| March 01, 2004 |
Author: Dr. Laurence J. Stybel & Maryanne Peabody
Source: STYBEL PEABODY LINCOLNSHIRE
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| New Roles For Chief HR Officers At The Board |
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This article will focus on the implications of Sarbanes Oxley for Chairmen CEO/Chief HR Officer relationship. The critical issues revolve around the change in the corporate balance of power and how Sarbanes Oxley will extend to private companies and nonprofits. With this new change in the balance of power, it is more important than ever for Chairmen/CEOs to properly read early warning signals from the Board. And, paradoxically, the potential for Board mis-cues and CEO missed cues have never been greater. The Chief HR Officer can play a critical early warning role for the CEO/Chairman.
Sarbanes Oxley changes the balance of power between CEOs and Boards. There will be a formalized checks and balances system. Plan on a feisty group of Board members who will be asking tough questions of CEOs. If CEOs are angry with Sarbanes Oxley, that means they “get it.” The new world of governance does not have to be an adversarial one. The compliant “Good Old Boys from the Club” Board will be confined to sleepy credit unions and community hospitals.
Sarbanes Oxley is the future. Some public companies are openly talking about going private to avoid the costs of Sarbanes Oxley compliance. But that action will prove a costly mistake: in the near future, public companies doing business with private companies of a certain size will require that these private companies have the financial transparency and governance balance of power required of Sarbanes Oxley: they will want critical business suppliers to be as squeaky clean as they are. Companies whose exit strategies involve being acquired will find that compliance with Sarbanes Oxley a critical issue impacting the negotiated price. McKinsey has published two studies showing that institutional investors will pay a premium to acquire stock in companies with good governance. That premium ranges from 12% in North American to 50% in Africa and Eastern Europe. (www.mckinsey.com) There is no reason to assume public companies acquiring private companies will also not pay a premium for a private company that runs along Sarbanes Oxley lines. Even mutual funds, nonprofits and foundations will be moving in the direction of Sarbanes Oxley: new directors from the private sector will insist on governance structures as tight as what they are used to.
AN EMERGING ROLE FOR CHIEF HR OFFICERS
In the pre-Sarbanes Oxley world, the Chief HR Officer normally provided technical support to the Compensation Committee of the Board. At times The Chief HR Officer would be invited to specific meetings of the full board to answer questions relating to human capital.
In the United Kingdom, there is an explicit separation of the roles of Chairman of the Board and Chief Executive Officer. Most NACD members and students of good governance believe that such a separation has value. The reality is that U.S. business culture has a bias towards centralization of authority in one person by having CEOs also assume the roles of Chairman of the Board.
A Board is a work group. This bias has merits but it also has group dynamics problems. In a Sarbanes Oxley world, it is difficult one individual to be the impartial leader of a powerful working group and the subject of the group’s critical discussions under conditions when the CEO/Chairman has lost dominance over that group.
Board Options, Inc. is currently doing research on the early stages of Board Disillusionment with CEO/Chairmen. During this early stage, it is possible for CEO/Chairmen to turnaround disillusionment if they “read” the group dynamics signals in a timely fashion. It has never been more important for CEO/Chairmen to properly read group dynamics. And it has never been more difficult to do so.
For example:
One of our clients is a global technology company. The Chairman/CEO met us the day following his termination by the Board. He complained, “I thought it was going to be a typical Board meeting. I knew SOME members were unhappy. I had no clue that the Board was THAT unhappy. How could I have missed it? There is only one answer. The Board was working behind my back, that’s why!”
In discussions with Board members and observing the Board, we found the CEO/Chairman’s complaint was simultaneously true and false.
At the Board level, there is a custom that external directors (most of whom are CEOs of large public companies) be respectful towards the CEO/Chairman. They would not humiliate the CEO/Chairman in front of other Board members just as they would not want to be embarrassed in front of THEIR Boards by their external Board members. They treat the CEO/Chairman the way they would want to be treated.
The norm of courtesy at this Board includes “The Nod.”
The Nod is a one downward vertical movement of the chin with a blank facial expression. The Nod could signify, “I agree with you.” The Nod could also signify “I comprehend what you said, but I still disagree.” Interpretation of The Nod has to be placed in the context of what the external Board member has said in the past combined with the issue being discussed.
The Board was not initially working behind the CEO/Chairman’s back. They were, however in the early stages Disenchantment. External Directors were providing subtle signals to the CEO/Chairman. The Nod and its multiple interpretations is an example of a mis-cue. The CEO/Chairman failed to appreciate The Nod. This was the missed cue. He further looked for informal feedback from his strongest supporters instead of asking for feedback from the Board as a whole. This failure was yet another missed cue.
As the Disenchantment process continued, the Board eventually did indeed work behind the CEO/Chairman’s back, thus validating his assessment.
Reading Group Dynamics at the Board of Directors Level.
In addition to their other competencies, some Chief HR Officers are outstanding readers of group dynamics. What they may lack is an understanding of governance issues so that mis-cues and missed-cues can be placed in some appropriate business/strategic context. They may also lack techniques for giving negative feedback to powerful people.
Chief HR Officers who combine knowledge of group dynamics, an understanding of governance, and an understanding of how to provide negative feedback can be indispensable resources for CEO/Chairmen.
BETTER BONDING MEANS A MORE IMPORTANT HR FUNCTION
There truly is a good reason why Chief HR Officers should be present at Board meetings. And that reason is to symbolize the importance of human capital as a strategic tool. Beyond that reason, the Chief HR Officer will truly bond with the CEO/Chairman when the CEO/Chairman says to the Chief HR Officer:
“At the conclusion of this Board meeting, I want you to come to my office. I’ll tell you what I think happened. And you tell me what you think happened. “
As the value of the Chief HR Officer’s group dynamics expertise becomes clear to the CEO/Chairman, closer bonding between the two officers raises the entire status of human capital within the company.
IT’S ABOUT DIFFERENTIATION AND VALUE
Sarbanes Oxley is a dramatic change in the balance of power between CEOs and Boards. It is the future for public companies. Variations of Sarbanes Oxley are in the future for large private companies, nonprofits, foundations, and even mutual funds.
Chief HR Officers who immediately seize on the unique opportunities afforded them by Sarbanes Oxley will provide a critical value-add for their companies and for HR’s credibility within their companies. |
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