HR's Role in Improving Corporate Governance
These days, the business media are rife with ideas for improving corporate governance. Much of the discussion has focused on steps the U.S. government should be taking to rebuild the confidence of investors shaken by recent business failures and scandals. Yet, whatever laws are eventually passed, the responsibility for good corporate governance will ultimately rest on the shoulders of executives, directors and shareholders. Top HR professionals can help them shape the culture and practices that improve corporate governance.
Executive compensation is an area where HR can use its expertise. "Executive compensation is often thought by many HR professionals to be shrouded in the secrecy of private negotiations among CEOs and boards of directors," reported HR Magazine in May 2002. "But top-level HR officials who know their company's business thoroughly can and should play an important supporting role in establishing and adjusting compensation for the CEO and other top managers, say experts in corporate governance."
Of course, playing even a supporting role can be tricky at a time when stockholders are challenging high levels of CEO compensation and financial experts are questioning the degree to which stock options tempt executives to bend or break accounting rules in order to maximize their total compensation. Even if they don't agree with widely touted reform ideas, HR professionals who get involved in exec comp issues should have a solid understanding of those ideas, such as the indexing of stock options and the elimination of the practice of repricing options. They should also keep an eye on reform efforts that would require companies to expense stock options. They can encourage questions such as, "If expensing occurred, what would be the impact on the company's bottom line?"
Like the issue of exec comp, the hiring of a new chief executive is another function of the corporate board of directors and can be a political powder keg. "HR can't take control of the process, because it has [been] and always will be the board's job to select a CEO," said William C. Byham, chairman and CEO of Development Dimensions International. "But HR can show the board that they can be a valuable resource when it comes to selecting an executive search firm, performing background checks or providing data on compensation packages." In an age when the ethics of corporate leaders are increasingly scrutinized, HR can try to ensure that background checks reveal any ethical lapses of candidates for the top job.
Through leadership development and succession plans, HR can also have an impact on the grooming of talented people with high integrity who may one day take the CEO spot. And HR can work with the top leadership to forge strategies for inculcating strong ethical values throughout the organization. "Turn employees into corporate governors," urged an article in Fortune magazine last May. The article's authors recommend having an outside agency regularly solicit feedback from employees on sensitive questions and sending the results directly to the board. They also suggest letting employees hold question-and-answer sessions with the chief financial officer.
A culture in which everyone feels free to ask hard questions is less likely to suffer from Enron-like management and governance problems. But developing such a culture isn't easy, even with the full support of top managers. It is not enough to create mission statements, codes of conduct and statements of corporate values. A recent study of accountants and HR professionals who had encountered ethical quandaries found that "not only would openness in debates be required [to create a more ethical environment], but mechanisms would also need to exist to allow ideas, practices, and individuals to be challenged." Employees must honestly believe that raising questions about the ethics of the actions of top management won't jeopardize their jobs, future career prospects, or relationships with coworkers. Ethics experts suggest this is a tough nut to crack, but ultimately it may help create a climate where shady practices will not go unchallenged.
For a BusinessWeek article on how to "fix" corporate governance, see
http://www.i4cp.com/VMGGJ8
For a Fortune article on 3 quick fixes for corporations, see
http://www.i4cp.com/Q7xBuI
For an article on reforming exec stock-option packages, see
http://www.i4cp.com/AfApnA
For an analysis of why companies fail, see
http://www.i4cp.com/Nu0E21
To read President Bush's "A New Ethic of Corporate Responsibility" proposal, see
http://www.i4cp.com/VmrGF6
The Web site of the U.S. Securities and Exchange Commission can be found at
http://www.i4cp.com/NRZrTP
For more research on corporate governance, see
http://www.i4cp.com/MDVBM9
To read a global investor opinion survey that shows the degree to which corporate governance is now at the heart of investment decisions, please see the McKinsey&Company PDF report at
http://www.i4cp.com/wBXmSB
To look at the Global Corporate Governance Forum Web site, go to
http://www.i4cp.com/X3WNgp
To read Corporate Board Member magazine online, see
http://www.i4cp.com/AKBprG
To see Business Ethics magazine's Web site, go to
http://www.i4cp.com/HtGNVb
The articles alluded to in this TrendWatcher include:
Bates, Steve. "Piecing Together Executive Compensation." HR Magazine, May 2002, pp. 60-68.
Charan, Ram and Jerry Useem. "Why Companies Fail." Fortune, May 27, 2002, pp. 50-62.
