- In This Issue
3 Ways Human Resources Can Affect Corporate Responsibility and Integrity
HR leaders can be highly effective in putting businesses on a path toward responsibility and corporate integrity
This article was published in the Q3 2009 issue of Aon One, November, 2009.
While there are many contributing factors to the current global financial crisis, there is one that’s purely behavioral: how executives “bet the farm” by taking undue financial risk. Caught up in the excitement of growth, business leaders chased it at the expense of prudence, risk management and long-term sustainability.
Consequently, increased attention is being directed at corporate boards for their failure to provide fiduciary oversight in the affected financial institutions. After all, the board is entrusted to oversee how executives grow the business, mitigate downside risks and create shareholder value. And at the center of this increased attention are calls for a reexamination of ethics and integrity.
Indeed, each organization needs a set of universal principles that enable competent people to excel without going astray. And integrating these principles into every level of the organization should be high on the agenda of any business leader.
These are the same challenges with which human resources (HR) is entrusted to help top management implement throughout the organization. Which raises the question: What could HR have done better to help avert this crisis?
We would like to present three contributions to help organizations build high integrity, transparency and accountability for all employees.
1. HR LEADER AS THE Functional expert
In creating HR programs, there’s an opportunity to ensure that design principles and features are aligned to business models and objectives. Human resources needs to play an active role in challenging the design by asking the “why and what if …?” questions. In order to play this role effectively, HR needs to keep abreast of design alternatives, networking with external advisors who act as a sounding board. Here are three program examples:
Managing CEO compensation
Human resources practitioners are often asked to support the analysis and recommendations on CEO compensation, working with or without external advisors. In the U.S., CEO compensation could be as much as 400 times that of a rank-and-file employee. Is this justifiable? The argument for high CEO pay centers on the value that a CEO creates or what his or her industry peers make. Some people propose an internal standard to ensure good governance over CEO compensation by looking at the equity between the CEO and his or her direct reports.¹
As the CEO of one major corporation said, “The key relationship [in executive compensation] is the one between the CEO and the top 25 managers in the company, because that is the key team. Should the CEO make five times, three times or twice what this group makes? That is debatable, but 20 times is lunacy.”
This is one internal standard human resource practitioners should take into consideration to conduct more insightful analysis in supporting the compensation committee.
Committing to succession planning
A chief executive officer’s untimely departure exposes the company to business and market risks. Increasingly, corporate boards are paying greater attention to the succession pipeline. Other than institutionalizing succession planning in the company, there are many compensation techniques, such as deferred compensation or long-term incentives, which can motivate the CEO to identify and develop potential successors and ensure a successful transition when the time comes.²
For example, one company linked the payment of a portion of the CEO’s incentive to the completion of a successor’s development milestones. The CEO, assisted by an external firm, was responsible for setting aggressive board-approved development milestones for internal candidates and ensuring they were achieved. The board evaluated the chief executive officer’s performance at the end of the period, taking into account milestone achievements and candidate readiness.
Defining leadership requirements
Leadership requirements are no longer one-dimensional. Human resources practitioners should discard their one-dimensional leadership competency model and help their organizations in developing leaders and future leaders who are able to manage complex sets of priorities in a coherent manner, not merely aligning to one polar end vs. the other.
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