HR’s role has often been seen as peripheral when it comes to corporate governance. Craig Donaldson examines its role and investigates how HR can make a meaningful and more strategic contribution to corporate governance within organisations
HR’s role has often been seen as peripheral when it comes to corporate governance. Craig Donaldson examines its role and investigates how HR can make a meaningful and more strategic contribution to corporate governance within organisations
Now that the dust has settled from the corporate governance crises of the past few years, government and business have had some time to try and address the underlying problems that often lead to corporate governance problems. While these initiatives are well-meaning, some organisations still regard them as ‘tick the box’ exercises and fail to gain any traction – both at the management and broader workforce levels.
Corporate governance requirements can often be satisfied when it comes to the letter of the law, but the spirit of the law is another matter altogether. Much has been said and written about cultural change of late. After the corporate governance disasters of companies such as HIH and Enron, a strong correlation was found between a failure to embrace the spirit of corporate governance and deep-seated organisational culture problems.
It is widely accepted that CEO and executive behaviour, attitudes and values determine organisational culture – no matter how many mission or value statements HR plasters on the walls. Mention cultural change to the leaders of such organisations and you will be met with blank stares, folded arms or rolling eyes. This resistance to change is probably the biggest chink in an organisation’s corporate governance armour. Corporate governance is an issue that encompasses an entire organisation, but without a supportive executive, HR will most likely be sidelined.
“If there’s a resistant culture, HR has got a major challenge on its hands,” says John Egan, founder of corporate governance consulting firm Egan Associates. “Generally, what you’ll find is that HR will only get the opportunity to change inappropriate but entrenched practices with a change of CEO, or a change of chairman, or both. If you’ve got a board and senior management group with very set ways, then HR won’t change them.”
The old boys’ club
Business has traditionally been ruled by an old boys’club which is, in many instances, resistant to change. But this could be changing. Diane Grady, a non-executive director on the boards of Woolworths, Bluescope Steel and Wattyl, acknowledges that some boards take a reactive “don’t rock the boat” approach to business, while others prefer a more proactive “value-added partner” approach: “Some are still back in the dark ages, and some are very enlightened. I don’t think you can generalise any more, but there is a trend towards looking for board members who bring diverse skills to the table. While that statement about the old boys’club is true of some boards, I wouldn’t say it would be true of the majority of boards now,” she says.
A closer examination of photographs in the annual reports of the top 200 ASX companies reveals that board members “look pretty much the same”, according to Anne-Maree Moodie, managing director of the Boardroom Consulting Group. “You can’t tell the difference between all of them because the demographics of most board members in Australian listed companies are generally men aged in their 50s and 60s of Anglo-Saxon background, with former careers in accounting, banking and law.
Moodie says that board selection, performance and succession in Australia is conducted quite poorly and in a very traditional and old-fashioned way that is out of touch with community expectations: “The way company directors are nominated and selected is usually through, to use boardroom parlance, ‘who do you know?’”.
There are a couple of reasons for this, Moodie says. Members are appointed to boards based on their operations experience (former CEOs, for example) and their ability to merge seamlessly with the group dynamics of a board. This generally results in selecting people who are well known, so that members of the existing board will feel comfortable about working with them. “That is not generally the best way to select people,” Moodie says.
Brambles’ senior vice president of human resources, Tom Brown, also believes that prospective board members often come from a fairly tight-knit community. “If someone was on a board and had a colleague on another one, they would tap that person on the shoulder to participate on another board.”
As a result, he says, boards across the world found themselves with members as directors who didn’t have the necessary experience either in the area in which the company did business or in working across global borders and cultures. As the collective experience of boards did not reflect what was required for companies to do business, this limited boards’ ability to act on behalf of shareholders.
Brown believes this is changing now, as a focus on corporate governance has sharpened the effects of globalisation. This presents a number of opportunities for HR professionals. “From a HR perspective,” Brown says, “we’ve personally been working with executive teams for a number of years, making sure that we have individuals in place with global experience in different kinds of business environments, know how to be successful in different contexts as well as help shape top flight executive teams along lines relative to the business and the context in which it’s conducted.”
At the board level, he argues, HR needs to step up to the plate and bring its expertise one more level up in the organisation, as it were. HR could then can add value not only to the organisation but to the shareholder.
Diane Grady also believes HR’s role in succession planning is critical. “If you look at some of the problems companies have faced, in many cases not having the right people with the right skills has been a key component of [corporate governance] problems and I think HR has a critical role to play in the succession planning,” she says.
As such, she believes HR needs to develop more robust systems for assessing the skills of people who are in senior roles and potential candidates for such roles. “HR needs to take a more proactive stance in terms of ensuring people get the experience either inside the company or through external providers they need, in order to give boards a choice in good candidates.”
HR’s role in corporate governance
The ASX Corporate Governance Guidelines deal implicitly and explicitly with a number of HR issues, such as a transparent and thorough appointment process for senior executives, executive remuneration structure and public reporting of reward policies. John Egan believes that HR has a “terrific opportunity” to get closer to boards with these guidelines.
