TCB RR Managing Human Capital Risk

research report

Managing Human Capital RiskA Call for Partnership between Enterprise Risk Management and Human Resources

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Corporate Leadership

Economy, Markets & Value Creation

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Human Capital

www.conferenceboard.org

Managing Human Capital RiskA Call for Partnership between Enterprise Risk Management and Human Resources

RESEARCH REPORT 1477-11-RR

by Mary B. Young and Ellen S. Hexter

4 Executive Summary

6 Why Human Capital Risk Matters: A Call to Action

17 Research Findings

30 Research Conclusions

32 Practical Implications

34 Research Methodology, Limitations, and Future Steps

Appendix

38 Starting a Cross-Functional Dialogue

39 Inventory of Human Capital Risks, Crompton Greaves Ltd.

41 ERM Maturity Model

42 SWP Maturity Model

44 Endnotes

45 Additional Resources from The Conference Board

45 Acknowledgements

46 About the Authors

Research Report Managing Human Capital Risk www.conferenceboard.org4

Executive SummaryHuman capital risk (HCR) is the uncertainty arising from changes in a wide range of workforce and people man-agement issues that affect a company’s ability to meet its strategic and operating objectives. HCR assessment and management enable companies to anticipate these uncertainties and take action to increase the likelihood of meeting performance targets and strategic objectives.

In many companies, human capital accounts for at least half of operating costs and can have a significant impact on business results. While companies identify, assess, prioritize, and treat companywide risks through enter-prise risk management (ERM), most omit HCR from the process or focus on a narrow range of issues, such as suc-cession planning and the leadership pipeline.

In many ways, the corporate human resources1 func-tion is already in the business of managing HCR. Some may ask, “Isn’t that enough?” The problem isn’t that HR doesn’t do a good enough job, it’s that information about human capital risks is not incorporated into ERM’s com-prehensive view of multiple kinds of risks, root causes, interactions, and potential impacts—an aggregate view that enables leaders to set priorities. While ERM execu-tives may believe that the businesses provide all the HCR information that’s needed, HR should also have a voice in the assessment process, which is designed to provide the board and senior executives with an enterprise-wide view.

HR, too, can benefit when human capital risks are included in the enterprise risk process. To fulfill their risk oversight responsibilities, boards of directors require regular updates on the major risks to the enterprise. Even though HR has other mechanisms for sharing informa-tion with the board, it’s missing an important opportunity if HCR is left off ERM’s list or if, in the absence of HR’s participation, others outside HR articulate the business impacts of human capital risks.

This report presents The Conference Board’s research findings regarding:

• The impact of human capital risk in comparison to other types of risk.

• The current state of human capital risk management in companies based in the United States, Europe, and Asia-Pacific.

In short, our research finds:

• Human capital risk ranks fourth among 11 risks in terms of its impact on business results. That puts it ahead of many other risks that companies rigorously manage, such as financial, reputational, supply chain, and IT risks. Its comparatively high ranking is evidence that HCR should be taken very seriously as an enterprise risk.

• Human capital risk ranks tenth in terms of how effectively it is now managed.

• The combination of the above two findings should raise concern: Executives clearly recognize that human capital can have a make-or-break impact on business performance. Yet few companies have a systematic process or structure in place to ensure that the full spectrum of human capital risks—not just a few, top-of-the-house issues like succes-sion planning or the leadership pipeline—is considered as part of enterprise-level risk assessment and management.

• Less than one-third (31 percent) of companies believe they effectively assess human capital risk, while 45 percent believe they do so somewhat effectively, and 24 percent ineffectively. What’s different about the top group? These companies have a formal process for assessing HCR, in which both HR and the business participate. In addition, they have a standing group to oversee HCR.

• Roughly the same percentage (32 percent) of companies say they manage HCR effectively. Three factors set these companies apart: (1) they have a formal process for assess-ing HCR; (2) the business participates in assessing HCR; and (3) there is a standing group overseeing HCR.

www.conferenceboard.org Research Report Managing Human Capital Risk 5

Our research offers new insights regarding ERM and Strategic Workforce Planning (SWP):

• Companies’ ERM practices are more mature than their SWP practices. This is not surprising, since ERM has a few years’ head start on SWP.

• Neither a mature ERM process nor a mature SWP process ensures that companies assess and manage human capital risk effectively.

• Companies headquartered in Asia-Pacific differ from those in other regions. They are more likely to have reached the Mature stage of SWP and more likely to assess and man-age HCR effectively. Yet they are less likely than companies based in other regions to have reached a Mature stage of ERM.

Finally, there are significant disconnects between the views of HR and ERM professionals regarding HCR. This is one of the survey’s most interesting findings. The two functional areas that ought to have a common stake in human capital risks appear to have strikingly different views about the impact of those risks and about how well they are managed.

Fortunately, our research also points to specific actions companies can take.

Practical Implications1 HR and ERM executives should begin a conversation to

explore the current state and potential for managing HCR.

2 Risk management language is already familiar to the board and senior executives and may offer a useful way to reframe human capital issues.

3 When human capital risks (such as attrition) are translated into business process risks (such as lower efficiency), their importance may be easier for execu-tives to grasp, especially if their impacts (such as lost revenues or increased customer satisfaction) can be measured.

4 If HR has developed some expertise using human capital analytics and SWP, these capabilities can be extremely useful for managing HCR.

5 To ensure that human capital risks are factored into the enterprise-level risk portfolio, companies need a formal HCR assessment process, a solid plan for managing those risks, and a standing group to oversee them.

6 The chief human resources officer should be a member of the corporate risk committee.

7 While compensation and succession planning may already be on the board’s agenda, it is likely that addi-tional human capital risks should also be brought to its attention.

8 Businesses must own their human capital risks and participate in assessing and managing them.

The report concludes with practical tools, including:

• Questions that ERM and HR executives can use to start a conversation about human capital risk.

• A sample of one company’s inventory of human capital risks and mitigation strategies.

• Additional resources from The Conference Board related to ERM and SWP.


Why Human Capital Risk Matters: A Call to Action

“We have to manage human capital risk. In our business, human capital is our only asset, our only raw material, and our only product.”S Varadarajan Executive Vice President and Chief Human Resources Offi cer, Quatrro

Human capital can have a make-or-break effect on any company’s business performance, not just a business pro-cess outsourcing firm like Quatrro Global Services. Yet human capital issues are seldom included when compa-nies systematically identify, assess, prioritize, and manage risks at the enterprise level. When they are included, the company tends to focus primarily on issues at the leader-ship level. Relatively few firms assess the full spectrum of human capital risks:

• the current workforce;

• the external labor supply in all company locations, current and future;

• outsourced and contingent labor;

• the changing mix of critical skills, demographic, and economic trends;

• regulatory changes;

• the HR practices and organizational factors that shape the employment relationship; and

• the impact of these and a myriad of other human capital issues on business results, now and in the future.

As companies gain experience using two relatively new capabilities—human capital analytics and strategic work-force planning (SWP) (see “ERM and SWP Defined,” pp. 10-11)—they become better at pinpointing specific talent-related risks and opportunities and quantifying their business impacts. Too often, however, this information never makes its way to the company’s risk professionals, who are responsible for communicating enterprise risk pri-orities to the board. As a result, identifying and monitoring human capital risk (HCR) remains an HR function. No matter how well HR performs that function, the company’s enterprise risk management (ERM) process is diminished and, therefore, less effective if the full range of human capi-tal issues is omitted from the enterprise risk profile.

This report presents the results of research conducted by The Conference Board to understand the importance of HCR in comparison to other types of risk and to define the current state of human capital risk management in compa-nies from the United States, Europe, and Asia-Pacific.

Human Capital Risk Defi nedHuman capital risk is defined as the workforce factors and people practices that can have a range of possible effects on the company’s business performance. HCR can arise from myriad issues. It can be a byproduct of the many uncertainties that affect business plans and performance, including changes in the competitive environment, customer demand, technology, and regu-lations—changes that alter the company’s supply and demand for talent. HCR can result from, lead to, or interact with internal factors or risks, such as a change in manufacturing methods, a breach of data security, or a new service offering. HCR exists wherever a company has employees or potential employees and wherever its people make decisions, manage, innovate, perform their formal job responsibilities (or go above and beyond them), or talk to customers.

Our list of specific human capital risks (see “Examples of Human Capital Risk,” p. 7) is not meant to be exhaustive. Nor are these new topics; if anything, they are the meat-and-potato issues of HR. What is new, however, is the idea that these are also potential sources of HCR and, as such, can become inputs to ERM.

Throughout this report, we illustrate a variety of human capital risks in the series “Illustrations of Human Capital Risk” on pages 7 through 15. The common thread across all of these examples is that each has the potential to hurt or help business results.

The effects of HCR, like those for other risks, can be arrayed along a continuum, ranging from negative to positive. Most risk planning and mitigation focuses on the downside of uncertain events. In the case of HCR, com-panies may initially direct their attention to how work-force issues could negatively affect business results in the current year and longer term. But, in fact, human capital risks present companies with potential opportunities as well as potential negative impacts.


Human Capital Risk in ActionSo what does human capital risk look like? Here are three examples.

Rooting out the human causes of operational riskA major U.S. mortgage lender was hit with a number of “operational incidents”—the lender’s term for any unin-tended event or activity that cost $250 million or more. To root out the problem, the ERM team partnered with an organizational development (OD) consultant to map the step-by-step process for producing mortgage-backed secu-rities. They uncovered that a root cause of the operational

incidents was, in OD terms, “key person dependency.” Certain reports were produced by a single analyst in one department and then forwarded to a different department for action. When that analyst went on vacation, there was no one on hand who understood the source of the data or who could answer questions about how the report was interpreted and applied. It was a problem that traditional risk management most likely would have missed. While the lender’s ERM team had a “sense” of the people risk, team members didn’t have the right set of questions to investigate those risks as part of their process-mapping exercise.

ILLUSTRATIONS OF HUMAN CAPITAL RISK

Staffing Issues in a Pandemic

When a major U.S.-based big-box retailer conducts business continuity planning, human capital issues are high on

the agenda. If a pandemic were to strike, causing 70 percent of the workforce to be absent from work, how would a

distribution center be affected, compared to a retail store, and what would the financial impacts be? Under any

disaster scenario, what’s the minimum level of staffing that a store needs to keep its doors open?

Examples of Human Capital Risk

• Poor alignment of HR strategy

and activities with business

strategy

• Shortage of critical skills within

the company’s workforce

• Shortage of critical skills in the

external labor force

• Gap between talent capabilities

and business goals

• Succession planning/leadership

pipeline and the impact on

business performance and

continuity

• Over/under use of external talent

to fill key roles

• Ineffective selection processes

result in poor hiring

• Excessive turnover/ failure to

retain critical talent

• Inability to compete for critical

talent

• Alignment of pay and

performance

• Loss of critical knowledge

through attrition

• Use of contingent workers

• Excessive risk-taking

• Unionization/labor relations

• Globalization/offshoring

• Executive compensation

• Unethical behavior

• Intellectual property loss or

violation

• Compliance/regulatory issues

• Low employee engagement

• Inadequate or declining

productivity

• Behaviors and practices that

undermine diversity and

inclusion

• Employee wellness impacts

individual and company

performance

• Outsourcing and vendor

management

• Excessive labor costs

• Managing talent through mergers

and acquisitions

• Organizational culture that does

not support desired behaviors or

encourages undesirable ones


Location risk is also people riskPrior to its acquisition by Oracle in 2009, Sun Microsystems had an unusually robust workforce plan-ning process that played a key role in helping business leaders evaluate the risk tradeoffs when making location decisions. Whether the business wanted to expand into a new country, open a call center, build a new facility, or renew a lease, the workforce planning team had to weigh in. Its job was to research the options and to produce one or more location “scorecards,” capturing relevant data about the local labor supply, costs, and demographics; economic health; political stability; infrastructure; regula-tory environment; and so on. By putting workforce plan-ning in charge of the process, Sun ensured that human capital issues were scrutinized as thoroughly as other factors before leaders made critical business decisions.2


The Risk of Ad-Hoc Growth

By analyzing HR data, UBS realized that it would

never meet its aggressive growth targets without

changing its hiring practices in China. Managers there,

accustomed to a high degree of autonomy in decision-

making, hired ready-now candidates to fill 70 percent

of job vacancies. If attrition continued at 20 percent

annually, the bank would need to replace 100 percent

of its current headcount over the next five years —an

iffy proposition, given the region’s limited supply of

qualified talent. Moreover, headcount would have to

increase substantially to grow the business. Through

strategic workforce planning, the China Management

Committee saw the riskiness of continuing this ad-hoc

staffing strategy and the benefits of developing a more

disciplined approach country-wide.

Source: Mary B. Young, Strategic Workforce Planning in Global Organizations, The Conference Board, Research Report 1457, 2010, pp. 18–25.

Losing key talent in IndiaUsing human capital metrics, a global technology giant uncovered a significant human capital risk. Companywide attrition was well within acceptable limits, but drilling down by business unit and region revealed a major problem area: attrition in India was unacceptably high for managers with technical skills.

Since India was seen as a major growth driver over the next several years, high turnover might hamper growth and risk

the loss of significant intellectual capital. Together, ERM and business-unit executives did a “deep dive” to try to understand why the attrition numbers were so far off base.

Explosive growth in India meant that the company was constantly hiring. As a result, young managers with little experience and training kept getting more and more direct reports. India’s competitive labor market compounded the problem, as highly qualified managers could easily move to a competitor for more money.

The combined loss of talent and intellectual capital along with the cost of training and integrating new hires was caus-ing productivity problems for a division that was meant to help fuel growth for the global organization. In addition, the country manager was being evaluated on his ability to meet the goals set for India and was therefore uncomfortable bringing the matter to the global business leader.

Upon discovery, the ERM manager brought this issue to the attention of the global business unit leader, who recognized that the unit’s goals were at the root of the problem. In fact, the leader went so far as to change the mission of the Indian business to better develop people, rather than focusing only on near-term results. Reporting structures changed so that managers with only a year or two of experience no longer supervised a large number of direct reports. The company now does more to develop managers in order to retain them.

