When an ad for the post of head of HR at the Interim Olympic Development Author-ity (ODA) appeared late last year, it wasn’t just the £75,000-a-year salary that turned off many potential candidates, or the fact that the marketing director would be earning twice as much. What really stuck in the throats of HR professionals was the fact that the most important people management role in the 2012 Olympics would be reporting to the finance director (FD).
A follow-up poll of Personnel Today readers found that only a small minority (18%) of HR directors currently report to finance, with most going directly to the managing director or chief executive, setting HR apart as a vital function in its own right.
But why should reporting lines make a difference to the effectiveness of HR in an organisation? Part of the problem is perception, according to John Maxted, managing director of HR recruitment firm Digby Morgan and a former HR director.
“If you put HR through finance you are, by definition, saying that this is less important. Any strategic issues will be deferred,” he says. “Going back 20 years, a lot more HR roles went through the finance director. Finance used to be responsible for personnel – as it was known then. It tends to happen in companies where HR is viewed as an administrative function.”
Decades-old stereotypes also come into play. In the past, the finance function has tended to regard HR as soft, fluffy, and unable to communicate the value of what it does; HR has in turn regarded finance as a bunch of penny-pinching accountants who care nothing for the contribution people make to an organisation. But these are steadily breaking down, believes Susan Anderson, director of HR policy at the CBI.
“We’re now seeing HR and finance people working more closely together, for example on pensions. Before, they would be in their separate silos,” she says.
“I wouldn’t describe it as cosy, but I think a bit of creative tension is a good thing. HR is no longer soft and cuddly and needs to demonstrate it gets value for money – for example, demonstrating the return on money spent on training.”
Before it was dumped by chancellor Gordon Brown, the Operating and Financial Review, which required organisations to include people data in their annual financial results, would have seen HR and finance working even more closely together. And many organisations, including retailer United Co-operatives, already measure the value of their people by linking average hours worked to customer loyalty, for example. Trends such as outsourcing the recruitment process have also created a tighter working relationship between the two departments.
Yet there is still reluctance on HR’s part to report to the finance director, particularly if that means the top HR executive misses out on a seat on the board. A recent recruitment operation for the HR director of a high-street bank, for example, failed to attract the right calibre of external candidates because the position wasn’t board-level. The job was filled internally.
Paul Kearns, director of consultancy firm PWL, says senior HR practitioners often run into a credibility problem that finance directors rarely encounter. “You don’t get invited to board meetings unless you’re credible and you can bring value to the discussion,” he says. “HR just isn’t in the same ballpark as finance on this. They don’t speak the same language.”
“It’s taken for granted that the FD will be on the board but this isn’t always the case for HR,” agrees Maxted. “But one of the biggest changes in HR is that we can now see the bottom-line contribution we make. If you look at the last downturn, many companies lost people but didn’t cut research budgets because HR could prove the value of people in this function.”
He adds that more and more chief executives have now been through MBA programmes, where there is a greater focus on people management.
Ultimately though, reporting lines have little bearing on the contribution HR can make to an organisation. At least this is the view of Swag Mukerji, group finance director of healthcare provider FirstAssist.
From April, FirstAssist’s HR director will report to Mukerji and in previous roles he has had responsibility for HR. “It fits more appropriately with what we do,” Mukerji explains. “In the past, when businesses made decisions, finance and HR had been at the end of the decision. They’re now involved earlier in the process and there’s input from both of them.
“HR directors are used to having the ear of the chief executive, but by reporting to the FD they may feel they’re losing freedom,” he adds. “As long as the business is mature enough to do this, it shouldn’t matter if you report to the finance director. When we have meetings of the executive team, the HR director still attends even if he reports to me.”
If there are tensions between finance and HR, says Mukerji, it tends to be when the two departments are not communicating. “It’s very rare that we step on each other’s toes. For example, a year ago we redesigned our performance-related pay scheme. We thought there would be friction and presumed we would think differently about it, but in the end we were thinking along exactly the same lines.”
FirstAssist demonstrates that HR can report to finance without conflict, but in a tight recruitment market for senior-level HR executives, how can an organisation like the ODA attract the right candidates if it maintains this reporting line?
Kearns believes it is setting itself up for a challenge. “Do I believe the ODA will run as well with HR reporting to the finance director? No. It’s a catch-22 situation. It’s giving a clear signal that HR won’t be up to the job of making a difference.”
Whether they report to finance, the chief executive or another senior executive, establishing credibility is the key challenge for HR professionals in gaining equality of status, concludes Kearns.
“Just because you’re on the board, or report to the chief executive, this doesn’t mean that you’re adding value,” he says. “Unless you can demonstrate what effect your diversity project, or whatever, will have on the business, finance will always say: ‘Why the hell should we be interested in that?'”
The chasm between HR and finance may be getting smaller, though it’s unlikely they’ll always see eye to eye. But this can have a positive outcome, providing both parties have the welfare of their employer at heart. “I’m sure conflict exists and there’s a lot of mutual frustration,” says Anderson. “If both sides give their views strongly, you end up with a better result. If you retreat to your silos, you achieve nothing.”
In practice: United Co-operatives
Retail group United Co-operatives shares a quarter of its profits with members, employees and the communities in which it operates, so it’s vital that its 16,000 employees are deployed as efficiently as possible.
Since much of this profit is generated by good customer relationships on the shopfloor, chief financial officer Martyn Wates takes a keen interest in HR initiatives as they have a direct bearing on performance.
“People judge us by the experience they have in the shop, so HR has a very important role to play in the customer experience,” he says. “Some of the touchy-feely issues are not in my skillset as a finance director, but our HR team is totally switched on and commercially driven.”
The company’s people initiatives are anything but touchy-feely, however. “We have a very proactive HR department which not only has a clear strategy as to how we will deliver on our promise of being an employer of choice, but which also ensures that we take measurable specific actions,” explains Wates.
These ‘measurables’ include clear reporting on staff turnover, reporting on average hours (with a target placed on having more people working more regularly so they can build a rapport with customers), employee engagement surveys and training needs analyses. The company also offers an employee share plan based on its profitability and average hours worked.
The stakeholder payout for the year ending January 2005 was 10.8m, so HR clearly knows how to add value to the business.
What does finance want from HR?
According to Swag Mukerji, group finance director of healthcare company FirstAssist, the qualities he looks for in an HR director are:
- A commercial and pragmatic attitude
- A good understanding of the ‘hygiene’ factors in business, such as the law, yet is not hamstrung by them
- Spark – this is more important than industry knowledge
- An open mind to carry through change.