Internal Audit, Risk, Business & Technology Consulting

Board Oversight of an AI-Transforming Workplace: Insights from Active Directors

Below is the full summary, including key takeaways, of a discussion

among a group of active directors facilitated by Protiviti during a recent

National Association of Corporate Directors (NACD) event. An

abbreviated summary of this roundtable is provided in

Issue 122 of Board Perspectives: Risk Oversight (available at

www.protiviti.com/US-en/insights/bpro122) and on NACD/BoardTalk

(see blog at https://blog.nacdonline.org/authors/42).

The future of work is being shaped by the division of labor between people and AI-

enabled technologies. How can boards help management navigate the technological

advances expected to reduce significantly the number of human workers required to

perform certain types of work?

To gain fresh perspectives on the board’s oversight of workplace dynamics, Protiviti met with a group of active directors during a roundtable at an August 2019 NACD event to discuss their experiences. Below are the important points covered during that discussion, including key takeaways.

Two Questions Every Director Should Ask Two powerful forces are shaping the workplace of the future. One is the shifting composition of

the workforce to include both on- and off-balance sheet talent, with the latter group of workers representing both the contractual fringe and the temporary, flexible labor force. The other powerful force is the growing adoption of robotics, advanced analytics, machine learning (ML), deep learning, natural language processing (NLP) and other trends making artificial intelligence (AI) applications a mainstay in the workplace.

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McKinsey reports interesting insights regarding the workplace of the future:1

• Less than 5% of occupations can be automated in their entirety, but within 60% of existing jobs, at least 30% of their activities could be automated by adapting technologies available today. What lies ahead is a period of ongoing, and perhaps accelerated, change in how mundane and repetitive work and work involving data analysis and judgment are organized.

• This shift is expected to alter the jobs mix itself. As some jobs decline, the U.S. economy will continue to create other jobs, and digital technologies will give rise to new occupations. Job growth and displacement are expected to occur even within the same occupational category.

• The coming wave of automation will affect some large occupational categories in the U.S. economy, such as office support, food service, production work, and customer service and retail sales. Nearly 40% of U.S. jobs are currently in occupational categories that could shrink between now and 2030.

• As some occupations decline, the U.S. economy should continue to grow, creating new jobs during the years up to 2030. Strong job growth is forecast in healthcare; science, technology, engineering and math (STEM) occupations; creative fields; and business services.

• By 2030, middle-class workers could decline as a share of national employment by 3.4 percentage points, with employment in low-wage jobs declining by a 0.4 percentage point; meanwhile, employment in the highest-wage jobs could grow by 3.8 percentage points. But the growth of high-wage opportunities can be realized only if workers obtain the education and skills they need, presenting an opportunity to sustain the U.S. middle class by helping people

1 “Jobs Lost, Jobs Gained: What the Future of Work Will Mean for Jobs, Skills, and Wages,” by James Manyika et al., McKinsey Global Institute, November 2017: www.mckinsey.com/featured-insights/future-of-work/jobs-lost-jobs-gained-what-the-future-of-work-will-mean-for-jobs-skills-and-wages.

reskill, upskill and find higher-paying middle-wage jobs.

These unmistakable trends require workers to adapt, as AI-enabled technologies take root in the marketplace, and demand grows for work involving socio-emotional, creative, technological and higher cognitive skills. A common thread among shrinking job roles is that they involve many routine or physical tasks. But in addition to automating activities, there is the automation of intelligence. Because job roles affected by automation are distributed across the country, no community is immune from automation-related displacement.

Key Takeaway: With this evolving environment, each director faces two questions. First, what changes are in store for the workplace, the workforce, and the nature of work itself in our industry — and how do those changes affect our company? And second, how can we be sure we’re doing what we need to do to remain competitive?

These two questions are fundamental to the board’s oversight of workplace dynamics.

The Future of Labor and Transitioning the Workforce One way to think about the workplace of the future is to use Charles Handy’s “shamrock model,” which is illustrated on the next page. Companies are shrinking their “professional core” as they move to outsourcing and a managed services provider approach (i.e., “contractual fringe”). Essential noncore activities are being offshored, outsourced or assigned to a provider of managed services or business process as a service (BPaaS), in which the professional core specifies the results it seeks but does not concern itself with the methods for achieving those results so long as the methods deployed are within the bounds of ethical, responsible business behavior.

