Why HR Governance Matters*
By Mercer Consulting who can be contacted at www.mercerhr.com
A wide-ranging set of influences has propelled corporate governance issues out of the boardroom and onto the desktops of business executives throughout the organization.
HR executives face significant challenges, including managing a global function, realizing returns on technology, accelerating the pace of organizational change, leveraging human capital strategically, and reforming management practices in response to proliferating regulation.
Historically, most HR leaders have not been challenged to think formally about functional governance issues, so they operate with an implicit model. In those few instances where governance is made explicit, it is usually synonymous with compliance and does not address the central issue – improving leadership and management of a function that invests an average of 36 percent of operating revenue in compensation, health care, retirement, training, and other human capital investments. With over a third of revenue at stake, it’s time for HR leaders to develop an explicit model for functional governance – and to communicate the model proactively to involved stakeholders. This paper suggests how to formalize HR governance and shows how explicit governance can help HR executives uncover significant opportunities to improve functional performance and contribution.
2. The short history of HR governance
The concept of corporate governance arose from a confluence of legal, political, and economic ideas. Generally speaking, formal debates of the past 50 years have centered on the question of whether an organization can manage itself without regulation – and if not, who should do the regulating.
Until recently, US regulation of corporate governance has come from state statutes and stock exchange rules. But in 2002, federal lawmakers usurped the field when they passed the Sarbanes-Oxley Act. For HR executives, Sarbanes-Oxley has many implications, including personal, legal accountability for the reliability of reporting and decision making for benefits plans and programs. But it may be shortsighted to limit the scope of this far-reaching regulation to the single activity of effective plan governance.
The term "HR governance" may have been conceived in the mid-’90s along with HR’s widespread efforts to transform the function from an administrator into a business partner. Sarbanes-Oxley is another important motivation for HR executives to examine functional operating models with the goal of improving business contribution. Sarbanes-Oxley is now being considered as a model for corporate governance in Canada and the EU. So the most interesting chapter in the history of HR governance is just now being written.
3. HR Governance: A Definition and Key Elements
Because "HR governance" is an emerging organizational practice, there is currently no commonly acknowledged definition. HR governance is the act of leading the HR function and managing related investments to:
# optimize performance of the organization’s human capital assets;
# fulfill fiduciary and financial responsibilities;
# mitigate enterprise HR risk;
# align the function’s priorities with those of the business; and
# enable HR executive decision making.
Governance is not a strategic objective. It is a systematic approach to management that enables the function to achieve strategic and operational objectives.
4. The elements of governance
Mercer defines five core elements in an HR function’s system of governance. These elements enable functional leaders to manage areas of focus and accountability effectively. While distinct from each other, these elements are interdependent, meaning that each one must be individually articulated and developed to govern explicitly and effectively.
Exhibit 1 illustrates the relationship among business, human capital, and HR functional strategies that influence HR’s operating model and inform its governance system.
# Structure and accountability outline the design of the guiding group (the council) itself as well as its relationships with involved stakeholders. A charter document usually articulates the council’s areas of focus based on strategic, operational, and functional accountabilities. The charter may also address roles, meeting structures, and protocols.
# Effective councils link strongly to structure and refer to the personal, interpersonal, and group effectiveness of the council and other involved stakeholders.
# Philosophy and operating principles describe, at a minimum, the function’s risk tolerance, approach to delegating authority, and expected level of management autonomy at business unit or geographic levels.
# Core management activities include HR strategy development, business planning, oversight of rewards plans and programs, HR resource allocation, and HR staff development/leadership succession. Through these core management activities, the council sets direction and priorities, ensures effective execution over time, and enforces internal controls.
# Performance monitoring refers to the framework and metrics used to evaluate and communicate the function’s operational effectiveness, compliance, and contribution to business success.
** Reprinted by permission of Mercer Inc. who can be contacted at www.mercer.com