On the surface, the heads of HR and risk management may not seem like natural allies in a senior executive team. After all, such executives tend to come from very different backgrounds, operate with distinct worldviews and, frequently, divergent priorities.
For instance, risk managers said the business risks they worried most about last year included an unpredictable political landscape and technological disruption, according to CEB data. This was true across the United States, Europe, and Australia and New Zealand. By contrast, change management initiatives topped the list of priorities for HR executives: leadership development, talent management, and succession management. Engagement and retention are a regular focus for HR leaders, and this continued to be the case in 2016.
But over the past few months, heads of HR have become increasingly concerned about a specific category of change management: managing changes to corporate culture. They think that there should be better alignment between culture and company strategy, according to CEB analysis. A majority of those surveyed by CEB (92%) agree that organizational culture significantly affects financial outcomes, placing culture at the top of the CEO’s agenda, and that of the head of HR.
Notably, less than half of heads of HR believe that their actual company culture is consistent with the culture they think is essential to business strategy. Unsurprisingly, three-quarters of companies said they will pursue culture change initiatives this year.
Culture in Common
These culture changes are where chief HR officers (CHROs) and chief risk officers (CROs) will be attracted closer into one another’s orbits. While a majority (89%) of CHROs believe that running programs to improve or change company culture are a central part of their role, only 30% believe that it is primarily up to HR to successfully implement these initiatives. Critically, only 37% of senior HR executives say their teams can adequately define the metrics and collect the data needed to make successful cultural changes.
Such challenges and limitations faced by HR teams are neatly offset by the strengths typical of risk functions. Traditionally, the CRO’s primary role has been to quantify risks on “hard” issues such as physical or financial assets, with extensive use of data and analytics. Big data analytics is a top-five concern for risk managers around the world. On the other hand, “soft” issues, like culture, have not typically been the domains of CROs.
But this is now changing, as risk functions focus more on enterprise risk management (ERM). ERM takes more of a strategic approach to risk by establishing oversight, control, and discipline behind an entity’s risk management capabilities for tangible and intangible assets. Indeed, our research shows that CROs’ top enterprise risk challenges for this year include risk awareness, culture, and functional collaboration throughout the organization. Such concerns are, of course, more typical of the HR organization, which offers CROs a set of strengths and experience that risk managers don’t typically have.
At the same time, HR teams want to bring more analytic rigor to their work: 68% of heads of HR plan to enhance organizational talent analytics capabilities in 2017. This creates an opportunity for risk and HR executives to bring a new level of rigor and insight to culture through big data.
4 Questions for Heads of HR and Risk to Consider
In particular, heads of HR and risk can deploy the combined strength of their analytics capabilities to craft a better understanding of the intersection between culture and employee misconduct. High-profile crises over the past year, seen at firms ranging from banks to the automotive and traditional manufacturing sector as well as among high-flying internet startups, have put culture and related conduct risk high on the agenda of regulators, legislators, and prosecutors.
Understandably, this has put culture and conduct risk more prominently on the radar for senior management. Because such issues involve employee behavior, HR is called to the fore. But because these same behaviors represent risks to the organization, CROs are also asked to take responsibility.
This trend has been most pronounced in the banking and financial services sector, where many firms are now creating standing management committees made up of representatives from the HR and risk offices. This trend will likely extend into all heavily regulated sectors and among firms seeking to adopt emerging best practices.
Key questions heads of HR and risk should consider together include the following:
- How do we define our most critical talent segments and quantify their value (and risks)?
- What underlying processes determine good or bad employee conduct?
- Which processes are most likely to negatively affect employee conduct (unintentionally)?
- What proactive measures should we prioritize to aggressively guard against employee misconduct in our critical talent segments?
“Drucker once said that culture eats strategy for breakfast,” notes Nigel Morris, founder of Capital One. “It’s pretty clear to me that culture eats compliance for breakfast. Rules-based checking cannot deal with a rotten culture.” It is therefore unsurprising that culture is a core concern for CHROs and CROs alike this year.