Barriers to Managing Human Capital RiskOne of the earliest and most attention-getting discussions of human capital risk came in 2007, when the Economist Intelligence Unit (EIU) asked risk managers to rank 13 risks in terms of their impact on business results.3 Human capital topped the list ahead of the next most significant risk categories: regulatory, reputational, IT, and mar-ket risks. When the same respondents were asked how effectively their companies manage each of the same risks, human capital dropped nearly to the bottom. The only risks these companies managed less effectively, they said, were climate change and terrorism.

The dramatic juxtaposition of these two findings—that risk managers view human capital risk as the most signifi-cant risk in terms of its business impact, yet it is one of the least effectively managed risks—led the EIU to draw the following conclusion:

These findings point to the need for closer inte-gration between the risk function and the human resources function, as well as a clearer under-standing of the risks that companies face with their location and human capital strategies.4



Contingent Worker Risks

Recent surveys show that many companies plan to

reduce their reliance on fixed labor and substitute

flexible labor such as contractors or contingent

workers. IBM’s 2010 CEO survey, for example, found

that 62 percent of chief executives expect to increase

flexible labor usage. For this strategy to be effective,

however, companies need to manage a host of related

risks: co-employment and other legal risks; intellectual

property risks; knowledge management risks; the risk

of poor cost management, if the company doesn’t

include contingent workers as part of total labor

costs; and the risk of losing internal capabilities

that might become strategically important in the

future. While flexible labor may help companies deal

with uncertainty, it’s important that they follow this

strategy with eyes wide open to its inherent risks.

Source: Working Beyond Borders: Insights from the Global Chief Human Resources Study, IBM Global Business Services, September 2010.

By and large, we see little evidence that companies have made much progress achieving a closer integration. A 2008 study of 116 firms concluded “boards are largely missing in action when it comes to monitoring human capital. They do focus on succession planning at the top and many of them do see this as an important activity of the board. But, when it comes to them monitoring most of the talent in the organization, its condition and how it is managed, the situation is very different.”5

A review of the 2010 10-K filings6 of the largest publically held U.S. companies on the Fortune 100 list shows that only four of the top 10 cite human capital as a critical risk factor. Of these, most mention loss of key personnel as the only concern.7

So why aren’t human capital risks more prominent on the senior executive agenda? There are many reasons why human capital risk is often omitted from discussions of business risks to a company’s performance.

Organizational silos HR (the stewards of human capital) and ERM (which often resides within, legal, finance, strategy, or internal audit) are separated by different reporting lines. Because functional areas often operate in silos, there may be little incentive for the HR and the risk management functions to collaborate.

Differing cultures HR and ERM also represent differ-ent occupational cultures. Traditionally, risk manage-ment professionals have relied on quantitative skills and analyses, while HR work has been less focused on num-bers. Each function has attracted people with different skills and competencies, although that is changing. Those with a talent for quantitative analysis were unlikely, until recently, to seek a career in HR. Risk professionals often grew up on the finance or audit side of the business. Given these differences in skills, credentials, and work experi-ence, it’s not surprising that HR and ERM tend to speak somewhat different languages, although both must be able to speak and work with business leaders.

These are not the only reasons why ERM and HR may keep each other at arm’s length. ERM and SWP capabili-ties have evolved in recent years (see “ERM and SWP Defined,” pp. 10-11), but they don’t always do so in synch. A company may be farther ahead on its ERM maturity curve than it is in SWP or vice versa. In either case, the function with more sophisticated practices may question the value of partnering with the other to address HCR. While, in some cases, such reservations may be well founded, neither ERM nor HR should make assumptions about the other’s capabilities without further investiga-tion. (The discussion questions in “Starting a Cross-Functional Dialogue,” p. 38 can help.) As better data, methodologies, and tools become available, companies will become better at managing both risk and human capital. If, after a preliminary conversation, it seems pre-mature for HR and ERM to partner today, it’s an option worth revisiting in the future.


Offshoring Risks

Political instability may lead to significant increases

in human capital costs, especially for multinational

corporations with captive operations in a developing

country, using local staff. Events such as the 2008

Mumbai terrorist attacks result in higher costs to

cover everything from increased security to travel

to and from corporate headquarters, and the salary

differential paid to executives who must spend time

onsite monitoring the offshore operations.


Why Now?If HR and ERM have operated at a distance from one another, there are compelling reasons for this to change. In fact, it is already beginning to happen. We see growing evidence that human capital risk management, the com-mon territory that lies squarely at the intersection of these two functions, has entered the business vocabulary and is gaining currency. Many factors are driving this change.

Business driversHuman capital has become an increasingly valuable asset Whether a company competes on the basis of productiv-ity, innovation, customer loyalty, efficiency, speed, or agility, the workforce has a make-or-break impact on those results. “Our people are our most important asset,” is not just a platitude, although it often sounds that way in annual reports. Today, many companies can measure the costs and benefits of having the right talent, with the right

ERM and SWP Defined

Businesses are created to take risks and to profit from

that risk-taking. Enterprise risk management (ERM) is

a series of processes driven from the top of the organiza-

tion that enables managers to consider risk and reward

tradeoffs of their decisions. ERM helps executives to

meet objectives by taking risks in an informed manner. It

involves consideration of uncertainties—either positive

or negative—that could affect objectives. Companies

typically start by developing a risk inventory, prioritizing

which risks may have the most significant impact to the

company in a risk assessment process. Risks are then

treated in one of the following ways:

Mitigation: taking action to lessen the impact or the

likelihood that a risk will occur.

Acceptance: allowing the risk to be part of the business

plan or operations because management has agreed

that the returns are adequate to “pay” for the risk.

Rejection: deciding the downside risk is too high and

that this is a business not worth pursuing.

ERM provides a framework, language, policies, and

processes to think about risk in the context of one’s

own organization. Beyond those aspects, ERM must be

embedded into ongoing business practices and must ulti-

mately provide value to the organization. Effective ERM

drives culture change. Each risk has a risk owner, some-

one who is empowered to make decisions about how to

manage the risk and who is accountable for results.

Many companies find that ERM enhances communica-

tion regarding opportunity and uncertainty and where

resources ought to be allocated. ERM is a continuous

process that includes monitoring and re-assessing risks

and opportunities and the company’s ability to meet

objectives.

Strategic Workforce Planning (SWP) systematically

connects business strategy to HR strategy, as shown

below. Too often, HR strategy is developed independently

of business strategy. SWP corrects that. SWP engages

business leaders in a discussion of business challenges

and their workforce implications. Because SWP is inte-

grated with corporate strategy, business planning, and

financial planning, it enables HR to align human capital

investments with long-term business priorities.

Virtually all companies use operational workforce plan-

ning to construct short-term staffing plans, determine

recruiting activities, and track human capital metrics

like turnover. What differentiates SWP from this neces-

sary, but more operational, approach is that it engages

business leaders in considering longer-term business

strategy, the competitive landscape, new technologies,

SWP in Action

As SWP gains credibility and matures, it not only translates business strategy to HR strategy, it becomes an input to business strategy and a source of business intelligence.

Business StrategyHR Practice

SWP

HRStrategy


skills, in the right place, at the right time, and at the right cost. They can also analyze the business impacts of not having the necessary human capital.

Human capital’s measurable impact on business results makes it a critical source of both opportunity and risk. And, unlike any other long-term asset on the company’s balance sheet, human capital walks out the door every night; it can choose to do so permanently.


Retirement Wave

Some types of human capital risk may affect an entire

industry. The U.S. electric power industry, for example,

projects that 30 to 40 percent of its 400,000 workers

will be eligible to retire by 2013. By that date, three

utility sectors—electric, nuclear energy, and natural

gas—anticipate that nearly half the incumbents in five

job categories will need to be replaced. Utilities must

weigh the costs and benefits of hiring replacements

well in advance versus reacting in real time.

Retirement risk can translate into operational risks,

such as power reliability and rates. In nuclear energy,

companies also face regulatory risks if they don’t have

adequate back-up staff to perform certain tasks.a

a Mary B. Young, Gray Skies, Silver Linings, The Conference Board, Research Report 1409, 2007, pp. 26–30.

Human capital makes up a growing percentage of costs, especially as companies become more knowledge-driven. According to a 2003 study, human capital expenses aver-age 36 percent of revenues. Salaries, as a percentage of operating costs, vary by industry. The highest median percentage is in health care services (52 percent), followed by for-profit services (50 percent) and educational services (50 percent). The lowest median percentage is in retail/wholesale trade (18 percent).8

Growing business uncertainty drives greater human capital uncertainty As Wharton’s Peter Cappelli writes:

The idea that a company can predict accu-rately what it will be making ten years from now—something that was common in indus-tries as diverse as telecommunications, trans-portation, consumer goods, and financial services until the 1970s—has disappeared. The demand for talent flows directly from busi-ness and operating demands. So as business forecasts and plans have shrunk from ten years to five years to, in most cases, one year, the ability to predict the talent those plans demand also must be scaled back….

The type of talent management that makes sense in this economic context does not pre-tend that it can eliminate uncertainty through better forecasting and planning. Talent fore-casting cannot be any more accurate than the business forecasts on which it is based, and

and other potential changes in the operating

environment. Then it helps executives explore the

workforce implications, staying at a high level.

Rather than focusing on precise forecasts, SWP

helps identify the range of possibilities the com-

pany must prepare for and how each scenario

would affect talent supply and demand.

SWP uses quantitative and qualitative methods,

such as data mining and analytics, forecasting,

modeling, and scenario-planning, adopted from

Finance, Strategic Planning, Operations Research,

Supply Chain, Risk Management, and other func-

tions. The Conference Board’s Maturity Model for

SWPa describes how companies’ capabilities in this

relatively new methodology typically evolve over

three to five years. Once leaders gain confidence

in SWP and use it to make business decisions, SWP

is not only a mechanism for translating business

strategy into HR strategy, priorities, and plans,

it becomes an input to business strategy and a

source of business intelligence. However, as the

research described in this report confirms, very few

companies have reached a Mature stage of SWP;

most are still developing their capabilities in human

capital analytics or perhaps piloting SWP some-

where in their organization.

a See pp. 42-43 for model. Mary Young, Implementing

Strategic Workforce Planning, The Conference Board, Research Report 1444, 2009, pp. 19–25.


the latter aren’t very accurate. Because every plan involves commitments and commitments come with costs, long-term plans end up being expensive because they are often wrong. Rather than trying to eliminate uncertainty, the better approach is to find ways to manage it.9

Human capital risks multiply as companies undertake larger, more frequent business transformations, includ-ing globalization, mergers and acquisitions, outsourcing, shared service centers, restructuring, increased use of flexible labor, and so on. Human resources must not only help manage such massive changes, it must also assess the human capital risks they entail.

Human resources driversThe HR function has also changed, making it a more viable player in ERM.

Over the past decade, quantitative analysis has become increasingly important to HR. Though seldom at the fore-front of their companies’ efforts to integrate and analyze enterprise-wide data, human resources is a beneficiary. Thus far, companies have achieved varying levels of sophistication using HR data to drive decision-making. While risk professionals still express surprise to learn that HR has “numbers,” many HR teams now use data-driven methodologies, such as workforce analytics and strate-gic workforce planning (see “ERM and SWP Defined,” pp. 10-11), to shape their HR strategy and inform strategic business decisions. These same analytics and models can become valuable inputs to the ERM process.


The Risk of Employee Dissatisfaction

Sysco, the global food-service company, has

quantified the relationship between employee

satisfaction and critical business outcomes such as

revenues, costs, employee retention, and customer

loyalty. If employee satisfaction drops within an

operating unit, Sysco can project the impact on

financial measures and evaluate alternative actions

to reverse the trend.

Source: Thomas H. Davenport, Jeanne Harris, and Jeremy Shapiro, “Competing on Talent Analytics,” Harvard Business

Review, October 2010, p. 56.

HR’s growing use of data, analytics, and modeling is chang-ing the makeup of HR teams It’s become quite common for companies to beef up HR’s capabilities by redeploying tal-ent from finance, corporate planning, supply chain man-agement, and other numbers-oriented functions to serve in new HR roles, including those on the SWP team. At the same time, many companies are building the business acumen of their HR generalists and business partners. Bolstered by their team’s stronger skills and competencies, HR leaders can become solid contributors to risk assess-ment and risk management at the highest level.

Risk management driversERM, itself, is evolving in ways that necessitate bringing HCR into the mix.

Today, risk management is less likely to focus solely on compliance and regulatory issues When companies first instituted risk management, they focused on risk trans-fer using insurance, compliance with worker-safety and pension laws, financial reporting regulations, and the company’s own internally defined business practices. Today, while compliance and regulatory issues are still important, they aren’t usually the ones that bring com-panies to their knees. That’s more likely to happen as a result of the risk/reward tradeoffs that underlie myriad business decisions. Large risk events that are devastating to businesses often occur when several risks, including human capital, interact at the same time. The April 2010 oil spill in the Gulf of Mexico, for example, resulted from a combination of factors: the use inferior quality cement in the underwater oil rig, systemic inattention to process safety, inadequate training, and many decisions to ignore safety warnings or other red flags.10

Risk management is having to address qualitative as well as quantitative risks Not surprising, given its roots in finance, ERM has traditionally focused on quantifiable risks, such as the revenues lost when Johnson & Johnson had to pull 43 different children’s remedies from store shelves in 2010. With growing sophistication, however, leaders have rec-ognized that many key risks cannot be easily measured or ignored. ERM must assess and manage qualitative issues, including strategic risks, such as the decision to enter a new geography, and reputational risks, such as the dam-age that sticking accelerator pedals inflicted on Toyota’s global brand. As ERM gains experience in assessing and managing qualitative issues, it makes sense to bring human capital into the enterprise risk portfolio.



Mitigating HCR

Arcelor Mittal, the global steel company, uses

workforce planning to assess the risks posed by

attrition, employee mobility within the organization,

and other factors. Rather than simply comparing

talent supply and demand and taking steps to reduce

any gaps, the company weighs the risk trade-offs.

For some positions, there’s an ample supply of

internal or external talent. Others are more difficult

to fill because they require company-specific skills

and knowledge, or because of talent shortages. The

company compares the cost of risk mitigation versus

the cost of risk exposure on a position-by-position

basis to develop a long-term workforce plan.

