Why Is The Prevalence Of CHROs As Named Executive Officers On The Rise?

Here is what the future holds for CHROs

With heightened attention on important issues like diversity, equity, and inclusion, as well as human capital management (HCM), company culture, and organizational health, the role of  Chief Human Resources Officer (CHRO) has become more vital than ever. As the leader of a company's human capital strategy, programs, and practices, the right CHRO can help a company differentiate itself in terms of people and the workforce. As many investors and stakeholders see it, this explains a great deal about why some companies create more shareholder value and outperform their competitors.

Recent research from Main Data Group found that in companies in the S&P 500 where a CHRO is a named executive officer (NEO), the total shareholder return was about 30% higher than the rest of the S&P 500 over the last three years. That’s a significant difference and merits a deeper understanding of why a CHRO as a strategic member of the top team has such a company-wide impact.

In a small but growing number of companies, the CHRO is an integral member of the executive team, who contributes to developing and executing core business strategies. This emanates from some very long-term research around what creates “intangible value.” According to the Human Capital Management Coalition, various research demonstrates that human capital and non-financial value drivers explain up to 85% of “intangible value.” Therefore, does it make sense, for companies that want to increase that intangible value—and enhance their appeal to long-term and institutional investors—to focus more on human capital management and the role of the CHRO?

The best examples of successful elevation of HCM are in companies where the CEO, CFO, and CHRO are involved as partners in the strategic direction of the organization. The CEO has integrative oversight, setting business strategy. The CFO oversees the financial capital and the CHRO similarly oversees human capital. In such a C-suite, the CHRO leads all things related to “people,” and how that impacts strategy achievement and value creation for the business.

In order for such an arrangement to succeed (and lead to situations where shareholder return is higher), the CEO and board must support the CHRO and enable and expect them to create value through human capital. This shift is both a practical and symbolic step to elevating the role from a specialized HR executive (mostly focused on compliance and administrative activities) to a strategic business leader on equal footing with other NEOs. As such, the success measures and time horizons for the CHRO should be similar to the rest of the senior leadership team: well-defined, consistently measured, and benchmarked compared to peers.

Historically, we have seen another office elevated to the rank of NEOs with incumbent higher pay. The role of CFO notably emerged from its administrative focus (e.g., accounting, finance, budgeting/planning) to become the #2 officer in nearly every organization. The reason was simple: in the 1980s, investors began to demand a higher level of financial sophistication. Over time, the role—and pay—of the CFO is now typically just below the CEO in most companies.

Some could argue that the reason for the current emerging importance of the role of CHRO is because of an overweighted emphasis on financial results (with an assumption that HR does not add value) and the exclusion of HR from strategic conversations in the past. Unfortunately, at many companies, particularly publicly owned, when quarterly results aren’t strong, leaders have reacted with cost-cutting and downsizing. Over time, these repetitive short-term actions have created long-lasting effects, resulting in low employee engagement, high turnover, poor company reputation, negative customer experiences, unionization, social protests, and now the “Great Resignation.”

As we observe what is generally happening in the boardrooms around the U.S., it is clear that environmental, social, and governance (ESG) issues, and more specifically, HCM are crucial strategic concerns and here to stay. Given the external market dynamics and mounting investor interest, a slow, but steady further progression in CHRO pay is to be expected. More importantly, as investments are made to find and keep top talent and develop a high-performing workforce, the number of CHROs listed as NEOs will very likely continue to increase as CEOs and boards step up their requirements and make these important HCM-based organizational shifts. That will be followed by the inevitable competition for top talent, which is already an issue, and in short supply.