HR and the Board with Sarah McCann-Bartlett, CEO AHRI

Questions boards should be asking

• How are we ensuring that we are meeting our people compliance obligations? Do we have a framework for reporting and how often should we review it?
• What are the new changes to HR that should be reported or part of the compliance framework? How are our people risks aligned to organisational risk?
• What employee data do we collect? How do we collect it? How long do we store it?
• How can HR help upskill the board on people issues? Does our current and future people strategy support the delivery of the overall organisational strategy?
• How do we report on wellbeing and psychosocial safety?  What are the gaps and weaknesses and how do we support succession planning and retention of key people?
• How do we build a future capability across the organisation? How are we going to shift our current workforce to our future operating model? Are we ready for future shocks?

Discussion

BH: Board members are very much focused on organisational risks. One of the key risks facing organisations is their people. Over the last couple of years we've seen a lot of focus on culture, particularly with the Banking Royal Commission. More recently, we’ve seen the Great Resignation, quiet quitting, hybrid working and mental health and wellbeing risk. What do you think are the key people risks facing organisations and boards?

SMB: I tend to split people risks into two different areas, compliance and performance, both with a current and a future lens.

Compliance

Unlike financial compliance which boards talk about consistently and have strong reporting and compliance frameworks, boards often assume that people compliance is just happening naturally in the background. That is partly because there is no singular people compliance framework. A number of organisations still don't have one. What we are seeing in the compliance space is the acceleration of workplace regulation or regulator intervention. These include the sexual harassment and bullying positive duty, the new Safe Work Australia Psychosocial Hazards Model Code of Practice and the Fair Work Ombudsman’s investigations on underpayment.  One of the issues with people based compliance is that it is not as well defined or delineated as financial compliance or workplace health and safety. The psychosocial code of practice, for example, includes hazards like employee workload, job design and relationships between employees, but these are more open to interpretation and rely more on management practice than other compliance areas, which are easily put into process.

Performance

The second area of debate is performance or productivity and what it comprises from both the organisation and economic level. The right people in the right roles with the right skills is a strong contributor to performance. But in the short to medium term, there is an issue with just getting the right people given the current high turnover and staff shortages. AHRI is running a monthly poll to track voluntary turnover in a more timely way than the official data. Turnover has been incredibly high over the last 10 months, although it might be easing with voluntary turnover in the highest bracket down slightly in August and September.

Psychosocial Safety

One area that we don’t talk openly about is the link between high voluntary turnover with the compliance side risk of underpayment and the emerging psychosocial safety requirements. A lot of organisations have traditionally relied on unpaid overtime for delivery. This is not about award level employees where organisations are starting to move towards full compliance and restitution but middle and senior management. We have partnered with The Wellbeing Lab and The Leaders Lab on research that indicated 60% of leaders reported feeling burnt out at work. An emerging risk is middle management and senior management burnout leading to lower engagement and worse at top levels of the organisation.

New ways of working

Hybrid work is still a conundrum for organisations and creates a performance related risk whichever way you look at it. AHRI ran a hybrid and flexible work study which showed that many employees work from home at least one day a week. Over 50% said that they thought working from home or remote working would stay the same, 25% said they thought it would increase and just under 20% thought that it might decrease. One of the issues at the moment is we still don't know how to manage it. We are still in an experimentation phase. That is creating tension in our workplaces. We are in the middle of this massive workplace change, but not everybody realises or wants that. Our research found that the pressure to return to the physical workplace from senior management is causing tension between leadership and employees. Many leaders don't think hybrid working is working, it was not part of their vision in the first place and they are trying to call employees back to the physical workplace. So despite the data around high voluntary turnover and employees wanting more flexibility, it is still a difficult issue to resolve.

Finally, there is the risk of the post-COVID environment with high turnover and workplace changes, we are not spending sufficient time reading our workforce and our people for the future. We are so focused on the issues of today that we are not doing the longer term horizon work with our people.

BH: We need to move away from thinking about home versus the office, which is how the conversation has been shaped, but more about putting tasks first and place second. Rather than mandating three days a week in the office, irrespective of the work that needs to get done, focus on what work needs to be done and then what is the best environment to do that work. Our policy at PwC is if it works for your customer, your team and yourself, then it works for us.