Risk has become increasingly important at the board level In the wake of the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated that U.S. financial services firms must have a board-level risk management committee. Across other industries and geographies, boards are carefully recon-sidering risk-oversight governance because regulators, governance experts, and shareholders are doing so.

“Risk management in context” replaces rigid definitions of which risks matter In the early days of ERM (see “ERM and SWP Defined,” pp. 10-11), experts put forth fairly rigid models that specified exactly which risks must be included. With more experience, however, companies have moved toward “risk management in context.” This more flexible approach takes into account the unique mix of external factors (such as the company’s regulatory, political, and economic environment) and internal factors (such as the corporate culture) influencing the company’s risk profile. With greater flexibility, companies can define for them-selves which kinds of HCR they should be monitoring. The ISO 31000 Risk Management Principles and Guidelines published in 2009 promote this more flexible approach.11

A New OpportunityThis combination of business, HR, and ERM drivers builds a powerful case for why companies need to include human capital as part of their overall risk portfolio. Recently, we’ve seen growing evidence that human capital risk is becoming a buzzword in some HR circles:

• Since 2008, leading consulting firms have published white papers on human capital risk.12

• At The Conference Board 2010 Human Capital Metrics conference, no fewer than six presenters alluded to “human capital risk,” including Ken Carrig, executive vice president, human resources, at Comcast, whose keynote presenta-tion was titled “Leverage Human Capital Analytics to Better Manage Risk.”13

• Elsewhere, Orlando Ashford, senior vice president and chief HR officer, Marsh & McLennan Companies, told a confer-ence audience, “As the ‘War for Talent’ characterized the 1990s, the critical capability and value creator for HR over the next decade will be human capital risk management”14 (emphasis added).

In short, conditions are ripe for companies to take a sys-tematic approach to managing human capital risk. ERM and HR are the logical partners to take the lead. While many firms are still building their capabilities in ERM and SWP, the executives who lead these processes needn’t postpone contact until they’ve gotten every last detail per-fect. Both functions have data and tools that can help the other, although their current sophistication varies greatly from company to company.


What Went Wrong in the Gulf of Mexico?

The Gulf of Mexico oil spill is one of the largest

industrial accidents in history. Analyzing the root

causes, the U.S. Chemical Safety Board cited,

among other factors, the company’s “decentralized

management system and entrepreneurial culture.” A

lengthy investigation by Fortune magazine concluded

that the breakdown in safe drilling practices was

“the product of a corporate culture that venerated

risk taking even as years of merger-driven growth

and successive rounds of cost-cutting consumed its

leaders’ focus.”a Organizational structure, culture,

leadership competencies (such as sound judgment)

and change management, now seen as contributing

factors, typically fall within HR’s responsibilities. They

may not be routinely included in a company’s risk

assessment and management processes, however.

a Peter Elkind and David Whitford, “An accident waiting to happen,” Fortune, February 7, 2011, pp 105–142.


What HR BringsAt minimum, HR has descriptive statistics that measure important variables and trends: for example, changes in the average age of the company’s workforce over time and comparisons among different segments of the workforce, business units, or geographies.

Most HR departments can now use historical data to make projections, such as the size and shape of the company’s workforce at some future point based on past patterns of attrition, internal movement, and so on. By comparing projected talent supply to the workforce that the company will actually require, based on its business plan, HR can pinpoint future gaps and gluts. Combining these analyses with knowledge about the internal and external labor market, HR can see which roles will be most difficult to fill. While most companies are still devel-oping these capabilities, those that have acquired some sophistication in human capital analytics can project the dollar impact of any specific role that remains vacant: for example, the revenue lost when a retail store can only operate one checkout line between 5 p.m. and 6 p.m. or when a call center is operating 10 percent below its desired staffing level.

HR organizations that are fairly mature in SWP can also do scenario modeling. They can project the long-term impacts of various HR tactics and choose the best alternative. For example, what are the costs and benefits of increasing college recruiting vs. hiring more expensive, mid-career talent? HR can also use scenario modeling to weigh the outcomes of various strategic options that the business may be considering: What would be the labor cost implications of locating our new call center in City A, B, or C? By combining HR data with business plans and business data, HR can also prioritize human capital challenges and advise leaders where to invest resources. For example, it can compare the return on human capi-tal investment across operating regions to decide where expanding the workforce will pay the biggest dividends.15

HR organizations that have developed a robust SWP pro-cess to guide such decisions are already managing human capital risk—albeit using a different vocabulary than their peers in risk management—and advising the CEO and board about critical issues and their business impacts. Yet there is much that HR can gain from collaborating with ERM to raise the visibility of HCR.


Mobility Run Amok

In an effort to build a pool of potential senior

managers, a company adopted a highly regarded

“best practice” in leadership development: rotational

assignments. The program backfired, however.

Developing new products typically took three or more

years from inception to market. Yet high-performers

were moved every 16 months or so—too soon for

them to acquire deep technical knowledge or to be

held accountable for the outcomes of their decisions.

The fallout from this mobility process (combined with

other factors) was huge: quality plummeted, costing

the company more than $1 billion annually.

Rather than importing best practices and applying

them across the organization, companies can use

human capital analytics to assess the risks and

benefits of specific practices. In this case, they

might investigate current mobility patterns within the

workforce, their impacts on individual and business

performance, and the risks and benefits of alternative

scenarios (speeding up or slowing down mobility;

moving people laterally vs. upward).a

a Haig R. Nalbantian and Richard A. Guzzo, “Making Mobility Matter,” Harvard Business Review, March 2009, pp 3–11.


What ERM BringsFirst and foremost, ERM often has a direct path to the senior executive team and the board. In the wake of cor-porate scandals during the last 10 years, such as Enron, Parmalat, and WorldCom, regulators began to focus more heavily on risk. Initially, with the Sarbanes-Oxley Act of 2002 in the United States, the focus was on financial reporting risk and internal controls. Regulations, includ-ing the 8th European Company Law Directive and Clause 49 of the Companies Act in India, have focused on inter-nal controls in jurisdictions around the globe. Much of risk oversight has fallen to audit committees at the board level. In the United States, New York Stock Exchange Listing Rules require audit committees to discuss risk assessment and risk management. While such laws can’t ensure the effectiveness of risk oversight, they do neces-sitate some sort of structure to capture and report risks. Risk management is often guaranteed a regular slot on the board’s agenda, which means senior executives are likely to be well informed on these matters. In short, risk management’s access and visibility to C-level executives and the board make it a valuable ally for HR. While SWP may be an effective proxy for HCR management, it may not enjoy the same stature or entrée as ERM. Bringing human capital risk “inside the tent” of ERM provides a direct link to top decision makers.

By definition, ERM captures risks from across the orga-nization, assesses them, looks for interdependencies and interactions among risks, and helps executives establish priorities: Based on impact and likelihood, which risks deserve the closest scrutiny and monitoring? Which risks must be addressed immediately, by what means, and by whom?

ERM presents the CEO and board with its assessment of enterprise-level priorities. Human capital risks should not be absent, although they typically are. ERM is the scorekeeper determining which issues get considered. It can become HR’s ally in making sure that human capital issues are part of the mix.

ERM has a well developed vocabulary that most busi-ness leaders and board members understand and use. Translating human capital risks from HR-speak to more familiar risk terminology may help leaders see that human capital risks are, in fact, business risks, not just the province of HR.

Finally, ERM has developed a number of tools that HR may find useful in SWP and in assessing and managing human capital risk. Risk inventories, risk heat maps, risk grids, and risk/opportunity assessment templates may be easily adapted to human capital issues. Tools such as Monte Carlo simulations and root cause analyses may be useful new additions to HR’s tool kit, as may the ques-tions risk professionals use to assess a business’s risk appetite.16

In short, ERM and SWP are both relatively new capabili-ties. Both approaches can inform each other. Together they may be able to begin getting their collective arms around the company’s human capital risks.


Bad HR Decisions Can Turn into Reputational Nightmares

When a global communications company expanded

into India, a cost-conscious executive scanned the

local organization in search of excess staff. Tea

wallahs were one glaring example. These low-wage

workers served just a single function—serving tea

to executives and their guests—so the company

immediately eliminated these positions. Then, the

unimaginable happened: A former tea-wallah took his

own life, out of apparent grief and shame at having

lost the only job he’d ever known. That’s when the

company reconsidered its decision. The tea wallahs’

pay was a pittance compared to the reputational

damage that such a tragedy might cause, just as the

company was trying to build its local brand.


Our ResearchThe Conference Board has a longstanding interest in the evolution of both ERM and SWP, topics we have been researching and reporting to our members for more than five years. In 2009, we became interested in the potential for companies to combine these capabilities to manage HCR.

We explored these ideas through a series of cross-functional presentations, sharing our research on ERM with HR and SWP leaders and our research on SWP with ERM executives. In doing so, we learned several impor-tant things: (1) the need to manage human capital risk makes intuitive sense to both HR and ERM executives; (2) HR and risk management have little contact in many organizations; and (3) very few companies include HCR as part of their overall enterprise risk management process (assuming they have one).

Based on these exploratory findings, we designed a sur-vey to capture baseline data in answer to the following research questions:

1 How mature are companies’ ERM and SWP processes?

2 How does human capital risk stack up against other kinds business risks? Which human capital risks are most important?

3 How well do leaders understand HCR?

4 Do companies have a formal process to assess HCR? A standing group to oversee HCR? Who participates?

5 How effectively do companies assess and manage HCR?

In addition to capturing a snapshot of where companies are today, the survey was designed to test the relation-ships shown in the conceptual model below (Figure 1). We hypothesized six factors (shown left) would be related to each of the outcomes (shown right): effective assessment and effective management of HC risk.

Figure 1

Factors related to effective HCR assessment

and management: a conceptual model

Leaders’ understanding of HC risk

Who participates in assessing HCR

Formal process to assess HCR

Standing group to oversee

SWP maturity

ERM maturity

Effective HC risk

assessment

Effective HC risk

management

One hundred sixty-one companies participated in the sur-vey. Respondents work in either risk management or HR, allowing for comparison between the two functions. (See “Research Methodology, Limitations, and Future Steps,” p. 34, for further details about the survey sample, method-ology, and limitations.)

HCR Assessment and Management

Human capital risk assessment is the process

of identifying people and workforce risks, assess-

ing the likelihood of their occurrence and impact

(including interactions among risks), and establish-

ing priorities as to which risks need to be elevated

to senior management and the board.

Human capital risk management is the treatment

of these risks, either by accepting, mitigating, or

rejecting them. Risk treatment includes establish-

ing accountability through a risk owner, monitoring

changes, and regularly reporting progress to senior

executives and the board.


Research FindingsIn presenting the results of our research, we first discuss the answers to the five questions listed earlier. When sig-nificant, we also note differences based on region, indus-try, and company size.

Then we report on the relationships between the individ-ual input variables and the two outcome variables shown in Figure 1, noting significant17 differences.

Finally, we analyze which combination of the input variables differentiates companies that effectively assess human capital risk and (in a separate analysis) effectively manage HCR from those that do not.

How Does HCR Rank against Other Risks?We asked respondents to rank 11 types of risk based on their business impact. Table 1 shows the mean rankings. Regulatory risks ranked as most significant—likely as a result of the 2008 financial crisis—followed by opera-tional and strategic risks. Human capital ranked fourth of 11 risks. Crime, terrorism, and physical security was ranked lowest. While human capital trails strategic and operational risks, these risks often result, in part, from human capital risks. For example, not having the right skills and capabilities, or having a compensation system that provides incentives to maximize short-term returns over longer term strategic objectives, may contribute to strategic and operational risk. These are examples of the interactions among various types of risk that ERM is designed to capture and assess.

The fact that HCR ranked lower in our survey than in the 2007 EIU study, where it topped the list, might largely be explained by the economic crisis that occurred during the intervening three years. The Conference Board’s CEO Challenge survey administered during that time found a similar shift in priorities during the financial crisis, when 14 out of 20 people-related issues sank in the rankings. “Finding qualified managerial talent,” which was within the top 10 in the 2007 and early 2008 surveys, dropped eight places and fell out of the top 10 after the September 2008 collapse of financial markets.18 “Top management succession” fell from a rank of 18 in July/August 2008 to 29 in October of that same year. Most recently, however, the 2011 CEO Challenge survey finds that “talent” (a new category) emerges as a top 10 challenge, placing second globally and reflecting the revitalized drive for growth.19

Table 2 compares the rankings of ERM and HR respon-dents. Human capital risk was the most significant risk for HR respondents but ranked sixth among ERM respondents. Strategic risk topped the list for ERM, but was only fifth for HR. These differences are consistent with the pattern found throughout our findings: the pervasive disconnect between the views of ERM and HR respondents.

Table 1

Risk rankings based on impact on business overall

Rank

Regulatory risk 1

Operational risk 2

Strategic risk 3

Human capital risk 4

Reputational risk 5

Financial risk 6

Supply chain risk 7

Political and/or country risk 8

IT risk 9

Natural hazard risk 10

Crime, terrorism and physical security 11

Table 2

Risk rankings based on impact on business:

ERM vs. HR

HR Risk

Human capital risk 1 6

Operational risk 2 3

Regulatory risk 3 2

Reputational risk 4 5

Strategic risk 5 1

Financial risk 6 4

Supply chain risk 7 7

Political and/or country risk 8 8

IT risk 9 9

Natural hazard risk 10 10

Crime, terrorism and physical security 11 11


How Eff ectively Are Risks Being Managed?Although all respondents ranked the 11 risks based on their business impact, only risk executives were asked to rank how effectively their companies are managing each risk. HR executives, we assumed, might not be sufficiently knowledgeable to rank the effective of their companies’ management of non-HR risks, so we did not ask them for those rankings.

HCR ranked second to last; political and/or country risk was the only type that risk executives believe their com-panies manage less effectively. Risk respondents think that companies manage terrorism and natural hazards—external risks over which they have little to no control—more effectively than the risks associated with their own employees.

How can we explain this finding? One explanation is that ERM knows comparatively little about HCR and lacks information about how it is being managed.

