Mark Edelsten believes that HR managers have an important role to play in the risk management team.

When the millennium dawned, the economy was strong, and a sense of optimism filled the air. The stock markets boomed with e-business. All kinds of organisations were hiring new people and looking for new opportunities.

The future looked bright. Executives dreamed of the sunny uplands of prosperity as they sat at their desks waiting for the head-hunter to call. Others, seeing the chance to become a millionaire, burnt the midnight oil developing business plans and spent the days making furtive phone calls to venture capitalists.

In such an environment, it was hard to remember that business cycles exist, and that profit and risk are two sides of the same coin. Everyone knows that profits are the reward for taking risks - but on the whole it is more comforting to think about profits than about risks.

Managing HR risks
Last year, risks were being overlooked. Many related to people and human resources (HR). In the more sombre climate of today, HR risk management is an idea whose time has come.

HR professionals should adopt the techniques of risk managers and hold themselves responsible for managing the value of the human assets within their organisations. The appearance of standards for corporate governance - such as the Greenbury report's call for each company to have a remuneration committee, and the Turnbull report's appendix which mixes risk management with HR - have created great opportunities.

The Turnbull report instructs companies to adopt a 'risk-based approach to establishing a system of internal control and reviewing its effectiveness'. Historically, when writing up their company's audit reports, accountants have taken the phrase 'internal controls' to refer to the ownership of processes, such as the need for two signatories on a cheque, or the responsibility of this or that manager for a budget. At first sight, one might think this has nothing to do with HR and people management.

Turnbull's report, however, promotes a broad view of risk management. It requires all UK quoted companies to design processes to monitor the effectiveness of the way they manage risk. This means that companies have to think broadly about the risks that they face when trying to achieve their corporate objectives. They may, for example, ask themselves the following questions

  • How well does the company manage change?
  • What is the impact of moving into new markets?
  • How responsive are we to changing demand?
  • What drives employee morale and productivity?
Whatever each company asks itself, it should give HR considerations greater prominence. Managing people and HR risk are destined to become an integral part of the process of risk management. The Turnbull report recognises this explicitly: in the appendix, it suggests the type of questions to address during the annual review process. Does the board have clear objectives and are they communicated to staff? Do the company's culture, code of conduct, human resource policies and performance reward system support the business objectives and risk management/internal control system? Does senior management demonstrate the necessary commitment to competence, integrity and fostering a climate of trust within the company? Are authority, responsibility and accountability clearly defined? Do employees (and outsourced providers) have the knowledge, skills and tools to support the achievement of company objectives?

The FSA weighs in
The impact of regulation on HR risk management is not restricted to the Turnbull report. The Financial Standards Authority (FSA) has recently published a consultative document entitled Senior Manager Arrangements, Systems and Controls. This addresses issues of individual accountability and poses a number of key questions.

  • Is there a clear and appropriate apportionment of responsibility among the directors and senior managers (of FSA regulated businesses)?
  • Are individual roles and responsibilities clear?
  • Does the firm have organisation charts and job descriptions?
  • Are there systems to cover recruitment and continuing suitability of staff and agents, reporting lines, delegation (including outsourcing) and segregation of duties?
This document is proposed as an addition to the FSA's rulebook. The idea is that, if firms can show that they have developed acceptable levels of internal role clarity and accountability, the level of supervision can be allowed to fall.

The main concern, however, is not at the level of supervision involved - many now accept that this represents good practice - but as to who takes responsibility for implementation. At a recent risk management workshop designed for City of London HR professionals, delegates were told that much of the responsibility for this would fall on the shoulders of HR departments.

It is clear that there is a key role for HR professionals in regulatory processes. At present, finance and risk managers are generally responsible for compliance. For companies that have already addressed the issues that the FSA raises in its document, HR is often involved on the periphery of operations. But HR managers have an important part in helping companies to become compliant and in using HR risk management positively to create the necessary link between effective risk management and greater organisational value. This can only be achieved if HR departments develop a coherent and persuasive approach to risk management. They must develop a clear understanding of the generic risk management process and of how to use it within the sphere of HR management.

What is HR risk management?
The fundamentals of risk management involve establishing a process for reviewing risks on an all-inclusive basis. In other words, the process has to be broad enough to capture all key risk areas, to rank them in terms of priority, and to assess the risks for severity/impact and frequency/volatility.

