Board members are increasingly challenging management to ensure the organization’s talent pipeline can meet the needs of the strategy. In this episode of the Inside the Strategy Room podcast, we continue our series on board perspectives by looking at the board’s role in helping organizations develop the right talent and culture. To explore this topic, Frithjof Lund, the global leader of McKinsey’s board services work, speaks with two experts on governance and organization. Hugo Bague, a former group executive at Rio Tinto, is a non-executive director on the board of Jones Lang LaSalle (JLL), a global real estate services firm, where he chairs the compensation committee. Mary Meaney is a globally recognized leader on change management and organizational transformations who until recently co-led McKinsey’s Global Organization Practice and served on the global governance board. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, subscribe to the series on Apple Podcasts or Google Podcasts.
Frithjof Lund: The importance of maintaining a strong culture and talent pipeline has arguably grown during the pandemic. Hugo, how do you see that play out in boardroom discussions?
Hugo Bague: All the technological changes, market changes, and changes in the employment market have led to discussions at the board table because, of course, they link with strategy. Do we have the right talent to fulfill that strategy? While years ago, financial capital was the dominant aspect of board discussions, that is now balanced with these other topics.
Frithjof Lund: One of the board’s key roles is overseeing CEO succession. Are boards now extending that lens to other talent?
Hugo Bague: Yes. When I was at Rio Tinto, and now on the board at JLL, I have seen a huge shift. Traditionally, the role of the board was indeed looking at succession planning, but now it has expanded to questions such as, if we make these strategic shifts, do we have access to the critical skills needed for those shifts? What is the health of the leadership pipeline, and not only in terms of robust succession plans for the top team but for other critical roles?
It links with capital investment as well. At one time at Rio Tinto, we discussed investing in a particular industry and let go of one of those potential investments because we were not sure if we could get the right talent in place. That was an example where talent was on the front line of a strategic decision.
Mary Meaney: I agree that we are seeing a shift. Historically, boards did not spend much time on talent and culture, and when they did, it was very narrowly focused on CEO compensation and succession. Even with that narrow focus, many board members were unhappy with the quality of the debate and outcomes. Now, many companies realize that human capital is incredibly strategic, and that attracting, developing, retaining, and deploying that talent is a real source of competitive advantage. For the board, that involves a delicate balancing act because executing this is the role of management but it is the board’s role to ensure governance.
Hugo Bague: The board can be enormously powerful in the questions they ask or fail to ask and what they put or don’t put on the agenda. All that sends a big signal about what matters. I do see a trend toward more companies and boards putting talent on the agenda, and even at the top of the agenda. Sometimes they rename committees—for example, from a Remuneration Committee to a Talent and Rewards Committee. Anecdotally, I would observe that the time the board spends on talent is proportional to the time that operational business leaders spend on talent. Twenty years ago, CEOs and other members of the senior team delegated talent to the chief HR officer [CHRO]. Today, that is changing, too.
Frithjof Lund: You mentioned, Mary, the sensitivity around the delineation of roles between the board and the management team. I am currently working with a new chair who has a strong mandate from the owner to become involved in talent beyond succession, while the management and the CEO are skeptical about opening that up to the board. How do you manage that sensitivity?
Mary Meaney: A lot depends on the ownership structure, whether the company is family-owned or publicly listed or private equity–led. It also depends on the relationship between the chair and the CEO. Historically, the board put their noses in but kept their fingers out. It respected the management’s responsibility to develop the strategy and execute it but asked questions and played that governance role. But the COVID-19 crisis was an unprecedented time. One of the CEOs I work with put it well: “I have to make 100 percent of the decisions with only 10 percent of the information I need.” The way he thought about it was, “I want to get the board’s perspectives because it is part of my sensing mechanism and a way to process this crisis.” When you create a constructive relationship between the CEO and the board, extraordinary things happen.
Hugo Bague: I would add two things that I, as a board member, try to do. One is probing. When you see that your CEO can talk in detail about the talent that sits two levels below him or her and has met those people personally, that gives you assurance that there is robustness in the talent system. We also ask management to give those lower-level people exposure to the board.
When the CEO can talk in detail about the talent that sits two levels below him or her and has met those people personally, that gives you assurance that there is robustness in the talent system.
Frithjof Lund: What are the best moments for the board to ask those probing questions?
Hugo Bague: In my experience, and that goes back to my time at Rio Tinto, it is around key investments a company wants to make. Where do we have the talent to fulfill the promise on that investment, whether that is a greenfield investment or an acquisition?
Mary Meaney: I would agree. The board needs to ensure that enough thought has been put into understanding the strengths of the target company’s talent and whether it is a good match in terms of values and culture. Are we going to be able to retain that talent? Otherwise, you lose a lot of the acquisition’s value. The second area is around big moves. There are numerous risk assessments in making a major strategic thrust but in my experience, companies do not always look at the talent risk. Do we have the talent that will enable us to deliver this? What evidence gives us confidence that we do?
Frithjof Lund: Many board remuneration committees have been reconfigured to take on a broader talent view. How much of the talent discussion do you find happens in the committee versus in the broader board?