A second explanation is that ERM respondents view HCR as “soft” or unmeasurable, a perception that belies the growing use of quantitative data and analytics in HR. Numbers are credible in business conversations, while qualitative measures may seem less reliable. Quantifiable risks are also more readily managed. An abundance of financial risk-management tools make it relatively easy to manage the tradeoffs between risk and return. Hence, financial risk seems the most transparent. Likewise, many other risks that survey respondents ranked as more effec-tively managed than HCR also are also easily quantified. Reputation risk and strategic risk, which involve qualita-tive factors, are notable exceptions.

It is important to note the significant gap between HCR’s business impact (ranked fourth) and how effectively it is managed (ranked tenth). The implication of this finding: Companies should pay more attention and commit more resources to assessing and managing human capital risk—the same conclusion drawn by the EIU’s research in 2007.

Which Human Capital Risks Have the Biggest Business Impact?We asked all respondents to rate the significance of 21 specific types of HCR in terms of their impact on the business. Table 4 shows these risks in rank order, based on the percentage of respondents who rated them as “very significant.” Risks associated with talent and skills rose to the top of the list. Roughly 70 percent of respondents say that the shortage of skills within the company’s workforce is very significant. A majority also rated three other issues as highly significant: succession and the leadership pipe-line; the gap between talent capability and business goals; and the shortage of critical skills in the external labor force. Compliance and regulatory issues ranked second.

Table 4 Human capital risks ranked by significance

Rank

Percent

rated “very

significant”

1Shortage of critical skills within your company’s workforce

69.9%

2 Compliance/regulatory issues 59.1%

3 Succession planning/leadership pipeline 55.8%

4 Gap between talent capability and business goals 52.1%

5Shortage of critical skills in the external labor force

51.3%

6 Employee engagement 49.1%

7 Ethics 43.1%

8 Loss of critical knowledge through attrition 38.7%

9 Labor costs 38.1%

10 Intellectual property loss or violation 37.7%

11 Managing talent through mergers and acquisitions 34.8%

12 Diversity 32.7%

13 Company’s inability to compete for critical talent 32.3%

14 Excessive turnover/Failure to retain critical talent 27.8%

15 Alignment of pay and performance 26.5%

16 Executive compensation 25.0%

17 Outsourcing and vendor management 22.3%

18 Globalization/offshoring 20.9%

19 Unionization/labor relations 16.3%

20 Excessive risk-taking 13.1%

21 Use of contingent workers 10.8%

Table 3

Risks ranked by how effectively they are managed

Rank

Financial risk 1

Operational risk 2

IT risk 3

Supply chain risk 4

Regulatory risk 5

Reputational risk 6

Strategic risk 7

Natural hazard risk 8

Crime, terrorism and physical security 9

Human capital risks 10

Political and/or country risk 11


A review of these risks’ rankings by HR versus ERM revealed that the two functions hold considerably different views. Both rank the internal shortage of critical skills first and succession planning among the top four human capital risks for companies. Across the board, HR respondents ranked every HCR but one (compliance/regulatory) higher than ERM respondents did. Chart 1 shows those human capital risks with statistically significant differ-ences in their importance to ERM and HR respondents.

There are several explanations for these differences: First, HR executives are steeped in human capital issues and are likely to give greater weight to issues they manage on a daily basis. Second, risk executives may not be well informed about the human capi-tal risks and their potential impacts. Alternatively, they see a broader array of risks and, in comparison, view spe-cific human capital risks as less significant. Whatever the explanation, these data once again point out a disconnect between risk and HR executives, a pattern found else-where in the survey results, as shown below.

Our analysis also found significant differences based on region (Chart 2). “Inability to compete for critical talent”

was a very significant risk for more than half (57 percent) of companies in Asia-Pacific, but just one-quarter of those in North America. Asia-Pacific companies were also more likely (45 percent) to rate executive compensa-tion as “very significant” than were North American companies (18 percent). European companies view out-sourcing and vendor management as a greater source of risk than do Asia-Pacific companies.

How Mature Are Companies’ ERM and SWP Capabilities?One of the hypotheses underlying this research is that companies with mature ERM will assess and manage HCR more effectively than companies with Early or Middle stage ERM, and the same would be true for SWP maturity.

Based on previous research by The Conference Board, we constructed maturity scales for ERM and SWP to assess whether companies were at the Early, Middle, or Mature stage of ERM or SWP. (For more details, see “Research Methodology, Limitations, and Future Steps,” p. 34, and pp. 41-43 for the maturity models.)

HR Risk

Chart 1

Disparity in importance of select human capital risks, ERM vs. HR

Percent of respondents rating risks “very significant”

Labor costs

Employee engagement

Shortage of critical skills

in the external labor force

Shortage of critical skills

within your company’s

workforce

74.3%

61.1%

Note: The difference between Risk and HR is significant at the 90 percent level.

57.9

37.7

54.6

37.7

44.3

25.9

North America Europe

Chart 2

Disparity in importance of select human capital risks, by region

Percent of respondents rating risks “very significant”

Outsourcing and

vendor management

Executive

compensation

Company's inability

to compete for

critical talent

25.0% a

57.1% a

18.0 b

45.0 b

36.8 c

23.8 c

Asia-Pacific

a,b The difference between North America and Asia-Pacific is significant at the 90 percent level.

c The difference between Europe and Asia-Pacific is significant at the 90 percent level.

37.5%

32.5

16.3


ERM maturityWithin our sample, 60 percent of companies have Mature-stage ERM practices (Chart 3). However, because this sample was made up of companies that participate in The Conference Board’s risk-related programs, it’s unlikely to be representative of the larger population. Previous research and ongoing contact with a more diverse sample of companies suggests that the majority is likely to be at the Early or Middle stage of ERM.20 Despite this limita-tion, our research findings still enable us to examine the relationship between ERM maturity and HCR. The results of this analysis, discussed later, are among the study’s most interesting.

Two-thirds of the companies based in North America have Mature ERM (Chart 4). Forty percent of Asia-Pacific-based companies are in the Early stage, compared to 33 percent based in Europe and 11 percent in North America. These regional findings are interesting when compared to those for SWP maturity.

SWP maturityBased on The Conference Board’s SWP maturity scale, the survey found that 16 percent of participating companies are at the Mature stage of SWP, 46 percent are at the Middle stage, and 38 percent are at the Early stage (Chart 5).

There was a marked difference between the portion of Asia-Pacific companies (40 percent) with Mature-stage SWP, as compared to just 7 percent of those in Europe and 14 percent in North America (Chart 6).

By and large, the results for SWP maturity are relatively consistent with anecdotal evidence that The Conference Board has collected since 2006. These qualitative data sug-gest that few companies have reached a Mature stage of SWP; in fact, many companies are just getting started. It is likely that the survey findings overstate the level of maturity that might be found in a broader sample of companies, again due to how we recruited our survey sample (see “Research Methodology, Limitations, and Future Steps,” p. 34).

Chart 3

ERM Maturity

MatureEarly

Middle

20.7

60.3%

n=58

19.0

Chart 4

ERM maturity by headquarters region

Mature EarlyMiddle

65.8%

23.7%

10.5

53.3

13.3

20

40

33.3

40

North America Europe Asia-Pacific

Chart 5

SWP maturity

MatureEarly

Middle

45.5

16.1%

n=112

38.4

Chart 6

SWP maturity by headquarters region

Mature EarlyMiddle

14.3%

41.4%44.3%

7.4

48.1

60.0

40.0

44.4

0



One point is strikingly clear: ERM has a major head start on SWP (Chart 7). While 60 percent of companies in our study have achieved the Mature stage of ERM, only 16 percent have done so in SWP. Twice as many compa-nies are at the Middle stage of SWP (46 percent) versus ERM (21 percent), and, again, twice as many are at the Early stage of SWP (38 percent) than ERM (19 percent).

The fact that ERM maturity is much more common than SWP maturity can be explained, in part, by the fact that ERM has been around longer than SWP. In addition, ERM’s development has been accelerated in the United States by regulatory requirements such as Sarbanes-Oxley and Dodd-Frank. As previously discussed, our research results probably overstate the prevalence of Mature ERM and, to a lesser extent, Mature SWP in companies overall. Nonetheless, when we combine the survey findings with our earlier research on ERM and SWP and with extensive anecdotal evidence, we can conclude with confi-dence that many companies’ ERM practices are much more developed than their SWP practices.

How Much Do Company Leaders Understand about HCR?We asked survey respondents to gauge the extent to which top decision makers understand human capital risk: board members, the chief executive officer (CEO), the chief HR officer (CHRO), the chief risk officer (CRO), the chief financial officer (CFO), and business leaders (Chart 8).

Not surprisingly, 91 percent of respondents indicated that their CHROs understand human capital risk to a great extent. CEOs are reported to have the next highest understanding (78 percent). About two-thirds of other leader categories—business units (68 percent), the CRO (67 percent), and the CFO (65 percent) —understand human capital risks to a great extent, but only 60 percent of boards.

These findings raise concerns about board-level under-standing of HCR. Independent directors have limited time to spend in their oversight roles. If HCR is one of the top four risks, but is one of the least well managed risks, it is imperative that the board understand this gap.

It is notable that 25 percent of respondents answered “Don’t know” in regard to the CRO’s understanding of human capital risks. Nearly one-third (30 percent) of all HR respondents chose this response option, as did 15 per-cent of risk respondents. That so many are unsure about their CRO’s grasp of human capital risk is further evi-dence of a cross-functional disconnect. A CRO’s primary job is to help drive discussions about the risks inherent in each business and function throughout the company. If the CRO is leading such discussions in human resources, many of our survey respondents are unaware of them.

Again, our analysis found significant differences based on the respondents’ functions (Chart 9). HR profession-als (67 percent) were more likely than risk professionals (45 percent) to say that their boards understand HCR to a great extent.

Chart 7

Comparison of ERM and SWP maturity overall

ERM SWP

EarlyMiddleMature

60.3%

16.1%

20.7

45.5

38.4

19.0

Chart 8

Leaders’ understanding of human capital risk

A great extent A moderate extent

Board

CFO

Chief Risk Officer

Business units

CEO

Chief HR Officer

68.4% 25.3% 6.3%

90.5 8.2 1.3

67.3 24.5 8.2

65.4 26.9 7.7

77.6 19.3 3.1

59.5 30.1 10.5

Small/no extent


There are several possible explanations. While risk executives may report top risks to the board or its audit committee, HR executives are less likely to participate in risk discussions at board meetings. A 2005 study that

examined executive attendance at board meetings sup-ports this view.21 While 91 percent of CFOs and 85 percent of general counsels attend all of their companies’ board meetings, only 19 percent of HR leaders do so. Thus, risk executives may be in a better position than their HR counterparts to judge the board’s grasp of HCR.

By contrast, HR professionals may have a more accurate gauge of the CEO’s understanding. ERM is typically not privy to conversations between the CEO and CHRO. While some of our HR survey respondents may not them-selves participate in those one-on-one discussions with the CEO, they may help prepare reports for the CHRO to discuss with the CEO.

The divergence of responses between risk and HR is evidence that neither group has a clear enough picture of what each is reporting to senior management and the board.

Table 5

Leaders’ understanding of human capital risk vs. ERM and SWP maturity

ERM SWP

Mature Middle Early Mature Middle Early

n=33 n=10 n=9 n=16 n=46 n=37

Board

A great extent 51.5% 20.0% 55.6% 87.5% 69.6% 54.1%

A moderate extent 36.4% 70.0% 44.4% 12.5% 21.7% 27.0%

Small/no extent 12.1% 10.0% 0.0% 0.0% 8.7% 18.9%

n=33 n=11 n=9 n=17 n=47 n=42

CEO

A great extent 72.7% 81.8% 55.6% 100.0% 85.1% 66.7%


Small/no extent 3.0% 0.0% 0.0% 0.0% 2.1% 7.1%

n=33 n=11 n=9 n=17 n=47 n=37

CFO

A great extent 66.7% 63.6% 77.8% 82.4% 66.0% 51.4%


Small/no extent 6.1% 9.1% 22.2% 0.0% 6.4% 10.8%

n=26 n=9 n=6 n=11 n=34 n=23

Chief Risk Officer

A great extent 73.1% 66.7% 83.3% 81.8% 67.6% 47.8%


Small/no extent 7.7% 22.2% 16.7% 0.0% 2.9% 13.0%

n=32 n=9 n=9 n=17 n=47 n=42

Chief HR Officer

A great extent 90.6% 100.0% 100.0% 100.0% 91.5% 83.3%


Small/no extent 3.1% 0.0% 0.0% 0.0% 0.0% 2.4%

n=32 n=10 n=9 n=16 n=47 n=42

Business units

A great extent 81.3% 60.0% 66.7% 93.8% 72.3% 47.6%


Small/no extent 3.1% 10.0% 0.0% 0.0% 4.3% 11.9%

The significance between highlighted percentages within the same row is significant at the 90 percent level.

Chart 9

Board’s understanding of human capital risk:

ERM vs. HR

A great extent A moderate extent

HR

ERM 45.3%a 45.3%b 9.4%

67.0a 22.0b 11.0

Small/no extent

a, b The difference between HR and ERM is significant

at the 90 percent level.


Table 6 shows regional variations in regard to leaders’ understanding of human capital risks. Asia-Pacific respondents are more likely (86 percent) than their North American counterparts (51 percent) to say that the board understands HCR to a great extent. These differences can be readily explained by their regional context. The Asia-Pacific companies (primarily from India and China) operate in high-growth markets where the supply of skilled talent is arguably the largest barrier to continued growth,22 so boards are likely to be well versed on this issue. When U.S. boards discuss HCR, they focus primarily on suc-cession planning, compensation, and loss of key personnel—issues that affect the senior leadership team—rather than on a broader view of workforce issues.

Standing Group to Oversee Human Capital RiskFewer than half of companies (41 percent) have standing groups to oversee HCR. Whether companies have such a group did not vary sig-nificantly based on the respondents’ function (ERM vs. HR), industry, or company size. However, it is interesting to note that more than half of the Asia-Pacific respondents said they have a standing group, compared to 41 percent in North America and 35 percent in Europe.

