It is 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. 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. 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.
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 organisation’s energy.
CEOs might complain that their CHROs are too busy in administrative tasks or that they do not 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.
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 crystallising 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 incentivising 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 digitisation, 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 digitisation. The specific metrics would be designed accordingly.
The CHRO should also be able to make meaningful predictions about the competition. Just as every army general learns about his counterpart on the enemy side, the CHRO should be armed with information about competitors and how their key decision makers and executors stack up against those at the CHRO’s organisation. Predictions should include the likely impact of any changes related to human resources at rival companies—such as modifications to their incentive systems, an increase in turnover, or new expertise they are hiring—and what those changes might signify about their market moves.
The CHRO should make comparisons unit by unit, team by team, and leader by leader, looking not only at established competitors but also at nontraditional ones that could enter the market. Is the person who was promoted to run hair care at X company more experienced and higher-energy than our new division head? Does the development team in charge of wireless sensors at Y company collaborate better than we do? The answers to such questions will help predict outcomes that will show up as numbers on a financial statement sometime in the future.
The CHRO is in a position to pinpoint precisely why an organisation might not be performing well or meeting its goals. CEOs must learn to seek such analysis from their CHROs instead of defaulting to consultants.
The CHRO should work with the CEO and CFO to examine the causes of misses, because most problems are people problems. The idea is to look beyond obvious external factors, such as falling interest rates or shifting currency valuations, and to link the numbers with insights into the company’s social system—how people work together. A correct diagnosis will suggest the right remedy and avoid any knee-jerk replacements of people who made good decisions but were dealt a bad hand.
If the economy slumped and performance lagged compared to the previous year, the question should be, How did the leader react? Did he get caught like a deer in the headlights or go on the offensive? How fast did he move, relative to the competition and the external change? This is where the CHRO can help make the critical distinction between a leader’s misstep and any fundamental unsuitability for the job. Here too the CHRO will learn new things about the leader, such as how resilient he is—information that will be useful in considering future assignments.
But focusing on individual leaders is only half the equation. The CHRO should also be expert at diagnosing how the various parts of the social system are working, systematically looking for activities that are causing bottlenecks or unnecessary friction.
There is great value in having the CHRO diagnose problems and put issues on the table, but such openness is often missing. Behaviors such as withholding information, failing to express disagreement but refusing to take action, and undermining peers often go unnoticed. Some CEOs look the other way rather than tackle conflicts among their direct reports, draining energy and making the whole organisation indecisive. Take, for example, problems that arise when collaboration across silos doesn’t happen. In such situations, no amount of cost cutting, budget shifting, or admonition will stem the deterioration. Thus, CHROs who bring dysfunctional relationships to the surface are worth their weight in gold.
At the same time, the CHRO should watch for employees who are energy creators and develop them. Whether or not they are directly charged with producing results, these are the people who get to the heart of issues, reframe ideas, create informal bonds that encourage collaboration, and in general make the organisation healthier and more productive. They may be the hidden power behind the group’s value creation.
Agile companies know they must move capital to where the opportunities are and not succumb to the all-too-typical imperatives of budgeting inertia. Companies should be similarly flexible with their human capital, and CHROs should be prepared to recommend actions that will unlock or create value.
These might include recognising someone’s hidden talent and adding that individual to the list of high potentials, moving someone from one position to another to ignite growth in a new market, or bringing in someone from the outside to develop capability in a new technology. Although capital reallocation is important, the reassignment of people along with capital reallocation is what really boosts companies.
Responding to the external environment today sometimes requires leaders with capabilities that were not previously cultivated, such as knowledge of algorithms, or psychological comfort with digitisation and rapid change. The company might have such talent buried at low levels. To have impact, those individuals might need to be lifted three organisational levels at once rather than moved incrementally up existing career ladders. The CHRO should be searching for people who could be future value creators and then thinking imaginatively about how to release their talent. Judging people must be a special skill of the CHRO, just as the CFO has a knack for making inferences from numbers.
Another way to unlock value is to recommend mechanisms to help an individual bridge a gap or enhance her capacity. These might include moving her to a different job, establishing a council to advise her, or assigning someone to help shore up a particular skill. For example, to build the technology expertise of the small start-ups he funded, the famed venture capitalist John Doerr used his huge relationship network to connect the people running those businesses with top scientists at Bell Labs. In the same vein, CHROs could make better use of their networks with other CHROs to connect people with others who could build their capacity.
The CHRO might also recommend splitting a division into subgroups to unleash growth and develop more P&L leaders. He might suggest particular skills to look for when hiring a leader to run a country unit or big division. Other prescriptions might focus on improving the social engine—the quality of relationships, the level of trust and collaboration, and decisiveness. The CHRO could, for instance, work with business divisions to conduct reviews once a month rather than annually, because reducing the time lag between actions and feedback increases motivation and improves operations.