and people issues have a direct impact on company performance. In the past, companies could hold on to their advantage with a superior supply chain, strong product lines, or highly efficient facilities. Today more than ever, however, knowledge and the people who can leverage it are core competitive differentiators. Having talent is not enough. Successful companies identify, attract, develop, and retain the right talent effectively and consistently. Of course, some boards have long focused on people issues and have begun to take this focus to the next level. Kellogg Company’s board, as one example, receives regular updates on executive development, three or four levels of succession planning, and the status of various employee groups including how they fit into the overall strategic outlook for the company. It also pays particular attention to the development of high-potential employees whom the company expects to take on leadership roles over the next five to ten years.

“I don’t think boards will ever go backwards,” says Kevin Cox, CHRO of American Express and a director for the Corporate Executive Board and Chef’s Warehouse. “The genie is out of the bottle. Gone are the days of simply reviewing the talent book that the CHRO prepares once a year.”

“ The genie is out of the bottle. Gone are the days of simply reviewing the talent book that the CHRO prepares once a year.” Kevin Cox

CHRO, American Express

Going forward, more boards are likely to act like Kellogg’s—which creates important implications for chief executive officers (CEOs) and their chief human resource officers (CHROs). By understanding what is driving this change, CHROs can ensure that they are serving the board’s changing needs, and seize this opportunity to expand the influence of HR inside and outside their company—in some cases, by taking on board-level positions themselves. By that same token, CEOs had better ensure that their CHROs are board capable and will represent the CEO and the company as a whole.

The drivers of director interest in talent As boards focus on helping to influence corporate strategy in more meaningful ways, the availability and quality of human capital join finance and operations as a risk factor. “The members of every board I’m on, including my own, are saying, ‘Can we do less check-the-box stuff and more strategy?’” says Glenn Britt, CEO of Time Warner Cable and a member of the Cardinal Health and Xerox boards. “HR is an important part of that.” Particularly now, as the economy emerges from the recession, U.S. companies are transforming their operations, markets, and strategies, often by expanding into international markets. These shifts mean boards may deem a wider swath of leadership roles to be strategic or material, such as the chief financial officer, a business unit president, a regional head of operations, and the HR team that partners with these leaders. Boards are also considering whether their companies have the right people to support global growth. This ultimately falls on the shoulders of the CEO and his/her CHRO. Clayton M. Jones, CEO of Rockwell Collins and a member of the John Deere board has seen that play out in his own company. “Our company is becoming far more global in nature and expanding its reach into new countries and regions,” says Jones. “We have to make sure we have the right resources and that we are able to attract the right people with the right level of experience in a particular country and the right level of understanding of our business.”

At the same time, talent issues are seeping into issues that have always been board-level concerns. Many times, the success of a joint venture, strategic alliance, or merger/acquisition depends upon the talent itself and the integration of that talent into the company. “The single biggest risk in these types of deals involves culture and, more specifically, how well the organizations’ cultures and talent fit together,” says American Express CHRO Cox. Asking pointed questions about the talent, including about specific leaders and corporate culture, is an important way boards assess the risk of such transactions. Mirian Graddick-Weir, executive vice president of human resources for Merck & Co. and a member of the Yum! Brands board, says keeping a finger on the pulse of talent and leadership is one way boards fulfill their primary mission: positioning the company for success over the next three to five years. “How are you going to grow the business? Do you have the skills and capabilities necessary to help you do so?” she says. “While CEO succession remains a dominant focus for boards, boards want to understand whether the company has the people with the right skills and capabilities to fill the talent pipeline and take the organization where it needs to go.” In fact, some boards—including Procter & Gamble, Amazon.com, Yahoo!, and Dow Chemical—have changed the name of the compensation committee to the “compensation and leadership development committee” to reflect this broader charter. How deep a board takes its involvement in and its questions about talent varies by company and even the business or operational unit involved. Ann Korologos, who serves on boards of several companies, including Harman International Industries, Kellogg, and Host Hotels & Resorts Inc., notes that almost all of the boards on which she serves are involved in talent development and succession planning two, three, or even four levels beyond the CEO. “We look at these issues at least annually,” she says. Kellogg’s board also charges the Social Responsibility Committee with tracking metrics related to equal employment opportunity and diversity. At Rockwell Collins, in addition to succession, the board deals with the state of talent acquisition and the health of the talent pool in various functions. The board also focuses on collateral issues, such as having the right compensation plan to attract and retain key talent. “They spend a lot of time and attention on the structure of that plan—and not only understanding how much we spend, but also whether we’re incenting the right things through the way it’s structured,” says Jones.

“ Boards want to understand whether the company has the people with the right skills and capabilities to fill the talent pipeline and take the organization where it needs to go.” Mirian Graddick-Weir

Executive vice president of human resources, Merck & Co.

However, even though these questions are critical to the business, Jones says he hasn’t seen them rise to the level as other strategic concerns, such as positioning the business, using the right technology, analyzing customer impact of various moves, and what competitors are doing. “Rarely have I seen questions like, ‘Can you attract the right people?’ ‘Are you getting all of the talent you need?’ coming up as an equivalent to those discussions,” he says.

A seat at the table: The CHRO director One of the best ways for CHROs to steep themselves in the workings and thinking of the modern corporate board is to serve on one. “There is no substitute to walking in someone else’s shoes,” says Mirian Graddick-Weir, executive vice president of human resources for Merck & Co. and a member of the Yum! Brands’ board. However, getting CHROs appointed to boards is still a work in progress. “I have not seen an increased demand for CHROs to serve on public boards, which quite frankly is surprising,” says Jacqueline Kane, Clorox’s CHRO and a director of Comerica Inc. “Yet, companies are looking to add diverse thinking and specific industry/functional knowledge to their boards.” CHROs who can position themselves in this way can make themselves and their expertise stand out. Kane notes that her significant experience in the financial services and high-tech industries was one of the reasons she was invited to take a seat on the Comerica board in 2008. “I was able to blend my industry experience with my complementary function skills in human resources, marketing, strategic planning and corporate affairs,” she says. “It is clear, however, that my role as a board member is to focus enterprise wide... not to be the de facto CHRO.”

