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When asked to rank 11 risks and their potential impact on business results, executives ranked human capital risks fourth—ahead of financial, reputational, supply chain and IT risks. But fewer than one-third (31 percent) think their organizations assess it effectively, and 24 percent said they do an “ineffective” job, according to a June 11, 2011, report by The Conference Board.
“Although both HR executives and risk management executives think that human capital is a very important source of risk and opportunity, few companies have a systematic way of assessing and managing those risks,” study co-author Mary B. Young, principal researcher in human capital at The Conference Board, told SHRM Online.
The study, Managing Human Capital Risk: A Call for a Partnership between Enterprise Risk Management and Human Resources, said forward-thinking companies have a formal process for assessing human capital risks in which HR and the business participate. It recommends that the chief human resource officer be part of the enterprise risk management committee.
“This really is about first of all starting a conversation between HR and risk management,” Young said. “Human resources probably has data and analytics that risk management doesn’t know about, and risk management probably has tools that could be helpful to HR.”
But Young added that the study highlights the fact that HR and risk management have different views about human capital risk, which suggests that “they’re not in regular communication.”
About the Study
The report said human capital accounts for at least half of operating costs at most companies. While building the leadership pipeline and succession planning might be top of mind, risks from internal and external talent shortages or workforce capability gaps might have even greater business impacts, the study found.
There might be risks from unionization and labor relations, offshoring and outsourcing, and staffing during a pandemic, which might get siloed in HR.
Enterprise risk management expert Jim DeLoach, managing director at Protiviti in Houston, said the study is timely. DeLoach said that his firm has done thousands of risk assessments and that he can’t recall one where human capital risks “didn’t emerge in one way or another.”
DeLoach noted however, some study limitations. For example, 60 percent of participating companies reported that they have a “mature” enterprise risk management capability and, in his experience, that number is much lower. He added that the study was based on a global survey of executives at 161 companies that participate in The Conference Board’s risk-related programs and is unlikely to be representative of the larger population.
“This is an important consideration,” DeLoach said, adding that while the findings have relevance to participating companies, most organizations have less mature enterprise risk management systems.
DeLoach agreed that there’s generally a disconnect between enterprise risk management and HR and said it often depends on where HR is positioned.
“If HR has a seat at the C-suite table, they’re going to be in a lot better position to impact the assessment of HR risk in the context of the company’s overall portfolio,” DeLoach said. But DeLoach said HR “sometimes finds itself on the outside looking in, and other executives are making assessments of human capital risks.”
Common Language, Tools and More
Victor Reyes, SPHR, a principal in KPMG Advisory’s People & Change group in McLean, Va., agreed that companies need a common language.
Reyes said CFOs and chief risk and chief audit officers at client companies typically lack “a very structured way of thinking about human capital risks. They know it’s out there and they know it’s important. But they haven’t necessarily put a lot of discipline and structure into how they examine and identify and manage and mitigate HR risk.”
Reyes said the enterprise risk management discipline provides a good framework and tools “that generally have not been applied to the field of human capital risk.”
He stated that it’s important to bring “some structure and the right tools and right vocabulary to the conversation and to make sure the right people are talking to each other.”
Reyes noted something the study didn’t address: the importance of cascading an understanding of human capital risks “all the way down into the organization.” It’s one thing for the head of HR and chief risk officer to have the right conversation and speak the same language. But if you want a sustainable practice for surfacing human capital risks, various business people responsible for identifying risk throughout your company need to be trained and on board, he said.
Similarly, Reyes said, HR practitioners further down in the organization “need to have (the idea of human capital risk) baked into their vocabulary, which they typically do not today. Your typical HR generalist or HR business partner may not really be familiar with the kind of enterprise risk management concepts we’re talking about.”
Pamela Babcock is a freelance writer in the New York City area.
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