Hugo Bague: At JLL, those questions are discussed with the full board. JLL made a large acquisition two years ago and more than once we had a full discussion about culture and talent and mitigation strategies around the risk of losing critical talent.
Frithjof Lund: What happens if the board is not satisfied with the answers to its questions about talent? Have you seen boards make active interventions?
Hugo Bague: I would say boards ask for more active interventions, not make active interventions themselves. You can give advice and suggestions.
Mary Meaney: What I see is more about challenging and questioning the CEO and the CHRO, and also CHROs being present more often at the board meetings and fully participating in the discussion. The board has to hold the senior executive team to account to make sure that they are fully addressing talent, culture, and purpose, because in today’s world, strategy is relatively easy to replicate and capital is relatively easy to access. What gives you a real source of competitive advantage is your talent and culture.
In today’s world, strategy is relatively easy to replicate and capital is relatively easy to access. What gives you a real source of competitive advantage is your talent and culture.
Frithjof Lund: That’s an interesting point. Some of my private-equity clients whose portfolio companies have boards link directors who have experience in people and organization issues with the company CHRO. They create these dynamic duos that can work across the board and the management team on these topics.
Let’s pivot toward culture, which is closely linked to talent. In the UK, the oversight of corporate culture is now also part of the Corporate Governance Code. Why is that, Mary?
Mary Meaney: The reason culture is increasingly on the agenda is because there is a huge downside when you get it wrong. We have seen many great organizations stumble and sometimes even collapse because they had deep cultural issues. There is also a massive upside when you get it right. We have data showing that companies with strong cultures outperform by a factor of three their peer sets.
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Frithjof Lund: How do you define culture?
Mary Meaney: It is a bit of an amorphous topic. The way I think about culture is as a set of mindsets and behaviors that shape how work gets done and decisions are made. It is very much about what people do on a day-to-day basis and the mindsets and beliefs that drive those behaviors. That makes it hard to measure, but it is critical to understand what the culture is. In large organizations, there is often not just one culture but a number of very different subcultures. Are some of those subcultures unhealthy and represent a risk because people are cutting corners or doing things they should not be doing?
Boards are getting increasingly involved in a governance capacity for those reasons—to make sure that senior leadership understands the culture and the risks. Culture is not an end in itself; it is a way of enabling the organization to deliver on its strategy. The board can ask: based on our strategy, what cultural elements and themes are most important?
Hugo Bague: Cultures can also change more rapidly than boards think. Board directors sometimes underestimate the influence the CEO has on the culture. The CEO’s behaviors are quickly copied throughout the organization.
Mary Meaney: I completely agree, Hugo. The culture needs to be owned by the senior leadership. People will watch their feet, not their lips. They will watch who gets promoted and who gets sidelined, which shows what is real and what is just rhetoric.
One other area of culture where the board can be really powerful is around lifelong learning. From the boardroom down to the engine room, everybody’s skills are growing obsolete faster and faster, so one of the critical success factors, both for individuals and institutions, is having a thirst for learning and an external orientation.
Frithjof Lund: You point to something important, Mary, which is the board as a role model on the cultural dimension. I saw that exemplified when a large retailer made a big acquisition and the board flew coach to visit the target’s headquarters. They rented a van and drove to the different outlets and then the board had a meeting in the head office canteen. The reason was that continuous improvement and cost-consciousness were big cultural and business drivers for that business niche, so the board wanted to send a strong signal: we are living this.
How do you learn the culture? Is it about surveys and data or more about talking to people one on one?
Hugo Bague: You need to do all those things to get a rounded picture. One of the things we were privileged to do at JLL is, after board meetings abroad, we would have dinner with local talent. We learned an enormous amount in those exchanges about how people interact with one another. Do they challenge one another? Do they support each another? You see the culture at work.
Mary Meaney: What is a waste of time are carefully orchestrated road shows where you get slick presentations but don’t get under the surface. You need different data points. I remember at one organization, when I talked to people in the factory they would look over their shoulders before they answered any question. That happened repeatedly and I realized there was a culture of fear.
It is important to get that 360-degree perspective. I often find that broad-based culture surveys highlight disconnects between what senior leaders say and what people at other levels in the organization report. It is interesting to look at how big the disconnect is and where it happens. Typically, leaders are more positive about the quality of the leadership. At one large company, the senior team all rated themselves top quartile on leadership, direction, culture, work environment, you name it, but what was fascinating is that their direct reports rated them at the bottom of the lowest quartile. It was right there for everybody to see.
It is particularly important for the board to delve into cultural elements that give you cause for concern. When people don’t have a strong sense of personal ownership or accountability, that makes me nervous because it suggests that the risk culture may not be there. If people do not have strong professional standards and values, or they feel disempowered, those are things to probe.
Frithjof Lund: What would you advise to board directors who want to become more engaged on issues around talent and culture?
Hugo Bague: Don’t only count on your own experience as an executive but be constantly on the lookout for what other companies are doing. Have exchanges with board members of other companies in other industries and see what you can apply to your own company.
Mary Meaney: This goes back to that mindset of lifelong learning, whether that is through external experts or the latest research or spending time with the organization. There is a huge amount at stake in getting this right.