Meeting the board-level talent challenge Now that people issues have landed on the board agenda, they appear likely to stay there. To address these issues effectively, directors and CEOs need a board-capable CHRO. Some companies are adding HR talent to the board to round out the perspectives and thinking around the issues outlined above. For their part, CEOs and boards need to make sure that their CHROs have the best-in-class skills and knowledge required to keep up with board concerns. Quite simply, it is important that the board, the CEO and the CHRO get their people issues right. How can CEOs help ensure that CHROs have the breadth and depth to meaningfully support this focus on talent? Carve out a new role for the CHRO. These changes are taking hold over time and the CHRO role is likely to undergo a more evolutionary than revolutionary transformation. CEOs need to develop an appreciation and an eye for strong HR talent if they haven’t already. Once they find it, CEOs may have to help CHROs to overcome some old prejudices and assumptions; despite the growing influence of HR, not all directors are eager to hear more from the function. “Many boards are made up of retired executives who grew up in an era where HR was further from the strategic table and further away from the modern HR model,” notes Cox. “But just as great CEOs have to be really good at a lot of things, so do today’s CHROs. The more that board members, who tend to serve on multiple boards, are exposed to strong HR the more it will drive demand for strong CHROs.” Understand where the board stands on people issues—and where it’s headed. An effective CHRO must understand what talent issues activate and interest the board, and what developing issues are likely to influence the board’s position over time. Even if directors are not heavily focused on talent today, they are likely to be in the future. The CEO and the CHRO need to skate to where the talent puck will be, not where it is now.

Focus on the skills that matter in a CHRO. The net result of these boardlevel developments is a rising demand for CHROs who are “technically competent, highly articulate, politically astute, and courageous,” says Jacqueline Kane, CHRO and senior vice president of human resources and corporate affairs for The Clorox Company and a director of Comerica Inc. With more exposure to the board, there is increased pressure on CHROs to perform and more opportunities to fail. “The old saying comes to mind: Be careful what you ask for,” says Kane. In this transitional environment, the CEO must position the CHRO for recognition as someone with the maturity and confidence to advise the board—and make sure he or she has the knowledge, presence, practice and training to instill that confidence. “Companies want a top HR person who can be a confidant to the CEO,” says Korologos. “To me, the CHRO, CFO, and general counsel are the three people who have to be able to stand in front of the CEO’s desk and say whether the company can or can’t do something, and to offer advice for what the company has to do and do so with integrity.” Provide clarity. To help CHROs prepare for this relationship to the board, CEOs need to include HR as part of the broader decision-making process, while also holding HR and the entire company to a higher standard for talent. For example, they must set aggressive but specific goals and clearly articulate expectations for outcomes. “CEOs tend to know what they don’t want, but they also have to articulate what they do want and hold the CHRO accountable for that,” says Cox. “Until CEOs ask and demand more of CHROs, the role will not evolve as it needs to in order to handle what boards, CEOs and their respective businesses require.” Refill the HR talent pipeline. Finding a CHRO who can steer the organization through the ever-shifting talent maze is only the first challenge for a CEO. The CEO and CHRO must also systematically build future HR talent who can handle board-level concerns. In many cases, companies look for CHROs who have a background that blends both HR and line experience. Some companies have pulled experienced general managers into HR, or rotated HR talent into other functions. In addition, a number of CHROs report gaining insight into the needs and perspectives of boards by serving as directors for other companies (see sidebar), and CEOs might encourage that as well. “Serving as a board member has given me a different vantage point,” says Kane.

Once on a board, CHROs need to focus on helping the company succeed while also making the most of the opportunity. Board experience can help CHROs hone many skills: understanding of fiduciary responsibility, business judgment, determining what material to trust and what to verify. Board meetings also reveal how much time is required or allotted to review and discuss specific topics, such as talent and succession. “My board service has helped me better anticipate the needs and requests of our directors, and to prepare our materials and dialogue in a way that encourages greater candor and efficiency,” says American Express CHRO Kevin Cox. “Serving on a board has absolutely helped me be more effective as a CHRO in terms of having a different perspective and an appreciation for the roles boards play.”

Conclusion The relationship and interaction between boards of directors and CHROs continues to evolve with business needs. In many ways, CEOs serve both as a critical bridge between the board and the CHRO and as a champion who positions the CHRO to evolve and grow in order to support this changing board focus. These shifts are fraught with challenges. By overcoming them, however, CEOs and CHROs will be well positioned to support their boards and help companies secure the talent to meet their strategic goals, grow, and maintain competitive advantage.

Nels Olson is a Vice Chairman and Co-Leader of Korn/Ferry International’s Board & CEO Services Practice, based in the Firm’s Washington, D.C. and New York offices.

Kim Shanahan is Senior Client Partner and Managing Director of Korn/Ferry International’s Human Resources Center of Expertise for North America. She also serves as the Firm’s Office Managing Director, Northern Virginia.

About The Korn/Ferry Institute The Korn/Ferry Institute generates forward-thinking research and viewpoints that illuminate how talent advances business strategy. Since its founding in 2008, the institute has published scores of articles, studies and books that explore global best practices in organizational leadership and human capital development.

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