TCB RR Managing Human Capital Risk

research report
Managing Human Capital Risk

A Call for Partnership between Enterprise Risk Management and Human Resources
The Conference Board creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. Working as a global, independent membership organization in the public interest, we conduct research, convene conferences, make forecasts, assess trends, publish information and analysis, and bring executives together to learn from one another. The Conference Board is a not-for-profit organization and holds 501 (c) (3) tax-exempt status in the United States. To help senior executives make the right strategic decisions, The Conference Board provides big-picture insights within and across our four knowledge areas: Corporate Leadership Economy, Markets & Value Creation High-Performing Organizations Human Capital www.conferenceboard.org

RESEARCH REPORT 1477-11-RR by Mary B. Young and Ellen S. Hexter
4 6 17 30 32 34
Executive Summary Why Human Capital Risk Matters: A Call to Action Research Findings Research Conclusions Practical Implications Research Methodology, Limitations, and Future Steps Appendix
38 39 41 42 44 45 45 46
Starting a Cross-Functional Dialogue Inventory of Human Capital Risks, Crompton Greaves Ltd. ERM Maturity Model SWP Maturity Model Endnotes Additional Resources from The Conference Board Acknowledgements About the Authors
Research Report Managing Human Capital Risk
www.conferenceboard.org
Executive Summary
Human capital risk (HCR) is the uncertainty arising from changes in a wide range of workforce and people management issues that affect a companys ability to meet its strategic and operating objectives. HCR assessment and management enable companies to anticipate these uncertainties and take action to increase the likelihood of meeting performance targets and strategic objectives. In many companies, human capital accounts for at least half of operating costs and can have a significant impact on business results. While companies identify, assess, prioritize, and treat companywide risks through enterprise risk management (ERM), most omit HCR from the process or focus on a narrow range of issues, such as succession planning and the leadership pipeline. In many ways, the corporate human resources1 function is already in the business of managing HCR. Some may ask, Isnt that enough? The problem isnt that HR doesnt do a good enough job, its that information about human capital risks is not incorporated into ERMs comprehensive view of multiple kinds of risks, root causes, interactions, and potential impactsan aggregate view that enables leaders to set priorities. While ERM executives may believe that the businesses provide all the HCR information thats needed, HR should also have a voice in the assessment process, which is designed to provide the board and senior executives with an enterprise-wide view. HR, too, can benefit when human capital risks are included in the enterprise risk process. To fulfill their risk oversight responsibilities, boards of directors require regular updates on the major risks to the enterprise. Even though HR has other mechanisms for sharing information with the board, its missing an important opportunity if HCR is left off ERMs list or if, in the absence of HRs participation, others outside HR articulate the business impacts of human capital risks. This report presents The Conference Boards research findings regarding:
The impact of human capital risk in comparison to other types of risk. The current state of human capital risk management in companies based in the United States, Europe, and Asia-Pacific.
In short, our research finds:
Human capital risk ranks fourth among 11 risks in terms of its impact on business results. That puts it ahead of many other risks that companies rigorously manage, such as financial, reputational, supply chain, and IT risks. Its comparatively high ranking is evidence that HCR should be taken very seriously as an enterprise risk. Human capital risk ranks tenth in terms of how effectively it is now managed. The combination of the above two findings should raise concern: Executives clearly recognize that human capital can have a make-or-break impact on business performance. Yet few companies have a systematic process or structure in place to ensure that the full spectrum of human capital risksnot just a few, top-of-the-house issues like succession planning or the leadership pipelineis considered as part of enterprise-level risk assessment and management. Less than one-third (31 percent) of companies believe they effectively assess human capital risk, while 45 percent believe they do so somewhat effectively, and 24 percent ineffectively. Whats different about the top group? These companies have a formal process for assessing HCR, in which both HR and the business participate. In addition, they have a standing group to oversee HCR. Roughly the same percentage (32 percent) of companies say they manage HCR effectively. Three factors set these companies apart: (1) they have a formal process for assessing HCR; (2) the business participates in assessing HCR; and (3) there is a standing group overseeing HCR.
Our research offers new insights regarding ERM and Strategic Workforce Planning (SWP):
5 To ensure that human capital risks are factored into the

enterprise-level risk portfolio, companies need a formal HCR assessment process, a solid plan for managing those risks, and a standing group to oversee them.
Companies ERM practices are more mature than their SWP practices. This is not surprising, since ERM has a few years head start on SWP. Neither a mature ERM process nor a mature SWP process ensures that companies assess and manage human capital risk effectively. Companies headquartered in Asia-Pacific differ from those in other regions. They are more likely to have reached the Mature stage of SWP and more likely to assess and manage HCR effectively. Yet they are less likely than companies based in other regions to have reached a Mature stage of ERM.
6 The chief human resources officer should be a member

of the corporate risk committee.
7 While compensation and succession planning may

already be on the boards agenda, it is likely that additional human capital risks should also be brought to its attention.
8 Businesses must own their human capital risks and

participate in assessing and managing them.
The report concludes with practical tools, including:
Finally, there are significant disconnects between the views of HR and ERM professionals regarding HCR. This is one of the surveys most interesting findings. The two functional areas that ought to have a common stake in human capital risks appear to have strikingly different views about the impact of those risks and about how well they are managed. Fortunately, our research also points to specific actions companies can take.
Questions that ERM and HR executives can use to start a conversation about human capital risk. A sample of one companys inventory of human capital risks and mitigation strategies. Additional resources from The Conference Board related to ERM and SWP.
Practical Implications
1 HR and ERM executives should begin a conversation to
explore the current state and potential for managing HCR.
2 Risk management language is already familiar to the

board and senior executives and may offer a useful way to reframe human capital issues.
3 When human capital risks (such as attrition) are

translated into business process risks (such as lower efficiency), their importance may be easier for executives to grasp, especially if their impacts (such as lost revenues or increased customer satisfaction) can be measured.
4 If HR has developed some expertise using human capital

analytics and SWP, these capabilities can be extremely useful for managing HCR.
Why Human Capital Risk Matters: A Call to Action

