[This essay was originally published in "A Seat at the Table: Worker Voice and the New Corporate Boardroom" by The Aspen Institute Business & Society Program. And extended and updated version has been published in the Rutgers Business Law Review (Vol. 17, No. 2, Spring 2022)]
Demands for worker voice are on the rise, and if trends continue, boards could soon be challenged to accommodate worker voice more formally in corporate governance. Rather than being caught flat-footed, boards can start reimagining now. Looking at their own committees would be a good place for boards to start.
The board hears worker voice, but through a thick filter.
Any discussion of corporate governance starts with the board of directors, and the issue of worker voice in corporate governance is no different. Under the US governance model, worker voice has typically been articulated to the board via senior management. Obviously, it is virtually impossible for that articulation to give the board a true sense of how members of the general workforce see their places and feel about their experiences as employees of the corporation. While many boards receive reports on the results of periodic employee sentiment and engagement surveys, those reports are prepared by senior management and the results are presented on broadly aggregated bases.
The fact that boards generally do not take more proactive measures to hear the voices within the general workforce follows from the view of many corporate governance experts who espouse that the board’s entire role can be boiled down to hiring, evaluating and firing the CEO. While the board’s duty of care requires it to oversee the entirety of the corporation’s business and affairs, hearing and responding to the voice of workers below the CEO is seen as part of the operational responsibilities of the CEO and other executives like the chief human resources officer, not the board itself.
Lessons from new corporate disclosures.
Historically, SEC disclosure requirements did not cover how the board or management oversee the company’s workforce or even much about the company’s workforce at all. In 2020, the SEC amended its rules on annual corporate disclosures to require registrants to describe their “human capital resources… and any human capital measures or objectives that the registrant focuses on in managing the business.” A number of organizations have examined the initial corporate disclosures made in 2021 to comply with the new requirements in an attempt to get a sense of the role of boards in overseeing how companies manage their human capital resources.
According to a report from Intelligize, the new corporate disclosures reveal that many companies “vest authority for managing human capital with the board of directors, its committees (the audit, compensation, corporate governance, and management development committees were mentioned most frequently) and officers (particularly CEOs, diversity officers and chief human resource officers).” Both Compensation Advisory Partners and Intelligize highlight Starbucks Corporation as a model of disclosure on board oversight:
Our Board of Directors and Board committees provide oversight on certain human capital matters, including our Inclusion and Diversity programs and initiatives. As noted in its charter, our Compensation and Management Development Committee is responsible for periodically reviewing Starbucks partner resource programs and initiatives, including healthcare and other benefits, as well as our management development and succession planning practices and strategies. Our Audit and Compliance Committee works closely with the Risk Management Committee, led by Starbucks CFO and general counsel, to monitor current and emerging labor and human capital management risks and to mitigate exposure to those risks. Furthermore, our Nominating and Corporate Governance Committee annually evaluates the effectiveness of our social responsibility policies, goals and programs, which also include partner-related issues. These reports and recommendations to the Board and its committees are part of the broader framework that guides how Starbucks should attract, retain and develop a workforce that aligns with our values and strategies.
Seeking more detail on how boards provide oversight on the management of human capital resources, the Council of Institutional Investors (CII) issued a report focusing on “public disclosures of how large US public companies provide opportunities for board members to interact directly with employees, both at the management level and deeper within the organization.” CII observed that “many boards of directors are elevating company culture in their oversight of corporate strategy and risk… dedicating more time to presentations from human resources personnel, visiting worksites and assessing top management’s success in setting an appropriate ‘tone at the top.’” The CII report went on to say, “[s]upport is growing for explicit policies that encourage director interaction with rank-and-file employees as a way for boards to better oversee corporate culture.” CII also cited recent reports from KPMG, Deloitte, and the National Association of Corporate Directors that identified site visits and interaction with employees as “options for boards looking to improve oversight of corporate culture.”
Access to workers is granted, but is it used?
Regarding the board’s access to the company’s employees and opportunities for engagement, the CII report cited common approaches disclosed by the largest (S&P 100) US companies:
Almost all have policies stating that board members have access to either employees generally or management.