Leonard, Bill. "Turnover at the Top." HR Magazine, May 2001, pp. 46-52.
Lovel, Alan. "Ethics as a Dependent Variable in Individual and Organisational Decision Making." Journal of Business Ethics, May 2002, pp. 145-163.
Executive compensation is an area where HR can use its expertise. "Executive compensation is often thought by many HR professionals to be shrouded in the secrecy of private negotiations among CEOs and boards of directors," reported HR Magazine in May 2002. "But top-level HR officials who know their company's business thoroughly can and should play an important supporting role in establishing and adjusting compensation for the CEO and other top managers, say experts in corporate governance."
Of course, playing even a supporting role can be tricky at a time when stockholders are challenging high levels of CEO compensation and financial experts are questioning the degree to which stock options tempt executives to bend or break accounting rules in order to maximize their total compensation. Even if they don't agree with widely touted reform ideas, HR professionals who get involved in exec comp issues should have a solid understanding of those ideas, such as the indexing of stock options and the elimination of the practice of repricing options. They should also keep an eye on reform efforts that would require companies to expense stock options. They can encourage questions such as, "If expensing occurred, what would be the impact on the company's bottom line?"
Like the issue of exec comp, the hiring of a new chief executive is another function of the corporate board of directors and can be a political powder keg. "HR can't take control of the process, because it has [been] and always will be the board's job to select a CEO," said William C. Byham, chairman and CEO of Development Dimensions International. "But HR can show the board that they can be a valuable resource when it comes to selecting an executive search firm, performing background checks or providing data on compensation packages." In an age when the ethics of corporate leaders are increasingly scrutinized, HR can try to ensure that background checks reveal any ethical lapses of candidates for the top job.
Through leadership development and succession plans, HR can also have an impact on the grooming of talented people with high integrity who may one day take the CEO spot. And HR can work with the top leadership to forge strategies for inculcating strong ethical values throughout the organization. "Turn employees into corporate governors," urged an article in Fortune magazine last May. The article's authors recommend having an outside agency regularly solicit feedback from employees on sensitive questions and sending the results directly to the board. They also suggest letting employees hold question-and-answer sessions with the chief financial officer.
A culture in which everyone feels free to ask hard questions is less likely to suffer from Enron-like management and governance problems. But developing such a culture isn't easy, even with the full support of top managers. It is not enough to create mission statements, codes of conduct and statements of corporate values. A recent study of accountants and HR professionals who had encountered ethical quandaries found that "not only would openness in debates be required [to create a more ethical environment], but mechanisms would also need to exist to allow ideas, practices, and individuals to be challenged." Employees must honestly believe that raising questions about the ethics of the actions of top management won't jeopardize their jobs, future career prospects, or relationships with coworkers. Ethics experts suggest this is a tough nut to crack, but ultimately it may help create a climate where shady practices will not go unchallenged.
For a BusinessWeek article on how to "fix" corporate governance, see
http://www.i4cp.com/VMGGJ8
For a Fortune article on 3 quick fixes for corporations, see
http://www.i4cp.com/Q7xBuI
For an article on reforming exec stock-option packages, see
http://www.i4cp.com/AfApnA
For an analysis of why companies fail, see
http://www.i4cp.com/Nu0E21
To read President Bush's "A New Ethic of Corporate Responsibility" proposal, see
http://www.i4cp.com/VmrGF6
The Web site of the U.S. Securities and Exchange Commission can be found at
http://www.i4cp.com/NRZrTP
For more research on corporate governance, see
http://www.i4cp.com/MDVBM9
To read a global investor opinion survey that shows the degree to which corporate governance is now at the heart of investment decisions, please see the McKinsey&Company PDF report at
http://www.i4cp.com/wBXmSB
To look at the Global Corporate Governance Forum Web site, go to
http://www.i4cp.com/X3WNgp
To read Corporate Board Member magazine online, see
http://www.i4cp.com/AKBprG
To see Business Ethics magazine's Web site, go to
http://www.i4cp.com/HtGNVb
The articles alluded to in this TrendWatcher include:
Bates, Steve. "Piecing Together Executive Compensation." HR Magazine, May 2002, pp. 60-68.
Charan, Ram and Jerry Useem. "Why Companies Fail." Fortune, May 27, 2002, pp. 50-62.
Leonard, Bill. "Turnover at the Top." HR Magazine, May 2001, pp. 46-52.
Lovel, Alan. "Ethics as a Dependent Variable in Individual and Organisational Decision Making." Journal of Business Ethics, May 2002, pp. 145-163.