May 2010

By Na Boon Chong,
Director, Consulting, South-east Asia

This article was featured in The Business Times' Corporate Awards Supplement on May 11, 2010 and is reprinted in this issue of Asia Connect with BT's permission.

Attracting and retaining top talent and guarding against reputational risks are the key risk concerns in our survey of the world’s leading risk professionals and corporate officers earlier in late 2008.

Cases of corporate abuse and mismanagement that brought companies down have also highlighted the importance of mitigating human capital risks. Reputational risk is, however, not as much about catching bad people doing bad things as much as it is about stopping good people from doing bad things.

Human frailties such as greed, self-interest and over-confidence need to be reined in so as to prevent them from impairing business judgment. Therefore, the board should take human capital issues seriously and play a bigger role to manage the risks.

While the board is now expected to be more involved in their company's risk management through a board-level risk management or audit committee, we would urge them to also be more involved in managing the values and behaviors underpinning executive performance, compensation and leadership.

These issues are usually delegated to the compensation committee and the nominating committee of most boards, but we think that accountability lies with the entire board. While there is a fair amount of board attention on compensation issues, there is less attention paid to the performance management process, leadership quality and succession.

In our view, a board's responsibilities in performance management should comprise the following:

• Determine and prioritize the CEO's goals according to the strategic plan
• Draft the initial performance plan by the compensation committee, and include a potential risk analysis on failure to achieve the plan
• Review draft with CEO and get feedback, and adjust accordingly
• Get entire board approval on the final plan
• Communicate the final plan to the CEO, and have the CEO cascade his plan down the ranks
• Have ongoing communication with the CEO
• Conduct timely and thoughtful performance evaluations at least once a year
• Recognize and reward performance accordingly

For this performance management process to work, the CEO has an equally important role to play by clarifying expectations, providing regular feedback on the viability of meeting goals, and identifying barriers and key risks that may hinder the progress.

The nominating committee, among its other duties, oversees CEO succession (which ultimately should be decided by the full board). We suggest the following approach:

• The board and the CEO should take responsibility for CEO succession planning
• The plan should be updated at least once a year, and the board should receive an annual report on the plan
• The plan should contain five basic elements:
  • Assessment of the company's current and future business needs
  • Assessment of the strengths and weaknesses of the current CEO
  • Identification of internal candidates to succeed the CEO
  • Consideration, updated periodically, of whether to conduct an external search for CEO candidates
  • An emergency crisis management plan when there is no ready-made CEO successor

Having a shared understanding and clear expectations would help the CEO improve his relationship with the board, and vice versa.

The management is managed by an independent board. But who manages the board? Is there an inherent lack of independence in a self-management mechanism? Would there be independent thinking and actions devoid of self-interest?

This is where underlying values and behaviors are even more important. Coupled with this moral compass, the board's self-management is further reinforced by professional competence, rigorous processes and deliberations, and transparency.

Ensuring quality in human capital starts from the top and this is probably the most fundamental risk mitigation tool any company can have.

Contact

For more information on how Aon Consulting can help you with human capital issues at the board level, please contact Na Boon Chong, Director, Consulting in South-east Asia at boon_chong_na@aon-asia.com.