Enterprise Risk Management Practices Should Include Human Capital Risks

NEW YORK, July 11, 2011 /PRNewswire/ -- According to a new report released today by The Conference Board, companies need to incorporate risks from workforce and people-management issues more fully into their overall risk-management structures. Based on a global survey of executives at 161 leading companies, Managing Human Capital Risk: A Call for a Partnership between Enterprise Risk Management and Human Resources is the most extensive study to date on the role of human resources in the calculus and containment of enterprise risk.

The report was co-authored by Mary B. Young, principal researcher in human capital at The Conference Board, and Ellen S. Hexter, principal of Hexter & Company, a risk consulting firm, and the senior advisor for enterprise risk management at The Conference Board.  The report examines the current state of human capital risk management in companies in the U.S., Europe, and Asia.

At most companies, human capital accounts for at least half of operating costs and can have a significant impact on business results. However, the study finds that human capital risk (HCR) — which can range from unionization/labor relations to offshoring and outsourcing to staffing in a pandemic — tends to be siloed in human resources departments, away from the companywide assessment and mitigation processes of enterprise risk management (ERM). This arrangement prevents information about HCR from having a role in the comprehensive, aggregate view of risks, root causes, interactions, and impacts through which leaders set priorities and determine overall strategy.

Out of eleven risk categories, executives ranked HCR as having the fourth highest impact on business results, ahead of financial, reputational, supply chain, and IT risks. This high ranking is evidence that HCR should be taken seriously as an enterprise risk.  However, less than one-third (31 percent) of companies believe they effectively assess human capital risk, and 24 percent believe they do an ineffective job.

"Executives clearly recognize that human capital can have a make-or-break impact on business performance," said Young. "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 succession planning or the leadership pipeline — is considered as part of enterprise-level risk assessment and management."

The report also found the best-prepared companies were those with a formal process for assessing HCR, a board and CFO with deep understanding of human capital issues, and well developed capabilities in strategic workforce planning. In addition, Asia-Pacific companies appear to be significantly better equipped to incorporate HCR at the core of their risk planning than firms headquartered in other regions.  Although any conclusions drawn are preliminary due to a small sample size, these regional differences are consistent with The Conference Board CEO Challenge 2011, which found Asia-Pacific executives to be the most keenly focused on talent.  

Managing Human Capital Risk concludes with a series of practical implications for companies looking to improve their risk-management processes. As first steps, HR and ERM must begin a conversation, which in turn, means having a common language to describe human capital risk.

"We hope this report will foster the conversation between HR and risk professionals," Hexter said. "Most companies have a gap in their understanding of how critical human capital risks are to their ongoing success.  It's time to think about these workforce issues holistically."

Source: Managing Human Capital Risk
A Call for Partnership Between Enterprise Risk Management and Human Resources
Research Report No. 1477-11-RR
The Conference Board

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