HR on the board: HR professionals are providing some much-needed expertise as members of boards of directors

HR Magazine, June, 2004 by Robert J. Grossman

Bill McLaughlin had set a pretty ambitious goal for himself. As president and CEO of Select Comfort in Minneapolis, Minn., a bedding retailer with 1,800 employees and annual net sales of $336 million, McLaughlin needed to add a new board member.

But not just any business leader would do. McLaughlin wanted a seasoned businessperson who had a global perspective, was a knowledgeable strategist, was savvy in consumer markets and could understand a balance sheet.

He also wanted someone with whom the other board members--mostly CEOs from other companies--could feel comfortable, someone whose contributions they would value and whom they would welcome as a peer.

A tall order indeed--but there was more. With an outside financial expert already in the fold, McLaughlin--whose background is in sales and management--wanted an HR voice to round out his team. "We had a lot of CEOs and business leaders, but none really knew compensation," he says. "And we knew that creative compensation policies are crucial to incenting our executives and improving overall retention.

"A lot of companies don't appreciate how important HR can be," McLaughlin adds, "but I've seen firsthand how it can make a difference. I've had the good fortune of working at Pepsico, where HR was very strong."

After a careful search, the board at Select Comfort chose Mike Peel, senior vice president of HR and corporate services at General Mills. Peel assisted General Mills' board and its compensation committee for 12 years, and brings a wide variety of business skills to the table.

"Select Comfort is growing 30 percent each year, and one of the great challenges is having sufficient human capital and leadership," Peel says. "I'm able to provide a broad business perspective, and I have areas of expertise that add synergy," such as compensation, succession planning and international business.

McLaughlin says Peel, who chairs Select Comfort's Management Development/Compensation Committee, has had an immediate impact. "In people issues, we've become more analytical, more fact-based, in developing alternatives. Before, we were relying on consulting for our HR input; now we're more participative and planful in our decision-making."

Peel's antenna is attuned to things others miss, like when the board considered moving manufacturing offshore where labor is cheaper. "He helped us understand the advantages of staying local, that we have a real strategic advantage in our domestic workers' dedication and participation in improvement," McLaughlin says.

Peel is one of a growing list of elite HR executives proving their mettle in both corporate and nonprofit boardrooms. Along with contributing to overall board policy and strategy, these HR pros typically provide leadership on board committees responsible for compensation, succession planning, executive assessment, ethics and recruiting.

Perhaps more important, they serve as the vanguard, leading the way for others to follow as their boards learn firsthand just how much directors with comprehensive HR expertise add to corporate governance.

Governance Under Scrutiny

Since the spate of corporate scandals in the past few years, the roles and responsibilities of boards--and the selection of directors--have become major issues.

With board performance facing greater scrutiny, Congress and regulators have moved to make sure that boards are more accountable and independent. For example, the Sarbanes--Oxley Act, which applies to all publicly traded companies, requires audit committees to be completely independent and to have at least one financial expert.

And Wall Street is paying more attention too. Both the New York Stock Exchange and National Association of Securities Dealers recommend that a majority of board directors come from outside the company, and that nominating, audit and compensation committees be composed entirely of independent directors. The National Association of Corporate Directors (NACD), a Washington, D.C.-based membership association for boards, directors and their advisers, also suggests that compensation committees be staffed only by outside directors.

The push for outside directors underscores the increasing scrutiny placed on these positions, as well as the need for new kinds of individuals to fill these roles.

At the same time, a debate is forming regarding the skill sets directors should possess: Should these individuals be generalists, or should they specialize in certain skill areas, such as HR?

Some academics--including Jeffrey Sonnenfeld, associate dean of the Yale School of Management--believe that specialists are unnecessary. "Boards don't need HR specialists or other narrow experts," says Sonnenfeld. "CEOs or other experienced generalists with big-picture expertise are sufficient."

Indeed, roughly 60 percent of all directors in the Standard & Poor's (S & P) 500 are current CEOs--and many of the remaining 40 percent are retired CEOs--according to Chris Plath, associate director of the Global Corporate Governance Research Center at The Conference Board, a nonprofit business research and educational organization in New York.