“This could be the beginning of a beautiful friendship”[1]: Human Resources and the Board
A recent study confirmed what most astute Board Directors already know: that a company’s productivity is higher, and risk better managed, when the human resources section provides regular reports to its Board of Directors.
In order to monitor closely the organisation’s performance and its strategic effectiveness, and fulfill their duties, senior managers and Board Directors must be able to ensure the appropriate identification and management of risks that have the potential to threaten the organisation’s achievements, strategy, reputation or business model. In some organisations, risk issues are referred to risk and audit committees of the Board, but ultimately all directors – whether of not-for-profits, government entities, SMEs or large businesses – carry duties in relation to risk.
Think about all the different types of risk that senior managers and Board members must manage: strategic, operational, financial, compliance, market, political, contractual, industrial, environmental and more. Many of these risks have the acts and omissions of employees at their core. For example:
- Breach of compliance with health and safety legislation;
- Failure to properly manage creditors;
- Theft or neglect of key equipment;
- Reputational damage arising from internal disputes or legal claims;
- Missing industry knowledge or key trends in customers; and
- Fraud or substantial mismanagement of resources.
So, in order to increase the probability of the organisation’s successful achievement of overall objectives, and to reduce the probability of failure or uncertainty, how can senior managers and Board members ensure that they have the necessary information about people-related risk?
Human resources managers and the employees themselves are the best source of information about what’s happening ‘on the ground’ in the organisation, but often this information does not filter up to senior levels.
There are many reasons why important human resources information is not always communicated to the Board. There may be no formal procedure for the Board to be informed about human resources issues that relate to that organisation’s monitoring of risk and compliance with its values and the law. Perhaps the Board does not wish to have such matters noted to them, believing these are matters to be managed by HR and not appreciating the potential damage that people-related risk can cause. The current well-publicised legal dispute at David Jones demonstrates only too well how it may be that a Board may not necessarily be cognisant of the entirety of its risks.
The allegation is that the David Jones Board has engaged in misleading and deceptive conduct in contravention of the Trade Practices Act (Cth) by stating that the incident was a one-off event. The Board’s level of knowledge of the CEO’s ‘ alleged behaviour is therefore crucial to its defence. If the argument that the Board had no knowledge of the CEO’s alleged behavior is accepted, it begs the question whether a Board would knowingly choose to be ignorant of human resources matters that could have serious ramifications, both for individual employee wellbeing and an organisation’s adherence to values.
In a changing regulatory environment, the idea that “ignorance is bliss”, or that human resources matters are of less importance in managing organisational risk and compliance, is not tenable. In particular, there has been an increasing tendency within the past year for regulatory agencies, such as the Victorian WorkSafe Authority to prosecute individual directors for breaches of occupational health and safety law. Once Boards have decided that they want information about people-related risk, senior managers and Board members should consider what the blockers are to receiving such information. What processes, cultural or other factors might prevent a problem being reported to them?
Senior managers and Board members should consider:
- What formal arrangement exists for the reporting of serious and/or potentially serious HR matters directly to the Board or the risk and audit committee? For example, while the potential risk of physical injuries are assessed and monitored as part of an OHS risk assessment, so too should psychological risks, such as workplace bullying.
- Is all HR reporting being done or vetted by the CEO? If so, this may not reveal a risk involving the CEO personally.
- Are there any managers who turn a blind eye to inappropriate workplace behaviors so that underreporting is common? This can allow a culture to develop that discourages staff from raising any issues of concern that could develop into a potential risk. Even, a manager may impose unreasonable pressures, also posing an additional risk .
- Does the organisation have a whistleblower procedure? An employee with a serious grievance may be fearful of reporting a complaint to his or her direct supervisor or another senior manager, so ideally there will be a mechanism by which employees can make complaints directly to the risk and audit committee.
- Is the CEO required to report immediately to the Board certain types of risk?
- Are resolved matters reported to Board, or are complaints reported as soon as they are made? By the time these matters are dealt with by management initially, and as they escalate by General Counsel, the timeframe for quickly and effectively managing that conflict and repairing internal relationships may have passed.
