People Before Strategy: A New Role for the CHRO
CEOs know that they depend on their company’s human resources to achieve success. Businesses don’t create value; people do. But if you peel back the layers at the vast majority of companies, you find CEOs who are distanced from and often dissatisfied with their chief human resources officers (CHROs) and the HR function in general. Research by McKinsey and the Conference Board consistently finds that CEOs worldwide see human capital as a top challenge, and they rank HR as only the eighth or ninth most important function in a company. That has to change.
It’s time for HR to make the same leap that the finance function has made in recent decades and become a true partner to the CEO. Just as the CFO helps the CEO lead the business by raising and allocating financial resources, the CHRO should help the CEO by building and assigning talent, especially key people, and working to unleash the organization’s energy. Managing human capital must be accorded the same priority that managing financial capital came to have in the 1980s, when the era of the “super CFO” and serious competitive restructuring began.
CEOs might complain that their CHROs are too bogged down in administrative tasks or that they don’t understand the business. But let’s be clear: It is up to the CEO to elevate HR and to bridge any gaps that prevent the CHRO from becoming a strategic partner. After all, it was CEOs who boosted the finance function beyond simple accounting. They were also responsible for creating the marketing function from what had been strictly sales.
Elevating HR requires totally redefining the work content of the chief human resources officer—in essence, forging a new contract with this leader—and adopting a new mechanism we call the G3—a core group comprising the CEO, the CFO, and the CHRO. The result will be a CHRO who is as much a value adder as the CFO. Rather than being seen as a supporting player brought in to implement decisions that have already been made, the CHRO will have a central part in corporate decision making and will be properly prepared for that role.
These changes will drive important shifts in career paths for HR executives—and for other leaders across the company. Moreover, the business will benefit from better management of not just its financial resources but also its human ones. We say this with confidence, based on our experience with companies such as General Electric, BlackRock, Tata Communications, and Marsh, all of which act on their commitment to the people side of their businesses.
The CEO’s New Contract with the CHRO
A CFO’s job is partly defined by the investment community, the board, outside auditors, and regulators. Not so for the CHRO role—that’s defined solely by the CEO. The chief executive must have a clear view of the tremendous contribution the CHRO could be making and spell out those expectations in clear, specific language. Putting things in writing ensures that the CEO and CHRO have a shared understanding of appropriate actions and desirable outputs.
To start redefining the job, the CEO should confer with his or her team and key board members, particularly the board’s compensation committee (more aptly called the talent and compensation committee), and ask what they expect in an ideal CHRO. Beyond handling the usual HR responsibilities—overseeing employee satisfaction, workforce engagement, benefits and compensation, diversity, and the like—what should an exemplary CHRO do?
Here are three activities we think are critical: predicting outcomes, diagnosing problems, and prescribing actions on the people side that will add value to the business. Some of these things may seem like the usual charter for a CHRO, but they are largely missing in practice, to the disappointment of most CEOs.
CEOs and CFOs normally put together a three-year plan and a one-year budget. The CHRO should be able to assess the chances of meeting the business goals using his knowledge of the people side. How likely is it, for example, that a key group or leader will make timely changes in tune with rapid shifts in the external environment, or that team members will be able to coordinate their efforts? CHROs should raise such questions and offer their views.
Because a company’s performance depends largely on the fit between people and jobs, the CHRO can be of enormous help by crystallizing what a particular job requires and realistically assessing whether the assigned person meets those requirements. Jobs that are high leverage require extra attention. Many HR processes tend to treat all employees the same way, but in our observation, 2% of the people in a business drive 98% of the impact. Although coaching can be helpful, particularly when it focuses on one or two things that are preventing individuals from reaching their potential, it has its limits. Nothing overcomes a poor fit. A wide gap between a leader’s talents and the job requirements creates problems for the leader, her boss, her peers, and her reports. So before severe damage is done, the CHRO should take the initiative to identify gaps in behavior or skills, especially among those 2% and as job requirements change.
The CHRO, with the CFO, should also consider whether the key performance indicators, talent assignments, and budgets are the right ones to deliver desired outcomes. If necessary, the pair should develop new metrics. Financial information is the most common basis for incentivizing and assessing performance, because it is easy to measure, but the CHRO can propose alternatives. People should be paid according to how much value they contribute to the company—some combination of the importance of the job and how they handle it. Finance and HR should work together to define ahead of time the value that is expected, using qualitative as well as quantitative factors. Imagine the leaders of those functions discussing a business unit manager and triangulating with the CEO and the group executive to better understand what the manager needs to do to outperform the competition in the heat of battle. For example, to move faster into digitization, will he have to reconstitute the team or reallocate funds? Predicting success means weighing how well-attuned the manager is to outside pressures and opportunities, how resilient he would be if the economy went south, and how quickly he could scale up into digitization. The specific metrics would be designed accordingly.
As another example, a top marketing manager might have to build capability for using predictive data in advertising. The CFO and CHRO should recognize that if the manager fails to steep herself in the fundamentals of data analytics and is slow to hire people with that expertise, new competitors could come in and destroy value for the company. Metrics should reflect how quickly the marketing head acts to reorient her department. One set of metrics would focus on the recruiting plan: What steps must the marketing manager take by when? These become milestones to be met at particular points in time. Another set of metrics might focus on budget allocations: Once the new people are hired and assimilated, is the manager reallocating the marketing budget? And is that money in fact helping to increase revenue, margins, market share in selected segments, or brand recognition? Such improvements are measurable, though with a time lag.
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