How boards can champion a resilient talent strategy

Boards have come a long way since we surveyed directors on the topic of human capital oversight in the fall of 2019. A key finding of our survey then was that there was a discrepancy between directors who viewed human capital and talent issues as important for the board and those who believed these issues were beyond the board’s purview. Five years later—which included a global pandemic, social upheaval and ongoing disruptions to the business environment—those perspectives have changed significantly.

Directors spend more time on talent oversight, but want a better understanding of employee sentiment

When asked whether they agree that the board’s purview includes oversight of strategic workforce matters, directors overall gave an average of 4.4 on a scale where 5 is “strongly agree” and 1 is “strongly disagree,” with a majority of directors (58%) strongly agreeing.

According to directors surveyed, the majority of boards now discuss workforce matters at least quarterly (58%), with another 24% saying they do so at least twice a year. That’s a significant jump from the 40% who said in 2019 that they discussed human capital regularly throughout the year.

The trend is even more pronounced when looking at the data by company size: 78% of directors on the board of companies with $10bn in market cap or more say they review human capital data quarterly, versus 22% of those at companies with a market capitalization of less than $300m.

However, despite this increased time investment, directors’ confidence in their understanding of employee sentiment is relatively low. When asked whether their board has the insights it needs to understand the issues prioritized by employees, directors overall gave an average of 3.6 out of 5 on a scale where 5 is “strongly agree” and 1 is “strongly disagree.”

When asked whether they agree that the board has a strong pulse on employee sentiment among frontline workers, that average ticked down to 3.2/5. Further, one out of three said they strongly disagreed with that statement—and 8% said it didn’t apply because their boards do not discuss data or insights related to the experience of employees.

Directors think more employee engagement would increase the impact of their oversight

The fact that so many directors think their pulse on employee sentiment is weak is perhaps explained by how few directors are actually hearing directly from employees. Most boards are relying on the Chief Human Resources Officer (CHRO) or employee survey data to obtain insight into employee experiences and perspectives, with few having direct employee engagement.

Less than a quarter (22%) of directors said they directly participate in listening sessions with employees (e.g., town halls, employee resource groups, employee advisory committees), and under half (44%) said they conduct worksite visits. Yet, some leading directors have heralded the benefits of such opportunities to gain insight into what employees are thinking and how they’re feeling about their organization and leadership.¹

At the same time, some directors expressed concern that the oversight methods they’re relying on most— management reports and company-sponsored surveys—could be misleading or biased. A third (34%) said that employees may not be fully honest in company-sponsored surveys or discussions with management, and 23% said the CHRO may not feel comfortable conveying negative messages to the board.

Director concern that employee perspectives are getting filtered may be warranted: The EY 2023 Work Reimagined Survey found that employees have significantly different views than employers on key talent areas, underscoring the importance of direct communication with employees below the management level. For example, that survey found 80% of employers believe that their organization is equipped to adapt to change and build skills for evolving needs, but fewer (58%) employees do. Similarly, it found that 76% of employers believe that their company’s leadership is in tune with the experience of the workforce and cares about employees as people, compared with 54% of employees.

Despite current practices, directors signaled that they want more direct engagement opportunities with employees. When asked to rate which oversight method they find to be most impactful (rather than what they actually do), 44% listed direct engagement with employees—a 22-point gap between what boards are doing and what they find most impactful.

A majority of boards are relying on the CHRO or employee surveys for insights into the employee experience

GenAI is poised to upend work as we know it and is already changing the way employees work—even in ways in which management might not be aware. The speed and scale of GenAI developments are generating both optimism and anxiety across the workforce and reshaping the skills and talent needed. Directors acknowledge that the impacts to labor could be profound.

Directors recognize that AI developments demand a reskilling of the workforce

Sixty percent of directors think technologies like GenAI and automation will impact the company’s workforce “significantly” or “very significantly.” Further, a majority (55%) think the biggest impacts of GenAI on their company’s workforce strategy will be reskilling existing employees, second only to the 59% who said the elimination of certain functions or responsibilities would be the biggest impact. Yet, employee reskilling and training does not appear to be a current area of board focus.

Training and development not a top board focus area despite innovation being a significant growth strategy

When asked which workforce issues the board is most focused on from a governance perspective, only a quarter of directors chose training, development and reskilling as a top three priority, putting it toward the bottom of the rankings. Further, metrics related to training are rarely reviewed by boards on a regular basis. Just 8% of directors said their boards are overseeing training effectiveness and hours on a regular basis. Twice as many (16%) said it is among the metrics they find most useful in their oversight, but that is still a small minority compared to other metrics.

