Volume 2 Issue 4
Technology as an Enabler | Saving with Health & Wellness | Corporate Ethics and Integrity 

Corporate Ethics and Integrity

Does HR Have a Role in Ensuring Ethics and Integrity in Corporations? 

Na Boon Chong 

While there are many contributing factors to the current global financial crisis, there is one factor at the behavioral level, i.e., how the executives “bet away the farm” by taking undue risk in the aggressive pursuit of growth. Caught up with the exuberance of growth in the last few years, business leaders chased growth at the expense of prudence, risk management and long-term sustainability.

Increasing attention is being put on corporate boards for their failure to provide fiduciary oversight in the affected financial institutions. A board is entrusted to oversee how executives grow the business, mitigate the downside risks and create shareholder value. Along with this responsibility, the board manages the executives’ performance, compensation, development and succession.

Ethics and integrity are fundamental to good governance. There needs to be a set of universal principles in any organization, which would enable competent people to excel and not to go astray. These are invariably integrity, transparency, accountability, collaboration, and performance orientation. And, these principles need to be applied from the top-end of the house, at the board level, down to the shop floor.

Permeating these principles into the daily decision making process at every level of the organization would probably be the single greatest achievement of an outstanding business leader, be that a chair of the board , CEO or his/her executives. It is about culture, behavioral norms and role models that will sustain the change that is brought on by changing the structure, process, programs, systems and rules.

Are these not exactly the same challenges that HR is entrusted to help top management to operationalize in the organization? If yes, then what could HR have done better in order to help avert this crisis? There are some post-crisis suggestions that HR should play the role of a Chief Integrity Officer, be a coach to the CEO, and have the same direct access to the board as internal audit.  While these are thought provoking ideas, we’d like to present three possible contributions that HR can make, which if carried out successfully, would help organizations build high integrity, transparency, and accountability.

1. Contribution as Functional Expert 
2. Contribution as Process Owner 
3. Contribution as Champion of Integrity and Ethics 

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1. Contribution as Functional Expert

In designing any HR programs, HR has the opportunity to ensure that the design principles and features are not just in line with the market practice, but aligned to the business models and objectives. HR needs to play an active role in challenging the design by asking the “why and what if…?” questions. In order to play this role effectively, HR needs to keep abreast of design alternatives, network with external advisors and practitioners who act as a sounding board, and exercise critical thinking. Three program examples follow. 

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Managing CEO Compensation

HR practitioners are often asked to support the analysis and recommendations on the CEO compensation, working with or without external advisors. In the U.S., CEO compensation could be as much as 400 times that of a rank-and-file employee. Is this justifiable? The argument for high CEO pay centers on the value that a CEO creates or what his/her industry peers make. The argument is hard to dispute during good times when board of directors and shareholders are all happy with the returns, as what we have seen prior to 2008. Some people propose an internal standard to ensure good governance over CEO compensation by looking at the equity between the CEO and his/her direct reports¹. No CEO operates as an island by himself/herself; a top team supports a CEO. Along that line, what should be the pay differential between the CEO and the direct reports?

GE’s CEO Jeffrey Immelt was quoted as saying, “The key relationship (in executive compensation) is the one between the CEO and the top 25 managers in the company because that is the key team. Should the CEO make five times, three times or twice what this group make? That is debatable, but 20 times is lunacy.”

Adding this technique to the HR toolkits would help the HR practitioners conduct more insightful analysis in supporting the compensation committee.  

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Generating Commitment to Succession Planning

A CEO’s untimely departure exposes the company to business and market risks. Increasingly the corporate boards are paying greater attention on the succession pipeline. Other than institutionalizing succession planning in the company, there are many compensation techniques, such as deferred compensation or long-term incentives, which can motivate the CEO to identify and develop potential successor(s) and ensure a successful transition when the time comes².

To give a concrete example, one company we consulted for, linked the payment of a portion of the CEO’s incentive to the completion of a successor’s development milestones. The CEO, assisted by an external firm, was responsible for setting aggressive board-approved development milestones for internal candidates and ensuring that they were achieved. The Board evaluated the CEO’s performance at the end of the performance period taking into account the milestone achievement and candidate’s readiness. 

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Defining Leadership Requirements

The global financial crisis makes salient the inadequacy of the leadership in the affected financial institutions. The inadequacy lies in managing both growth and risks simultaneously, in achieving short-term results while ensuring long-term sustainability, and in balancing the group-wide and individual business unit performance. Leadership requirements are no longer single dimensional but about managing equally important dichotomous business priorities. HR practitioners should discard their overly simplistic single-dimensional leadership competency model and help their organizations in developing leaders and future leaders who are able to manage complex sets of priorities in a coherent manner, not merely aligning to one polar end vs. the other.   

As a concrete example, a regional head office we consulted for, developed a leadership model to support its business transformation. The model defined some of the effective behaviors in managing these dichotomous business priorities. The model was then used as a basis to identify talent and development plans across the region. 

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2. Contribution as Process Owner

In McKinsey’s board survey 2008, directors were asked about the amount of time the board spent on topical issues, and what they think the board should spend more time on. Talent management emerged as the one area that directors want to see the greatest increase in time spent³. The talent management issues identified include the following:

• Leadership succession and development
• Organization structure and capabilities
• Rewards and incentives

HR issues are definitely getting boardroom’s attention. The challenge is for HR practitioners, as the process owners of these issues, to better understand the needs of the board of directors and help to add value to the reviews and discussions. The value adding may be delivered by HR conducting the analysis and providing expert views, or channeling the appropriate resources to the board’s review. 

It may be a worthwhile exercise to ask the directors (especially the directors in the nominating and compensation committees) the following questions:

• What information you would like from HR in order to better discharge your duty?
• In what form would you like the information to be in?
• Are there any “vital signs” you would use to monitor the health of the organization and the workforce?
• What are some potential people risks that you fear?
• What role would you like the HR leader to play in working with the board? 

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3. Contribution as Champion of Integrity and Ethics

Assuming that HR has played the above two roles (functional expert and process owner) very competently but the CEO or the board is not heeding to the advice and pursue the business riskily, and bordering on being unethical. What is HR to do when there is no formal feedback channel such as a whistle-blowing policy direct to the board?  Should the HR leader take a stand and risk his/her career? It is obviously a personal choice to act on moral courage or go with the tide.

Before getting to that stage, the HR leader should use his/her personal effectiveness and organization awareness competencies to try to put things into perspective with the decision makers. While one should have a flexible style to deal with issues and not be rigid, one’s style should anchor on some fundamental principles and integrity, which cannot be violated.

On a normal day-to-day basis, the HR leader needs to ensure that HR policies and practices are helping to build a culture of open dissent, trust and candor.  Such a culture will help to surface and address potential problems as opposed to merely following the leader (to the ruin of the company as we have seen in a number of recent cases). 

Acting as a champion of integrity and ethics would be what differentiates a leader from a follower, in business as well as in the HR profession. 

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Contact

For more information about Aon's corporate governance capabilities, please contact Na Boon Chong, Director - Consulting at boon_chong_na@aon-asia.com

*This article was featured in Aon Consulting’s Asia Connect e-newsletter and Singapore’s Human Resources Magazine – Apr 2009 

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