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OPINION
Corporate Governance - Does HR Have A Role?
Vijayam Nadarajah
believes that HR’s role and contribution ought to be important items on the Board’s agenda when discussing corporate governance

April 2011 | Boards entrusted with corporate governance discuss financials, business plans, strategies, rules and regulatory compliance and operations in meetings with shareholders and investors.

However, in none of the several annual general meetings (AGM) and extraordinary general meetings (EGM) that I had attended for 2010 did the Chairman nor any director mention what the company had and could do to ensure HR makes a meaningful contribution to performance and corporate governance.


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Somewhat on the contrary I was pleasantly surprised to hear in a recent AGM of a property and investment holding company that several retail investors had recognised and attributed corporate success to the CEO and the management team.

The retail investors linked the CEO’s leadership and peoples’ performance to the financial track record and good corporate governance of the company. There seems to be some form of awareness amongst the investing public that people, culture and the corporate environment play a crucial role in value creation.

Corporate governance is defined broadly as rules and regulations, systems, processes and practices, and ethical conduct that assist the decision making top down with a view to create responsible, accountable, controlled and value driven companies. Such attributes promote investor, shareholder, customer, and employee confidence, both current and future.

The collapse of Enron and Worldcom in the USA, and HIH Insurance in Australia, to mention a few, is shocking. These are companies that were profitable and exhibited good business and trend setting practices in the corporate world.

Taking a step back – how did these companies with strong governance practices not hedge themselves against corporate failures of such magnitude and scale? In these companies’ disclosure, leadership, targets that were set too high as well as ethical and moral conduct were identified as amongst the major reasons for their failure. Unfortunately till today there are corporations, supervisors and regulators that have not learned enough from these failures nor placed enough focus on directing efforts towards these challenges.

CEO and HR cost account for a large portion of operating revenue depending on the kind of business operated - in compensation, health care, contribution to the employee provident fund, training and other HR expenses.

Very often this cost is not challenged at Board meetings linking its contribution to overall corporate performance and governance. In some instances there is no objective and unbiased assessment of the CEO and top management as part of the Board governance process.

I tend to agree with some gurus in HR consulting that there is no commonly acknowledged definition for the act of leading and managing the human capital, which is somewhat an evolving organisational practice. Yet, it deserves corporate attention.

Mercer Consulting Inc in defining “HR governance” is seen to have linked HR’s role in the management of functional investments to optimisation of peoples’ performance, fulfilling fiduciary and financial responsibilities, mitigating enterprise HR risk, aligning the function’s priorities with those of line business, and enabling executive decision making.

Mercer goes on to detail the elements of governance to include structure and accountability, philosophy and operating principles, core management activities and performance monitoring. These activities link to task execution and performance i.e. results and conformance. What is evident is that the HR function has an expanded role that evolved over time from providing basic administrative and support function to one of a business partner and possibly catalyst for change, enhancing leadership practices and creating ethical environments for business operation.

Improving productivity, driving transformation programmes, policy and rule compliance, clarity in reporting structures supported by role clarity, preferred culture and leadership practices, delegation of authority and accountability, managing reward plans and programmes, staff development and talent /leadership management and retention, resource allocation, succession planning, and performance monitoring – all these can be linked to operational effectiveness, compliance, risk management and contribution to business continuity and success. Together with corporate values, integrity and skill enforcement HR shapes ethical corporate behaviour and successful companies.

Under the Sarbanes–Oxley Act (SOX) the HR operating model apart from reward and reporting issues is examined and recognised as an important constituent in business success. SOX gives a holistic approach to corporate governance. SOX contributed to pushing the role of HR to a higher level in the organisational structure - a business partner role to achieve strategic and operational objectives.

HR has a role in corporate social responsibility. HR ensures corporate governance mindsets, culture and thinking top down are enshrined in everyone in the company for the overall success of the company. Without doubt, HR’s role and contribution ought to be important items on the Board’s agenda when discussing corporate governance - how HR can motivate a workforce to execute the business strategy through sourcing, applying appropriate capabilities and managing related investments.


Vijayam Nadarajah is now a freelance analyst on corporate governance (CG) and financial matters.

In this role she assists companies to embrace best corporate practices, highlight weaknesses in governance, internal audit and risk management practices.
She also trains in finance, risk, internal audit corporate governance and insurance matters.

Previously she worked as a financial controller and in other roles in financial institutions. Vijayam is a past president of the Institute of Internal Auditors Malaysia.

 

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