Why CEOs see HR as a key business risk

by 19 Oct 2009

Members of the C-suite know human capital can put their business at risk, but they also realise it can also hold the key to their success, writes Ingrid Selene

Human capital risks

CEOs, CFOs and other executives are extremely aware of the risks in not managing an organisation’s human capital well. An annual study by Aon has consistently found that human resources is one of the top five risk concerns year after year.

Similarly, a survey of executives by the Economist Intelligence Unit in 2007 found that 60 per cent rated the threat to their organisation of human capital risks as very high or high. That was the risk with the highest threat rating. It exceeded other risks such as reputational risk (53 per cent), market risk (41 per cent), credit risk (34 per cent) and nat ural hazard risk, including climate change, (19 per cent).

But only one in three executives (34 per cent) in the survey said they were effective or very effective in managing the threat of human capital risks. This was the risk with the second-lowest rating of ef fective management, with ratings for other risks being reputational risk (59 per cent), market risk (58 per cent), credit risk (64 per cent) and natural hazard risk (24 per cent)

While the results relating to credit risk would no doubt be a little different in 2009, it’s unlikely that the GFC has had a big impact in Australia on ratings for human capital risks.

Australian CEOs not only regard human capital as a key risk, they recognise it is a significant asset for achieving business re sults. In one survey, they rated recruiting and retaining skilled employees as the most im portant factor for their business success and employing and developing leaders as the third most important. Second was increas ing customer satisfaction.

Increased importance of human capital

CEOs’ attitudes have arguably changed be cause human capital has become more and more important for achieving business suc cess because of the following factors.

1. Demographic trends caused by the Baby Boomer phenomenon. This will continue to put pressure on the demand for labour for a number of years, despite the economic downturn of 2008 and 2009.

2. Changes in the workforce as a result of changes in social values and expecta tions. The workforce is now more diverse, with more women working, more dual- earner couples and more part-time work ers. The motivators for attracting and re taining talent have also shifted as social values and expectations have changed. For example, while salary is still the most important factor in causing people to leave a job, it is closely followed by the desire for career development opportunities and a desire for work/life balance.

3. Changes in the nature of business. The developed world’s economies are now mainly based on services and information. This means that people are the critical asset and competitiveness increasingly derives from knowhow: the abilities, skills and com petence of an organisation’s people.

In Australia, 40 years ago 55 per cent of employees worked in service industries and 45 per cent in production. Today, that split is 75/25, with three in four employees working in service industries.

Impact on the HR function

Despite CEOs’ increasing focus on human capital, the HR profession has made little progress in gaining recognition for the value that HR strategies and programs can bring to the business. The lack of clear measures that demonstrate this value remains a key road block and frustration for many HR managers.

By Ingrid Selene, Principal at Aon Consulting AustraliaTel: 02 9253 7738 or email ingrid.selene@aon.com.au