How Do You Assess the Risk of Your HR Department?

Are your risk and audit functions (and senior management) paying enough attention to the Human Resources Department (HRD) as a source of significant risk?

It can and should be a major player in protecting enterprise value. But it should also be a major contributor to creating it.

If it is less than effective in either dimension, it can have a significant effect on achieving enterprise objectives. But when it excels, the effect can be magical.

The Potential of People Management

Consider these quotes from Jack Welch, considered by many as an excellent CEO:

The team with the best players wins.
If you pick the right people and give them the opportunity to spread their wings and put compensation as a carrier behind it you almost don't have to manage them.
Before you are a leader, success is all about growing yourself. When you become a leader, success is all about growing others.
What could possibly be more important than who gets hired, developed, promoted, or moved out the door? Business is a game, and as with all games, the team that puts the best people on the field and gets them playing together wins.
No company, small or large, can win over the long run without energized employees who believe in the mission and understand how to achieve it.
My main job was developing talent. I was a gardener providing water and other nourishment to our top 750 people. Of course, I had to pull out some weeds, too.
Great leaders love to see people grow. The day you are afraid of them being better than you is the day you fail as a leader.
A leader's role is not to control people or stay on top of things, but rather to guide, energize and excite.

Tom Peters, my favorite management guru and author of multiple books including "In Search of Excellence," has a collection of quotes in "Putting People (Really) First." They include:

If you want to WOW your customers, FIRST you must WOW those who WOW the customers! (Peters)
Business has to give people enriching, rewarding lives … or it’s simply not worth doing. (Richard Branson)
Groups become great only when everyone in them, leaders and members alike, is free to do his or her absolute best. … The best thing a leader can do for a Great Group is to allow its members to discover their greatness. (Warren Bennis and Patricia Ward Biederman, “Organizing Genius”)
In a world where customers wake up every morning asking, ‘What’s new, what’s different, what’s amazing?’ … success depends on a company’s ability to unleash initiative, imagination and passion of employees at all levels — and this can only happen if all those folks are connected heart and soul to their work [their ‘calling’], their company and their mission. (John Mackey and Raj Sisoda, “Liberating the Heroic Spirit of Business.” Mackey is the founder and CEO of Whole Foods)

However, years ago Peters and another management guru published a series of talks including one where they said that for many organizations the best HRD is no HRD. The function can be as much an impediment and obstacle to hiring, developing and motivating people as it enables them.

The Downsides of Human Resources

We've all had experiences with a frustrating HRD and its policies. Mine include:

An HRD made it difficult for me to hire the people I needed to build an agile, high-value internal audit department. I wanted people with experience and the ability to be creative, so I was hiring former controllers, external audit managers and the like. But the HR department refused to let me offer them jobs as "managers" because they wouldn’t be "managing" a team. Eventually, we reached a compromise: in the HR system they would be shown as expert consultants, but they could use the title of manager when they spoke to people. Their business cards said "manager."
An HR department once mandated that I grade my people "on a curve." That meant that only one, or at a stretch two, could be given the top rating. Most had to be around average, and at least one or two had to be below. But they were all top performers, and an average or below rating would be a huge de-motivator. I was a VP in IT at the time. I eventually got around this by having them accept that my small team would be graded as part of the full IT department.
An HRD once forced me to give one of my best people a warning because she was missing days through illness. I didn’t feel it was either fair or in the company’s best interests because she was still getting her work done and at a high level. I gave her the warning and she quit. (I still feel guilty.)
An HR executive tried to stop me from hiring younger women because they would have kids and leave. He was also biased against certain minorities.

On the other hand, I have also worked with an HRD that was very much open to new ideas and let me hire former controllers as managers (with no staff) and pay them what they were worth.

How Do We Assess the Risk of HR Departments?

As practitioners, do we consider the risks (upside and downside) from an effective or ineffective HRD? Do we assess the risk? Do we consider the risk, both upside potential and downside, in our reports and plans? Or do we just complain about it?!

Assessing the effectiveness of HRD and understanding the related risks can be as simple as performing a survey. Confidential discussions (to protect the innocent) with hiring managers can be very useful, as can sending a broader survey for a larger organization. The HRD might even collaborate on the latter (a positive sign).

I would also consider developing analytics around terminations, both voluntary and for cause. Is the level of either higher than should be expected, and are there any trends of note? Have a look at the level and nature of employee complaints.

Perform the analysis by location and function to see if there’s a localized or entity-wide problem.

Similarly, look at the time it takes to hire new employees. How many open positions are there and for how long? Are there indications that the company is having difficulty hiring because of clumsy policies or poor pay?

Look at social media and what people (current and former employees) are saying.

I have written about the need to “audit/manage while walking and listening around.” We need to be sensitive to signals of disquiet, of morale concerns, as well as those indicating high levels of loyalty and contentment with the business.

When there are indicators of high risk, act.

But this can be a political minefield, especially when a defensive EVP of HR asserts that we don’t know anything about HR. If we are not careful, it can look like we are trying to get even because we don’t like some of the policies they apply to us.

Maybe any survey of HR quality and effectiveness can be combined with a survey of other corporate functions, like legal and finance.

It would help if we could persuade the CEO that an independent and objective assessment would be valuable, to see what people think and whether improvements can be made.

Either way, I suggest that we need to consider the risks that an ineffective HRD can present (on the downside) — and how a world-class function can help us have a world-class enterprise.

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