Toward a “Sense of Purpose” for Employees: Investor Engagement on Human Capital Management

BlackRock, a leading global investment manager, provided an illustration of the steps and questions that might be part of institutional investor engagement on an important social issue: “human capital management” (“HCM”).  In his 2018 annual letter to CEOs, the Chairman and CEO of BlackRock wrote that:

“Companies must ask themselves: What role do we play in the community? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world?”

BlackRock and other institutional investors have taken note of the importance of recruiting and retaining talented works as a primary factor in the financial performance of companies and investors realize that business continuity and success is tied to the company’s approach to HCM, a broad topic that includes employee development, diversity and a commitment to equal employment opportunity, health and safety, labor relations, supply chain labor standards and continuously adapting the workplace to taken into account rapidly changing technologies.

This article is adapted from material in Governance: A Handbook for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here.

While traditional human resources activities have often been pigeonholed as a management issue, institutional investors expect directors to be proactively involved in HCM as a natural extension of their duties to oversee the company’s strategy and define the company’s purpose.  Among other things, directors should be prepared to monitor HCM initiatives to ensure that they are aligned with overall strategy and that employees are fully engaged and supportive of the company, its business and goals.  The board should also treat HCM in the same way as other sustainability-related topics, which means constantly looking for risks and opportunities and developing appropriate responses.  Management’s role in HCM is obviously more operational and focused on executing the strategies and initiatives approved at the board level; however, working to bring out the best in the company’s people is arguably the most important of any manager’s day-to-day activities and senior executives should be proactively involved in developing and presenting innovative HCM ideas to the directors and should be forging relationships with employees throughout the organization to demonstrate the company’s commitment to their current contributions and long-term wellbeing.  Directors and managers should all be familiar with, and use, the expanding set of recognized qualitative and quantitative human capital management metrics that are now available to assist companies in gauging the effectiveness of their efforts to positively engage with their employees and disclosure the results of those efforts to investors and other stakeholders.

BlackRock made it clear that it intended to back up its public statements on HCM with constructive engagement with directors and executives of its portfolio companies with the goal of building mutual understanding, probing questions and issues to develop effective solutions and sharing information on best practices.  BlackRock’s proposed agenda for discussions with directors on HCM included:

  • Oversight of policies meant to protect employees (e.g., whistleblowing, codes of conduct, EEO policies) and the level of reporting the board receives from management to assess their implementation
  • Processes to oversee that the many components of a company’s HCM strategy align themselves to create a healthy culture and prevent unwanted behaviors
  • Reporting to the board on the integration of HCM risks into risk management processes
  • Current board and employee composition as it relates to diversity
  • Consideration of linking HCM performance to executive compensation to promote board accountability
  • Board member visits to establishments or factories to independently assess the culture and operations of the company

When engaging with management teams, BlackRock suggested that the following topics would be an appropriate starting point:

  • Policies to encourage employee engagement outcomes and key drivers (e.g., wellness programs, support of employee networks, training and development programs, and stock participation programs)
  • Processes for ensuring employee health and safety and complying with occupational health and safety policies
  • Voluntary and involuntary turnover on various dimensions (e.g., seniority of roles, tenure, gender, and ethnicity)
  • Statistics on gender and other diversity characteristics as well as promotion rates for and compensation gaps across different employee demographics
  • Programs to engage organized labor and their representatives, where relevant
  • Systems to oversee matters related to the supply chain (including contingent workers, contractors and subcontractors)

While the recommendations above were intended primarily for engagement between large institutional investors and directors and senior executives of companies with securities traded in public securities markets, they can also serve as a foundation for continuous discussions between sustainable entrepreneurs and their key early-stage investors, some of which may actually have a representative on the board and others will allow the founders to serve as the only directors but will want to be able to monitor their activities with respect to HCM in the boardroom and on the office floor.  HCM oversight is particularly important when the success or failure of a startup often turns on the “talent” that can be brought to bear on solving a particular problem and developing and launching the solution, be it a product, service or combination of both.  Outside oversight of HCM practices is challenging for startups given that lines of authority are blurred and the founders are often so focused on completing a mission critical project that they are unable to step back and consider their actions in the context of creating the appropriate workplace culture and modeling acceptable behaviors.

