Today’s increasingly unpredictable business environment can make management decisions more consequential. Companies face pressure to control costs and innovate amid uncertain economic conditions, a competitive talent landscape and a business environment that likely requires significant digital transformation. Talent management — having the right people in place to make those decisions — is increasingly important. And boards can play a critical role in achieving success on that front.

Corporate directors have traditionally focused their talent management efforts on the C-suite, leaving oversight of the broader workforce to senior executives. But changing employee preferences, broader stakeholder influences, societal shifts, and the astonishing pace of business and digital change have made it critical for boards to ramp up oversight of talent management at multiple organizational levels.

Doubling down on talent

Overseeing a company’s top talent has long been a core responsibility of a corporate board. Directors are responsible for hiring and firing the CEO, evaluating top executives’ performance, approving leadership succession plans and supporting a pipeline of talent to execute company strategy. Effective board oversight can be essential.

Indeed, many boards have come to understand that effective talent management oversight, driven by a well- developed talent strategy, is at the core of success today. And strong execution of the strategy is enabled by talented people throughout the organization — particularly when many companies are reinventing themselves amid geopolitical and economic volatility and technological advancement.

The ability to attract, develop and retain top talent has become an increasingly critical business imperative. Even in the wake of the Great Resignation and the “quiet quitting” era, which has given way to a more stable labor market, increased competition for the “right” talent continues to top directors’ matters of concern. In our 2023 Annual Corporate Directors Survey, nearly 40% of corporate directors rated talent and corporate culture as a top risk posing significant oversight challenges for boards.

Digital transformation also presents a growing set of challenges to operations and strategy, with new technologies —most notably, generative AI —demanding constantly updated hiring and training strategies(see Appendix A for a discussion of the implications of AI on talent management). As widespread transformation drives demand for workers with new skills, lacking a holistic plan for attracting, developing and retaining workers may hurt a company’s ability to grow and innovate.

Even as the COVID-19 pandemic subsides, many companies have retained remote and hybrid work arrangements in some form. While many corporate leaders are encouraging or even mandating employees to “return to the office,” companies continue to be challenged with defining new ways of working and aligning technology and corporate culture to support virtual and hybrid work environments.

Talent management today carries both higher stakes and higher risks. The board can play an important role in helping management navigate the challenges that may lie ahead.

The evolving regulatory environment

Director focus on talent management should consider shifting regulations as well. In November 2020, the SEC issued a new rule expanding its human capital disclosure requirements beyond listing the number of employees. Although principles-based, the rule requires companies to disclose the number of employees and a description of its human capital resources, if material to the business as a whole, along with any human capital measures or objectives that the company uses to manage the business, including talent development, attraction and retention. With the principles-based requirements including neither a definition of “human capital” nor a list of measures to cite, disclosure has thus far been disparate and highly qualitative.

The SEC has indicated that it will issue proposed rule amendments that may include requirements for more prescriptive disclosures, including specific metrics relating to areas such as employee turnover, skills and development training, compensation, benefits, workforce demographics including those relating to diversity, and health and safety. And in September 2023, the SEC’s Investor Advisory Committee recommended strengthening existing human capital disclosure rules to include specific metrics and narrative disclosure of how a firm’s labor practices, compensation incentives and staffing fit within the firm’s broader strategy.

A shifting legal landscape may impact recruitment and retention

The Supreme Court’s June 2023 ruling on racial consideration in college and university admissions has brought with it potentially significant implications for corporations. Though the decision was in relation to college admissions, there’s been a flurry of legal activity aimed at also applying the court’s stance to corporations’ hiring and DEI programs.

In July, 13 attorneys general sent a letter to the CEOs of Fortune 100 companies, indicating that the overturning of affirmative action in college admissions could have ramifications for corporate DEI programs. They argue that large companies have set “racially discriminatory quotas and preferences.” In a counter action, 21 attorneys general subsequently sent a letter to Fortune 100 CEOs urging them to “double-down on diversity-focused programs because there is still much more work to be done.” And in recent months, a nonprofit organization has filed complaints against several companies, alleging that their DEI policies constitute racial discrimination; filed lawsuits against two law firms, claiming their fellowship programs are discriminatory; and sued a venture fund over its grant program for Black female entrepreneurs.

While legal professionals have widely differing views about how these matters will ultimately be resolved, corporate leaders and directors should be monitoring and evaluating these cases to understand any potential impacts to how racial/ethnic diversity may be used in employment, contracting, internships and broader DEI efforts, which may in turn impact their ability to attract and retain talent.

