Philip Sadler CBE

Futurist, Author, Speaker


HR in tough times


The first decade of the 21st century has brought with it a whole new series of challenges for organisations and their leaders. These challenges in turn have important implications for the role of HR
The main issues to be faced include:
• A loss of confidence on the part of investors triggered by a number of factors, including the near collapse of the global banking system. Savings and pension funds have been seriously eroded by the collapse of stock market values.
• A loss of morale and the erosion of traditional loyalties in the work force, resulting from a combination of a substantial number of plant closures and redundancies and the closure of final salary pension schemes, all in the context of rapidly inflating top management reward packages and 'golden parachute’ payoffs.
• Growing public concern about the actions and policies of business organisations, particularly large global enterprises, leading to increasingly violent anti- capitalism demonstrations. In the case of companies under attack the consequences both for the morale of existing employees and for the firm's ability to attract fresh talent are evident.
• Very considerable performance and morale problems in the UK public sector and in the fields of health, education and crime prevention in particular. These problems stem from failures of leadership and organisation design as much as from resource problems.

In facing up to these issues HR people need to think through very carefully the question of what implications they have for the policies and practices for which they hold responsibility. These implications range over such matters as recruitment practices, talent management, leadership development programmes, benefits policies and administration, organisation design and employee communications. Equally important, however, is the need for them to revisit some fundamental questions to do with the role of HR, its relation to questions of the purpose and governance of the organisation.

There are particular implications for HR directors who are also board members and as such are not only responsible for the formulation and implementation of HR strategy but also share the collective responsibility for the governance of the company, its conformity with the law and its obligations to its investors and other stakeholders.

The pursuit of shareholder value
In businesses that focus exclusively on shareholder value the process of human resource management is confined to the mechanistic carrying out of the basic administrative functions that are necessary - recruiting and inducting employees, remuneration, compliance with employment law etc. There is a complete absence of understanding of the role that progressive HR policies can play in building employee commitment and establishing a sustainable competitive advantage. This reflects a remarkable lack of knowledge on the part of top management of the impressive array of research findings that show how critical is the gaining of the commitment and loyalty of the workforce in achieving competitive success.
The point is often made that if a company declares the creation of shareholder value as its purpose then this is hardly likely to be inspiring and motivational for the shop floor or graduate entrants. Even a statement of purpose that is about meeting the needs of all the stakeholders is unlikely to call forth exceptional commitment and effort. For this to happen the purpose needs to be inspiring or challenging, seen as worthwhile, as serving society in some higher way than the material interests of the stakeholders. It also needs to be capable of being clearly articulated in very few words and sufficiently tangible and quantifiable that the extent of its achievement is capable of verification by measurement.
A Company that, from a modest start in a garage rose to be one of the world's most rapidly growing and successful business of all time - Hewlett Packard - was guided from the beginning by Dave Packard's thinking on purpose.

'I want to discuss why a company exists in the first place…I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being…We inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so that they are able to accomplish something collectively that they could not accomplish separately – they make a contribution to society.'

A similar point is made by Arie de Geus
'There is accumulating evidence that corporations fail because the prevailing thinking and language of management are too narrowly based on the prevailing thinking and language of economics. To put it another way, companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organisation’s true nature is that of a community of humans. The legal establishment, business educators and the financial community all join them in this mistake.’

Arie de Geus's point is well made, but does not go far enough. In many companies it is not even any longer the case that top management focuses on producing goods and services; they focus instead on financial transactions such as capital restructuring, acquisitions and rights issues. Had their top teams focused to a greater extent on customers’ needs and the quality of their goods or services, many failed companies might well have avoided disaster.

. Business success and employee commitment

In recent years a very substantial body of research evidence has been built up that demonstrates clearly the relationship between organisational performance and employee commitment, which in turn is largely a function of the organisation's HR policies and practices. Unfortunately a very large proportion of top managers either remain relatively ignorant of these findings or, due to inbuilt attitudes, are highly sceptical of their validity. In a survey conducted by IBM in association with Towers Perrin UK , HR executives were asked to list the capabilities HR specialists would require in the 21st century. Top of the list, scoring 90% was the ability to educate and influence the line. They were also asked to state whether they believed they possessed that ability. 8 per cent replied in the affirmative. A vitally important role at the strategic level for HR is precisely this ability to convince the top team (and the finance director in particular) that the human factor is critical to success and to present the research findings forcefully and with conviction.
A good example to take would be the work of Frederick Reichheld who, in his book The Loyalty Effect (1996) showed the strength of the relationship between business success and the ability to build customer loyalty, and how this, in turn, is a function of employee loyalty.
Another is the research carried out by Pfeffer (1998) which demonstrated that the combination of a number of powerful tools and policies of human resource management, acting as a total system, produce the highest levels of employee commitment and sustained company business success. He extracted from various studies, related literature, and personal observation and experience, a set of seven dimensions that characterise most if not all of the human resources practices of companies producing profits through people.
These are:
• Security of employment
• Selective hiring.
• Training. ‘
• Reduction in status differences
• Sharing information.
• Self-managed teams
• Pay for [performance
Pfeffer goes on to argue that ‘the real sources of competitive leverage’ are the culture and capabilities of the organization that are derived from the way people are managed. This, he asserts, is a much more important source of sustained success than things like having a large market share or a distinctive brand ‘ because it is much more difficult to understand capability and systems of management practice than it is to copy strategy, technology or even global presence’.
Ian Wilson (Wilson 2000) identified eight elements in what he calls the ‘new social contract’ between employees and the corporation:
• A vision and sense of shared purpose, beyond profit and shareholder value.
• Inspiring leadership.
• Empowerment of the workforce.
• The customisation of work – tailoring job content, hours and compensation packages to meet individuals’ needs.
• A climate of equity, respect and due process.
• Reduced volatility in employment patterns.
• Increasing employability.
• First rate on-site amenities and services.

