HR Can Play Influential Role in Helping Boards Manage Risk

By Dave Zielinski Aug 10, 2011
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​In recent years, news reports have recounted tales of companies that failed because of breakdowns in management oversight or lax corporate governance. Avoiding inappropriate business risks is a key function of a board of directors, and some experts believe HR leaders should play a bigger role in helping boards and executive teams evaluate and mitigate those risks.

Many of the fundamental risks companies face fall within or on the edges of HR’s domain. Issues such as hiring systems that don’t screen effectively for employee values, flawed succession plans, and compensation that incents the wrong behaviors are areas where human resources can lend its expertise to risk management.

“HR historically hasn’t been a big player at the strategy table or with boards, but I think that is shortsighted,” said David Larcker, a professor at the Stanford Graduate School of Business and co-author of the book Corporate Governance Matters (Pearson Education, 2011). “Human resources should be a key part of risk management. A company can have a great strategy, but if it doesn’t have the right people in the right roles and they don’t lead or perform with the right values, it’s in trouble.”

Succession Planning

Lack of a strong executive succession plan tops the risks that HR can help limit. Too often, Larcker said, companies have such plans but they’re not operational. “Would you really follow your current succession plan in a time of need?” Larcker said. “In most companies these plans are just names in a box, and it takes them a long time to find new senior executives.”

Instead of focusing on the features of corporate governance, Larcker said, more attention should be paid to the functions of it, such as the process for identifying qualified executives and directors and developing a differentiated business strategy.

Ann Rhoades, president of PeopleInk, a firm that helps create workplace cultures based on values and performance, and who has led compensation committees at JetBlue Airways and P.F. Chang’s China Bistro, said HR plays a crucial role in giving boards an honest evaluation of current executives as well as of succession candidates.

“HR leaders’ responsibility is to give the board a fair and accurate assessment of the performance levels of senior players since the board isn’t there every day to see how they perform,” Rhoades said. An ability to create good succession plans, and thus mitigate risk by promoting only top-flight, prepared executives, “is only as good as the quality of data the board gets from HR on the potential and readiness of succession candidates,” she said.

A diminished investment in people also can be an area of risk. Mary Pat McCarthy, U.S. vice chair at KPMG and executive director of the company’s audit committee institute, said that the committee’s 2011 survey of hundreds of audit committee members around the world posed the question: What is your greatest area of concern stemming from cost cuts over the last two or three years? “Many said employee talent and training, so there is a level of concern about that,” McCarthy said.

Risk from Disaffected Employees

Catherine Allen, chairman and CEO of The Santa Fe Group, a strategic consulting company, said that human resources—given its ability to spur employee engagement and influence corporate culture—can play a role in stemming the internal fraud that has plagued many financial institutions since the onset of the recession.

“That fraud has a lot to do with a breach in trust between employees and employers, particularly in companies that have laid people off, have existing staff doing the work of two or three and have senior leaders making extraordinary salaries while others have gone two or three years without a raise,” Allen said.

Allen said a recent survey by Metropolitan Life showed that 87 percent of 5,000 U.S. employees interviewed were ready to leave their jobs, and an alarming 17 percent said they were doing harm to their companies.

Values-Based Hiring

Mitigating risk is a function of hiring and promoting employees with strong values and integrity, Rhoades said, factors that should be baked into selection systems.

“As an HR leader, if you do nothing else right, make sure you build a hiring system that gets you the right players, with no exceptions,” Rhoades said. “In the airline industry, for example, you can’t hire a pilot that has great technical skills but who doesn’t come with strong values. In the case of a crisis, you want someone with integrity and who’s a good team player so they’ll do things like prepare the back of the plane properly and solicit opinions from the first officer, since people’s lives are at risk.”

Behavioral-based hiring geared toward identifying such values is critical, Rhoades said. “One question I always ask candidates to help determine integrity is, ‘Give me an example of a time when you knew that telling the truth was putting your job on the line,’ ” Rhoades said. “What was the situation, what did you do about it, and what was the result?”

Compensation and Risk

At the WCD Global Institute in May 2011, a gathering of 200 female directors from around the globe, a panel agreed that while audit committees were in the “hot seat” in the aftermath of Enron, compensation committees are in that role today. Few factors have as much power to shape employee behavior—and drive acceptable and unacceptable risk taking—as compensation.

Allen, who sits on two compensation committees, said HR professionals can play a key role in establishing proper compensation levels throughout an organization by researching comparative comp programs and analyzing existing comp plans for ways to create new incentives that drive desired results. Some of those incentives increasingly might be nonmonetary, Allen said, such as flexible scheduling, use of sabbaticals and additional time off rather than traditional bonuses.

“HR also should make comp committees aware of the latest legal or regulatory changes that apply to compensation issues,” Allen said.

Risk Aversion … As a Risk

Rhoades said that one of the biggest risks companies face is playing it too safe and not being innovative enough coming out of the recession. “I think you have to come out of this running, and the great companies are talking about where they want to be in five years, not just about cutting more costs,” she said. “They know that kind of mind-set keeps workers engaged and excited instead of worrying about their jobs.”

Dave Zielinski is a freelance journalist in Minneapolis.

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