Approximately half have policies specifically granting board members access to all employees.
Approximately one-third have policies granting board members access to management without explicit mention of access to or interaction with other employees.
Approximately two-thirds have policies granting board members access to employees or specific guidelines for board-employee interaction.
One-fifth disclosed both policies on employee access and a discussion of specific circumstances where board members have the opportunity to speak with employees.
More than one-third detailed some kind of board-employee interaction.
What is not clear from the disclosures is whether board members are actually using the access granted and to what extent that access must be pre-arranged and chaperoned by senior management. When there are opportunities for board-employee engagement through visits to manufacturing, retail and R&D sites, experienced corporate staffers who have arranged board site visits reveal that they are extensively planned and rehearsed. Senior management at the sites carefully select and vet the employees who will interact directly with board members, and selection is made with the grooming of “high potential” employees in mind more than the board’s goal of hearing worker voice.
What is clear is that boards would have to be proactive in using the access granted to them and go to great lengths to create regular opportunities to hear rank-and-file workers’ voices directly from the workers themselves and engage in candid dialogue away from the watchful eyes (and sensitive ears) of senior management.
Time to form, or reimagine, a board committee?
Some experts have suggested that boards make changes to their own structures to ensure meaningful oversight of human capital resources. Currently, the only mandated board committee that directly touches employee issues is the compensation committee, for which the chief priority is determining the CEO’s compensation. While the compensation committee may oversee retirement and benefits plans that cover wide swaths of employees, they focus more of their attention on the short- and long-term incentive plans that apply only to high-ranking managers. And that’s when they are not talking about the CEO’s compensation and wordsmithing the related proxy disclosures.
Former Delaware Supreme Court Chief Justice Leo E. Strine, Jr. recently proposed a “reconceived compensation committee” to “help make corporations more responsible employers and restore faith in American capitalism.” Chief Justice Strine and his co-author, Kirby M. Smith, wrote that expanding the compensation committee’s perspective beyond executive compensation would make the committee think about the “company’s workforce as a whole” and “result in directors who have a better grasp on how human talent matters for the company’s business strategy and operations.”
In this way, the reconceived compensation committee will become the subset of the board most deeply engaged in all aspects of the company’s relationship with its workforce, and inefficiently ensuring that the company has a sensible plan for retaining and motivating human talent to achieve its business objectives.
This follows what has up until recently been a slow trend. Realizing that the scope of their compensation committees have been too narrowly focused on the compensation of the directors and most senior executives, boards are now increasingly expanding the scope of these committees to include talent development beyond the executive suite and cover company-wide human resources, not just remuneration. Still, most do not go as far as Chief Justice Strine would like.
Chief Justice Strine separately proposed that boards be required to create “workforce committees” to “address workforce issues,” including “ensur[ing] quality wages and fair worker treatment,” at the board level.
These workforce committees would be focused on addressing fair gainsharing between workers and investors, the workers’ interest in training that assures continued employment, and the workers’ interest in a safe and tolerant workplace. These workforce committees would also consider whether the company uses substitute forms of labor, such as contractors, to fulfill important corporate needs and whether those contractors pay their workers fairly, provide safe working conditions, are operating in an ethical way, and are not simply being used to inflate corporate profits at the expense of continuing employment and fair compensation for direct company employees.
I also recently urged boards to rethink the current board committee structure and reimagine the board’s committees in a stakeholder-driven way. Following the resurgence of the stakeholder model of corporate governance, I proposed completely redesigning the board committee structure to create separate board committees dedicated to each of the corporation’s four major stakeholders: customers, employees, communities, and shareholders. A board committee dedicated to the corporation’s employees could conceivably cover enterprise-wide strategy and oversight of employee staffing levels, health and safety, compensation and benefits, labor relations, diversity and inclusion, talent development, recruitment and retention, training, engagement, and corporate culture.
Board committees are of particular interest because a board typically creates committees, either standing or ad hoc, for a subset of the board to dive deep into particular board responsibilities and report back to the full board with recommendations for board action. If worker voice is to be made a board priority, that initiative should start with a dedicated board committee.