Marsh & McLennan Cos.' CHRO tells how a keen focus on the varieties of human
capital risk -- employee engagement, talent management and an aging workforce --
are necessary for the success and survival of today's HR executives, but
especially important is the risk of CEO succession.
For many human resource executives, the shift to a global, knowledge-based
economy has changed the game when it comes to identifying the real drivers of
corporate success. We no longer view workers as interchangeable cogs in a matrix
of assets, defined by the fixed capital of property, machines and their tangible
products.
Instead, we recognize human capital as our primary asset, and we require a clear
picture of how our workforces' capabilities, performance and culture correlate
to the bottom line. By now, we know that managing human capital risk -- or any
risk, for that matter -- means identifying what is predictable and being able to
respond quickly and effectively to what is unpredictable.
It's a matter of having nimble structures and strategic vision, so we can cope
with the threat or probability that an action or event will affect our
organization's ability to achieve our objectives. For HR leaders, that's
anything that threatens a firm's ability to attract, develop and retain the key
talent that drives business value.
Human capital, of course, is crucially different from structural capital in that
it is owned by the individual -- that is, individuals who can walk out the door
and take their unique capital with them, unless their competencies, knowledge
and skills are either tangibly recorded or somehow incorporated into an
organization's procedures and structures.
That's a primary example of human capital risk -- loss of key talent -- but
consider some others that often fly under the radar of human resource executive
thinking:
1. Employee engagement.
The risk of insufficiently or poorly engaged employees can yield a direct hit to
the bottom lines of organizations, taking a toll in terms of turnover,
productivity and the company's internal and external brands. Companies that fail
to survey their human capital regularly, respond to substantial issues revealed
by survey research and communicate effectively to the workforce are playing
Russian roulette with their long-term success.
2. Hiring practices and talent management.
The risk of ineffective hiring practices, in which the right talent may be
overlooked while the wrong talent takes its place, can be a major drain on
corporate success. It can also have complicated sources -- from outmoded or
insufficient job descriptions to less-than-rigorous interviewing and
background-screening processes.
Beyond hiring, talent-management failures -- ranging from weak onboarding
practices to poor training, limited development opportunities, stale performance
management and a lack of mentoring -- can compound the risk.
3. An aging workforce.
The risk of an aging workforce has become a global issue, as demographic
realities in some of the most dynamic societies of the east and west --
including those of the United States, Europe, China and India -- point to an
increasing dearth of younger workers to take the place of retiring employees
whose experience and skill levels may be a key factor in driving business
results.
As challenging and as variable as these risks can be, let's also focus on a key
human capital risk factor faced by virtually every organization: CEO succession.
Indeed, from personal experience as a human resource executive and in light of
some recent research on the subject, I feel strongly that mitigating the risk
posed by CEO-succession issues is a key component of sound HR strategy.
Inside CEO Succession
For example, the 2010 Survey on CEO Succession Planning, conducted by Stanford
University, notes that the boards of most of the surveyed organizations agree
that their single-most-important task is choosing the next CEO -- but, on
average, they spend only two hours per year on succession planning.
Furthermore, 69 percent of the 140 survey respondents think that a CEO successor
needs to be "ready now," but only 54 percent of them are grooming an executive
for the position, while 39 percent say they have "zero" viable internal
candidates.
And, not surprisingly, statistics tell us that only 50 percent of CEO
successions are planned at all.
If we agree that CEO selection can have a profound impact on shareholder value,
it's clear that this is one of the most important -- and least managed -- of
human capital risks.
Writing in a December 2008 Chief Executive magazine article entitled "The Cost
of CEO Failures," Nat Stoddard, chairman of Crenshaw Associates, a New
York-based consulting firm specializing in career and transition management for
senior executives, and Claire Wyckoff, a writer and editor who has held
executive positions in both the corporate and nonprofit sectors, estimate the
total cost of such failures -- in terms of cash, inefficiencies and
opportunities lost -- is approximately $14 billion annually.
They write: "Leadership failure at the CEO level plays out in many directions:
There are direct costs related to the individual's compensation ... [and]
indirect costs, which result from errors in judgment, bad strategies, poor
execution, opportunities foregone and the disruption to the organization caused
by inconsistencies, lack of direction and, worst of all, loss of trust."
Indeed, CEO succession has become a vital aspect of corporate governance -- and
thus a key focus of my role as chief human resource executive -- at my
organization, which is itself largely focused on both risk and human capital.
Marsh & McLennan Cos. Inc. is a global professional-services firm, the parent
company of a number of the world's leading risk experts and specialty
consultants: risk and insurance services provider Marsh; risk and reinsurance
intermediary Guy Carpenter; Mercer, the provider of HR consulting, investments
and outsourcing services; and management consultancy Oliver Wyman. Together, we
employ some 51,000 people worldwide, with annual revenues in excess of $10
billion.
As Marsh & McLennan has evolved over the decades, so has its commitment to a
robust CEO succession plan, especially in the face of the inevitable challenges
and changes that large, global companies must face.
As we began to understand the true costs of CEO turnover -- in terms of hard
costs, and the less quantifiable but very real impact "CEO churn" has on
corporate culture and employee engagement -- it became clear that we needed to
take a more active approach to mitigating this key element of our human capital
risk (indeed, through our work with clients, we had witnessed firsthand
the negative impact of CEO and C-suite churn).