Continued investor focus

Institutional investors are paying closer attention to talent management as part of stakeholder engagement. Several of the largest have documented specific expectations as part of their engagement priorities, urging boards to become more involved in workforce planning and development. They are also pushing for more transparency about the board’s oversight of human capital management. Nearly 80% of investors in our 2022 Global Investor Survey view labor/skills shortages as a top industry disruptor over the coming decade.

Many investors see holistic human capital management (HCM) practices as a competitive advantage, assuming a company can attract, retain and develop workers with the skills and experience necessary to help execute long- term strategy, meet the needs of customers and others in the value chain, and deliver financial returns for shareholders. Investors ultimately want to understand how effective boards and management are in developing and maintaining a workforce that can deliver long-term financial performance. Investors are calling for greater transparency in how companies are managing one of their most critical assets: their people.

Typically, investors engage with their portfolio companies on the risks and opportunities of HCM matters as an initial mechanism to understand how a company is managing talent. If companies are viewed as making insufficient progress on this matter, an institutional investor may consider taking action by using votes — either supporting relevant shareholder proposals or voting against relevant directors at shareholder meetings. When investors engage with companies, HCM discussions can cover a range of matters, such as:

• Board oversight: how the board oversees human capital-related risks and opportunities
• Metrics: the key metrics used by management and overseen by the board relating to HCM
• Strategy and business practices: how the company approaches human capital management and its possible impact on long-term strategy
• Compensation: how pay strategies are used to recruit and retain employees
• DEI: how a company’s business practices foster a diverse, equitable and inclusive workforce culture
• Employee engagement and sentiment: how concerns and ideas from employees are solicited and how the workforce is engaged in the organization

Given the SEC’s expected proposal on disclosure of human capital, continued investor focus and the evolving business environment, directors are taking a hard look at their company’s talent management strategies and reporting. The board role is likely becoming more critical in supporting organizations’ talent needs to execute new strategies in an increasingly complex world.

Three steps to better board oversight

Taking a more substantive role in talent management oversight can be challenging, requiring boards to strike a balance: acting strategically to support the company’s strength without stepping into the role of management. With this in mind, we offer a framework to help maintain healthy oversight at three different levels of the organization:

1. The C-suite

Directors are responsible for selecting and monitoring the performance of the CEO. As part of that responsibility, the board should hold the CEO and other C-level executives accountable for company performance on talent management. This has become even more important as CEO tenure has shrunk in recent years. As CEOs are under more pressure to deliver short-term results, tackling longer-term initiatives such as upskilling the workforce and fostering diversity can become challenging. Boards should keep talent development a top management priority.

When it comes to C-suite oversight, this can mean setting objectives related to:

• CEO compensation metrics
• strategic talent management
• upholding healthy and ethical corporate values to set the right tone at the top
• fostering a diverse, equitable and inclusive work culture

Closely measuring executive performance in each area is key, along with making it clear to team members that the board expects them to model proper workplace behavior.

2. Up-and-comers

Boards should see to it that the company has a highly qualified talent pipeline for C-suite functions. They can do this by using a readiness chart ​that helps identify senior executives capable of assuming C-level positions now and who might be ready within the next five years. In the meantime, they should take steps to get to know and assess these high performers’ abilities by:

• having them present to the board on major initiatives
• assigning them to work on special board projects
• inviting them to board dinners and other social events

3. Middle management

Directors may lack the time and bandwidth to get to know middle managers personally. At this level, the board can provide oversight in understanding the organization’s talent philosophy, culture and needs for the future by:

• reviewing talent retention strategies and compensation programs to see that they can help address issues such as gender inequity and achieve DEI aspirations
• reviewing metrics that indicate whether the culture aligns with company strategy
• asking how management plans to address current and future skills gaps that may be created by the adoption of artificial intelligence, machine learning, big data, advanced analytics, cloud technology and automation

Board oversight in action

What tools should the board leverage to see that a company’s talent management approach aligns with corporate strategy? Here’s where to start:

Data

During the height of the pandemic, board reporting shifted. Management sent boards more frequent and detailed human capital reports as they monitored workers’ health, safety and productivity. Even now, boards can continue to use this data to spot warning signs and help make better-informed decisions. A review of talent management-related key performance indicators can identify red flags and opportunities for improvement. Helpful data points to monitor include:

• high turnover and high-performer departure rates
• unfavorable exit interviews, particularly those of high-performing employees
• the racial/ethnic and gender breakdown of the current workforce, new hires, the recently promoted and those who resigned
• positions that remain unfilled for long periods
• succession plan failure rate —that is, the number of times management established a succession plan but ultimately hired someone else external
• low employee engagement scores, including an analysis of scores by diverse groups, and
• whistleblower complaints and lawsuits involving HR issues such as harassment and discrimination

A dashboard can ground board conversations about DEI in data and establish a baseline for tracking progress. Although the appropriate metrics will vary by company, this publication of ours includes dashboard examples that can help the board get started.