This process applies to HR just as much as to an assessment of any other area of risk. It is particularly important for companies to stick to such a process in carrying out an HR risk management review and resist the overwhelming temptation to dive down into the detail.

For example, it is common to find that considering HR and people-related risk is limited to thinking about recruiting, retention and reward issues, within a framework that is too restrictive and which is inclined to ignore the context of HR policy issues.

Broadening the framework
Managing HR and people risks effectively means taking a broad view of HR. It is not simply about hiring and firing. Reviewing HR risks should involve thinking about the performance of people in the work environment, both now and in the future, and looking at how people relate to their work and to the organisation in all its aspects.

As a first step, it is indeed necessary to consider aspects of recruiting, motivating, rewarding and retaining not only key employees, but the workforce as a whole. But analysing HR risks should involve going further. It is important to widen the scope to consider some of the following ideas:

  • How do people interact with each other, with technology and with work processes?
  • How do people use organisational knowledge, systems, data and information?
  • What impact does the organisation's structure have, and how do people influence and shape it ?
  • How clear are roles, responsibilities and accountabilities across the business?
  • How does the way the organisation communicates change and makes decisions affect people and influence their behaviour?
All these issues impact upon people and represent the key drivers of human capital.

HR in context
It is often difficult to assess HR risks accurately. It is always important to consider them in their overall business context. For example, organisations often think of high labour turnover as 'bad' and consider it one of their high-risk areas. But turnover is not in itself necessarily 'good' or 'bad' in risk terms. It depends entirely on who is leaving and joining and how the situation has arisen.

In extreme cases, high and volatile labour turnover could be critical to a company's survival. Some organisations need to turn over their staff rapidly, partly to retain structural flexibility and partly because they depend on the renewal of ideas, knowledge and skills from external sources. This is the case in the consulting and high tech sectors.

On the other hand, some of the UK's largest employers have consistently low or stable rates of labour turnover, which seem to bear no relation to significant changes in profitability or share price. When dealing with the risks of labour turnover therefore, the context is critical. The same holds true in the other main HR policy areas. For example, base pay/bonuses/benefits should not be taken into account in isolation, because difficulties with recruitment may not be just a matter of pay levels.

HR risk management process
There are dangers, then, in taking too restrictive a view of HR risk and also in isolating particular HR risk areas for examination before looking at the overall business context. To overcome this, it is important to develop a broad based HR risk management process, and to use it consistently to measure and manage risks effectively and efficiently. The fundamentals involve the following:

  • establishing a process for reviewing HR risks on an all-inclusive basis
  • capturing all key HR risk areas
  • ranking HR risks in terms of priority
  • assessing HR risks for severity/impact and frequency/volatility
  • focusing on key issues by establishing an HR risk early warning system.
This process is only the first step in developing an HR risk management strategy, and much more work is needed to design and implement any strategy. Several leading organisations have already embarked on such a process and many more will follow. HR professionals have a great opportunity to take the initiative in meeting the new regulatory challenges and maximising the benefits of the new approach for their organisations.
Mark Edelsten is European partner, William M Mercer, Tel: 020 7488 4949, E-mail:

Keeping key employees
A report from the Institute for Employment Studies - Keeping the Best: a practical guide to retaining key employees - by S Bevan, L Barber and D Robinson gives the following checklist.

  • Good data - Be able to identify turnover hot spots, high risk groups, costs and trends over time
  • Data on reasons for leaving - Use well structured exit interviews or leavers surveys to highlight reasons which are in your control
  • Risk analysis - Establish, by looking at the likelihood and consequences of resignation, to what extent you have employees in the danger zone
  • Recruitment - Avoid recruiting turnover by matching people to posts and by not over-inflating recruits' expectations before they join
  • Training and development - Tailor and deliver training and development opportunities to the needs of both the organisation and the individuals. Training can also be seen as a reward
  • Management style - Ensure managers have the skills to manage people effectively and that they understand that the way they manage can increase or lower staff turnover
  • Job content - Allow as much autonomy, team-working and control as practical. Ensure flexibility does not meet only the organisation's needs
  • Rewards - Use loyalty bonuses only where nothing else will work and do not expect their effect to last. Ensure rewards are seen to be fair
  • Flexible working - Ensure that employees with a need for flexibility in hours or location feel that the organisation is responsive to them