Understanding HR risk

This has been necessitated by the fact that many HR processes and programmes such as talent management and succession planning impinge significantly on business performance. In fact, a recent survey by Ernst & Young of Fortune 1 000 companies reveals the following:
l HR/People issues are ranked among the top five business issues impacting a corporation’s results, and among the top three business risks most likely to occur
l HR risk is the most difficult to define, control and, therefore, manage, and
l Strategic business risks (including talent management and succession planning) will have an increased focus in the organisation over the next three years.
>From the foregoing, it is thus clear that strategic organisations need to raise their awareness of HR risk and come up with organisation-specific HR risk management frameworks within the broader ambit of enterprisewide risk management.
This article attempts to situate the context of such conversations on the subject.
It begins by providing an overview of risk and proceeds to identify HR risk and the various categories of such risk. It concludes by proffering recommendations on effective HR risk management for sustained high performance.
My first contact with the importance of risk was during the Business Finance course in business school, a couple of years ago.
I recall my lecturer then, Mr. Matanda, over-emphasising the nexus between risk and reward. Nothing was lost in translation, Sir! Modern-day investment decisions are largely driven by the lure of reward over risk. Risk, in common parlance, means danger. From a technical point of view, it refers to the likelihood that something good may not happen or the likelihood that something bad will happen.
 A perusal of the various audited and unaudited financial statements which appear in The Financial Gazette from time to time will show a section on the various risks peculiar to a particular organisation. Examples of such risks are strategic risks, operational risks, financial risks, and compliance risks.
Strategic risks are the risks that a company takes to fulfill its business objectives and are inherent in the company’s goals and objectives. Strategic risks focus on a business’ ability to deliver sustained growth and shareholder wealth.
Operational risks lie in a company’s execution of strategies and efficient use of resources while financial risks are intrinsic to the company’s financial management and reporting. Compliance risks are associated with complying with laws, regulations and the company’s code of conduct.
The resource-based view of the organisation is very clear on the importance of human resources as a source of organisational strategic competitiveness. In fact, human resources are a key strategic differentiator because they cannot be imitated because of the aspect of behaviour.
To that extent, HR risks can be construed as risks associated with utilising this strategic resource both within and outside your organisation. Thus, by logical extension, effective HR risk management ultimately becomes itself, a key strategic differentiator and driver of long-term organisational strategic competitiveness. This argument therefore forms the business case for increased organisational awareness around HR risks going forward.
HR risks cut across the core areas in which enterprisewide risk is located i.e. strategic, operational, financial and compliance.
An effective HR risk management framework must therefore focus on the key HR risks associated with each of these risk categories. Thus, going by one of the survey findings stated in the foregoing, it is clear that HR risks in the strategic category will be more nuanced going forward. HR/People issues are projected to be top corporate business risks with significant impact on corporate results.
Organisations will have to pay greater attention to how they recruit, retain and develop their talent as part of their strategic risk management approaches.
>From an operational risk perspective, there is need to strengthen the HR infrastructure so that it really delivers value by supporting the strategic focus of the enterprise. Generally, HR risks in this category are usually minimal once adequate processes have been put in place. Perhaps one category fraught with HR risks is the compliance category.
In Zimbabwe, companies have to manage risks associated with regulatory compliance. I recall reading somewhere an appeal by the National Social Security Authority to employers to remit outstanding employee contributions.
Organisations need to constantly monitor and assess the regulatory environment for any changes and ensure that they are on top of the situation.
Finally, organisations need to be aware of financial risks attaching to various direct and indirect HR programmes. Healthcare benefit costs, pension benefits and compensation costs are easily spotted on financial statements but there is need for greater focus on the indirect HR aspects and costs. As issues of disclosure gather momentum in view of corporate failure in the US, more and more companies will be expected to do full disclosure on executive pay and compensation.
The most effective approach to HR risk management is to make HR a key component of the enterprisewide risk management framework. In other words, risk management should not be viewed in silos but should be integrated across all the key areas of business.
People are an intermediating component of such an architecture hence their impact at each area needs to systematically and meticulously assessed and monitored.
-Shereni Jongwe is a senior executive for people, learning and development. For feedback, send an sms to +263 913 002 275