Firsthand information

Aside from data, directors can benefit from exposure to employees from as many levels of the organization as possible; monitoring employee sentiment and behaviors can identify areas of strength or concern. This can be done by:

• getting a sense of the tone at the top through observation and the use of quantitative metrics related to work culture
• observing interactions between management team members during board presentations to identify potentially unhealthy dynamics, such as an unwillingness to be candid
• interacting with employees below the C-suite level during social events, site visits and board programs
• using the company’s products and services to interact with frontline employees and get a sense of the customer service style
• reviewing employee engagement surveys and requesting reports and presentations on corporate culture

Accountability

Focus from the board can keep talent development and management as one of a company’s top priorities. Directors should consider six actions as they look to provide greater oversight:

• Assign talent management responsibility to either the full board or a dedicated committee so individuals understand their roles and responsibilities. Talent oversight is often allocated to the full board, with committees overseeing certain aspects within their specific areas of oversight. Many boards choose to assign talent management oversight to a designated committee, usually compensation. Whichever structure the board adopts, the important thing is to clearly establish the allocation of responsibility.
• Incorporate talent into strategy discussions. When assessing strategic initiatives’ viability, directors often focus on financial implications. That’s a big piece of it, but the board should also make sure the company has the right people to execute that strategy. The board can do this by requesting that management include a talent component in every new initiative presented to the board.
• Make talent management experience a search consideration for new board members and highlight existing capability. Not every board needs a director with HR experience, but talent management skills can be beneficial. Directors who have managed companies, divisions or regions can bring helpful experience —indeed, companies may wish to highlight this skillset among current directors in proxy statements.
• Elevate the chief human resources officer (CHRO) to a more strategic role and ask for regular updates. Many companies have elevated their human capital leaders, giving them greater responsibility for overseeing talent development and culture efforts. As a C-suite member, the CHRO should have a regular spot on the board’s agenda. Some CHROs present an annual talent review to the entire board, with updates as needed. This talent review should include a focus on DEI efforts.
• Make talent management a KPI for executive compensation. Set specific people-development goals in areas such as DEI, as well as retention targets for new hires and high-potential performers to encourage leaders to place greater focus on talent issues.
• Embed DEI efforts within the organization. This also requires management to provide appropriate reporting to the board on DEI aspirations and performance against those goals. The board’s efforts in the area are important too. Examining the board’s own diversity and approach to succession planning —and being transparent about those efforts —can indicate a commitment to achieving the aspirations.

The takeaways

Director oversight of talent management may be more critical than ever. Companies are dealing with unprecedented business challenges and rapidly evolving technology, requiring constant adjustment of business operations and evolution of business models. These challenges will likely continue to have significant talent management implications, and boards should be proactive in overseeing companies’ policies and practices to support responsiveness and transparency to stakeholders.

Appendix A

The implications of AI on talent management

What is artificial intelligence?

Artificial intelligence (AI) is a technology that has been around in various forms for decades, and in routine use in companies for nearly as long, but the convergence of cloud computing, high- speed computer processing and ubiquitous data has dramatically increased its accessibility and use. AI, in our broad definition, is a collective term for computer systems that can sense their environment, think, learn and take action in response to what they’re sensing and their objectives. AI enables computers, apps and an ever-growing range of programs and devices to perceive the digital or physical world, quickly process what they perceive, and make decisions, recommendations, and/or take actions that traditionally have required human intelligence.

Generative AI (GenAI) goes one step further. It is a type of deep learning that can create content. Since it often works on plain language commands, it can be remarkably easy to use. Simply put, it can not only process and analyze data but generate text, images, video, software code and audio. Models trained on large amounts of data from a wide range of sources that are given user prompts can summarize text, generate and refine code, answer questions and engage in a dialogue, create synthetic data for testing, and more.

Impact on talent management

AI has many organizational benefits, and its impact on talent management can be significant. Many individuals who work with knowledge, even if they have no technical background, can directly work with generative AI. But they’ll likely need new skills to use generative AI so that it can deliver relevant and consistent outputs. Organizations may also need talent in new, specialized roles to benefit from the technology. Companies will likely need to address their retraining and upskilling strategies for existing employees with potential impact on hiring, development and retention strategies.

An emerging wave of AI tools for talent management has the potential to help organizations find better job candidates faster, provide more impactful employee development and promote retention through more effective employee engagement. For example, AI-driven talent systems can analyze and extract key identifiers for the most pertinent qualifications for a given role and even generate an initial assessment and ranking, expediting the identification of top individuals. And with the right combination of AI, human interaction and personalized upskilling, HR teams can contribute to a more equitable and unbiased selection process.