One of the worthiest calls for sustainable entrepreneurs is launching and building an organization in which all participants feel a “sense of purpose”, which was the central theme of the BlackRock Chairman’s 2018 CEO letter referred to above.  To achieve this goal, sustainable entrepreneurs must act purposefully with an eye on improving the skills and overall wellbeing of their employees.  A purposeful organizational does not come about on its own, it must be nurturing by its leaders.  As such, sustainable entrepreneurs should be prepared to consider the following questions, and take the following actions, when engaging with their investors:

  • Has the sustainable entrepreneur taken the lead in creating a healthy organizational culture in which all employees feel protected from unwanted behaviors of others, particularly those persons who exercise supervisory responsibilities over them? All employees need to feel free to express their opinions and the workplace should be free of harassment and discrimination and compliant with applicable health and safety standards.
  • Has the sustainable entrepreneur proactively launched programs and activities to engage with employees and build loyalty and commitment throughout the workforce? Even the smallest companies can implement wellness programs, providing training and development opportunities and allow employees to assume an ownership stake in the business through stock/profit participation programs.
  • Has the sustainable entrepreneur integrated of HCM issues into the company’s risk management processes? Talent is a scarce resource, particularly during the startup stage, and careful consideration has to be given to the consequences of being unable to recruit and retain the right people and the potential costs associated with mistakes in the hiring process.  The sustainable entrepreneur needs to be able to explain the reasons for voluntary and involuntary turnover with the pool of initial employees and take steps to remediate any problems that may be adversely impacting team building.
  • Has the sustainable entrepreneur explicitly integrated diversity goals into the company’s plans for future recruitment of employees, executives, advisors and directors? Diversity is one of the fundamental tenants of sustainability and effective HCM and goals should be set from the outset and progress continuously checked.  If goals are not being attained, an assessment should be made to identify the reasons and make appropriate changes in recruiting strategies.
  • Have HCM issues been included as explicit criteria for compensation of the sustainable entrepreneur and each of the senior executives and key managers of the company? While traditional financial goals and objectives should remain part of the assessment process, each organizational leader should expect that a significant portion of his or her contingent compensation will be based on success against mutually agreed HCM metrics that are within his or her control.
  • Has the sustainable entrepreneur established career paths for each of the employees in anticipation of future growth of the company including objective criteria for promotions and upward adjustments in compensation and is the sustainable entrepreneur committed to “equal pay for equal work” and equal opportunities for advancement.
  • Has the sustainable entrepreneur established procedures for employees to safely convey their complaints about the workplace to organizational leaders? As noted above, employees should feel free to propose ideas for improving the workplace; however, there should also be ways for employees to report, without fear of retribution or retaliation, activities that appear to be illegal, unethical or otherwise not in line with company culture and expectations and those reports need to be taken seriously.
  • Has the sustainable entrepreneur taken steps to ensure effective oversight of contingent workers and contractors? Many companies, particularly startups, rely heavily on non-employees, such as interns, contractors and outside consultants, and organizational leaders need to monitor the activities of these workers to ensure that they do not disrupt organizational culture and that the expected contributions to the business are being made.
  • Is the sustainable entrepreneur prepared to allow major investors to visit the company’s facilities to assess for themselves the organizational culture and the manner in which day-to-day operations of the company are conducted? If the major investor is a director of the company, board meetings should always be onsite and should include tours of the work spaces and interviews and meetings with managers and employees from different parts of the organization.

If the major investor is a director, each of the questions above should be covered at each board meeting and during briefer meetings or calls at regular intervals between meetings.  For their part, investors electing to serve on the board need to realize they are accepting important and substantial additional oversight responsibility with respect to HCM and should be prepared to invest the appropriate amount of time in fulfilling those duties.  Non-director investors should not be “passive” and leave HCM to the board and the sustainable entrepreneurs.  Instead they should insist on regular meetings with board members and the executive team to go over the above questions and assess whether or not the investors’ choice for director is acting as a proper steward of the company’s human capital.

Sources: BlackRock, “BlackRock Investment Stewardship’s approach to engagement on human capital management” and the BlackRock Chairman’s 2018 annual letter to CEOs.

This article is adapted from material in Governance: A Handbook for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here.

Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedInTwitter and Facebook.

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