The recent Federal Budget included a lot of focus on the tough economic climate ahead. Difficult economic conditions often lead to cuts to workforce expenditure. This is on top of a decline in discretionary spending with learning and development budgets. But a lot of organisations are still wanting to drive growth. How do you see this playing out? What should organisations be investing in to drive growth?

SMB: If you don't invest in your people and your workforce, even through difficult times, then your organisation will be permanently behind. It is difficult to catch up when the economy starts to recover. There is a current and growing body of research that links positive people management and employee wellbeing with engagement by employees and positive organisational outcomes. But organisations tend to under-prioritise and under-invest in core people management skills within their employee development and training programs. The Federal Government has a key role to play in protecting and potentially growing public funding for adult skills. There is a case for introducing financial incentives to encourage more employee investment in skills and interventions that go beyond TAFE and into people management practice. The forecast slowdown in economic growth coupled with the high cost of borrowing, input costs and wages growth is going to result in cuts to learning and development budgets, particularly in the area of people management. AHRI has been talking to government about support mechanisms and what might be appropriate in times of cyclical economic downturn to maintain organisational spend on people management, skills uplift and training.

HR has a significant role to play in their own organisations by ensuring people management is prioritised within the overarching business strategy and making a business case for it. HR can also make the link between productivity and good people management practices around culture, reward and recognition, employee engagement, and ensuring it continues to be funded as part of the overarching business strategy. HR also has a role in broadening how we think about good management practice. We need to ensure that managers understand how important a sense of purpose and meaning is in reducing turnover, increasing engagement, and linking it to individual and workforce performance. Whether we call it ‘the Great Resignation’ we know that employees are looking for more purpose in their work. They want to understand how the organisation and their individual role is contributing to a higher purpose.

BH: We have always spoken about HR wanting a seat at the board table. During COVID, HR really stepped up and we saw the value of that partnership. Do you think that HR is valued by organisations and their boards in the current climate?

SMB: During COVID, HR was very much central to organisations.  Our members told us they felt that a particular measure of their influence increased by about 15% and they expected that to be maintained or continued. We also saw the breadth of responsibilities of HR leaders expanded to include risk, internal communications and employer branding. I'm not questioning that HR roles are valued by boards and their executive teams but HR as a profession is still undervalued. In my role, I've developed a deeper understanding of the technical and theoretical aspects underpinning HR. The conversion of theory to practice happens in a highly ambiguous space. It requires high level analysis, the ability to cut through ambiguity and make decisions in uncertain environments. It is not straightforward.

There are no legal barriers to entry to practise as an HR professional. Given compliance risk, the role of HR in driving performance and the need to ensure good governance over all culture and people matters, we should be ensuring that HR competencies are taken seriously and insisted upon.  A lot of large organisations, particularly public sector, have HR capability frameworks.  AHRI has one that groups and outlines the behaviours, capabilities and knowledge areas expected of HR professionals. We certify HR professionals against that capability framework, to become a Certified HR Practitioner. There is a real shift in the thinking around HR. Executives value what their own HR team brings but we need to uplift the thinking about HR as a profession.

BH: When you see advertisements for board vacancies, they are looking for capabilities of finance, governance, risk or legal but very rarely do you see a board explicitly looking to recruit someone with a strong HR background. What are your thoughts on that?

SMB: The Governance Institute researched board composition recently and found that only 1% of board members had HR experience. When we think about how important people are to our organisations, that feels incredibly unbalanced. Putting the broader issue of board diversity to one side, it goes back to those fundamentals of governance, compliance and driving performance, as well as getting the transparency and understanding of what is really happening with your people. It is very important when selecting board members to think about how they could support your organisation, governance, risk management, compliance, and drive organisational outcomes.

BH: What is the importance of developing stronger relationships between HR and the board? Do you have any advice around how board members could go about doing that?

SMB: The first thing is to make sure that your HR lead is part of the executive leadership team. That reduces the reporting line to the board. Regular board reporting is important. It is not just about ‘the what’, it is really about ‘the why’. Understanding the underlying drivers is incredibly important. Consider establishing a board subcommittee that deals with people. We often have a remuneration committee, which is a very narrow piece, but a people or culture committee can drive stronger engagement between HR and the board.