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Companies are also deploying the “flexible labor force.” This contingent workforce taps into the so-called sharing economy and is actively supported through staffing agencies, independent freelance workers, online staffing, crowdsourcing and the human cloud. The trend toward flexible labor reflects the growth of the gig economy, which is sized by several sources from one-third to half of the available workforce over the next several years. Millennials like the

advantages and flexibility of freelance work and, in general, do not possess the same appetite for climbing up the corporate ladder embraced by professionals from older generations. Thus, these employees, as well as employers, are approaching things differently to engage in the workplace effectively.

The shamrock model is illustrated below:

While the aforementioned trends may be unmistakable to some, several board members raised valid counterpoints concerning an important segment of the flexible labor force: the gig economy. What happens when reality hits for gig workers? They start families, buy homes and seek affordable healthcare coverage, something that may not be available to them when they work as freelancers or contractors. Many gig workers take on temporary and contract work because that is all that is available to them. They want full-time work but cannot find the right

role. Alternatively, organizations are hesitant to hire them because they seek the right candidate with the requisite experience, expertise and skills defined for the role. Thus, the question arises: Is gig work the preferred choice or is it what people are doing because that is what is available to them?

Key Takeaway: As more organizations transition to outsourcing noncore activities, deploying managed service providers to perform the work of different functions or tapping into the flexible labor force, the

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board should seek answers to several key questions from management:

• Do we have an eye on the demographic, social and technological trends affecting the labor model? What is happening in our industry? What are our competitors doing? How do we know?

• Given the evolving market trends, do we have processes in place to evaluate their implications to our labor model? Who makes these critical decisions to use alternative sources of labor in our company? What criteria are they using to support the business case to proceed? Do we consider the economics, opportunities and risks associated with outsourcing noncore activities?

• If we are applying all three elements of the shamrock model, are we managing the unique challenges of each labor segment effectively?

• Are we getting the talent we need to execute our strategy and business model? If not, how are we closing the gaps? Do we have the right human resources (HR) partner?

With the labor model as context, we summarize below five key messages from the directors’ roundtable conversations.

KEY MESSAGE: Organizations should continue to focus on optimizing the inevitable blend of technological and human resources for the benefit of the workforce.

How is the board overseeing the organization’s talent strategy, given the ongoing digital transformation initiatives taking place? Obviously, there is the impact on people — the human workers. But there is also the need to understand the nature and potential of digital workers (AI-enabled technologies). The question arises: How should the board oversee the confluence of resources in the workforce?

Many senior executives need help in defining exactly what AI is, for it involves not just the automation of tasks but intelligence itself. Given its projected impact of displacing job roles, there is often a knee-jerk reaction among companies to view the implementation of AI technology as a means to reduce staff versus an opportunity to increase productivity elsewhere by upskilling workers. This limited perspective is a mistake.

With the design and use of AI comes the critical issue of cognitive bias. Humans, not AI-enabled technologies, are responsible for creating datasets and algorithms. Some of the directors at the roundtable pointed out the importance of management assessing the efficacy of the individuals writing the algorithms. If it is not a diverse group of people (e.g., just white males), how does management know there isn’t a risk of bias in the algorithms, unintentional or not? There was agreement that organizations should deploy diverse teams and consider ethical and social responsibility when writing code and algorithms for AI systems. It also is critical to have a model validation process to assess whether models and algorithms perform as intended.

As for HR, the board’s role traditionally has been about oversight of overall organizational health, succession planning — especially at the CEO and upper-management level — and using tools such as surveys to gauge employee morale and the organization’s overall culture. But many boards have focused on ethical AI and related issues. Some directors at the roundtable asserted that the board needs to advocate for the development of training and other activities to encourage employees to embrace new technologies and seek ways to enhance their value and productivity in other job roles. Thus, organizations should have a strategy for reskilling and upskilling workers as they bolster their long-term succession planning efforts.

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Key Takeaway: Organizations are evolving toward an amalgamation of humans and AI-enabled technologies. In supporting management’s initiatives in this regard, directors should seek answers to several questions:

• Are we aware of the latest technologies in the market affecting the future of work? What are we doing to remain abreast of technological trends affecting work and the workplace? The effect of AI, ML and automation on the workplace, particularly within the industry, should be assessed continuously over time and the board briefed periodically.