Since I joined the organization in 2008, one of our priorities has been to work
closely with President and CEO Brian Duperreault and the board of directors to
codify our approach to CEO succession.
From our perspective, nothing less than proactive management of CEO-succession
risk would do, and so, through regular consultations with our CEO and board, the
new Guidelines of Corporate Governance were adopted in September of 2010,
spelling out the board's belief that planning for CEO succession is one of its
most important responsibilities.
The board is now required to approve and maintain a succession plan for the CEO,
taking into account the recommendations of the directors and governance
committee. This means that, at least annually, the CEO meets with the
non-executive directors to discuss his or her potential successors and related
issues. Afterward, the board may update its CEO succession plan as appropriate.
In addition, the CEO keeps in place, at all times, a confidential procedure for
the timely and efficient transfer of his or her responsibilities in the event of
an emergency or his or her sudden incapacitation or departure.
The CEO also periodically reviews with the non-executive directors the
performance of other key members of the firm's senior management, as well as any
succession issues relating to those individuals. The board is responsible for
determining that a satisfactory system is in place with regard to the education,
development and orderly succession of senior management throughout the
organization.
Risk Factors and HR's Role
Given the direct and indirect correlation of CEO succession to shareholder value
and costs, succession planning should be at the top of the enterprise-risk
agenda. The role of the senior HR executive in this process is threefold,
requiring:
1. A thorough, objective understanding of the company's current CEO-succession
plan; the CHRO should be analyzing and discussing the process with the CEO and,
directly or indirectly, with the board of directors.
2. A clearly defined set of core CEO competencies against which to measure
potential CEO candidates, and a one-, three- and five-year plan for developing
internal talent. This is, of course, a basic tenet of talent management;
however, the skills and accountabilities required of a CEO are vastly different
than any other senior-leadership position at the firm.
3. HR's championing of the notion of human capital risk -- and CEO-succession
planning, in particular -- as fundamental to the overall
enterprise-risk-management strategy of the firm.
The stakes are simply too high to treat CEO-succession planning as anything less
than a strategic imperative.
As Marsh & McLennan Vice Chairman David Nadler, an expert on CEO succession and
board planning, says, "A constant, collaborative process is crucial to ensuring
a successful transition -- and it must begin the first day a new CEO takes the
helm."
These prescriptions make such sense that we might expect them to exist within
every large organization, yet it's apparent that many companies do not face the
risk of CEO succession with a proactive management approach.
And while managing CEO succession is something that must be driven from the top
of any organization -- there's a distinct line of sight from the board to the
C-suite, after all -- not all examples of human capital risk management are as
clearly defined.
Let's consider another example of human capital risk, that of a technology
manufacturing organization, a client of ours, that faced dramatic changes in its
business environment.
In this case, the risk factors involved burgeoning competition from Asia and the
seismic shift from the analog basis of the company's products to digital
technology.
Senior management recognized the need to change its organizational structure, so
it created new units to sell new products and be more competitive with Asia and
the world in general.
But management was slower to consider the workforce aspects of these changes --
i.e., that a different business strategy required a different human capital
strategy, especially considering that the future of its business was going to be
digital, yet thousands of its workers still possessed only "analog" skills.
The company's human capital risk was compounded by a compensation structure that
tended to reward low performers in the older, analog lines of business.
And, not surprisingly, the company's stock price had declined some 90 percent
over a two-year period, as the market recognized the competitive disadvantage
the company was at. Restoring the company to competitive health, therefore,
required a keen focus on its human capital aspects.
The solution included an emphasis on compensation -- analyzing reward practices,
restructuring the compensation system to pay for performance and shifting the
bulk of reward compensation to employees with proven positive impact on the
company's bottom line.
In hand with that, performance evaluations and metrics were changed to reflect
the firm's new business goals. This meant that, in addition to having to meet
team goals, even low performers on high-performing teams had to meet individual
goals as well. Finally, new training programs were instituted to migrate,
wherever possible, employees with older, analog skills into digital skill sets.
The larger point of all this is that quantifying human capital risk and its
business impact remains a challenge for many organizations, especially in an age
of global business and increasing complexity.
It calls for a new mind-set, in which companies not only recognize the singular
importance of human capital to business performance, but aggressively
incorporate human capital risk as part of enterprise-risk management,
correlating workforce performance with the bottom line through more rigorous
data, analytics and metrics -- such as internal-labor-market statistics and HR
dashboards that enable management in new ways.
And, in the case of CEO succession, it's vital that such a primary
risk-management function be embedded in the corporate-governance structure
itself.
For HR, the challenge is to make these correlations between human capital
performance and business impact through education, effectiveness and evidence.
It's vital for HR leaders to carry the message that, in a global knowledge
economy, human capital risk has emerged as one of the biggest potential threats
to the value of the enterprise.
Just as the "war for talent" characterized previous decades of HR action, HR's
critical capability and value creator for the next decade will be managing the
risks of global talent.
[About the Author: Orlando D. Ashford is senior vice president and chief HR and
communications officer of New York-based Marsh and McLennan Cos. Inc. He serves
as the lead employee advocate for 50,000 employees in more than 100 countries.]
Regards,
Harvinder
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