BH: Boards should set an expectation with the adjacent functions that come to the board around consultation with HR. If the head of property or the CFO is coming to the board, there should be an expectation that they have already consulted HR on the matter. We are seeing a lot more interdependency across streams of work at many organisations.

What questions should boards be asking of their organisation and HR function?

SMB: The question that doesn't get asked enough is “How are we ensuring that we are meeting our compliance and our people's compliance obligations?” and “Do we have a framework for that?” Then we can have discussions around the reporting threshold to the board on different kinds of issues and “How often should we review this?”

If you think about the external financial audit, the auditors turn up every year and talk about the changes to accounting standards and what needs to be reported on that wasn’t reported in the past. In the same way, what are the new changes to HR that should be reported or part of the compliance framework? How does the board get assurance that that is reviewed on a regular basis and how are their people risks aligned to organisational risk?

Cyber risk is another piece that we are just starting to lift the lid on, in terms of employee data. What do we collect? How do we collect it? How long do we store it?

How can HR help upskill the board on people issues? Does our current and future people strategy support the delivery of the overall organisational strategy? Does it encompass culture alignment and development, and shared purpose, diversity and inclusion, future workforce planning and leadership capability development?

How do we report on wellbeing and psychosocial safety?  What are the gaps and weaknesses and how do we support succession planning and retention of key people?

How do we build a future capability across the organisation through reskilling, upskilling, digital uplift, digital readiness and adaptability in the organisation? How are we going to shift our current workforce that supports our current operating model to our future operating model? Are we ready for future shocks that we are being told are inevitable.

BH: My advice for board members would be to challenge your HR leads to make sure that it's not an overt focus on tactical operations, but continually asking what are we thinking about in 2, 3 or 4 years beyond the current economic climate? How are we future proofing ourselves? That balance will be critical in the coming period.

Q&A

How can the HR team help the board better understand and then assess organisational culture, particularly risk culture?

SMB: There are many ways to measure organisational culture. Longitudinal measurement is really important. But first the board needs to understand the desired current and future culture of the organisation and that’s what you need to be measuring against. Those measures are one way to report on culture but there are other ways as well such as employee complaints about behaviour, which goes back to compliance and the reporting threshold to the board. What kinds of complaints does the board actually want to hear about and in what? Exit interviews are another rich source of data.

Don’t just ask your HR lead to undertake some culture measurement over a period of time to identify what the organisational culture is. Ask them to talk about how all of the data they gather can be understood and brought in to show a more fulsome picture.

Risk culture is an interesting one. There is the traditional view of risk, which is often financial, but we also have cyber risk and people risk. I say that middle managers are the most important in an organisation. Others say it is the hardest job in the organisation. Make sure that middle managers are skilled at having the same conversations that the executive team have with the board, and have those on a daily basis in all of their interactions with their teams. They should be asking how we have built in risk, how have we thought about risks as new projects are being implemented. A lot of that relies on capability, but HR has a role in upskilling and uplifting those middle managers.

NED: We are seeing engagement go up, but so is turnover. In the past, engagement was a leading indicator that turnover was under control, but now there seems to be a disconnect. What are your insights on that?

SMB: At the moment, some of our measures are still backward looking and have not taken account of the new ways of working in a post COVID environment. So are those measures still fit for purpose? In the past, we thought about engagement and culture as organisational level phenomena. But with new ways of working, we are seeing them at the team level. If you think  of multinational organisations, there were always organisational values and behaviours but culture tends to differ country by country. We are seeing that same phenomenon within workplaces as we move down to alignment at a team level. My first question is do we measure the right things? I’d be asking the HR team what they are measuring and how.

Additionally, the concept of engagement between employees and leaders is currently misaligned. When you look at advertisements or employee value propositions, they talk about flexibility but that’s now just a basic hygiene factor. A basic expectation of all employees is to be offered some kind of flexibility. There is a piece of realignment that needs to be done not only in the tools that we use, but also in terms of what we are offering.