• Given evolving trends, are we evaluating their impact on our workforce? What’s the goal of automating work? For example, what are we seeking to accomplish and why? What are the benefits and costs to the organization? What are the likely implications of automation on the industry, given the nature of the work and workplace? What are possible actions by competitors? And which technologies should we embrace now versus later? This evaluation should fuel management’s planning for an auto-mated component of the workforce. It should be a business discussion, not an IT discussion.

• Are we embracing the new workplace dynamics by deploying the appropriate technology tools? Will these tools (e.g., AI, ML, deep learning, NLP) become an integral part of our organization’s future workforce? Businesses are learning about and using the latest technologies, but many also struggle to determine which technologies to use and where to apply them. They also face the challenge of finding highly skilled talent to deploy these

technologies to their highest and best use.

A key aspect of this discussion involves building a culture and HR function capable of developing and blending digital skills. That’s why it may be time to rethink the HR and talent development function, as discussed further below.

KEY MESSAGE: Boards should encourage management to redefine the organization’s HR and talent management programs.

Historically, boards have been hesitant to immerse themselves in workforce management (i.e., what the organization does to manage the workforce below the executive level). Considering the issues involved with the forthcoming changes in the workforce, the board should rethink its approach to oversight in this area. Directors are in a unique position to encourage the company’s executives and other managers to take a step back and evaluate “people” risk in light of the new digital realities.

One key discussion point at the roundtable: It is important to understand and possibly redefine the company’s HR and talent management strategy to address the growing impact of digital labor (AI-enabled technologies). Boards should be proactive in these efforts. Directors should not assume that HR is focused on training and developing the people needed not only today, but also in five years. As one director pointed out, HR needs to become more than a compensation and benefits function. Its new and expanded role should be about collaborating with the organization’s operating units and functions to address talent development, upskilling and training consistent with the company’s growth strategy, planned AI implementation, and expected workforce disruption.

The directors at the roundtable represented a broad range of companies in terms of size and complexity. The group made it clear that the sophistication of the HR and talent management function is likely different when comparing large, multinational organizations, where this function already may be highly complex, to small and

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midsize companies, which may be facing different challenges. To that end, below is a framework for questions directors should

consider, given the size, maturity and sophistication of the companies they serve.

While the above questions are illustrative and not intended to be all-inclusive, they show how perspectives can differ because larger organizations may be far more advanced in transforming their HR and talent management functions. That said, there is no one-size-fits-all framework. Some or a variant of all of these questions may apply to a given company, depending on its specific circumstances. But generally speaking, the directors’ expectation is to monitor progress and overall direction in larger organizations and advocate for HR and

talent management transformation in smaller and midsize organizations.

During the roundtable, one director observed that many organizations need to transition away from the traditional pyramid structure and staffing model to more of a cylindrical model for the HR function. This transition should be led by HR with the board’s encouragement. Some key points arising from this discussion:

• It starts with having the organization’s HR leader present to the board, perhaps

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periodically, on the organization’s talent and recruiting strategy and directors listening closely to determine whether the discussion is primarily about today or five years from now.

• Some directors expressed concern that their organizations may be rejecting too many candidates who are otherwise qualified for the roles the organization must staff today as well as tomorrow because they are deemed unqualified based on what may be out-of-date or unduly stringent requirements. HR should revisit current standard job requirements to assess their continued relevance (e.g., requirements such as “10 to 15 years of experience” or “ranked at the top of the class”). Board members should understand the results of this review.

• As part of this broader focus on talent, board members should advocate for their organizations to invest more in developing people. One director observed that there is too much of a “plug-and-play” view of people, in which organizations are looking for exactly the right candidate who can simply come in and do the job right away. Where is the proper balance struck between hiring people with the required skills right from the beginning and developing people’s skills through the requisite internal or external training?

• One result of automating tasks and intelligence is that employees are not learning the process, its underlying activities and why they are done, leading to gaps in fully understanding how the business works. To compensate, more training and investment are needed to develop the workforce and bring in a broader range of individuals. Otherwise, companies end up asking people to rely on job roles and tasks they do not understand at a deep enough level because technology is doing the work.

• To the above points, a contrarian view was expressed that many organizations are already investing significantly in their people

and that current levels of investment may be sufficient but not directed to the right areas. For example, internship programs often represent substantial investments. While hiring interns is a valuable strategy for recruiting and training potential long-term employees, investments in interns may not be fully realized, as more than a few interns who become employees soon choose to leave for various reasons.