But while AI can have significant talent management benefits, as with many emerging technologies, applications carry risks. Companies should assess and manage AI-based talent management risks, which could include:

• low trust in AI-driven decisions
• AI bias and ethical implications
• erosion of employee privacy
• potential for legal risk

In addition to these risks, there are also risks associated with AIs perceived and actual impacts on the workforce. For example, there is a perception that AI can replace humans and eliminate jobs en masse. However, while AI has proven to be effective with automating routine, recurring tasks, its impacts on the broader workforce remain to be determined. Many people believe AI will likely become a significant job-creator but may require new skills and new roles along the way.

To manage these and other risks, and to harness generative AIs power to drive sustained outcomes and build trust, companies should have responsible AI as a fundamental part of their AI strategy. What is responsible AI? It is a methodology designed to enable AIs trusted, ethical use. When well deployed, it can address both application-level risks, such as lapses in performance, and enterprise and national-level risks, such as compliance and brand denigration.

The board’s focus

Director focus should be on understanding AI applications’ strategic business opportunities and risks. The board will likely want to know how the company looks to change its talent strategy and upskill existing talent to use the technology, and what new skillsets may be needed for success. Directors should assess whether management has considered the social implications and long- term talent development implications. The board should also aim to set the tone regarding responsible AI use and gain comfort that directors and management are clearly aligned as to its use, including understanding mitigation strategies to reduce bias in decision-making.

Appendix B

Talent questions directors can ask management

Overall strategy

• Does the company have a workforce plan that forecasts talent needs both now and three to five years in the future?
• Does the plan incorporate changes spurred by recent global events and the continued evolution of technology?
• How is management monitoring and evaluating regulatory developments so that the company’s infrastructure and reporting can be responsive to the current environment?
• Does the company need to recruit new and different kinds of talent, given changes and developments?
• What is the strategy for attracting or developing talent?
• What is the strategy for retaining and upskilling existing talent?
• What are the challenges to executing the company’s people strategy?
• Is the company adequately investing in skills development, reskilling, upskilling, job redesign and alternate workforce models to help address the talent implications of recent business developments?
• Does senior leadership recognize the strategic importance of human capital?
• Does the CHRO have the right level of visibility in the boardroom?

Shareholder engagement

• Has management identified the company’s key shareholders and does the board understand its prioritization and expectations relating to talent management?
• What human capital metrics, if any, have key shareholders identified as part of the engagement process?
• How has management considered the human capital priorities of key shareholders

Succession planning

• What is the current succession plan, and how far into the organization does it go?
• What is the company’s track record with succession planning — for example, how often an identified successor candidate was ultimately chosen?
• Are the executives two to three levels below the C-suite getting the experience and training they need to take on higher-level roles and to drive strategy — even a completely new strategy?

Technology

• What is management’s process to identify technology risks and mitigation strategies?
• What technology investments are planned in the short and long term that could affect talent management?
• Has the company developed appropriate processes and procedures to support the use of generative AI and other emerging technologies?
• How is the company gaining comfort that AI-based technology implemented into the talent
• management process is not incorporating or perpetuating bias?

Diversity, equity and inclusion

• How is the company investing in recruiting, developing and promoting a diverse workforce? What are the results of those efforts?
• If the company doesn’t have a diverse workforce, has a root-cause analysis been conducted to determine why? What steps are being taken in response to this challenge?
• Are executives being held accountable for DEI through compensation metrics or aspirations?
• Should the company consider adopting a policy of interviewing at least one woman or racially/ethnically diverse candidate for management positions?
• Is the board receiving the data it needs to gauge progress on DEI efforts?
• How is the company balancing its DEI efforts amid increasing pushback from various stakeholders and changes in the legal landscape?

Board composition

• Does the board have sufficient talent management experience or access to the skillsets?
• To what extent is talent management experience prioritized when recruiting new directors?
• Does the board’s composition reflect the diversity aspirations that are expected at the leadership level within the organization?
• Does the proxy statement articulate the full extent of the board’s talent management experience?

Employee recruitment, retention, feedback and workforce metrics

• What is management’s process for gauging employee sentiment — annual surveys or pulse surveys?
• What programs and initiatives have been implemented or enhanced to positively affect employee retention?
• What is management’s process for determining the effective metrics to increase employee retention?
• What efforts has the company undertaken to understand and align the expectations of new
• joiners with those of existing employees?
• What changes has the company made to expand its employee pipeline — for example, hiring nontraditional candidates?
• How is the company differentiating itself as an employer of choice?