Companies with Mature SWP (71 percent) or Middle-stage SWP (44 percent) are more likely to have a stand-ing group than those with Early-stage SWP (16 percent). ERM maturity was not related to whether companies have a standing group (Chart 10).

While we did not inquire about the makeup and opera-tion of these standing groups, anecdotal accounts indicate that some companies use existing forums, such as the corporate risk committee or council, while others have developed groups specifically to discuss human capital risks. However, our survey finds significant differences in the views of ERM and HR executives regarding who

participates in assessing HCR and about the effectiveness of their companies’ HCR assessment process (Tables 7 and 8).

Standing groups help to surface the thorniest human capital risks and to show how some businesses units may be addressing them. The discussion is especially helpful in prioritizing these risks. It is human nature to assume the risks that we personally face are most important. A stand-ing group made up of people from diverse functions and business units may shine a light on other, more pressing risks that the enterprise should tackle first.

A standing group for HCR would likely include busi-ness leaders or their direct reports who have a unit-level perspective on human capital issues, HR leaders who bring an enterprise-wide perspective, and representatives

Table 6

Leaders’ understanding of human capital risk by region


n=93 n=39 n=21

Board

A great extent 50.5% 66.7% 85.7%

A moderate extent 38.7% 17.9% 14.3%

Small/no extent 10.8% 15.4% 0.0%

n=99 n=41 n=21

CEO

A great extent 71.7% 80.5% 100.0%



n=96 n=39 n=21

CFO

A great extent 60.4% 74.4% 71.4%



n=68 n=27 n=15

Chief Risk Officer

A great extent 66.2% 59.3% 86.7%



n=97 n=41 n=20

Chief HR Officer

A great extent 87.6% 95.1% 95.0%



n=96 n=41 n=21

Business units

A great extent 70.8% 56.1% 81.0%



The significance between highlighted percentages within the same row is significant



from other relevant functions, such as legal, compliance, finance, environmental health and safety, and strategy, and an experienced ERM professional to facilitate the discussion. Depending on the maturity of the company’s ERM process, a standing corporate risk committee is likely to meet quarterly or more frequently, if the process is in its early phases. That group may be the right place to evaluate human capital risks at the enterprise level.

While these results provide a snapshot of the prevalence of standing groups to oversee HCR, the survey did not dig deeper into this topic. The Conference Board plans to con-duct future research to investigate the nature, composition, and workings of these standing groups, where they exist.

Assessing Human Capital RiskHuman capital risk assessment is the process by which companies identify people-related risks, weigh the likeli-hood of their occurrence and impact, including their potential interactions, and then set risk management priorities. The survey asked three related questions on this topic:

1 Who participates in assessing human capital risk?

2 Does your company have a formal process to assess human capital risk?

3 How effectively does your company assess human capital risk?

Who participates in assessing human capital risk?We asked respondents to indicate which of the following functions participate in assessing HCR: human resources, enterprise risk management, internal audit, and the busi-ness (Chart 11). Not surprisingly, human resources was the most prominent participant (81 percent), followed by the business (63 percent), enterprise risk management (38 percent) and internal audit (23 percent). There was a small number of additional write-ins, which included the participation of the board, the CEO, the executive team, finance, legal, and strategy.

ERM respondents and HR respondents differed in their answers (Chart 12). Not surprisingly, ERM respondents are more likely (56 percent) than the HR respondents (28 percent) to say that ERM participates in the assess-ment process. Almost twice as many HR respondents (27 percent) than ERM respondents (15 percent) said that internal audit participates in the HCR assessment pro-cess. One possible explanation for these differences is that unless companies develop a formal process for assessing HCR, the details of that process—including who partici-pates—may be unclear or open to interpretation. This conclusion was not supported by further analysis, how-ever. The divergence between ERM’s and HR’s under-standing of who participates in assessing human risk held steady, regardless of whether companies have a formal assessment process.

Who participates in assessing HCR also varies based on the maturity of companies’ ERM and SWP processes, as shown in Table 7. More than two-thirds (69 percent) of companies with Mature-stage ERM report that ERM participates in assessing HCR, versus 50 percent of Middle-stage compa-nies and just 27 percent of Early-stage companies.

Chart 11

Who participates in human capital

risk assessment

Other

Internal Audit

Enterprise Risk

Management

The business

Human

Resources81.4%

62.8

37.8

23.3

7.0

Chart 10

Standing group that oversees human capital risk

by ERM and SWP maturity level

Mature EarlyMiddle

SWP

ERM

50.0%

30.0

55.6

70.6%a

44.4b

16.2a,b

a The difference between Mature and Early stage is significant


b The difference between Middle and Early stage is significant



SWP maturity, in contrast, turns out to be more broadly related to who participates in assessing HCR. The more mature a company’s SWP process, the more likely it is that ERM, human resources, and the business all partici-pate in the process.

The survey found one significant difference based on region: 86 percent of respondents from Asia-Pacific said that their businesses were involved in HCR assessment, versus only 57 percent in North America and 65 percent in Europe (Chart 13). This finding is consistent with the feedback we have received when presenting these research results to corporate audiences in the United States, Europe, and Asia-Pacific. Indian companies seem to “get” that HCR is a significant business risk, as expressed by S. Varadarajan, chief human resource officer at Quatrro, at the beginning of this report.

Does your company have a formal process to assess human capital risk?Survey responses were almost evenly split between com-panies that do (52 percent) and do not (48 percent) have a formal process for assessing HCR (Chart 14). Once again, ERM and HR executives held divergent views. ERM respondents were more likely (64 percent) to have a formal process than HR respondents (46 percent). What might account for this difference?

HR Risk

Chart 12

Who participates in human capital risk assessment:

ERM vs. HR

Other

The business

Human

Resources

Internal Audit

Enterprise Risk

Management

28.3%a

55.9%a

27.4b

15.3b

79.6

84.7

62.8

62.7

8.8

3.4

a, b The difference between HR and Risk is significant


Table 7

Who participates in human capital risk assessment

by ERM

Mature Middle Early

ERM n=35 n=12 n=11

Enterprise Risk Management

68.6% 50.0% 27.3%

Internal Audit 17.1% 16.7% 9.1%

Human Resources 82.9% 91.7% 81.8%

The business 65.7% 66.7% 54.5%

SWP n=18 n=51 n=43


50.0% 31.4% 14.0%

Internal Audit 44.4% 21.6% 25.6%

Human Resources 88.9% 90.2% 62.8%

The business 83.3% 68.6% 46.5%

The significance between highlighted percentages within the same row is

significant at the 90 percent level.

North America Europe

Chart 13

Who participates in human capital risk assessment

by region

The business

Human

Resources

Internal Audit

Enterprise Risk

Management

36.1%

37.2%

47.6%

23.1

20.9

28.6

79.6

81.4

90.5

57.4a

65.1

85.7 a

Asia-Pacific

a The difference between North America and Asia-Pacific

is significant at the 90 percent level.


“Does your company have a formal process for assessing human capital risk?” is a question built on the assumption that having a formal process is objectively knowable by all respondents, regardless of their role or function (ERM or HR). It is possible, however, that ERM respondents are more aware of the formal process for assessing HCR than are their HR colleagues, particularly if ERM is respon-sible for overseeing that process. Alternatively, if ERM is not responsible for assessing HCR, ERM may assume—incorrectly in some cases—that HR has a formal process for doing so. While our research does not provide a con-clusive explanation, the findings further demonstrate that ERM and HR are not well aligned.

Are companies with a Mature ERM and/or SWP process more likely to have a formal HCR assessment process? No and yes, according to the survey results. The percentage

of ERM respondents who reported having a formal pro-cess to assess HCR (over 60 percent) was quite consistent, regardless of their ERM maturity (Chart 15). The fact that ERM maturity and formal assessment appear unrelated is important. It suggests that the robustness of a company’s ERM capabilities provides no guarantee that its human capital risks are formally assessed or that ERM is aware of that assessment, if it exists.

The relationship between SWP maturity and having a formal process to assess HCR is stronger. Seventy-one percent of companies with Mature-stage SWP and 53 per-cent of those at the Middle stage have a formal process for assessing HCR, compared to just 26 percent at the Early stage of SWP. Thus, the more mature a company’s SWP process, the more likely that the company has a formal HCR assessment process. It is important to note, however, that SWP and HCR assessment are not necessarily the same, as some companies with Middle- or even Mature-stage SWP do not have formal process for assessing HCR.

How effectively does your company assess human capital risk?What ultimately matters, however, is how effectively com-panies assess HCR, one of two outcome variables shown in Figure 1 (p. 16). In response to this survey question, 31 percent of all respondents answered effectively, 45 per-cent somewhat effectively, and 24 percent ineffectively (Chart 16). Roughly the same portion of ERM (33 percent) and HR respondents (30 percent) said their company assesses HCR effectively.

Several factors were found to be significantly related to effective assessment of HCR.

To our great surprise, ERM maturity was not signifi-cantly related to effective assessment (Table 8). However, SWP maturity was: The majority of companies with Mature-stage SWP (65 percent) assess HCR effectively.

Chart 15

Formal process by ERM and SWP maturity level

Mature EarlyMiddle

ERM

SWP

70.6% a

53.1 b

25.6 a, b

65.5%

66.7

62.5

a The difference between Mature and Early stage is significant


b The difference between Middle and Early stage is significant


Chart 16

Effectiveness of human capital risk assessment:

ERM vs. HR

Effective Somewhat effective

Overall

ERM

HR 27.5%42.2%30.4%

16.351.032.7

23.845.031.1

Not effective

Chart 14

Formal process for assessing human capital risk:

overall and ERM vs. HR

Overall

ERM

HR 46.2% a

63.8 a

52.0

a The difference between HR and ERM is significant



The extent to which leaders understand HCR was related to effective HCR assessment: Companies in which leaders understand human capital risk to a great extent assess HCR more effectively than companies in which leaders have less understanding.

The participation of ERM and internal audit is signifi-cantly related to effective HCR assessment. This may be the case simply because ERM and internal audit already

have a risk assessment process that they use across many areas of the organizations. Survey respondents may believe that an established process assesses HCR more effectively.

What combination of factors makes a difference in effective HCR assessment?Having identified which individual variables were signifi-cantly related to effective HCR assessment, we analyzed which combination of variables differentiates companies with effective HCR assessment from others. This statisti-cal analysis goes beyond the simple bivariate relationship between each input variable and the outcome, discussed above. It narrows the field by selecting a smaller bundle of factors that, taken together, significantly increases a company’s likelihood of effectively assessing HCR.

We found that a combination of four factors—a formal assessment process, HR’s participation, the business’s participation and a standing group to oversee HCR—is predictive of effective HCR assessment. Other factors that our earlier bivariate analyses found to be related to effec-tive assessment may add value and be worth doing, but they weren’t what separated the leaders in HCR assess-ment from the rest of the pack.

Teasing Out Significant Differentiators

Because our two outcome variables—HCR assessment

and HCR management—were measured on an ordered,

three-point scale (effective, somewhat effective, not

effective), we used ordinal logistic regression modeling

to determine factors that differentiate more effective

outcomes from less effective ones. The explanatory fac-

tors we included in each model were: (1) who participates

in assessing HCR, (2) does your company have a formal

process for assessing HCR, and (3) does your company

have a standing committee that oversees HCR.

Like other multiple regression methods, an ordinal logistic

regression requires complete data for each “case”—i.e.,

company. Surveys with missing responses cannot be

included in the analysis. To maintain as large a sample

size as possible, we chose to drop a few variables from

the ordinal logistic regression:

• Leaders’ understanding of human capital risk

Because of the large number of missing cases,

including the 25 percent of respondents who answered

“Don’t know” in regard to the CRO’s understanding

of HC risk, we omitted leaders’ understanding of HCR

from this analysis.

• ERM and SWP maturity ERM respondents answered

questions related to ERM maturity, but HR respondents

did not. HR respondents answered regarding SWP ma-

turity, although ERM did not. Thus, both groups were

“missing” data for one of the independent variables.

For this reason, we omitted both ERM maturity and

SWP maturity from the ordinal logistic regression.

What we gain from the ordinal logistic regression is a

clearer picture of which factors set apart companies with

leading practices in HCR assessment and management.

What we lose is the opportunity to put all of the variables

in our model to the same test, although the bivariate

analyses tell us the strength of the association between

each of the input variables and the two outcomes.

Table 8

Effectiveness of human capital risk assessment by

ERM and SWP Maturity

Mature Middle Early

SWP n=17 n=47 n=37

Effective 64.7% 36.2% 5.4%

Somewhat effective 29.4% 48.9% 40.5%

Not effective 5.9% 14.9% 54.1%

ERM n=29 n=10 n=9

Effective 34.5% 30.0% 33.3%


Not effective 13.8% 20.0% 22.2%




Managing Human Capital RiskThe “Holy Grail” of all of these efforts is to be able to effectively manage an organization’s human capital risks. As Chart 17 illustrates, companies were most likely to rate themselves as somewhat effective.

It makes intuitive sense that the more senior executives understand HCR, the more likely they are to effectively manage those risks. Our findings support this in regard to two types of leaders (Table 9). Companies whose boards have a great understanding of HCR are more likely to manage those risks effectively (42 percent) than are companies whose boards have some understanding (21 percent). When the CFO understands HCR to a great extent, companies are more likely (40 percent) to manage it effectively than companies whose CFO’s understanding is only moderate (18 percent).

Nearly half (46 percent) of companies that have a formal process for assessing HCR manage it effectively, versus 17 percent of companies without a formal process.