It’s important to note that few organizations have cracked the code on shaping the HR function and talent management program of the future. The issues raise more questions than answers as concrete solutions are elusive at present. Challenges remain and likely will continue over the long term, making this a journey as the function and program evolve.

Key Takeaway: The participants in the roundtable discussion expressed the prevailing view that the board should encourage the organization to take the long view on talent management to envision the changes it must make to source, develop and retain talent successfully in the future. The board’s focus on the workplace for smaller, growing companies might be quite different than its focus would be for large, sophisticated companies with ample resources and advanced digital capabilities. Regardless of the company’s size and complexity, the board should encourage management to think more broadly about workplace issues that they may not be considering on a daily basis.

It all boils down to this question: Who in the organization will help the board, executive team and company become better informed with regard to talent management and development over the long term? If not the HR function, then who? Leadership is needed on this front. Only then can the appropriate level of investment in onboarding, training and other employee development programs be determined.

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KEY MESSAGE: Boards may need to step up to help their companies redefine their compensation programs as the workplace evolves.

The traditional HR focus on compensation and benefits may need revisiting as organizations and the nature of work and the requisite skills to perform that work change. Again, this is a discussion that creates more questions than answers, but suffice it to say, two powerful forces — previously discussed — are in play:

• As the labor model evolves and increases emphasis on deploying the contractual fringe and flexible labor model, companies must focus on retaining the professional core they need to operate. The specialized skills required to source that core may reside in a smaller talent pool than has existed in the past. Therefore, matching skills with needs becomes a competitive challenge as labor markets tighten. That means companies need to be creative in how they reward a generationally diverse workforce.

• As digital labor made possible through AI, robotics and cognitive solutions becomes more prominent, the organization should revisit the flow of the remaining work and new work performed by humans as a result of digitization, including how the related job roles are defined, the work is organized and the skills needed are sourced — whether through reskilling and upskilling or hiring and onboarding. Compensation and the reward system should figure into this assessment as HR plans for the future.

The directors at the roundtable acknowledged these challenges; however, some asserted that certain organizations — large, multinational entities, in particular — may already have advanced significantly in addressing these areas. Interestingly, one director noted that boards need to consider redefining the scope of the

2 “America’s CEOs Seek a New Purpose for the Corporation,” by Alan Murray, Fortune, August 19, 2019: https://fortune.com/longform/business-roundtable-ceos-corporations-purpose/.

compensation committee and its charter to focus below the executive level.

Key Takeaway: Many companies face a multigenerational workforce with varying financial and lifestyle priorities. As the workplace changes, the board should shepherd the creation of a compensation program that reflects new concepts and designs, placing a premium on reimagining rewards and benefits that are effective in recruiting and retaining a diverse workforce in the evolving digital economy of today and tomorrow. Organizations need to think about innovative ideas, such as sabbaticals, reduced workweeks, and flexible and remote work options, while also offering attractive compensation packages beyond traditional pay models (e.g., life insurance and supplemental health and disability benefits for Generation X employees and student loan repayment assistance to Millennials).

KEY MESSAGE: The board should support the organization’s focus on corporate social responsibility (CSR) and outreach to the communities in which the business operates.

Organizations should become more aware of how they impact not only their workforce but also the communities of which they are a part and where they do business. The recent “Statement on the Purpose of a Corporation” issued by the Business Roundtable asserted that the corporation has “a fundamental commitment” to deliver value to all of its respective stakeholders consisting of customers, employees, suppliers, communities and shareholders. The Statement also notes that each stakeholder group is essential, and it is vital to deliver value to all of them as the success of the corporation, the communities in which it operates and the country in which it is domiciled are inextricably linked.2

As to employees, this corporate commitment means rewarding people for hard work and creativity such that they are able to lead a life of

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meaning and dignity. It also means generating good jobs and economic opportunity. It requires fair compensation, important benefits and appropriate support through training, education and skills development in a rapidly changing world. And it demands a culture that is diverse, inclusive and agile, in which employees reskill and upskill themselves continuously over time.3

This CSR mantra offers a broader backdrop and context to the board’s oversight as it relates to human capital. Directors should not only monitor how the workforce is being managed in the new world of work, but also understand how the organization engages, enables and sustains its cultural health, which is becoming an increasing priority among younger generations and in the marketplace. Board members have the opportunity to take the initiative in ensuring the organization and its workforce are progressing in a disruptive, rapidly changing digital environment.

