Boards need to be more demanding of the HR function. Monica Belcourt outlines six steps that senior executives and board directors should consider in assessing the effectiveness of their HR function
Boards need to be more demanding of the HR function. Monica Belcourt outlines six steps that senior executives and board directors should consider in assessing the effectiveness of their HR function
Every few years, a cry goes out for the abolition of the HR function, with headlines such as ‘Blow up the HR function,’‘What is HR good for?’and ‘Why we hate HR.’ Indeed, many executives believe that the HR department consumes resources, contributes little and cannot explain what it does, except in warm, fuzzy language. Even advocates for HR suggest that the function is at a crossroads and risks being made obsolete by the outsourcing of its services and the return of the management of people to line managers.
We know of course, that the HR function does contribute to an organisation. Senior executives and board members just need to know how to question and assess the effectiveness of the department. There are compelling reasons to do so, beginning with the fact that labour costs are usually a firm’s largest controllable cost. Organisations are responsible for ensuring compliance with laws, regulations, standards and policies and usually pass this responsibility onto HR. Non-HR managers cannot usually distinguish between a fad and a valid program for changing employee behaviour. Measuring and benchmarking HR activities will result in continuous improvements and bring the HR department into line with other functional areas that have their work audited.
The 6C model
The HR function contributes to an organisation in many ways, which can be clustered under the following categories: compliance, consultant with a conscience, client satisfaction, culture management, cost control and contribution.
Compliance
Board members must rely on the head of HR to ensure that organisational practices and policies comply with the law. Legislation dealing with the employer-employee relationship is increasing in areas such as safety, health, and employment equity. Organisations that have received wake up calls in the form of fines and even jail sentences for executives for non-compliance with safety regulations, or sexual harassment of subordinates should at a minimum require assurance that these areas are being audited regularly. In this way, board members protect themselves and their companies from legal costs, fines and damaging publicity.
The consultant with a conscience
HR has traditionally been seen as the function which guards integrity. From its historical role in the 1930s, ’40s and ‘50s as a sounding board for employee concerns, the HR professional has retained the role of the conscience: the one person who consistently asks “Is this the right thing to do?” (Ethical values refer to doing the right thing, which is different than the compliance role which focuses on not violating any laws or regulations). There are several evolving tasks under this consultant with a conscience role.
In light of the scandals at Enron and elsewhere, someone in the organisation has to take responsibility for ensuring that employee behaviour is ethical. The HR function is the natural choice, as it can ensure ethical behaviour in various ways. These include the development of a code of conduct that would be signed by every employee annually, using rewards for compliance and punishment for offences, recruiting, orienting and training in ethical behaviour, and assessing ethical culture. Coupled with this is the development of protective measures for whistle blowers, such as an ethics hotline where questions can be raised, or the creation of investigative channels to review charges.
HR is currently perceived as representing management, although many employees feel that HR will side with employees on issues. However, there is some evidence that HR is beginning to represent, or at least be informed of the perspectives of other stakeholders. What is in the best long-term interests of not only shareholders, but other stakeholders such as communities, and environmentalists? Can HR evolve into a stewardship role where, like a farmer or manager of forests, the long-term sustainability interests are equal or more important than the short term interests of shareholders, and even executives, whose performance bonuses depend upon short term results? In this sustainability perspective, the VP of HR acts as consultant with a conscience to the board.
As a consultant with expertise in human behaviour, the HR head can be used by the board to not only explain the compensation packages for executives, but also to comment on the long term (and even dysfunctional) implications of these pay for performance packages. Their professional expertise could be used in areas such as succession management, executive assessment, and strategic areas where the management of HR issues makes the difference between success and failure: outsourcing, mergers and acquisitions, offshoring and restructuring. The HR person could be the insider who can be contacted directly by board members, much like they can currently by-pass the CEO to contact the audit committee or deal with external auditors. This could be one small step towards rebuilding trust in the boards of directors and the integrity of the organisation.
