Saturday, 1 November 2008

Feeling Bullish on Governance

You may be wondering what corporate governance and executive compensation is doing as the cover story in a Human Resources magazine, and rightly so. An audacious statement it may be, but I would gladly say that if we want to set high ethical and governance standards, HR is the function rightly poised to deliver results. After all, as every CXO loves to say, “it is all about people”.

Today when we look around, we see mammoth organisations being reduced to debris. As we probe further we realise that most failures can largely be attributed to lax governance and a culture of short-term profiteering. It then becomes obvious that what is required is a cultural shift in organisational thinking and hence a cultural change in the executives who direct the organisational strategy.

HR has evolved over time to become a key strategic player in the new-age organisation, in productivity and efficiency initiatives by sourcing work and talent for better leverage, outsourcing non-core work, and moving some talent costs from fixed to variable. For HR to remain a strategic partner in these new, anxious and unstable times, it must answer the call to support and systemise governance through a cultural shift that ensures growth without crossing the fine line between performance and greed.

A study by J. Richard Finlay, Chairman of The Centre for Corporate and Public Governance (Canada), shows that many boards devote more time and energy to executive compensation than to assure that their company adheres to its own stated standards of financial integrity and corporate responsibility.

In 2001, when Oracle made a record payout of $706 million to Larry Ellison (he exercised his stock options), the full board met only five times and acted formally or by written consent only thrice, in contrast to the compensation committee which acted 24 times in written consent or formal session.

The challenge for HR, and hence our focus till date has been to instill an entrepreneurial and business reward driven culture in our executives, in the hope of transforming corporate behemoths into nimble competitors. The challenge in the coming years will be to create corporate cultures that encourage and reward integrity as much as robust bottom lines, innovation and entrepreneurship. To do that, executives need to start at the top, becoming not only exemplary managers but also the moral compass for the company. CEOs must set the tone by publicly embracing the organisation’s values. Boards and CEOs need to be forthright in taking responsibility for shortcomings, be it an earnings shortfall, a product failure, or a flawed strategy; and show zero tolerance for those who fail to do the same by integrating these factors to pay and performance indices.

Overcoming the crisis in the corporate sector will take more than a single initiative or few. The breakdown has been so systemic and far-reaching that it will require major reforms in a number of critical areas. The HR community can play a vital role, as culture and hence people, starting at the top to the frontline, will need to transform in order to embrace a more inclusive business philosophy.

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