Having a standing group to oversee these risks is also linked to effective HCR management. The majority (56 percent) of companies with a standing group manage

Chart 17

Effectiveness of human capital risk management overall

EffectiveNot

effective

Somewhat

effective

43.4

31.6%

n=152

25.0

Table 9

Senior executives’ understanding of HCR versus effective HCR management

A great extent A moderate extent Small/no extent

n=86 n=43 n=14

Board

Effective 41.9% 20.9% 7.1%


Not effective 11.6% 37.2% 57.1%

n=117 n=29 n=4

CEO

Effective 36.8% 6.9% 25.0%


Not effective 17.1% 51.7% 75.0%

n=95 n=39 n=12

CFO

Effective 40.0% 17.9% 8.3%


Not effective 17.9% 28.2% 58.3%

n=70 n=26 n=8

Chief Risk Officer

Effective 44.3% 15.4% 25.0%


Not effective 11.4% 30.8% 62.5%

n=132 n=13 n=2

Chief HR Officer

Effective 34.8% 0.0% 0.0%


Not effective 21.2% 61.5% 100.0%

n=100 n=37 n=10

Business units

Effective 39.0% 13.5% 10.0%


Not effective 21.0% 27.0% 70.0%

The significance between highlighted percentages within the same row is significant at the 90 percent level.


human capital risks effectively, as compared to 14 percent of companies without a standing group.

When internal audit and/or the business participate in the assessment process, the company is more likely to manage HCR effectively.

The results by region did not vary greatly (Chart 18), although a higher percentage of Asia-Pacific companies (38 percent) manage HCR effectively than do companies in Europe (31 percent) and North America (30 percent).

SWP maturity is a better predictor of effective HCR management than ERM maturity. While just 38 percent of companies with Middle-stage SWP manage HCR effectively, 71 percent with Mature-stage SWP do so. With ERM, the maturity level has less impact, as shown in Table 10. The majority of ERM respondents at all three levels of maturity manage HCR somewhat effectively.

What Combination of Factors Makes the Diff erence?The final step in our analysis was to statistically test which combination of factors differentiates companies that effectively manage human capital. Three factors were significant:

1 A formal process to assess human capital risk

2 A standing group to oversee human capital risk

3 The business’s participation

The fact that all three factors also differentiate companies with effective HCR assessment makes them extremely important for company practice.

Again, this short list doesn’t invalidate the importance of other factors that, taken individually, were found to be related to effective HCR management. For example, in the majority of companies that effectively manage HCR, the CEO understands HCR to a great extent, but CEO understanding isn’t what distinguishes companies with effective HCR management from others with less effective practices.

Chart 18

Effective HCR management, by region

Asia-

Pacific

Europe

North

America30.4%

30.8

38.1

43.5%

43.6

42.9

26.1%

25.6

19.0

Effective Somewhat effective Not effective

Table 10

Effectiveness of human capital risk management by

ERM and SWP Maturity

Mature Middle Early

SWP n=17 n=45 n=39

Effective 70.6% 37.8% 10.3%


Not effective 5.9% 20.0% 48.7%

ERM n=29 n=11 n=9

Effective 34.5% 27.3% 22.2%


Not effective 13.8% 18.2% 22.2%




Research ConclusionsThe survey results provide companies with important new insights regarding human capital risk.

Where HCR ranks in relation to other risks Overall, human capital risk ranks fourth out of 11 risks, based on its impact on business performance, and tenth on the list in terms of how effectively companies are managing these risks. This ranking puts human capital ahead of several other types of risk, such as financial, reputational, supply chain, and IT risks, that companies typically include as part of their ERM process. However, ERM respondents ranked HCR as one of the least effectively managed risks, second only to political and/or country risk. Taken together, these two rankings point to a glaring short-coming in current practices and stress the importance of systematic HCR management.

Which human capital risks have the greatest business impact Out of 21 specific types of human capital risk (see “Examples of Human Capital Risk,” p. 7), five top the list, based on their business impact:

1 Shortage of critical skills within the company’s workforce

2 Compliance/regulatory issues

3 Succession planning/leadership pipeline

4 Gap between talent capability and business goals

5 Shortage of critical skills in the external labor force

The maturity of SWP and ERM Companies’ ERM capa-bilities are far more mature than their capabilities in SWP.

Eff ective HCR AssessmentFactors significantly related to effective HCR assessment include having a standing group to oversee human capital risk and a formal process for assessing it. The extent to which leaders (the board, CEO, CHRO, CRO, CFO, and business) understand HCR is significantly related to effective assessment, as is the participation of internal audit and ERM in the assessment process. SWP maturity is significantly related to effective HCR assessment, but ERM maturity is not.

What differentiates companies with effective HCR assess-ment? The combination of four variables emerges as statis-tically significant: having a formal process to assess, HR’s participation, the business’ participation, and having a standing group to oversee HC risk.

Eff ective HCR managementFactors that are significantly related to effective HCR management Companies with a formal process for assess-ing HCR and/or a standing group that oversees HCR are significantly more likely to say they manage HCR effec-tively than somewhat effectively or not effectively.

Other factors related to effective HCR management: the board and the CFO’s understanding of HCR; the board and internal audit’s participation in assessment; and SWP maturity. ERM maturity is not related to effective HCR management, however.

What differentiates companies that effectively manage HCR? When we look for which combination of variables makes the difference, we find that a standing group that oversees human capital risk, a formal assessment process, and business participation in assessment signifi-cantly increases the likelihood of a company’s effectively managing HCR.

Many companies lack the three most critical elements of effective HCR assessment and management Nearly half lack a formal assessment process, and 59 percent do not have a standing group to oversee HCR. In 37 percent of companies, the business doesn’t participate in assessing HCR. These findings point to specific actions companies can take if they want to become better at managing HCR.


Siloed Functions, Siloed ProcessesDisconnects between HR and ERM the survey finds significant differences between ERM and HR executives regarding the following:

• The business impact of all risks

• The business impact of human capital risks

• Having in place a formal assessment process

• How effectively their companies assess HCR

• Who participates in assessing HCR

• The board’s understanding of HCR

The pervasiveness of these differences strongly suggests that, in many organizations, ERM and HR are not on the same page in regard to many aspects of human capital risk and are reluctant to step into each other’s territo-ries. This disconnect may well be the greatest obstacle to improving HCR management. No matter how effective a company’s ERM and SWP processes may be, they do not, in and of themselves, ensure effective HCR management. Rather than running parallel—but separate—processes that perpetuate functional silos, ERM and HR need to build a common understanding of HCR and an architec-ture for managing it.

Regional Diff erencesCompanies headquartered in Asia-Pacific stand apart While the survey finds a number of regional differences, the most interesting pattern emerges in regard to Asia-Pacific companies. Compared to companies headquar-tered elsewhere, they are:

• More likely to have a board that understands HCR

• More likely to have the business involved in assessing HCR

• More likely than North American companies to say that the inability to compete for critical talent and executive com-pensation as significant human capital risks.

• Less likely than European companies to view outsourcing and vendor management as a significant risk

• Less mature in ERM

• More mature in SWP

• More likely to have a formal process for assessing HCR*

• More likely to have a standing group to oversee HCR*

• The most likely to say they assess HCR effectively*

• The most likely to say they manage HCR effectively*

*This difference, while interesting, was not statistically significant.

Because our sample was relatively small for Asia-Pacific companies, these conclusions are preliminary, although they clearly call for further investigation. However, the regional differences we found are consistent with those in The Conference Board 2011 CEO Challenge survey: Asia-Pacific executives chose talent as their foremost issue, higher than their counterparts in other regions.23 Given the importance of talent to Asia-Pacific CEOs, it’s not surprising that companies in the region have more mature SWP processes and greater understanding of HCR at the board level than companies based elsewhere.

The results of our HCR research deepen our understand-ing of the issue, current company practices, and the views of two key stakeholders—ERM and HR. The research findings also provide a foundation for future research, discussed on page 36, and suggest practical steps compa-nies can take.


Practical ImplicationsThe results of this research have practical implications for companies that want to assess and manage HCR more effectively.

1 Start the conversation between HR and ERM Many elements of effective HCR assessment and manage-ment probably already exist in your organization. The trick is to find them and fit them together. The conversa-tion between risk and human resources must start by educating each other about what is already known and understood. The questions presented in the Appendix (see “Starting a Cross-Functional Dialogue,” p. 38) may serve as a starting point. If human capital risks are not within the scope of current ERM work, bringing the CRO and CHRO together is the first step. HR can show ERM leaders what they have to offer in terms of human capital data, analytics, and modeling capabilities. ERM tools can help HR frame human capital risks in a way that business leaders and senior corporate leaders understand.

2 Develop a common language to describe human capital risk Much of what HR produces—HR strategy, hiring forecasts, staffing plans, human capital metrics, and so on—is all about HCR management. It may not be recognized as such, however, because it uses HR language. ERM language is not inherently superior, but it has the advantage of already being accepted by the business. ERM vocabulary can fairly easily be applied to human capital. Using a common language will help to communicate human capital risks across the organiza-tion. Royal Bank of Scotland went so far as to reject the term “strategic workforce planning” in favor of “human capital risk,” because it would be readily understood by anyone who operates in the financial world.24

3 Frame human capital risks as business risks and quantify, when possible The light bulb may go on for some executives when the discussion moves from HR issues, such as attrition, to their impact on performance measures, such as efficiency, cost, or productivity. To the degree possible, quantify human capital risks. Business leaders are comfortable understanding risks that can be measured.

4 Leverage what you’ve already got HR has significant workforce data and analytics that can help winnow criti-cal priorities from a lengthy laundry list of human capital risks. If your company has already implemented SWP, the information and insights it produces can fuel discussions about HCR. While our research found that companies with Mature stage SWP are more likely to manage HCR effectively than those at the Early or Middle stages, SWP maturity is not a prerequisite for starting the conversa-tion. ERM can provide tools such as self-assessment surveys or can help to lead risk workshops. While risk assessment surveys may include several questions on HCR that are already being answered by business unit executives, they may not be capturing the broader perspective of corporate HR. HR leaders can use these tools to compile risk data and perceptions from across the HR organization.

5 Develop a formal process for assessing HCR Having a formal assessment process tops the list of factors that contribute to effective HCR assessment and manage-ment. While our research did not investigate what this process should look like, there is unlikely to be a single answer. Rather, ERM and HR leaders should work together to identify existing risk-assessment processes that might serve the purpose, rather than starting over with a new process. Not every risk deserves to be escalated to an enterprise level. However, there are likely to be some common risks across businesses and geographies that demand greater attention, analysis, and resources. It takes a companywide understanding of human capital risks to effectively prioritize and decide which risks to treat locally and which to elevate to a higher level. It may require more than one cycle to learn what the appropriate thresholds are for escalating risks. (See “Inventory of Human Capital Risks,” pp. 39–40, for an illustration of capturing and assessing HCR.)

6 Assessment must be followed by risk treatment The company must also assign risk ownership, develop and execute risk mitigation plans, assign accountability for the mitigation, and ensure robust reporting and monitor-ing. These same steps are necessary for effective SWP.


7 Consider what form of standing group could effec-tively manage HCR Having a standing group to oversee HCR is the second factor that differentiates companies with effective HCR management, although the design or structure for such a group is not specified. The CHRO, CRO, and others should evaluate what would work best for the organization.

8 Rethink risk governance HR’s participation is a key factor that differentiates effective HCR assessment. The CHRO needs to be part of a corporate risk commit-tee, which is not a common practice. CHRO insights can be particularly valuable in understanding how human capital risks impact other business risks and vice versa. Without HR’s input, critical risks may be overlooked. Business units are likely to raise specific human capital risks as part of the unit’s overall business risk assess-ment, which is then folded into the corporate-wide assessment. However, HR has the enterprise-level view and can add important insights and perspective regard-ing common risks across the entire organization. Human capital risks are integrally linked to corporate strategy and the board should explicitly consider them.

9 Raise critical human capital risks to the board level Most boards customarily discuss compensation and succession planning. These topics can provide a spring-board to their review of a broader range of human capital risks.25

10 Businesses should ultimately own these risks, so get them involved Business should participate in the risk process, from the inventory and assessment through devising risk mitigation strategies. Executives and man-agers who are responsible for achieving certain targets will have the best idea about how to treat risks to meet those objectives.


Research Methodology, Limitations, and Future StepsThe research was designed to collect baseline data about human capital risk, a topic that has not been studied extensively, and about company practices for assessing and managing this type of risk.

MethodologyWe conducted an online survey in two versions: The version intended for HR respondents included questions based on The Conference Board’s maturity scale for strategic workforce planning; the version for risk profes-sionals included questions derived from The Conference Board’s maturity scale for enterprise risk management. Both versions included identical questions about human capital risk.

The SWP maturity scale was developed from The Conference Board maturity model of strategic workforce planning.26 Based on our previous research (see p. 45) and ongoing relationships with more than 100 companies that have implemented SWP, this model describes how companies’ SWP capabilities typically evolve over time. Responses to the SWP maturity questions were scaled to create three levels of SWP maturity: Early, Middle, and Mature. (See pp. 42–43 for the maturity scale.)

The ERM maturity scale was similarly constructed based on The Conference Board’s previous research and its ongoing relationships with companies with an interest in ERM. Companies’ responses to the survey questions that focused on ERM were scaled to create the same three levels of maturity (see p. 41).

The first wave of invitations to participate in the survey was e-mailed in July 2010, followed by two additional waves in September and November 2010.

Risk Management Invitations were sent to those who had attended The Conference Board’s annual ERM con-ference and to five of its Councils whose members oversee or are linked to ERM:

• Strategic Risk Management Council

• Council on Strategic Risk Management

• Council of Chief Audit Executives

• Chief Audit Executives Council

• South Asia Council on Governance and Risk Management

Human Resources Invitations were sent to members of 13 HR-related Councils of The Conference Board:

• Human Resources Executive Leaders Council

• Strategic Workforce Planning Council

• Council of Talent Management Executives I & II

• Midmarket Human Resource Executives

• Global Human Resources Council I & II

• Council on Strategic Workforce Planning

• European Council on Strategic Workforce Planning

• South Asia Council on Human Resources

• Asia-Pacific Human Resources Council

• China Human Resources Council

• Asia-Pacific Talent, Leadership Development and Organizational Effectiveness Council

In all, 818 persons were invited to participate in the survey; of these, 172 did so, resulting in a response rate of 21 percent.


Survey SampleOne hundred sixty-one companies participated in the survey. In the few instances where we received more than one HR response from the same company, we used the data provided by the most senior respondent. In no case did we receive two risk responses from the same company.

Two-thirds (66 percent) of survey respondents are HR professionals; 34 percent are responsible for ERM. In a handful of cases (11), we received both an HR response and an ERM response from the same company (although each completed a different version of the survey).