Client satisfaction
Most organisations track customer satisfaction, recognising that this measure has been found to predict, on a lagged basis, financial success. So too should the HR function be measured on the degree of satisfaction that its internal clients are experiencing. This measure reminds the HR department that it is indeed a service function that must meet client expectations, and provides the board with an assessment of the alignment of HR programs and services with real organisation needs. The board should ask the HR department to develop a survey to assess its value, as perceived by internal stakeholders, and this report should be reviewed annually.
Culture management
Highly effective organisations seek to influence employee attitudes through the development of an appropriate culture that supports optimum performance. Employee attitude scores have been found to predict absenteeism, tardiness, work performance, strikes, productivity and financial performance. These surveys can be considered ‘canaries in the mine shafts’ and the discussion of their results should be a regular part of board meetings.
Cost control
Employees continue to be treated as an expense which must be controlled and reduced. Organisations do this by limiting wage increases, reducing head count and outsourcing functions. The result may be decreased ability to provide services, reduced commitment on the part of employees and the hollowing out of the corporation. Much research has shown that while reducing headcount (downsizing) has an immediate, positive impact on shares, the impact on the long term share value may be negative. There are other more effective ways to control labour costs.
The first is to increase efficiencies by increasing outputs over inputs. By measuring and benchmarking time (average time to process a claim); volume (the number of requests processed per hour per employee) and or cost (cost per claim), managers can develop practices to improve these ratios. The ratios can be compared over time, across departments or similar organisations, or even benchmarked against the best in the world. The second way is to control the cost of employee behaviour. The board should be asking the HR head to track turnover rates, absenteeism rates and occupational injuries. All of these can be assessed and benchmarked, and relatively simple programs can be devised to reduce these costs significantly.
Contribution
Multiple studies have established that HR practices can have an impact on organisational performance in measurable ways. These best practices have a direct and economically significant effect on a firm’s financial performance.
The board should be requesting that any demand for resources to implement new HR practices should be accompanied by a cost benefit analysis, much as would be required for any capital investments. This demand would reduce the traditional reporting by HR of the number of hires or numbers of employees trained, which are essentially meaningless numbers. When HR states that 100 employees have attended a training course, the board should ask “so what?” The HR function should be able to demonstrate that the training course resulted in a 10 per cent improvement in customer satisfaction which in turn lead to a 1 per cent decrease in complaints, and so on. Ask directly: what impact does an empowered workforce have on the bottom line? What will the business process reengineering accomplish? Why should we select our next generation on attributes of emotional intelligence, and where is the empirical evidence that this works? This requirement forces HR professionals to use the same language of business as the other units and provides a rationale for making decisions.
The board’s responsibility
I have sat on many boards, and have never seen any board member ask important questions about the management of the organisation’s most important asset. Why does HR not report on these critical measures? The head of the HR function is not supplying this information for many reasons. The first is that measurement of the practices of HR will add another five per cent to the cost of the program, and there is the high risk that the evaluation will not be able to demonstrate a link between the practice and the anticipated effect. This could be professional suicide. Others argue that it is difficult to measure human behaviour, or that they cannot control either the labour market or the way individual managers treat their employees. But marketing cannot control product quality nor can finance control the interest rate, and these functions are held accountable.
Boards should require a presentation by the HR function, ensuring at a minimum:
• A written statement acknowledging compliance with employment laws and regulations.
• Evidence of an audit of the organisation’s own policies, such as adherence to the code of ethics, harassment prevention, etc.
• An employee engagement survey (professionally administered) to determine the culture of an organisation, with comparative data across time, units and ‘best in class’.
• An assessment of the effectiveness of the HR function in meeting their client’s needs and expectations (developed and administered by an external consultant).
• Statistics on employee turnover, absenteeism, and lost time injuries with comparative data over time, by unit and by national standards.
• For any HR initiative, a presentation on the anticipated cost benefits, and the methods used to assess these.
In this way, HR will demonstrate its value to the organisation, and board members will be assured that money spent on the ‘organisations’ most important assets’ is well spent.
This article is a revision and expansion of an article first published in the Ivey Business Journal, January/February 2001 entitled ‘Measuring and Managing the HR function: A guide for Boards.’ Monica Belcourt is a professor of strategic HRM and director of the graduate program in HR at York University, Canada.