This is at a time when companies are focused on GenAI strategies to accelerate growth. A recent EY CEO survey found that 100% of the CEOs surveyed are making or planning significant investments in GenAI in 2024. Related employee training might be needed to execute on and maximize those investments. That is certainly a question that investors are raising. Investors told EY they want to understand whether companies have the right skills and training to execute on investments they are making in digital transformation and GenAI.

Whether employees have the skills and training they need to execute on the innovation strategy is among the areas where employee and employer perspectives diverge, according to the EY Work Reimagined Survey. While 80% of employers feel their organization is equipped to adapt to change and build skills for evolving needs, 58% of employees feel the same—a significant gap.

Further, training and development opportunities can be an important component in employee engagement and retention—an area where boards are laser-focused—and that importance may be growing. As GenAI impacts ways of working, employees are reassessing the importance of skills-building, in part to maintain their attractiveness in a competitive job market. Training may become a more important part of how employees assess their total rewards and future opportunity with the company.

How training contributes to engagement and retention will be difficult for boards to gauge if they do not regularly oversee related training metrics—and 92% of directors surveyed said they are not. Through their oversight role, this is a key area for boards to dig deeper and challenge management to ensure that the talent strategy is aligned to and driving the company’s broader innovation strategy and capital investments.

Corporate diversity efforts have come under scrutiny in today’s polarized political environment. While the U.S. Supreme Court’s decision striking down affirmative action did not change the law with respect to corporate DEI programs, it did embolden DEI critics, and in its wake some companies have been named in lawsuits and federal civil rights complaints related to their DEI initiatives. In this challenging context, boards are keeping DEI high on their agenda.

Boards are maintaining focus on DEI, as companies navigate related scrutiny

DEI ranks fourth on the top board focus areas related to the workforce, with 41% of directors citing it among the top three talent issues on the board agenda. Further, when asked whether they are more or less focused on DEI matters today compared to a year ago, directors overall gave an average of 3.2, on a scale where 5 is “more focused” and 1 is “less focused”, with 82% of directors ranking it 3 or higher.

This could indicate that companies understand the business benefits of DEI and are continuing to keep their focus there, including assessing and clarifying their strategies in the current environment. While 38% of directors said legal risks have influenced their approach to DEI in the past year or so, putting that among the three most influential factors shaping their approach, it does not necessarily signal a rollback in DEI efforts. Companies may be preparing for continued scrutiny and seeking to reduce their risk while maintaining the advantages afforded by DEI initiatives (e.g., focusing more on inclusion and belonging, which is essential to keeping diverse talent but also perceived as lower risk in this environment). The top factors influencing directors’ approach suggest this may be the case.

Stakeholder expectations keep DEI in focus

That investor expectations are a significant influence resonates with what investors have shared with EY about DEI being a stewardship priority. Of the 50 institutional investors EY engaged in advance of the 2024 proxy season, 38% said they planned to engage companies on workforce or board diversity in 2024, making that the second-most cited engagement topic this year, in line with 2023. Those investors generally shared their views that DEI is an area of material opportunity and risk for companies and shared their interest in better understanding the effectiveness of company efforts to recruit, retain and develop a diverse workforce and foster an inclusive, equitable culture.

For years, a coalition of investors has pressed the SEC to mandate workforce diversity disclosures as part of a set of human capital metrics they view as fundamental. Additionally, the SEC’s Investor Advisory Committee recently voted in support of a recommendation to mandate certain human capital disclosures, including workforce demographic data sufficient to allow investors to understand the company’s efforts to access and develop new sources of talent and evaluate the effectiveness of those efforts.

The future talent pool may depend on companies prioritizing DEI

DEI is a key expectation of the workforce, so it makes sense that employee expectations also ranked high (43%) in terms of factors shaping directors’ approaches to DEI. The influence of employee expectations on DEI approaches may be poised to grow in the coming years, as millennials further move into leadership positions and Gen Z and younger employees fill the workforce.

While DEI initiatives play a pivotal role in recruiting and attracting top talent across generations, they are particularly important for younger workers. The 2023 EY Belonging Barometer, a survey of more than 5,000 globally employed adults across various industries and organizations, found that 63% of worker respondents would choose a company that prioritizes DEI over one that does not, and 74% said their company’s prioritization of DEI factors into their choice of where to work. This theme is most pronounced among Gen Z and millennials, of whom 73% and 68%, respectively, said they would choose a company that prioritizes DEI over one that does not, versus 53% of Gen X and 46% of baby boomers.