BH: We did a study on ‘The Great Resignation” which found that 38% of Australians were looking to leave their job this year, and 75%, who felt trusted and engaged, were also wanting to leave. From a sociological perspective, there were two factors driving that. One was a product of the time and environment. People were coming out of lockdowns, seeking a greater degree of control in their lives, buying houses, moving to regional areas and changing jobs as a visceral way of feeling that change. The other factor was the changing nature of how people view careers. For example, having 20 different jobs across five different careers and changing every two to two and a half years.  People are seeking different and diverse experiences. They might feel engaged by their current employer, but want to work for a startup, and their current organisation simply can't give them that opportunity. The US has seen the highest number of people leave traditional employment to start their own businesses. This is where organisations need to invest in alumni programs to encourage boomerang employees. Our research also found that of those people who had changed jobs in the last 12 months, three out of five were looking at changing again in the next 12 months, a lot of them wanting to go back to their old employer. It is important to keep those lines of communication open. Some organisations extend their employee benefits to their alumni for one to three years after they have left as a means of showing the value, to continue to be part of their fabric or the organisation and potentially come back. Employer loyalty is more complex than employees being satisfied and engaged. You have to build out clear career pathways in your organisation and invest in Alumni Programs.

NED: Why are we not seeing more HR expertise on the board? In the UK we’ve seen some very senior HR professionals appointed to major listed companies. How do we get more senior HR expertise in the boardroom to tackle some of these really big issues?

SMB: Despite a few high profile HR appointments to some very large boards in Australia, I think it goes back to viewing risk governance and performance through a people lens. Once the board and the Chair start to look at that, they realise the importance of having someone with people expertise on the board. I think the lack of barriers to entry to a HR career in HR has possibly downgraded the view of it as a profession, although that has significantly changed over the last five or so years. We are seeing a shift up for HR professionals to the executive team and that will start to bring them through. We are also seeing organisations like the AICD  talking more about people risk e.g. sexual harassment, bullying, wellbeing and other people compliance matters and what can boards do about it.

BH: It comes down to HR needing to be valued by the organisation more broadly. That will in turn influence board and CEO appointments. We are seeing more CEOs that come from a head of HR background, when traditionally those from finance and other functions tended to get those positions. We have to change the fundamentals of how we value HR as a function, coupled with top down board to organisation directives to continue to influence that.

NED: On a skills matrix, you are unlikely to tick audit experience if you are not an auditor. You won’t tick legal experience if you’re not a lawyer. But when you come to the culture and people skills, everyone’s ticking them. When big companies get into trouble and damage their reputation, it’s worth looking at their board composition to understand who was looking at culture and stakeholders more broadly. That is where people and culture directors deliver value, as they are trained to look at an organisation’s ecosystem more broadly. Secondly, people and culture trained directors tend to look forwards. Other roles such as auditors and lawyers by nature look backwards. But HR professionals are trained to look for patterns, interpret and be more future oriented. If you look at where you need to go as organisations, getting that short term versus long term balance more into perspective will drive growth.

SMB: HR is a technical profession. You need to understand what your governance framework needs to look like for people and how you can use that expertise to push the organisation forward.

NED: You talked about the board understanding the alignment between people strategies and strategic performance. In terms of measuring that, how would you expect HR to be tracking that through to uplifted operating performance or strategic outcomes?

SMB: There is a growing body of research that measures people management capability in the organisation. That is at a company wide level, rather than at an individual program level.

When we think about a piece of infrastructure that we are investing in the organisation, we tend to assign all of the productivity gains - increase in outputs, quality enhancements or cost savings - to that actual piece of infrastructure. But a lot of that uplift should be assigned back to the people who changed the way they work, learned how to use that piece of technology and continue to contribute to it. I think we have probably misassigned some of our ROI metrics in the past.

We know that the most destructive thing to organisational performance is poor culture. Relational issues in an organisation will definitely lead to a drop off in performance. When you have a positive culture, strong engagement and strong learning programs and you measure your capability as an input rather than an output, you do see improvements around engagement and organisational performance.

NED: How often do you think the CHRO or representative should come to the board?

SMB: As often as your CFO.  If you think about the risk profile of your organisation, the level of people risk is as strong as the level of financial risk. I would argue that there has to be regular board reporting that doesn't rely on the top line metrics, you have to get under the waterline and understand the why.