One perspective from a board member:

The new workplace dynamics and the introduction of the so-called “digital worker” are not new. This has been a progression happening for decades. We simply are using the latest and greatest computer-aided tools. Thus, boards and organizations should not become overly excited about it. The solution is about growth and tool-building.

However, not everyone in the room shared this perspective. Others asserted that automating intelligence is not the same thing as automating tasks and presents different challenges.

This part of the discussion elicited commentary on the following points:

• Given impending talent shortages in the future workplace, achieving diversity across the organization is a strategic imperative: The board is in an ideal position to encourage management to consider and develop long-term strategies for building diversity throughout the

3 Ibid.

workforce, and not just at the board or upper-management level. Some directors asserted that diversity is an imperative for competitive reasons as much as it is responsive to sustainability objectives.

• Solving diversity challenges may be an industry imperative: Diversity may be more than an issue for just the organization. It also may be a serious industry matter with long-term implications. Talent and workforce diversity may be key to growth in both the company and the industry — in effect, an industry issue in search of an industry solution. For example, the challenges associated with women in STEM occupations have been widely publicized. Ensuring continued growth of, say, the technology industry will help ensure continued growth of technology companies as well. It may be in the best interests of the organization to partner with competitors on outreach initiatives to advocate for the industry at secondary schools and universities. But it is up to the companies themselves to facilitate retention and upward mobility of women in the workforce to the executive ranks.

• Eliciting proactive HR support is essential to success: With respect to many of the above issues, it is imperative that HR be on board and a proactive participant in addressing them. Otherwise, the function ends up being an impediment to the process.

• Funding support of higher education: One director asserted that better partnerships between corporations and higher education would help align curricula with the needs of business. The example of IBM extending its mainframe business by funding university programs is well known. Could this be the kind of cooperation needed to facilitate upskilling and reskilling in the workplace?

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• Supporting alternative forms of education, even moving away from the traditional four-year college or university: Other directors believe there are other forms of education that can produce the professionals organizations will need for the future at a reasonable cost.

Key Takeaway: As talent grows scarcer and intelligent machines become fixtures in the workplace, the day-to-day nature of work could change for nearly everyone. The traditional labor model will come under pressure as the traditional HR management model likely undergoes a sea change. The board can expect these developments to intensify the war for talent. Given these factors, a sustainability mindset in dealing with environmental and social issues — particularly those affecting the communities in which the company operates — can help it differentiate itself in its quest for the best and brightest talent. This mindset can also help boards bring a big-picture, principled approach to their oversight of human capital management.

KEY MESSAGE: Directors may have to drill deeper than they are accustomed to in order to help management navigate the choppy seas of changing workplace dynamics.

Several directors noted that boards should not confine their perspectives and input on workplace dynamics to the macro level. This is an area where everyone is learning, the potential magnitude of the disruptive environment is virtually unprecedented in terms of everyone's experience, and executives are searching for answers in a changing world not contemplated by traditional HR playbooks. In drilling deeper, directors should rely on their own experiences and be reluctant to accept, without challenge or inquiry, traditional standards and historical mores and requirements that may no longer be fit for purpose in the digital age.

As an example of deeper board inquiry: How is the objective of getting the organization’s workforce agile and ready to leverage new digital technologies being addressed? Board members should lean on their individual areas of expertise, interests and innate curiosity to probe and ask questions of management, including human resources, to determine whether the organization has thought about these issues and is on the right path.

Key Takeaway: The board has an important role to play in helping management embrace new ways of thinking and operating. Board members can challenge areas such as talent management, automation strategy, CSR initiatives, corporate culture and more. Delving into workplace dynamics may not be a traditional oversight role of the board, but maybe now is the time to engage management constructively on:

• Aligning the HR model with market realities by optimizing the components of the labor model and distinguishing between full-time and project and outsourcing needs;

• Positioning the company to thrive in the digital age by breaking down internal walls and seizing the gains made possible through AI technologies; and

• Making the necessary investments to reskill and upskill employees and facilitate their transition to the jobs of the future.

With the stakes high, boards have an opportunity to lead as the workplace changes in fundamental ways.

Questions for Boards Based on the risks inherent in the entity’s operations, has the board considered the key takeaways noted in the above discussion?

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