It’s even more vital to have a system that allows allegations of misconduct, harassment or discrimination that involve the CEO or implicate the CEO to be brought specifically to the Board’s attention. In the current David Jones case concerning alleged inappropriate behavior, there was the additional problem of the respondent being the CEO himself. As a CEO is appointed and managed by the Board, and a CEO potentially has a conflict of interest in reporting personally unbecoming matters to the Board, clearly there should be a comprehensive process established to deal with complaints about a CEO.
Even when there are clear guidelines for the reporting of serious matters to senior managers and directors, sometimes these complaints may go unnoticed or are buried “down the line”.
By way of example, new chairman to the board of the West Coast Eagles Football Club, Mark Barnaba found himself rebuilding the club after a breakdown in communication between the Board and senior management over the behaviour of players off the field.
In 2007, the West Coast Eagles Football Club had the highest turnover and was the most profitable club in the AFL and had experienced sustained success on the field. Investigations revealed, however, that there were 35 off-field incidents involving 13 players in six years. Blinded by on field and financial success, the Board had not asked the tough questions of senior executives about players’ behaviour. A culture of alcohol and drug abuse existed at the club which came to light with the breakdown of their then key player, Ben Cousins and his subsequent sacking, and was a publicity disaster for the club. What followed was a reshuffle of the Board and extensive re-education program for players and senior staff. [2]
So, how can companies better ensure the reporting of serious HR issues to the Board? There are a number of ways in which information about the health of the workforce and any serious employee risks, conflicts and grievances can be identified and monitored by the Board.
Recruitment
In its guidelines for the appointment of Company Directors, the Australian Institute of Company Directors recommends that a board should be comprised of individuals with a diverse range of skills. While it is common for boards to be comprised of people with legal and accounting skills for example, at least one board member should have people management skills.
Communication and Relationship Between Board and Management
Although the Board and management team share the same vision and goals, the success of their relationship is critical to the effectiveness of the organisation and its governance. It is very important then that the respective roles of the Board and management are clear with regard to roles, delegations and boundaries around the distribution of information. Clearly the Board should not be in a position where it is receiving reports of minor operational issues that fall within the domain of management, so it must give very clear directions to the CEO about what issues should be reported, and when.
Allow Senior Managers to Observe
From time to time, for example, it may be appropriate for the Board to invite senior managers to be observers at Board meetings, to answer questions and generally observe the conduct of a meeting. This person should not become a “de facto director”, but their presence helps foster a culture that indicates to staff the Board takes the welfare of the organisation’s most precious asset, its employees, seriously.
Know Your Product
In order to truly understand the organisation, directors should ask themselves how well they really know the organisation. It is possible for them to understand the organisation extremely well using other sources of information, without undermining the CEO.
Directors may be able to become a customer of the organisation, enabling them to test the real application of the organisation’s values and interact with its staff. This is particularly important for non-executive directors. Many companies, as part of their induction programs for new directors, will include plant tours or stints of working in the business.
Workplace Audit
A sophisticated way for the Board to remain abreast of how well it is handling ‘people risk’ is through the use of workplace audits. A workplace audit will provide a detailed assessment of how the organisation is travelling with respect to staff wellbeing, its capacity for conflict resolution, discrimination, complaints handling, any values/ethics statements and associated policies and processes.
It is important that the audit is conducted by an independent organisation that is able to engage employees in a frank and open discussion about the workplace, form objective views about the results and make expert recommendations. The Board should receive the results of the audit directly – unedited and uncensored.
Through a workplace audit, the Board will know how to address any underlying risks, reducing the likelihood that bullying, harassment, discrimination and fraud will arise.
In summary, the old adage, ‘information is power’, is very apt. A company that establishes clear and direct lines of reporting for people-related risk and potentially serious human resources issues is far more likely to identify problems, and proactively address them, before they escalate and become front page news.
[1] With apologies to Casablanca!
[2] As reported in “All on Board” by Louis White, Company Director Magazine, 1 July 2008, [1].
