|
Other
articles can review the specifics of Sarbanes Oxley.
This article will focus on the implications of
Sarbanes Oxley for Chief HR Officers. The critical issues revolve around the change in the
corporate balance of power and how Sarbanes Oxley will
extend to private companies and nonprofits.
With the new change in the balance of power, it is
more important than ever for CEOs to properly read the
signals from the Board.
And, paradoxically, the potential for mis-cues have
never been greater.
There is
a critical role for chief hr officers who have the
competence and willingness to help prevent mis-cues from
escalating.
Sarbanes
Oxley changes the balance of power between CEOs and Boards.
There will be a formalized checks and balances
system. Plan
on a feisty group of Board members who will be asking
tough questions of CEOs.
If CEOs are angry with Sarbanes Oxley, that means
they “get it.” The
new world of governance does not have to be an adversarial
one. The
compliant “Good Old Boys from the Club” Board will be
confined to sleepy credit unions and community hospitals.
Sarbanes
Oxley is the future.
Some public companies are openly talking about
going private to avoid the costs of Sarbanes Oxley
compliance. But
that action will prove a costly mistake: in the near
future, public companies doing business with private
companies of a certain size will require that these
private companies have the financial transparency and
governance balance of power required of Sarbanes Oxley:
they will want critical business suppliers to be as
squeaky clean as they are.
Companies whose exit strategies involve being
acquired will find that compliance with Sarbanes Oxley a
critical issue impacting the negotiated price.
McKinsey has published two studies showing that
institutional investors will pay a premium to acquire
stock in companies with good governance.
That premium ranges from 12% in North American to
50% in Africa and Eastern Europe.
(www.mckinsey.com)
There is no reason to assume public companies acquiring
private companies will also not pay a premium for a
private company that runs along Sarbanes Oxley lines.
Even mutual funds, nonprofits and foundations will
be moving in the direction of Sarbanes Oxley: new
directors from the private sector will insist on
governance structures as tight as what they are used to.
AN
EMERGING ROLE FOR CHIEF HR OFFICERS
In the
pre-Sarbanes Oxley world, the Chief HR Officer would
provide normally technical support to the Compensation
Committee of the Board.
The chief HR Officer would be invited to specific
meetings of the full board to answer questions relating to
human capital. In
rare instances the Chief HR Officer would sit beside the
Chief Financial Officer as a full member of the senior
executive team at the Board of Directors table.
In the
United Kingdom, there is an explicit separation of the
roles of Chairman of the Board and Chief Executive
Officer. Most
of the literature on good governance in the United States
recommends adoption of the British model.
But few U.S. public companies have done so:
there still is a tendency to invest one individual
with both roles, despite the conflict inherent in the role
of being moderator of the group that evaluates the
performance of the Chief Executive Officer.
A Board
is a work group. In
a Sarbanes Oxley world, it is difficult for a CEO/Chairman
to be the leader of a group and the subject of the
group’s discussion under conditions when the
CEO/Chairman has lost dominance over that group.
CEO/Chairmen face the following dilemma: it has
never been more important that CEO/Chairmen accurately
read group dynamics and it has never been more difficult
for them to be able to do so.
For
example:
One
of our clients is a global financial institution.
At the Board level, there is a joke about the The
Nod. It is a
vertical movement of the head downwards with a blank
facial expression. The
Nod could mean “I agree with you” or “I understand
what you have said but I disagree with you.”
The interpretation of The Nod has to be placed in
context of what is going on in at the Board, combined with
what the Board member has said in the past.
Many Board members use The Nod as a way of avoiding
clear statements that could later be used against them in
a shareholder class action lawsuit.
When a
CEO/Chairman is the leader of the group, the subject of
the group’s attention, and has lost control over the
group what is the probability that the CEO/Chairman can
mis-evaluate subtle cues?
In our
work with CEOs who have been fired by their Boards, it is
not unusual to get the following complaint:
I
thought this was going to be a typical Board meeting.
I had no clue that the Board was THAT unhappy.
How could I have missed it? There is only one
answer. The Board was working behind my back, that’s
why!
Our
experience is that the Board may not have initially been
working behind the CEO/Chairman’s back. They were,
however providing the CEO with subtle cues about their
dissatisfaction. The
CEO/Chairman was mis-reading the subtle cues.
Eventually the Board did indeed work behind the
CEO’s back.
Reading
Group Dynamics at the Board of Directors Level.
In
addition to their other competencies, Chief HR Officers
are outstanding readers of group dynamics.
What they may lack is an understanding of
governance issues so that The Nod or other subtle cues can
be placed in some appropriate business/strategic context.
Chief HR
Officers who combine knowledge of group dynamics with an
understanding of governance issues can be indispensable
resources for CEO/Chairmen.
Combine
the two and the Chief HR Officer can make a compelling
case why the Chief HR Officer should be present at every
Board meeting and sit next to the CFO as a peer.
BETTER
BONDING MEANS A MORE IMPORTANT HR FUNCTION
The Chief
HR Officer will truly bond with the CEO/Chairman when the
CEO/Chairman says to the Chief HR Officer:
“At
the conclusion of this Board meeting, I want you to come
to my office. I’ll
tell you what I think happened.
And you tell me what you think happened. “
As the
value of the Chief HR Officer’s expertise becomes clear
to the CEO/Chairman, it becomes easier to convince the
CEO/Chairman about the important role of organization
development interventions within the rest of the
organization.
Any
issues of the VP HR reporting to the Chief Financial
Officer will be off the table if this type of bonding can
be achieved and sustained.
IT’S
ABOUT DIFFERENTIATION AND VALUE
Sarbanes
Oxley is a dramatic change in the balance of power between
CEOs and Boards. It
is the future for public companies.
Variations of Sarbanes Oxley are in the future for
large private companies, nonprofits, foundations, and even
mutual funds.
Chief HR
Officers who immediately seize on the unique opportunities
afforded them by Sarbanes Oxley will provide a critical
value-add for their companies and for HR’s credibility
within their companies.
At the
individual level, they also will be able to uniquely
differentiate themselves in the future marketplace for
Chief HR Officer talent.
###
Dr.
Laurence J. Stybel and Maryanne Peabody are co-founders of
two companies. Stybel
Peabody’s is a twenty-five year old company whose
mission is Career Excellence for Leaders.
Board Option’s mission is helping Boards be more
effective problem solving units through the integration of
National Association of Corporate Directors standards and
proven organization development techniques.
Their website is www.boardoptions.com.
|