Respondent company profiles

Industry n=172

Agri/mining 5.2%

Manufacturing 36.6%

Financial serivces 11.6%

Non-financial services 26.7%

Energy/Utilities 11.6%

Pharma/Medical 8.1%

Total 100.0%

Revenues n=149

Less than 1 billion 10.1%

$1 to less than $5 billon 17.4%

$5 to less than $10 billion 20.1%



$40 billion or more 22.1%

Total 100.0%

Full-Time Employees n=140

Less than 1,000 3.6%

1,000 to less than 10,000 25.7%

10,000 to less than 50,000 34.3%

50,000 to less than 100,000 20.7%

100,000 or more 15.7%

Total 100.0%

Region n=172

North America 62.8%

Europe 25.0%

Asia-Pacific 12.2%

Total 100.0%

HR vs. Risk response rate

HRRisk

65.7%

n=172

34.3

HR

North AmericaAsia-Pacific

Europe

24.8

61.9%

n=113

13.3

North AmericaAsia-Pacific

Europe

25.4

64.4%

n=59

10.2

Risk


LimitationsReal-world research is seldom conducted without some compromises. We acknowledge a few here.

1 In nearly all cases, we had either an ERM or an HR respondent from each company. Thus, when we com-pare HR to ERM responses, we are also comparing two different subsamples of companies. It is possible, therefore, that the observed differences in the out-come variables aren’t due to the respondents’ function, but rather to the companies themselves. To test this possibility, we compared the company characteristics of the two functional groups and found no significant difference based on company size, region, or industry.27 These results support the conclusion that the differ-ences between ERM and HR responses reflect functional differences rather company differences.

2 The survey did not assess respondents’ level of responsibility. As a result, it is likely that respondents’ perspective may range from a broad, strategic view to one that focuses on a specific discipline within ERM or HR. Within the HR sample, job titles include chief human resources officer; executive vice president, corpo-rate human resources; director, talent development, Asia; vice president and deputy head, global human resources; as well as more specialized titles such as manager, workforce planning and analytics; or general manager, global workforce development. Within the ERM sample, respondents included vice president, chief risk officer; head of internal audit; director, risk manage-ment; and advisor, corporate governance. Because job titles can be misleading, they are an unreliable indication of hierarchical level or perspective. Nonetheless, our failure to control for organizational level within ERM and HR is likely to have had some impact on the research findings, although the extent of that impact is unknown.

3 Despite efforts to increase the number of responses from Asia-Pacific, only 12 percent (n=21) of our sample comes from that region, too few for us to draw research conclusions with confidence. This is particularly regrettable because the data we do have suggest that Asia-Pacific companies may be much more experienced in managing HCR than those in other regions, a hypoth-esis we plan to test in future research.

Next Steps in ResearchIn addition to identifying practical steps companies can take to address HCR, this study also provides a founda-tion for future research. While The Conference Board’s research agenda will be shaped, in part, by feedback on this initial study, we have identified several questions that will advance our understanding of HCR:

1 What can we learn from companies that have already established a process and structure for managing human capital risk? What led these companies to get started? What obstacles did they encounter or overcome?

2 What does a formal process for assessing human capital risk look like? (We assume that it need not be the same for every company.) Which factors should companies consider in developing their own formal process for assessing HCR?

3 What should the governance structure be to manage human capital risk?

4 How do companies measure the effectiveness of human capital risk management?

Clearly, the differences found between companies based in Asia-Pacific versus other regions warrant further inves-tigation, which we will pursue.

Appendix

Starting a Cross-Functional Dialogue

Inventory of Human Capital Risks, Crompton Greaves Ltd.

ERM Maturity Model

SWP Maturity Model


AppendixStarting a Cross-Functional Dialogue

Questions for HR to Ask of ERM Questions for ERM to Ask of HR

Questions to learn about current processes and capabilities

• What is the mandate of ERM today? How has ERM evolved at our company over the past several years? Has the finan-cial crisis been a major influence in the changes you’ve seen?

• What value does ERM deliver to the organization?

• What does the ERM process look like and how is it inte-grated with other planning processes in the businesses and functions? Who participates? At what organizational level do you conduct ERM (BU, region, enterprise)?

• What are the inputs? Who provides this information? How do you get the attention of participants?

• What are the outputs? Can you show me some examples?

• How are the outputs used, and by whom?

• What are the strengths of our current ERM process? Where do we need to improve?

• Do you quantify or measure human capital risk? If so, how?

• How can HR help to provide an enterprise wide view of HC risk?

• What can HR/SWP do to help ERM?

• How has HR’s ability to manage human capital (supply, demand, gaps, business impacts) evolved at our company over the past 10 years?

• What areas of human capital represent the largest risks to our company?

• Do we have a strategic workforce planning process? If so, how is it integrated with other planning processes in the businesses and functions? Who participates? At what organizational level do you conduct SWP (BU, region, enterprise)?

• What are the inputs? Who provides this information? How do you get the attention of participants?

• What are the outputs? Can you show me some examples?

• How are the outputs used, and by whom?

• What are the strengths of our current process? Where do we need to improve?

• How do you quantify or measure human capital risk?

• How do SWP and other HR processes add value to the organization?

Questions about HCR

• To what degree does HCR factor into the overall risk profile today?

• For purposes of building the risk profile, does ERM track HR compliance?

• How can we look at some of the interrelations between HCR and other types of risks in a meaningful way?

• How do we ensure that assessing and managing HCR isn’t an HR-only exercise?

• How do we bring HR into ERM’s risk conversations with the business, executive team, and board?

• What are the underlying assumptions about human capital in our business forecasts? (e.g., are we assuming an adequate internal and external supply?)

• Which of these assumptions should be reexamined or do we know to be incorrect?

• What is the risk that our organizational structure does not support our strategic intent?

• What is the risk that our company culture does not support our strategic intent?

• Do we have sufficient resources to achieve expected growth in all business areas? In which specific areas (key roles, critical skills, functions, locations, etc.) are we most at risk? Where might excess resources hinder results?

• What is the risk that we do not attract or retain the right talent to achieve our strategic targets?

• What are our leadership competencies and how do we ensure those and nurture them in a rapidly growing company?

• Which HR policies, programs and practices pose potential risks? How do we manage those risks?

Questions about Future Collaboration

• How could HR enhance its current practices to capture, assess, and manage the people issues that might also be called “human capital risks”?

• What ERM tools might we find useful?

• How could ERM help HR enhance our current processes for capturing and prioritizing HC risks?

• If HR were to become a formal participant in ERM’s risk assessment and management process, what would that look like?

• What might be the benefits of HR partnering with ERM to assess and manage HCR? What are the obstacles or drawbacks?

• How might this work? Who should be involved?

• What initial steps could we take?


Inventory of Human Capital Risks, Crompton Greaves Ltd. (Avantha Group)

Categories of HCR with a Representative Example and Mitigation Tactic

Risk

(Bulleted factor is absent, inadequate or ineffective) Mitigation Responses

I. HR ENTERPRISE RISKS

HR Strategy

• Linkage of HR strategy & plans with business strategy and plans, both short- and long-term

• HR Mission & plans are appropriately aligned with the business, the organization’s size and complexity

Competence of the HR Function

• Use of business systems and IT to facilitate HR • Development and use of IT portal to manage the entire “life cycle” of employees from recruitment to separation, including Talent Management, Training and Development and Competencies.

Leadership Development (LD)

• Formal LD processes lead to reactive recruitment • LD activity is linked to business drivers and company’s future business directions

Competencies & Evaluation of Potential

• Inadequate measures of requisite skills and competen-cies that affect productivity/business objective

• Competencies measured by department/unit/division heads, 360-degree evaluation, external evaluation

Talent Acquisition & Retention

• Attrition of superior talent • Clear KPIs for Unit Head and HR to minimize attrition of key talent and superior performers

Succession Planning

• Impact on business continuity due to an inadequate number of successors

• 1-2 successors exist for all key positions and development for these potential successors is conscious and progressive

HR Responses to Change

• Negative impact or misalignment between employees’ national cultures

• Conduct cultural sensitivity training programmes and Employee engagement surveys at pre-determined intervals and tracking of action plans, with periodic reviews

II. HR PROCESS RISKS

Recruitment & On-boarding

• Clear recruitment processes to deliver best-fit selections

• Recruitment processes are designed to evaluate candidates based on job description and competency framework

Goal Setting & Performance Management

• Absence of goal setting processes which have clear metrics, accountabilities and time frames

• Goals setting is linked to business imperatives, job roles and responsibilities

• Performance Management System has adequate built-in checks and balances

Training & Development

• Linkage between training initiatives and organisational objectives, goals and business drivers

• Training and Development plans address the short, medium and long term plans of the organisation and are linked to business drivers

Source: Avantha Group (reproduced with permission).


Categories of HCR with a Representative Example and Mitigation Tactic

Risk

(Bulleted factor is absent, inadequate or ineffective) Mitigation Responses

II. HR PROCESS RISKS continued

Remuneration

• Ineffective benchmarking of remuneration with industry

• Market percentile positioning is based on comparisons with relevant comparators/competitors

Separation

• Bad publicity by separating employee; employer brand impact in communities

• Transparent, well-documented/communicated separation processes

Employee Engagement

• Ineffective employee engagement initiatives leading to critical outcomes including absenteeism, attrition, customer satisfaction operational performance

• Comprehensive plans to create an employee engagement culture

Communication

• Disengagement of employees due to inadequate information flows and transparency

• Established forums where employees can express their views and suggestions

Employee Behavior & Conduct

• Negative impact of employee behaviour on the work environment or other employees

• Comprehensive policies and procedures for employee behavior and conduct

III. OTHER HR RISKS

Regulatory HR Compliance

• Regulatory sanctions and notices due to non-compliance

• Accountabilities are predefined for all HR compliance areas

Environmental Health & Safety (EH&S)

• Negative regulatory sanctions and notices • Documented and well communicated EH&S policy

Labor Unrest

• Disturbance of relationships with unions and workforce, leading to loss of production and sales

• Welfare of workforce is reviewed at pre-determined intervals and actions taken

Employee Records

• Inappropriate access to employee records • Establishment of formal, robust, legally compliant, confidential and consistent processes for recording, storing and accessing employee records

Source: Avantha Group (reproduced with permission).

(continued)


ERM Maturity Model

ERM Maturity Components

Early Stage, Year 1 Middle Stage, Years 2 – 4 Mature Stage, Years 3 – 5+

• Driven by board of directors

• Focus on controls and monitoring

• Business risk inventory

• Develop assessment process to prioritize risks

• Develop common risk language

• Heat maps and risk registers for reporting to senior management and board

• ERM developed to help avoid surprises

• Risk workshops with businesses and functions

• Oversight of ERM assigned to person

• Driven by board of directors and senior management

• Focus on controls, monitoring and compliance

• Beginning to think about risk limits or tolerances

• Collect appropriate data based on key risks

• Developed risk governance including processes to assess risk and standing group to evaluate and discuss risks

• Risk reporting to audit committee or other relevant committee and full board

• ERM integrated into business processes

• Work with businesses on risk mitigation planning

• Tied to strategic and operational planning processes

• Driven by business unit leaders

• Accepted throughout organization as effective way to deal with risks transparently

• Ability to expand focus across businesses and functions to encompass wide range of risks to organization

• Develop risk appetite or risk philosophy

• Risk tolerances stem from risk appetite

• Enterprise-wide transparency into risks

• Access to critical data; developed key risk indicators tied to key performance indicators

• ERM program used for better resource allocation and better decision-making

• ERM integrated with corporate processes

• ERM provides competitive advantage to company

• ERM tools used to help identify opportunities

• ERM used to help identify emerging risks

• Well-defined metrics


SWP Maturity Model

The Conference Board’s SWP Maturity Model

Dimension Early Middle Mature

Reach Pilot project(s) Enterprise wide Key supply chain partners: colleges, contracting firms, joint ventures

Planning Period 12-18 mos. 2-3 years 3-5 years+

Who Drives? HR pushes SWP BUs w/ HR support. SWP may be pushed out by HR, business may pull SWP , or both.Progress in 2-way educational process that is at the heart of SWP.

Senior executives/ business leaders pull SWP, use it as a lever and use output to make business decisions

Scope May entail all jobs or just critical ones.

Selective focus on critical jobs/skills (i.e., workforce differentiation/segmentation).

Internal talent plus some external (e.g., contingent workers).

Prerequisites:

• People

• Relationships

• Processes

• Critical business issue that SWP can address.

• Business champion.

• Broader, cross-functional support/partners.

• Biz leaders “get” SWP’s value.

• Integration w/ business planning, strategy

• Ongoing dialog w/business.

• HR business partners skilled, confident in facilitating process.

• Common taxonomy of jobs/skills.

• Prioritized short list of roles and/or skills.

• Companywide metrics enable com-parisons across BUs, geographies.

• Data and metrics re suppliers.

• Integration of some systems with sourcing partners, vendors.

• Employees may have visibility to components.

Data Inputs • Current and historical workforce data.

• Spreadsheet analysis.

• Business plans.

• Consistent data (“One version of the truth”).

• LT Business strategy.

• Performance data (actual vs. plan) and mid-cycle adjustments.

• External data.

• Alt. business scenarios.

Data re

• External stakeholders (suppliers, joint ventures, etc.) .

• Alternative labor sources (contractors, retirees).

• Employee skills assessments.

Source: Mary B. Young, Implementing Strategic Workforce Planning, Research Report 1444, 2009, pp. 19-25


The Conference Board’s SWP Maturity Model

Dimension Early Middle Mature

Outputs & Outcomes • Headcount & labor costs projections (OWP).

• Workforce analytics, forecasts, action plans.

• SWP tools (interview guide) and more refined process.

• HR business partners gain experience, skills, confidence regarding SWP facilitation.

• Business leaders begin to see SWP’s value.

• Statistical insights regarding key relationships between drivers and outcomes.

• Alternative scenarios and impact on biz and workforce.

• ID critical roles.

• Line of sight across BUs, geographies.

• Reliable analysis, insights, forecasts to inform, influence business decisions.

• Mid-cycle report of plan vs. actuals.

