This article is co-authored with Josh Gentine, founder of Bench Analytics. It appears in the Perspectives section of the Winter 2019 edition of People & Strategy Journal as a counter-point in the Inside-Out People Analytics discussion. Photo by Dane Deaner on Unsplash.

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While the rise of people analytics has dominated the narrative in and around HR departments, there is a critical audience on the executive floor that needs to understand its impact: the board of directors. Directors have a fiduciary duty to stockholders that includes three legal obligations: 1) the duty of care that directors make decisions with due deliberation; 2) the duty of loyalty that directors act in the interest of the corporation (i.e., in the interest of shareholders); and 3) the duty of candor that directors provide shareholders all information that is important to evaluation of the company.1

From a board’s perspective, information relevant to the company’s evaluation is largely centered on financial considerations. Fortunately, a growing body of work ties the performance of people to the long-term financial performance of an organization. In their 2018 book, Talent Wins, Barton, Carey, and Charan contend that “Talent, even more so than strategy, is what creates value.”2 As such, people, and people-related information, fall squarely in the board’s duty of candor, informing shareholders of all information that is important to their evaluation of a company. 

This sentiment is shared by the Human Capital Management Coalition, a group of major institutional investors, which submitted a petition to the SEC in 2017 asking the agency to require human capital disclosures in SEC reporting by public companies. This would include human capital management policies, practices, and performance issues (e.g., workforce skills and capabilities, workforce culture) as effective human capital management was essential to long-term value creation, and therefore, material to evaluating a company’s prospects.3

Given human capital’s increasingly recognized contribution to company value and results, boards must pay greater attention to human capital analytics insights. A prime example of this need for visibility and understanding is during a merger and acquisition (M&A) transaction. Historically, boards have spent a majority of due diligence time on earnings quality, market and financial projections, and legal and operational risk-related concerns. Certainly, HR matters are addressed during due diligence—such as compensation, benefits, actuarial estimates, etc.—but true understanding of the people involved in the transaction is astonishingly underrepresented.

According to The Corporate Leadership Council of the Corporate Executive Board, “research shows…overcoming human capital challenges is more important to integration success than any other aspect of integration.”4 A 2018 Mercer survey links culture issues to M&A problems: “43 percent of M&A transactions worldwide experienced such serious culture issues that deals were delayed, terminated, or purchase prices were negatively impacted.”5

Today, the growing use of people analytics provides a bridge for leadership, boards, and transaction advisors to better understand the people-related implications of a transaction. For instance, acquirers can collect target company metadata and use organizational network analysis (ONA) to better understand the communications and connectivity of divisions and teams. This insight can help design objectives for the future state of the organization. Ongoing ONA analysis during the post-merger integration phase can preemptively mitigate integration risk by identifying communication gaps between the converging organizations. Careful human capital due diligence identifies who in the target company is engaged, what factors contribute to role success, and what contributes to regretted turnover. Although atypical for due diligence, this information is vital to getting a transaction right and ensuring the integrated company achieves its stated investment thesis.

To meet the fiduciary duty of candor, people analytics must be understood in the boardroom. CHROs and analytics teams need to arm directors with the data-driven insights that will help directors exercise this fiduciary duty.

References

1. Larcker, D.F. & Tayan, B. (n.d.). Board of Directors: Duties and Liabilities. Corporate Governance Research Institute, Stanford Graduate School of Business. Retrieved from https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-quick-guide-03-board-directors-duties-liabilities.pdf

2. Charan, R., Barton, D. & Carey, D. (2018). Talent Wins: The New Playbook for Putting People First. Boston, MA: Harvard Business Review Press. 

3. Public letter from Human Capital Management Coalition to the U.S. Securities and Exchange Commission (2017). Retrieved from https://www.sec.gov/rules/petitions/2017/petn4-711.pdf

4. Corporate Leadership Council of the Corporate Executive Board (2006). HR’s role in mergers and acquisitions: Tools and mandates for the chief human resources officer. Retrieved from http://www.hralliance.biz/resources/mergersandHRRole.pdf

5. Mercer (2018). Mitigating culture risk to drive deal value. M&A Readiness Research™ Series 3.0 Report. Retrieved from https://www.mercer.com/newsroom/mercer-survey-reveals-that-culture-issues-derail-ma-transactions-at-an-alarming-rate.html