Opportunity knocks

Duncan
Brown, assistant director general of the Chartered Institute of Personnel and
Development (CIPD) outlines the view of HR in relation to the Higgs Review of
corporate governance

Q.
Why do you think that Higgs’s code will present more opportunities for senior
HR professionals to take up non-executive director (NED) roles?

Let’s
be clear, the new combined code on corporate governance and associated reforms
to financial reporting and company law are not primarily designed to create
board-level openings for people management and development professionals, and
nor should they. This will happen anyway as we progress in showing that we can
leverage the huge potential to add value to our employers through effective
people management and development, which is what the CIPD exists to support and
promote. It’s not about a board position for its own sake, but making this
contribution to strategic success through people, and then being recognised for
doing so.

But
with Derek Higgs highlighting the basic inadequacies in the people management
of many boards – a dearth of basic selection and training, of formal appraisal
mechanisms, and so on – he has undoubtedly acted as a tremendous advocate and
provided opportunities for HR professionals to demonstrate their importance in
enhancing the board’s and the organisation’s effectiveness.

Q.
Will it strengthen the HR profession’s position in the boardroom and give it a
more prominent role?

[Higgs’s]
emphasis on the need to ‘widen the gene pool’ and diversity of boards and NEDs
should benefit the professional group with the highest proportion of female
members – 70 per cent of CIPD’s total membership. We undoubtedly have
senior-level members who would make excellent candidates for NED posts on other
boards. But HR professionals have to earn that place at the top table through
their contributions to effective resourcing strategies, talent and performance
management, and eliciting the discretionary commitment and energy of people in
organisations, and so on.

Related
changes, such as the likely requirement to report on human capital in a
company’s report and accounts, should have similarly beneficial effects for
directors and employees, shareholders and HR professionals.

Q.
Will the extra time, effort and growing responsibilities make it increasingly
difficult for companies to attract NEDs, thereby making HR’s job harder?

The
CIPD would certainly like to see HR professionals much more routinely involved
in recruiting NEDs. The indicated limit on the number of directorships held
will marginally reduce the existing population, but HR professionals should be
helping senior management colleagues think of ways to get the best talent onto
their boards, tapping new pools and sources, and then putting the systems and
processes in place to deliver. According to the latest CIPD research, 97 per
cent of companies reported skill shortages and recruitment difficulties, and
that is no different at board level.

The
fundamental challenge for sourcing NEDs remains a quality rather than just a
quantity issue: getting the best people, who are most in demand from all sides
and usually extremely busy themselves – to take on the roles and then perform
well in them, to proper standards of governance. That’s why you need skilled HR
professionals to help secure them.

Q.
Will the code deliver on its aims of improved corporate governance, increased
transparency and sustainable performance without any detrimental effect on
business?

The
code only came in at the start of November, so it’s far too early to judge its
effectiveness. Already we have seen examples of it being followed, as in the
Granada-Carlton merger, and proposed exceptions made, as in the moves of the
chief executives of Sainsbury’s and Barclays to chairmen positions.

With
the amendments made by the Financial Reporting Council to incorporate more of
Higgs’s requirements as broader principles, we at CIPD think it has struck the
right balance between common required standards of accountability and
compliance, and flexibility to tailor arrangements appropriately on a ‘comply
or explain’ basis. A key benefit already evident is that it is bringing out
into the open much more clearly some of these governance issues, requiring more
and improved communication and understanding between directors and all their
key stakeholders, which has to be a good thing.

If
you look at the recent DTI inspector’s report on the collapse of Transtec,
there are strong arguments that the requirements of the code in respect of
NEDs, risk management and audit would have made this situation much less
likely. But no regulatory framework, however rigorous, can eliminate the risk
of fraud or accounting misstatement as occurred at Enron.

Q.
Are there any downsides to the Higgs code, such as smaller boards with fewer HR
directors on them?

As
far as HR professionals are concerned, it’s easy to get too hung up on the
issue of board membership. Many top HR executives exercise considerable
influence from their places on the top management teams, regardless of whether
they are members of executive/governance boards.

The
key issue for us is this: is HR in a position to exploit the fantastic
potential that exists in most organisations to better leverage the
contributions of the people to deliver on the strategic goals of the organisation?
Because if they are, that’s great news for their boards, their investors, their
employees and the HR professionals themselves.

As
Jim Collins said at the CIPD’s Harrogate conference last October, in an
increasingly knowledge- and human capital-based economy, the issue is not
whether HR is at the table, because we are the table with the most knowledge
about organisations’ most powerful resources. Having better selected,
developed, informed and managed boards, with support from the new combined
code, is bound to increase the scope for this potential to be realised.

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