Sadly many companies appear never to have signed up to such a new social contract

The leadership vacuum
Today there are two reasons to be concerned about the quality of leadership in large organisations, both private and public. On the one hand there are concerns about competence in the sense of the ability to create a clear vision and to articulate it in such a way as to inspire and motivate. On the other hand, following recent cases of fraud and suspect share dealings there are severe doubts about the integrity of leadership. All too often the top managers held up as role models for our young leaders of the future turn out to either fallible or corrupt or both.
'If Only CEO Meant Chief Ethical Officer' was the lament in a recent edition of Business Week. It was suggested that many of those people who have climbed to the position of CEO are ill-equipped to lead business out of its current confidence crisis..

'Chickenless heads'
Where top managers focus their attention primarily on financial transactions and relations with the city institutions they inevitably lose touch with the grass roots of the organisations they control. The result is the opposite of the term 'headless chickens'; instead we have 'chickenless heads'. The term headless chickens implies that, without clear leadership from the top, the organisation’s employees run around in circles accomplishing very little. The concept of the chickenless head tells a story that is more common today. The organisation's rank and file employees may carry on doing a reasonably good job of pleasing its customers and producing quality goods and services, unhampered by the remoteness of top management, until, because of mismanagement of its financial affairs it becomes bankrupt or is taken over. Companies rarely destroy shareholder value because their employees at all levels below the very top are not doing their jobs. When the same chickenless heads who have brought about the company's collapse walk away with payoffs that represent huge sums in the eyes of the average worker any remaining vestige of morale or loyalty is finally destroyed.
At Tomorrow’s Company we have developed the concept of stewardship. We believe that members of the board of a company have a duty of stewardship in respect of the assets – human as well as financial - that have been entrusted to them. Similarly, the institutions which invest on behalf of pension funds and savers have a stewardship role- one which reaches back to the beneficiaries and forward to the companies in which the funds are invested.
What is implied by this role? The key element is trust; a steward is one who can be trusted. Another is service; a steward is servant of those of whose assets he is custodian; service is placed above self interest. Thirdly, by its nature, the stewardship role is one which implies commitment over time and to the long term well being of the assets concerned; it is not, therefore, to be undertaken lightly.

In today's uncertain and depressed business climate one vital stewardship role that HR can play is to persuade top management to abstain from short term knee jerk reactions which can only damage the organisation's long term prospects of success. Such reactions include large scale redundancy programmes that result in loss of talent and experience as well as the erosion of morale, reducing employers’ contributions to pension schemes, slashing training budgets, suspending graduate recruitment and other cost cutting measures
Actions such as downsizing cannot fix deep-seated problems of product acceptability, quality, service, process design or management style. The damage is compounded when the wrong people start leaving, and too much experience and expertise is lost (corporate Alzheimer's) or when the cut is too deep and those who remain suffer stress due to heavy work loads, (corporate anorexia).
In such cases a downward performance cycle can be triggered. Performance problems lead to downsizing, which in turn leads to employees reducing their efforts, spinning work out to make it last or leaving to find more secure employment. This in turn lowers performance further, leading to yet more redundancies and so the cycle continues.

As company directors or members of boards of trustees, HR specialists share fully in the fiduciary and other responsibilities of such bodies. This means in practice that they share responsibility for all aspects of the organisation's performance. HR directors often lack the necessary financial knowledge to enable them to discharge these responsibilities effectively. It is worth bearing in mind that the HR director of a company found to have engaged in fraudulent accounting practices would be held equally culpable alongside the CEO and the finance director. The implications are clear:
HR directors must ensure that they are adequately educated in financial knowledge of the company's accounts, including all the footnotes. They must persist in asking for clarification of any matters that are not clearly understood.
They must be fully aware of the environmental issues associated with the company's operations and the company's track record in dealing with these. This is particularly important with regard to any environmental issues that carry health and safety risks for employees or members of local communities.
They must also be fully aware of the moral and legal aspects of the company's relationships with its customers or clients. For example, in past cases of miss selling of pensions and other investment, to what extent were senior HR people aware of the practices being employed by their companies?
In relation to any issue that causes doubts to be raised as to the legality or morality of the company's operations, the HR director must be prepared to challenge those responsible. .

De Geus, Arie (1997) The Living Company, Nicholas Brealey London
Pfeffer, J. (1998) The Human Equation, Harvard Business School, Cambridge, MA
Reichheld Frederick F. and Teal Thomas (1996) The Loyalty Effect, Harvard Business School, Cambridge, MA
Wilson, Ian (2000) The New Rules of Corporate Conduct, Quorum Books, Westport, Connecticut