Managing human capital risks effectively
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So why this fuss around human capital risk management? Put simply, think of it as a health check-up. Of course, you don’t need a treadmill test each week, but being concerned, aware and responsive towards your well-being decides your state of health. Determination and examination identify ailments or the risk of developing them in time, while ignorance could simply mean walking hastily towards the “dead” end. Meaningful comparisons can be drawn in the context of a business enterprise. It is now amply evident that “technology” and “people” will drive the next wave of differentiation, growth and business success. That said, it is worrisome to note that a vast majority of organizations in India are ineffective at managing risks regarding their most valuable asset—people! It is very common for discussions on managing human capital risks to revolve around the daily challenges that the human resources (HR) team deals with—tasks like managing the total rewards, attracting and retaining employees, restructuring grades and salary structures, managing employee communications, etc. Also, more often than not, HR teams have culturally been more attuned to dousing fires rather than anticipating and preventing them. The fact that organizations operate in a much more volatile, uncertain, complex and ambiguous macroeconomic business landscape simply exacerbates the situation.
Essentially, effective human capital risk management is not about dealing with daily challenges, nor is it simply compliance related, it involves having formal strategies that assess the uncertainties which have a material effect on business performance and help in deciding whether to accept or mitigate the risk. Therefore, there is an urgent need for a fundamental shift in mindsets; a change from being reactive to being proactive.
It is not as if companies in India are oblivious to human capital related risk, as is evident from a recent study Willis Towers Watson did in collaboration with Confederation of Indian Industry. Paradoxically, for a country where organizations have limited human capital risk mitigation strategies, the study found that human capital risk ranks first among 12 risks in terms of impact on business performance, highlighting the need to manage these as rigorously as other enterprise risks. Further, 62% respondents identified human capital risks as a significant board-level concern, yet, just one in three have a formally defined risk mitigation or control strategy in place. Even fewer believe they are effective at human capital risk management. When considering the potential impact and the probability of occurrence, some of the biggest risks facing companies in India are insufficient leadership bench-strength, retention of critical talent segments, capability gaps, low workforce productivity and inadequate talent attraction programmes.
The study brings out three key imperatives that Indian companies have to turn their attention to—strengthening understanding of human capital risks, developing specialists in this area, and better quality of dialogue between risk and HR functions.
Today’s business environment demands a holistic approach that aligns talent and the related risks with broader strategic objectives. Human capital risk management should be seen as a tool to mitigate customer, financial, operational and reputational risk while delivering a consistent service delivery process leading to an improved overall employee experience.
The need to move towards an integrated risk management process
Despite the plethora of avenues producing human capital data such as employee surveys, HR information systems, compensation benchmarking tools, HR policies, etc., most companies fall short in connecting the findings of each undertaking to be able to compare how problems are interrelated and share common origins. The solution lies in the formulation of a formal risk mitigation strategy that yields a framework where organizations can identify and compartmentalize human capital risks.
One of the most critical barriers to effective human capital risk management is the culture of HR function having insufficient dialogues with risk management functions. The result—risk managers may be unaware of the impact human capital risk has on business sustainability or view these as less important in comparison with other risks. At the same time, HR might be struggling with risk nomenclature or may overrate the importance of certain day-to-day issues. They need to work together to help identify and assess risks allowing business leaders to decide whether to accept or mitigate particular risks. However, the situation in organizations in India does not indicate much collaboration—only 33% respondents said that human capital risk is managed by the internal audit function and 32% said it is managed by enterprise risk management in their organization. Both functions will be more successful by building a partnership that brings these issues into the formal risk framework which is reported to the board of directors.
Meanwhile, in terms of maturity of human capital risk management processes, less than half the organizations that were polled have processes that are sufficiently mature to deal with human capital risks and multinational corporations (MNCs) seem to be doing better than domestic companies here. The human capital risk mitigation process is three times as mature at MNCs versus domestic organizations. The global risk management approach of MNCs combined with the fact that they’ve been at it for quite some time now, may be the probable reasons for their lead over domestic companies.
The time to act is now
A coordinated and a formal risk management process is more crucial than ever before. It will help organizations to identify human capital risks which the organization might not have been aware of previously, enable risk prioritization based on quantifiable evidence and allow leadership to gain advance insights into various risks that impact business performance and perhaps exploit them for driving competitive advantage. Additionally, individual business units must understand the implications of human capital risks on their business strategy and take more informed decisions.
The key to improving oversight and management of human capital risks lies in applying a risk-based perspective when dealing with core HR issues like employee engagement or recruitment, having a formal human capital risk process in which the business participates and having a standing group or committee that oversees the process. Giving chief HR officers more exposure and access to the corporate risk committee, senior leadership and the board will significantly improve direct communication, and foster greater collective accountability. It is pivotal to conduct regular HR audits that involve review of current practices, policies and procedures, and may include benchmarking against organizations of similar size and industry. Finally, taming the human capital risk demon will require closer coordination and collaboration between the risk/audit and HR functions, and greater involvement of boards by making human capital risk an integral part of the risk management framework and agenda.
The journey towards effectively managing human capital risks begins with one question that organizations must ask themselves—if human capital is your biggest asset, then is not having a human capital risk management strategy worth the risk?
Vivek Nath is managing director (India and South Asia) and Urvi Shriram is economist at Willis Towers Watson, a global advisory, broking and solutions company.