Board Oversight of Human Capital

In 2022, NACD released the Future of the American Board: A Framework for Governing into the Future to help boards become better stewards of long-term value creation for all stakeholders and to help them meet broadening expectations. A key principle of the framework emphasizes that “Governance structures and practices should support board focus on the corporate strategies, policies, and programs that support the attraction, retention, development, compensation, and well-being of the talented and motivated workforce required for the corporation to succeed.”

This Director Essentials publication provides guidance for boards on the oversight of human capital—the economic value of the knowledge, skills, experiences, and capabilities of a company’s workforce. Boards are recognizing the need to enhance their oversight of this vital—and, often, the most complex—form of capital. This report helps directors to

• become familiar with the evolving human capital governance essentials and identify opportunities to strengthen oversight,

• integrate a human capital strategy into the broader business strategy, and

• oversee the broad spectrum of human capital-related risks and opportunities in all levels of the company.

The report’s recommendations were shaped by a working group of eight directors serving on public, private, and nonprofit boards; interviews with other experts; and NACD research.

Human Capital: A Board Imperative

Human capital is recognized as an indispensable and dynamic linchpin driving organizational growth and success. A focus on human capital is not new for directors. Boards have traditionally focused on the CEO and executive team, specifically on succession planning and compensation for these roles, governing the impact of effective leadership to drive organizational value. However, consideration of employees and employee matters below the C-suite was often left to management or siloed in a functional department and was rarely elevated to the board’s agenda.

Boards have increased their level of engagement in response to major events that have impacted the workforce (like the #MeToo movement, the COVID-19 pandemic, corporate scandals, and M&A), but after the event has stabilized or has passed, boards have often reverted to their traditional, narrow posture. But this approach is changing, as boards recognize that the link between human capital and the company’s broader strategy and financial performance demands more thorough—and consistent—oversight from the board.

Several converging factors are driving a wider and deeper focus on the workforce. The focus of value creation has shifted over the past 50 years from predominantly tangibles (e.g., real estate, equipment) to assets with a theoretical value: brand, reputation, intellectual property, research and development, and human capital. Intangible assets now account for 90 percent of the value of the S&P 500 Index, a substantial increase from 36 percent in 1985, and are estimated to comprise more than half of a company’s market value on average.

Alongside this shift in value creation, other factors are driving a reevaluation of how companies view their people—not only as an expense on the income statement but also as a critical investment.