GLOBAL EXECUTIVES are not monitoring areas of HR risk with the same scrutiny as other traditional risk issues, leaving them open to severe financial and reputational consequences, a global report has found.
“HR risks are the challenges that stem from managing your people, programs and processes, both inside and outside the walls of your business,” said Bill Leisy, Americas markets and services leader, performance and reward for Ernst & Young, which conducted the report.
“By proactively addressing these areas, the C-suite, as well as those in HR and finance, can drive sustainable, positive business results. But if not managed properly, these issues may cause significant damage.”
Risks in the HR arena extend beyond what many would consider the responsibilities of the HR department. Examples include insufficient training and development programs for employees, pay and performance alignment issues, as well as weaknesses in manageing vendor relations (such as relationships with recruiting agencies or healthcare assistance hotlines), among others.
The report, based on the results of a survey conducted among global finance, HR and risk executives from Fortune 1000 companies, found that in today’s economic climate, C-suite executives are contemplating ways to make broader changes to their businesses. If viewed on a company-wide basis, manageing HR risks can drive significant financial (and non-financial) performance improvement efforts by identifying areas where these opportunities may exist.
Global organisations do not have a full understanding of the extent of HR risks, which may be because they are not easily identified, the report found. But results also show executives do have the desire to look outside the designated responsibilities of HR and build an understanding of how these risks, when managed well, can help them meet the desired goals of the business.
The report found that 43 per cent of respondents said the area of strategic HR risk – in which organisations have the ability to improve business performance – will gain the most exposure over the next three years. Individual risks – such as talent management and succession planning, ethics/tone at the top and pay and performance alignment – are all seen as having a high or very high presence in terms of their impact and likelihood of occurrence within an organisation.
Gus Cummings, a partner with Ernst & Young in Australia, said that HR risk is indeed manifesting as a matter of greater importance with much greater credibility. “Greater emphasis is being placed on HR risk management strategy development and implementation. This supports many disciplines in HR management, behaviour management, organisation structuring, risk and reward management, communication, cultural change and diversity,” he said.
He said, however, that the challenges also present good opportunities for competitive success for those who get the responses right. Cummings also cautioned that if something as obvious as HR appears undermanaged, the focus needs to continue to be on truly strategic risks to the business.
The report, 2008 Global HR risk: From the danger zone to the value zone –accelerating business improvement by navigating HR risk, found that 41 per cent of respondents said their Board of Directors either never formally reviews the companies’ HR risk profiles or only reviews them on an ad hoc basis (with only 39 per cent communicating results from the HR risk management team into the corporate risk management process).
However 34 per cent say traditional corporate risk matters are formally reviewed on a quarterly basis (or even more frequently), and 14 per cent say they are never (or only) reviewed on an ad hoc basis.
Bill Farrell, partner, Ernst & Young, said the risk impact of talent shortages and ageing will manifest itself in several ways.
“HR managers need to take custodianship of this people risk profile,” he said.
“The talent shortage has resulted in organisations accepting lower competency standards and lower skill levels – ultimately resulting in risk impacts on operations and projects. We know, for example, the key reasons for project failures are lack of knowledge and competency at project management levels.”
• Less than half (42 per cent) of companies validate and prioritise their HR risk profile
• Only 43 per cent analyse HR risk coverage by business unit and develop, monitor and enhance their plans
• Nearly half (46 per cent) validate their HR risk profile with executive management and the audit committee
• Slightly more than half (56 per cent) of the respondents say they identify and document the likelihood and impact of HR risks to the organisation
• Only 29 per cent of companies say their corporate risk budget will be increasing over the next 12 months, while 57 per cent say the budget will stay the same