• SWP is an input to business strategy and planning

• Business leaders get relationship between talent and business outcomes and use SWP to make decisions.

• Data-driven modeling produces optimal solutions, improves utilization.

• Strategic sourcing strategy:

• Drives supplier relationships

• Enables volume leverage, economies of scale

Communication: How outputs are shared

• Push: HR/SWP deliver reports to business.

• Business has limited ac-cess to tools, data.

• Tools, output may suffer from over-complexity.

• Pull: BUs can generate own reports, models, scenarios.

• Often through dashboards.

• BUs submit requests to SWP for more analysis.

• Simplifying of tools, output to match varied user needs.

• Form and language fit company culture.

• Web-based tools enable employee access to selected areas and career resources.

• Trusted external partners may have limited access.

Source: Mary B. Young, Implementing Strategic Workforce Planning, Research Report 1444, 2009, pp. 19-25

(continued)


Endnotes

1 The terms “human capital” and “human resources” are sometimes used interchangeably, but are not in this report. Here, “human capital” refers to the people, skills, and competencies that create organizational capabilities ultimately deliver business value. “Human resources” refers to the functional area, as an umbrella, and its various sub-functions, such as staffing, compensation and benefits, employee relations, training and development, and so on.

2 Mary B. Young, Strategic Workforce Planning in Global Organizations, The Conference Board, Research Report 1457, 2009, 26-33.

3 Economist Intelligence Unit, Best Practices in Risk Management: A Function Comes of Age, 2007, pp 4–5.

4 Ibid., p. 5.

5 Edward E. Lawler III, “Human Capital Management: What Are Boards Doing?” Center for Effective Organizations, Marshall School of Business, University of Southern California, CEO publication G 08-16 (552), 2008, p. 1.

6 Form 10-K is an annual filing of public companies with the U.S. Securities and Exchange Commission. It is a comprehensive summary report of the company’s performance and includes company history, organizational structure, equity, holdings, earnings per share, subsidiaries, and the like. It must be filed within 60 days of the end of the fiscal year.

7 Wal-Mart, Bank of America, Hewlett-Packard and JP Morgan Chase mention human capital in the Item 1a. risk factors. Exxon-Mobil, Chevron, General Electric, ConocoPhillips, AT&T and Ford Motor do not.

8 CFO Research Services and Mercer Consulting, Human Capital Management: The CFO’s Perspective, CFO Publishing Corp., 2003, www.cfo.com/whitepapers/index.cfm/displaywhitepaper/10339475?topic_id=10240327; SHRM, “Salaries as a Percentage of Operating Expense,” SHRM Metric of the Month, November 1, 2008, www.shrm.org/Research/Articles/Articles/Pages/MetricoftheMonthSalariesasPercentageofOperatingExpense.aspx.

9 Peter Cappelli, Talent on Demand: Managing Talent in an Age of Uncertainty, (Boston: Harvard Business Press, 2008), pp. 9–10.

10 Peter Elkind and David Whitford, “An Accident Waiting to Happen”, Fortune, February 7, 2011, Vol. 163, No. 2, pp. 105–132 (available at http://features.blogs.fortune.cnn.com/2011/01/24/bp-an-accident-waiting-to-happen/).

11 ISO 31000: 2009, “Risk Management Principles and Guidelines,” International Organization for Standardization, 2009.

12 For example, see World Economic Forum, “Global Talent Risk—Seven Responses,” January 2011, http://www3.weforum.org/docs/PS_WEF_GlobalTalentRisk_Report_2011.pdf (last accessed May 13, 2011); Towers Watson, “Strategies for Growth: Talent and Performance Issues Lie at Heart of an Emerging Global Growth Agenda,” December 2010. http://www.towerswatson.com/assets/pdf/3371/Towers-Watson-Strategies-Growth.pdf; Ingrid Selene, “Taking a Risk Approach to Managing Your Human Capital,” Asia Connect, Vol. 3, No. 6, September 2010, Aon Consulting, http://www.aon.com/thought-leadership/asia-connect/2010-sep/risk-approach-to-managing-human-capital.jsp (last accessed May 13, 2011); Ernst & Young, 2008 Global HR Risk: From the Danger Zone to the Value Zone – Accelerating Business Improvement by Navigating HR Risk, 2008, www.ey.com/US/en/Services/Tax/Human-Capital/Human_Capital_HR_risk_report (last accessed May 13, 2011); Marcus Morrison and Nicholas Garbis, Human Capital Risk Management, Infohrm, 2009, http://informimpact.com/downloads/?id=6 (last accessed May 13, 2011); OrcaEyes, Inc, “HR’s Role in Effective Enterprise Risk Management,” OrcaEyes Insights, October 2010, http://www.orcaeyes.com/insights/HR_Role_in_HC-ERM.pdf

13 The Conference Board 2010 Human Capital Metrics Conference, New York, October 14–15, 2010.

14 Orlando Ashford, Managing Human Capital Risk, Aberdeen Group’s Human Capital Management Summit, March 24, 2010. http://summits.aberdeen.com/1/Orlando%20Ashford.pdf.

15 For examples, see the Sun Microsystems and 3M case studies in Mary B. Young, Strategic Workforce Planning in Global Organizations, The Conference Board, Research Report 1457, 2009, pp. 10–17, 26–33.

16 An in-depth discussion of ERM tools can be found in: Ellen S. Hexter, Risky Business: Is Enterprise Risk Management Losing Ground? The Conference Board, Research Report 1407, 2007.

17 Throughout our analysis, significance was measured at the 90% level (alpha= (p) less than or equal to 0.10).

18 Charles Mitchell, Ellen S. Hexter, and Linda Barrington, CEO Challenge 2008: Top 10 Challenges—Financial Crisis Edition, The Conference Board, Research Report 1440, 2008, pp. 6–7.

19 Charles Mitchell, The Conference Board CEO Challenge 2011: Fueling Business Growth with Innovation and Talent Development, The Conference Board, Research Report 1474, 2011.

20 Ellen S. Hexter, Risky Business: Is Enterprise Risk Management Losing Ground, The Conference Board, Research Report 1407, 2007 pp. 26–27.

21 Edward Lawler, Who’s in the Boardroom and Does It Matter: The Impact of Having Non-Director Executives Attend Board Meetings, Center for Effectiveness Organizations, University of Southern California, G 05-15 (487), 2005, p. 5.

22 Working Beyond Borders: Insights from the Global Chief Human Resource Officer Study, IBM Global Business Services, September 2010.

23 Charles Mitchell, The Conference Board CEO Challenge 2011: Fueling Business Growth with Innovation and Talent Development, The Conference Board, Research Report 1474, 2011.

24 Greig Aitken, Group Head of Human Capital Strategy, Royal Bank of Scotland Group, from a presentation to The Conference Board European Council on Strategic Workforce Planning, November 4, 2010.

25 Matteo Tonello, The Role of the Board in Turbulent Times: Leading the Public Company to Full Recovery, The Conference Board, Research Report 1452, 2009, pp. 37–38.

26 See Mary B. Young, Implementing Strategic Workforce Planning, The Conference Board, Research Report 1444, 2009, pp. 19–24.

27 The only exception is that the companies represented in the ERM sample were slightly more likely (7 percent) than those in our HR sample (1 percent) to have fewer than 1,000 FTEs.

www.cfo.com/whitepapers/index.cfm/displaywhitepaper/10339475?topic_id=10240327

www.shrm.org/Research/Articles/Articles/Pages/MetricoftheMonthSalariesasPercentageofOperatingExpense.aspx

http://features.blogs.fortune.cnn.com/2011/01/24/bp-an-accident-waiting-to-happen/

http://www3.weforum.org/docs/PS_WEF_GlobalTalentRisk_Report_2011.pdf

http://www.towerswatson.com/assets/pdf/3371/Towers-Watson-Strategies-Growth.pdf

http://www.aon.com/thought-leadership/asia-connect/2010-sep/risk-approach-to-managing-human-capital.jsp

www.ey.com/US/en/Services/Tax/Human-Capital/Human_Capital_HR_risk_report

http://informimpact.com/downloads/?id=6

http://www.orcaeyes.com/insights/HR_Role_in_HC-ERM.pdf

http://summits.aberdeen.com/1/Orlando%20Ashford.pdf


Additional Resources from The Conference Board

Companies that would like to pursue human capital risk manage-ment or better understand either ERM or SWP may benefit from the resources available on The Conference Board’s website at www.conferenceboard.org.


PublicationsRisk Oversight Handbook forthcoming (fall 2011)

Building Risk Awareness into Performance: Integrating ERM and Performance Management

Managing Reputation Risk and Reward

Assessing the Climate for Enterprise Risk Management in India

Risky Business: Is Enterprise Risk Management Losing Ground

Emerging Governance Practices in Enterprise Risk Management

From Risk Management to Risk Strategy

Directors’ Notes SeriesRisk Oversight Practices: Insights from Corporate Directors

Risk Oversight Practices: Two Success Stories

Councils

Strategic Risk Management Council

Council on Strategic Risk Management

South Asia Council on Corporate Governance & Risk

Council of Chief Audit Executives

Council of Chief Audit Executives

Strategic Workforce Planning

PublicationsStrategic Workforce Planning Quarterly

Strategic Workforce Planning in Global Organizations

Implementing Strategic Workforce Planning

Gray Skies, Silver Linings: How Companies Are Forecasting, Managing and Recruiting the Mature Workforce

Strategic Workforce Planning: Forecasting Human Capital Needs to Execute Business Strategy

Councils

Strategic Workforce Planning Council

Council on Strategic Workforce Planning

Animated Model of SWP in Action

www.conferenceboard.org/publications/describe.cfm?id=1663

Acknowledgements

This research owes much to the executives who participated in the survey and to the thoughtful comments and questions we received from 2008 through 2010, as we presented The Conference Board’s emerging thinking on Managing Human Capital Risk to risk and human resource professionals in India, Europe and the US.

We are grateful to colleagues who contributed to the survey research, data analysis and final report — Lindsay Collins, Henry Silvert, and Judit Torok — and to Steve Petrie, who provided additional statistical expertise.

The report benefited from careful review and feedback provided by various readers: Rebecca Ray, David Learmond, Gad Levanon, Chuck Mitchell, and Matteo Tonnello from The Conference Board; Nicholas Garbis of GE Energy and Stacy Chapman, founder of Aruspex. Marta Rodin edited the report and transformed the manuscript to the finished product you are now reading.

Finally, we want to acknowledge the extraordinary opportunity for conducting cross-functional research that we have been afforded. The Conference Board produces knowledge and facili-tates peer-to-peer learning across many topic areas: Economy and Markets; Corporate Leadership; Human Capital and High-Performing Organizations. The breadth of these interests and the diversity of executives who engage with The Conference Board provide a remarkable platform for conducting practical research. Sometimes it also provides the opportunity to reach across functional boundaries, as we have done here. Without the breadth of The Conference Board’s mission and the global reach of its membership, this research would never have happened.


About the Authors

Mary B. Young is principal researcher in human capital at The Conference Board. Young leads The Conference Board program of research on strategic workforce planning (SWP) and has been a major contributor to mature workforce research at The Conference Board. Trained in organizational behavior and organizational development, she has studied strategic workforce planning’s emergence and evolution as a business process in more than 100 companies. Drawing upon her skills as a long-time journalist, she has completed 20 in-depth case studies describing how companies implement SWP and has presented her research findings at scores of corporate meetings in the United States, Canada, Mexico, Asia-Pacific, and Europe.

Young’s research on SWP is available in four research reports from The Conference Board: Strategic Workforce Planning in Global Organizations, Implementing Strategic Workforce Planning, Gray Skies, Silver Linings: How Companies Are Forecasting, Managing and Recruiting a Mature Workforce, and Strategic Workforce Planning.

Young’s research on human resource issues has been cited in the New York Times, Wall Street Journal, Financial Times, USA Today, Time, BusinessWeek, and National Public Radio’s Morning Edition. With more than 20 years’ experience in organizational research, she has produced studies for the Center for Organizational Research, the Human Resources Policy Institute, the Work/Family Roundtable, the National League for Nursing, the International Association for Public Management—Human Resources, the American Public Power Association, and the Canadian Broadcasting Corporation.

Young received her doctorate in organizational behavior from Boston University’s Graduate School of Management. She earned a M.Ed. in organizational development at the University of Massachusetts at Amherst and a BA in English from Case Western Reserve University.

Ellen S. Hexter is principal of Hexter & Company, a risk consult-ing firm. She is senior advisor, enterprise risk management, for The Conference Board and previously led The Conference Board’s work in enterprise risk management, developing research and executive programs in this area. Hexter is managing director, enterprise risk management, at Recursion Ventures, a security solutions firm, and works with Hesleden Partners, a London-based research and consulting firm focused on reputation management. She is a faculty member of The Conference Board Directors’ Institute, working with boards of directors to provide director training in risk management practices and the role of the board in ERM oversight. She has collaborated extensively with The Conference Board Governance Center since its inception.

Hexter currently manages seven executive councils at The Conference Board, including the European and the U.S. Strategic Risk Management Councils, the South Asia Corporate Governance and Risk Management Council, and the Council of Financial Executives. She has managed The Conference Board’s research on ERM and is the author or co-author of Building Risk Awareness into Performance: Integrating ERM and Performance Management; Managing Reputation Risk and Reward; ERM in India; Risky Business: Is ERM Losing Ground?; and From Risk Management to Risk Strategy. She also contributes to the Directors’ Notes series.

Hexter received an A.B. from the University of Michigan and a MBA from Cleveland State University. After receiving her MBA, she worked as an equity securities analyst for Cowen & Co. and Deutsche Bank in New York. Her career on Wall Street included positions as a corporate credit analyst and a mergers and acquisi-tions specialist. She is a chartered financial analyst and a member of the CFA Institute’s taskforce on not-for-profit board code of conduct. Hexter serves as an arbitrator for the Financial Industry Regulatory Authority. She chairs the board of Ethics of New Castle, New York, and is treasurer of the board of the Chappaqua Summer Scholarship Program.

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Managing Human Capital Risk

A Call for Partnership between Enterprise Risk Management and Human Resources

RESEARCH REPORT TCB-R-1477-11-RR

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