Failing to meet employee expectations around DEI could mean missing out on a growing talent pool at a time when the workforce is shrinking and the talent gap is growing. DEI should be part of long-term growth strategies, as companies seek to maximize their competitive advantage with young talent.

Beyond some of the core opportunities already highlighted, there may be additional opportunities for boards to strengthen their governance of talent in terms of how, and with whom, they are spending their time and the metrics they are reviewing.

We asked directors which culture-related metrics their boards oversee on a regular basis and—regardless of their response—what metrics they find most useful in their oversight. What we found is that what boards are doing and what they find impactful don’t always line up. Responses indicate that directors want to spend more time reviewing employee survey data/engagement scores, training effectiveness and hours, external sources of data, and turnover and attrition measures and exit interview data—and less time discussing whistleblower/hotline data, legal claims and litigation data, and diversity in the workforce and on the board.

What boards find most impactful does not always align with what they are doing

In addition, a key barrier to effectiveness that directors continue to cite is their lack of time. When asked about what barriers they’ve encountered in their oversight of talent, the top response—with 40% of directors selecting it—is competing priorities for the board’s attention and challenging schedules. A solution to both challenges may be one and the same.

Change how, and with whom, the board’s time is spent

Our 2023 Corporate Board Member/EY survey found that as boards face new pressures and new tasks, many are seeking to do more with less by changing the way they get work done. This includes creating more time for discussion in board meetings by doing more work before the board meeting. It also includes asking management to improve the quality of the information sent to the board, including a greater focus on critical key performance indicators.

Many boards have already sought to create more time to go deeper on the talent agenda through assigning human capital oversight responsibilities to compensation committees. In fact, 42% of S&P 500 compensation committees are charged with overseeing human capital matters, up from just 9% in 2020, based on an EY review of the description of those committees’ responsibilities in proxy statements. Further, an EY examination of the charters of Fortune 100 compensation committees found that 79% include responsibilities related to oversight of workforce-related matters such as DEI, human capital management and culture.

Compensation committee chairs and board leaders are well-placed to challenge whether the committee or board is spending time on the workforce metrics that matter most based on the company’s unique circumstances, and whether there are opportunities to create more time for discussion of talent matters in meeting agendas by reducing time for management presentations and committing to a careful review of management material as part of board preparation.

Board and committee leaders should also take care that human capital considerations are integrated into full board discussions on strategy, risk and various priority topics on the board agenda to avoid discussions becoming siloed and compartmentalized. For example, talent considerations should be part and parcel of discussions regarding innovation and emerging technologies, cybersecurity and data privacy, sustainability, and more.

That may mean that related conversations are happening across different board agenda items and committees (e.g., the compensation committee considering overall human capital management topics, the audit committee considering talent needs related to cybersecurity, a technology committee considering talent needs related to emerging technologies).

Board leaders can proactively provide that full board meeting agendas enable knowledge to be well distributed and that committees are coordinating as needed where oversight responsibilities may overlap or intersect. There are voices beyond the CHRO that can meaningfully contribute to board discussions on talent, as explored in the first section of this report. Engaging with business unit executives as well as heads of large departments offers opportunities to broaden the board’s perspective on talent management across the enterprise. For example, as investments in AI accelerate, Chief Technology Officers may provide a valuable perspective on employee engagement and change management.

Enhance stakeholder communications to create maximum impact

Finally, boards and board committees have an opportunity to share more about their work in this space with investors. Talent strategy is a top investor focus area: when EY asked investors what they want companies to prioritize in 2024, the talent agenda emerged as to top priority, cited by 63% of participants. They shared their views that workforce retention and development are critically important to long-term resilience. Better communicating the strength of the board’s oversight and its impact on shaping a resilient talent strategy may help build investor confidence in this area of increasing focus.

Moving forward: Putting people first to enable resiliency

In a time of transformation and change, it is people who will ultimately drive a company’s success or failure. Through their oversight, boards can elevate talent strategy as an integral driver of overall strategy and put people first to enable resiliency. That means gaining deeper insight into the employee experience, overseeing how workforce skill development is aligned to the company’s strategy and transformation initiatives, and challenging how the company is positioning itself as an employer of choice for a next-generation workforce. It also means evaluating and improving the board’s governance practices to provide that the board is spending its time most effectively, and with the right people, on the topics and metrics that matter most.