“As board remuneration and nomination committees become more sensitive to risk” Egan says, “they’re going to look to HR for guidance and counsel in some areas. HR is going to be more involved because that’s what shareholders are requiring.”
“Boards are going to be more conscious about the development of people. They’re going to be more conscious about retaining good people and getting good advice on how to do that. Boards will be looking to HR for the best source of advice in the market in all these areas.”
Tom Brown believes there are a number of specific areas in which HR should be able to offer expertise to the chairman or board committees. It is feasible, for example, that HR could assess the needs of the board, looking at the core capabilities required in Non-Executive Directors (NEDs), based on the nature of the business and its strategies, to ensure that both the geographical and cultural representation of the business is reflected in board composition.
HR should also be able to create a ‘success profile’ for the NED role, which includes the core competency set, organisational values (such as integrity) which help guide selection and assessment. The department could manage the external search and monitor performance thereafter, by adapting the multi-rater process for use at board level, to assess performance against the NED profile and board.
And the senior HR executive could also act as a ‘confidante’ to the CEO and Chairman on these issues, and serve as advisor and confidential sounding board.
Aside from board concerns over corporate governance, Diane Grady says HR can play an important role at the organisational level. As boards are charged with assessing the strategy for an organisation, and with monitoring management’s delivery of that strategy, they need to recognise that the main drivers of such strategies are the people involved. “I think it’s up to HR to firstly make an assessment about whether a strategy is doable from an organisation and people perspective and secondly, to decide what aspects of this perspective need to be strengthened in order to deliver the strategy. At BlueScope, for example, we have HR formally sign off on any acquisition because we want to be sure that the people strategy to manage that acquisition is in place,” Grady says.
Wanted: business-focused HR
Historically, boards have not seen HR as essential players in corporate governanc, questioning their overall value to the organisation. The problem is exacerbated by HR executives who see themselves as HR people first and business people second.
HR needs to ensure that it understands the business in its entirety and its place within that holistic model, according to Anne-Maree Moodie: “HR unfortunately still suffers from a reputation of being more of a cost centre and more of the softer area of the business,” she says.
If a HR specialist is to broaden the opportunities they have in their career, Moodie believes that it is imperative they pursue other forms of education and training in business and corporate governance, such as those offered by the Australian Institute of Company Directors or Chartered Secretaries Australia.
Diane Grady also believes HR needs to be aware of the business strategies that a company has in place and develop human resource strategies that are aligned to the business strategies. “I think one of the issues is that sometimes HR sets about implementing a number of best practices, without actually thinking through the key people or organisational issues that need to be focused on to deliver the strategy. HR sometimes takes a process perspective rather than a strategic perspective, but if HR is going to help when it comes to governance it needs to develop a people strategy that’s aligned to the business strategy.”
Often HR professionals have not been well-schooled in the business side of their role, Grady says. Such individuals come up through the profession, but lack exposure to relevant business challenges.
“If you look at finance as a profession, it has become much more critical to the executive team over the past ten to 15 years. Concerns about capital management and a number of the issues that finance directors worry about today really weren’t on the agenda 15 years ago. The finance function was more about counting the money. That’s changed, and I think over the next ten years people will realise that the HR profession needs to change in the same way,” she says.
A critical area of improvement for HR, according to Grady, is in the area of people metrics. “I’m not just talking about headcount, turnover and the like, but detailed data on performance management, succession planning and developing high potential people. In the companies I’ve seen, generally speaking, HR is very poor when it comes to putting together metrics that are meaningful and that highlight relevant issues.”
Instead of relying on the argument that metrics are too subjective, Grady says HR “should simply say, ‘OK, this is how we’re going to do it, this is our convention and we’ll do it the same way every year and we’ll see what the trend is.’ I think there are ways to make soft HR hard, and HR needs to be more determined to do that.”
HR’s credibility problems
When it comes to corporate governance, HR is often the victim of a vicious cycle. Because it lacks business perspective, HR lacks credibility within the organisation. But without credibility, HR often has trouble getting a foot in the door of business opportunities.
Tom Brown believes credibility is a massive issue for HR. “If you don’t have credibility at the senior executive level, you can forget about doing things at the board level. It’s just never going to happen. One way to establish your credibility is through your CEO and CFO, who typically sit on the board as well. They can talk up HR at the board level – if you’ve got that credibility with the CEO then translating that advisor/confidante role to the chairman level, and therefore exerting influence through that level, is very possible,” he explains.
But the first step for HR is to establish credibility with the CEO and CFO, Brown adds. HR needs to present people solutions with the business primarily in mind, as opposed to solutions that focus on functional excellence: “This is a key reason for that lack of credibility. Until HR can establish that credibility with the CEO, the CFO and the rest of the executive, then the invitation to play a value-adding role at the governance level will not be forthcoming.”
