With everything that has happened in the past two years in terms of the financial meltdown and failing companies, many business leaders who have survived are asking “why did this happen, and how can we avoid it happening to us in the future?” One way is to effectively manage the risks associated with doing business. Business leaders need to take a methodical, systematic, and holistic approach to addressing a variety of risks, by identifying the financial, operational, compliance and business/strategic risks and determining ways to reduce those risks in order to operate successfully.
Human Resources risks are a critical element of this overall risk management review. A 2009 survey by Ernst & Young noted the following five HR risk areas that are most critical:
- Talent management and succession planning. For a company to successfully reach its business objectives, it has to have the right people in the right job at the right time. Keeping this talent focused on the success of the company requires effective management, including a clear plan for selecting the appropriate talent, managing it and replacing that talent it in the future. Talent management begins with selection. Selecting the right person for the job increases the likelihood that the individual will stay with the organization. Poor recruiting and selection add to the cost associated with turnover, which can be substantial, and can have a negative impact on the morale and productivity of other workers. Ultimately, poor selection and management of talent, especially those in decision-making and management roles, can lead to poor decisions being made by those in charge, which can devastate a company’s financial position and reputation.
- Ethics and tone at the top. Employees throughout the organization take their cues from observing the behavior of those who serve in senior leadership positions. If senior executives don’t support the company’s performance management program, or if there’s a lack of diversity amongst the senior team, or harassing behavior is tolerated at senior levels, the risk of costly lawsuits is increased, as is the risk to the company’s reputation in the community. This reputation can spread like wildfire, especially with the explosion of social networking sites, and a company that is setting a poor tone at the top runs the additional risk of getting a reputation as an undesirable place to work, which can lead to difficulty in attracting the best and brightest talent.
- Regulatory compliance. Increasing regulations adds risks for organizations, especially in the areas of compensation and benefits. With an increased focus on compliance related to employee classification - exempt vs. non-exempt and contractor vs. employee - the risk is greater than ever. Employee benefits is an area ripe with regulatory requirements that can cost a company hundreds of thousands of dollars in penalties, fines and legal fees. All the more reason for companies to ensure they are minimizing their risk by working with qualified professionals who have experience in these areas.
- Pay and performance alignment. The risk of expensive discrimination lawsuits increases when pay decisions are made for reasons other than actual performance. And if employees don’t understand the link between their performance and the rewards provided by the company, they can become dissatisfied and look for new opportunities, thus resulting in turnover due to a simple misunderstanding of pay and performance. A solid and effective communications program can help to minimize these risks.
- Employee training and development. Providing opportunities for employees to continually grow and learn professionally provides several areas of value to an organization. Turnover will be reduced if employees are able to continue their professional growth within the organization. By encouraging training and learning, you’re creating a workforce that can adapt to the changing needs of your customers so that your organization doesn’t become stagnant. And you’re creating a pool of available talent within your own organization that you can tap into as positions become available. The risks involved in NOT training and developing your employees include higher turnover, which means the costs associated with turnover and hiring, and a workforce that is inflexible and unable to grow and adapt as your customers needs change and develop over time.
A systematic approach to identifying and addressing the risks in your business can minimize your exposure to financial losses and costly regulatory issues.
