Ethics and integrity are fundamental to good corporate governance. While there are many contributing factors to the current global financial crisis, there is one factor at the behavioural level in affected financial institutions. That is how errant executives “bet away the farm” by taking undue risks in the aggressive pursuit of monetary growth. Caught up with the exuberance of the economy in the last few years, business leaders chased growth at the expense of prudence, risk management and the company’s long-term sustainability.
After the economy’s collapse, increasing attention is being put on the affected financial institutions’ corporate boards for their failure to provide fiduciary oversight. Which means even though a board is entrusted to oversee how executives grow the business, mitigate the downside risks and create shareholder value, there still needs to be a set of universal principles in any organisation. The principles – which would enable competent people to excel and not to go astray – are invariably integrity, transparency, accountability, collaboration, and performance orientation. And, these principles need to be applied from the top-end of the house, at the board level, down to the shop floor.
Permeating these principles into the daily decision making process at every level of the organisation would probably be the single greatest achievement of an outstanding business leader, be that a chair of the board, CEO or his executives. It is about culture, behavioural norms and role models that will sustain the change that is brought on by changing the corporate structure, process, programmes, systems and rules.
These are exactly the same challenges HR is entrusted to help top management operationalise in the organisation. There had been some post-crisis suggestions that HR should play the role of a chief integrity officer – be a coach to the CEO and have the same direct access to the board as an internal audit. While these are thought provoking ideas, there are three possible contributions HR can make, which if carried out successfully, would help organisations build high integrity, transparency, and accountability.
HR should contribute as functional expert
In designing any HR programmes, HR has the opportunity to ensure the design principles and features are not just in line with market practices, but aligned to the business models and objectives. HR 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, network with external advisors and practitioners who act as a sounding board, and exercise critical thinking. Here are three examples:
a) Manage CEO compensation
HR practitioners are often asked to support the analysis and recommendations on the CEO’s compensation, working with or without external advisors. In the U.S., a CEO’s compensation could be as much as 400 times that of a rank-and-file employee. The argument for such high CEO pay centres on the value that a CEO creates or what his industry peers make. This is hard to dispute during good times when the board of directors and shareholders are happy with the returns, as what we have seen prior to 2008. Some people propose an internal standard to ensure good governance over CEO compensation by looking at the equity between the CEO and his direct reports. No CEO operates as an island by himself; a top team supports a CEO. So what should be the pay differential between the CEO and the direct reports?
GE’s CEO Jeffrey Immelt was quoted as saying, “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 make? That is debatable, but 20 times is lunacy.” Adding this technique to the HR toolkits would help HR conduct more insightful analysis in supporting the compensation committee.
b) Generate commitment to succession planning
A CEO’s untimely departure exposes the company to business and market risks. Increasingly the corporate boards are paying greater attention on the succession pipeline. Other than institutionalising 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.
One company we consulted for linked the payment of a portion of the CEO’s incentives 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 then evaluated the CEO’s performance at the end of the performance period, taking into account the milestone achievements and the candidate’s readiness.
c) Define leadership requirements
The global financial crisis makes salient the inadequacy of the leadership in the affected financial institutions. The inadequacy lies in managing both growth and risks simultaneously, in achieving short-term results while ensuring long-term sustainability, and in balancing the group-wide and individual business unit performance. Leadership requirements are no longer single dimensional but about managing equally important dichotomous business priorities.
HR practitioners should discard their overly simplistic single-dimensional leadership competency model and help their organisations develop leaders and future leaders who are able to manage complex sets of priorities in a coherent manner, not merely aligning to one polar end versus the other.
A regional head office we consulted for had developed a leadership model to support its business transformation. The model defined some of the effective behaviours in managing these dichotomous business priorities. The model was then used as a basis to identify talent and development plans across the region.
HR should contribute as a process owner
In McKinsey’s board survey 2008, directors were asked about the amount of time the board spent on topical issues, and what they think the board should spend more time on. Talent management emerged as the one area that directors want to see the greatest increase in time spent. The talent management issues identified include the following:
- Leadership succession and development
- Organisation structure and capabilities
- Rewards and incentives
The challenge for HR practitioners, as the process owners of these issues, is to better understand the board of directors’ needs and help add value to the reviews and discussions. The value adding may be delivered by HR conducting the analysis and providing expert views, or channelling the appropriate resources to the board’s review. It may be a worthwhile exercise to ask the directors, especially directors in the nominating and compensation committees, the following questions:
- What information you would like from HR in order to better discharge your duty?
- In what form would you like the information to be in?
- Are there any “vital signs” you would use to monitor the health of the organisation and the workforce?
- What are some potential people risks that you fear?
- What role would you like the HR leader to play in working with the board?
HR should contribute as a champion of integrity and ethics
Assuming HR has played the above two roles of functional expert and process owner very competently but the CEO or the board is not heeding to the advice and pursue the business riskily, and bordering on being unethical. What can HR do when there is no formal feedback channel such as a whistle-blowing policy direct to the board? Should the HR leader take a stand and risk his or her career? It is obviously a personal choice to act on moral courage or go with the tide.
Before getting to that stage, the HR leader should use his or her personal effectiveness and organisation awareness competencies to try to put things into perspective with the decision makers. While one should have a flexible style to deal with issues and not be rigid, one’s style should anchor on some fundamental principles and integrity, which cannot be violated.
On a normal day-to-day basis, the HR leader needs to ensure HR policies and practices are helping to build a culture of open dissent, trust and candour.
Such a culture will help to surface and address potential problems as opposed to merely following the leader, which might lead to the ruin of the company as we have seen in a number of recent cases. Acting as a champion of integrity and ethics would be what differentiates a leader from a follower, in business as well as in the HR profession.
Na Boon Chong
Director of Consulting SEA
Aon Consulting
boon_chong_na@aon-asia.com