We have to manage human capital risk. In our business, human capital is our only asset, our only raw material, and our only product.
S VaradarajanExecutive Vice President and Chief Human Resources Ofcer, Quatrro
Human capital can have a make-or-break effect on any companys business performance, not just a business process outsourcing firm like Quatrro Global Services. Yet human capital issues are seldom included when companies systematically identify, assess, prioritize, and manage risks at the enterprise level. When they are included, the company tends to focus primarily on issues at the leadership level. Relatively few firms assess the full spectrum of human capital risks:
Human Capital Risk Dened

Human capital risk is defined as the workforce factors and people practices that can have a range of possible effects on the companys business performance. HCR can arise from myriad issues. It can be a byproduct of the many uncertainties that affect business plans and performance, including changes in the competitive environment, customer demand, technology, and regulationschanges that alter the companys supply and demand for talent. HCR can result from, lead to, or interact with internal factors or risks, such as a change in manufacturing methods, a breach of data security, or a new service offering. HCR exists wherever a company has employees or potential employees and wherever its people make decisions, manage, innovate, perform their formal job responsibilities (or go above and beyond them), or talk to customers. Our list of specific human capital risks (see Examples of Human Capital Risk, p. 7) is not meant to be exhaustive. Nor are these new topics; if anything, they are the meatand-potato issues of HR. What is new, however, is the idea that these are also potential sources of HCR and, as such, can become inputs to ERM. Throughout this report, we illustrate a variety of human capital risks in the series Illustrations of Human Capital Risk on pages 7 through 15. The common thread across all of these examples is that each has the potential to hurt or help business results. The effects of HCR, like those for other risks, can be arrayed along a continuum, ranging from negative to positive. Most risk planning and mitigation focuses on the downside of uncertain events. In the case of HCR, companies may initially direct their attention to how workforce issues could negatively affect business results in the current year and longer term. But, in fact, human capital risks present companies with potential opportunities as well as potential negative impacts.
the current workforce; the external labor supply in all company locations, current and future; outsourced and contingent labor; the changing mix of critical skills, demographic, and economic trends; regulatory changes; the HR practices and organizational factors that shape the employment relationship; and the impact of these and a myriad of other human capital issues on business results, now and in the future.
As companies gain experience using two relatively new capabilitieshuman capital analytics and strategic workforce planning (SWP) (see ERM and SWP Defined, pp.10-11)they become better at pinpointing specific talent-related risks and opportunities and quantifying their business impacts. Too often, however, this information never makes its way to the companys risk professionals, who are responsible for communicating enterprise risk priorities to the board. As a result, identifying and monitoring human capital risk (HCR) remains an HR function. No matter how well HR performs that function, the companys enterprise risk management (ERM) process is diminished and, therefore, less effective if the full range of human capital issues is omitted from the enterprise risk profile. This report presents the results of research conducted by The Conference Board to understand the importance of HCR in comparison to other types of risk and to define the current state of human capital risk management in companies from the United States, Europe, and Asia-Pacific.
Human Capital Risk in Action

So what does human capital risk look like? Here are three examples.
Rooting out the human causes of operational risk

A major U.S. mortgage lender was hit with a number of operational incidentsthe lenders term for any unintended event or activity that cost $250 million or more. To root out the problem, the ERM team partnered with an organizational development (OD) consultant to map the step-by-step process for producing mortgage-backed securities. They uncovered that a root cause of the operational
incidents was, in OD terms, key person dependency. Certain reports were produced by a single analyst in one department and then forwarded to a different department for action. When that analyst went on vacation, there was no one on hand who understood the source of the data or who could answer questions about how the report was interpreted and applied. It was a problem that traditional risk management most likely would have missed. While the lenders ERM team had a sense of the people risk, team members didnt have the right set of questions to investigate those risks as part of their process-mapping exercise.
ILLUSTRATIONS OF HUMAN CAPITAL RISK
Staffing Issues in a Pandemic

When a major U.S.-based big-box retailer conducts business continuity planning, human capital issues are high on the agenda. If a pandemic were to strike, causing 70 percent of the workforce to be absent from work, how would a distribution center be affected, compared to a retail store, and what would the financial impacts be? Under any disaster scenario, whats the minimum level of staffing that a store needs to keep its doors open?
Examples of Human Capital Risk Poor alignment of HR strategy

and activities with business strategy
Excessive turnover/ failure to

retain critical talent
Compliance/regulatory issues Low employee engagement Inadequate or declining

productivity
Inability to compete for critical

talent
Shortage of critical skills within

the companys workforce
Alignment of pay and

performance
Shortage of critical skills in the

external labor force
Behaviors and practices that

undermine diversity and inclusion
Loss of critical knowledge

through attrition
Gap between talent capabilities

and business goals
Employee wellness impacts

individual and company performance
Use of contingent workers Excessive risk-taking Unionization/labor relations Globalization/offshoring Executive compensation Unethical behavior Intellectual property loss or
violation
Succession planning/leadership
pipeline and the impact on business performance and continuity
Outsourcing and vendor

management
Over/under use of external talent

to fill key roles
Excessive labor costs Managing talent through mergers

and acquisitions
Ineffective selection processes

result in poor hiring
Organizational culture that does

not support desired behaviors or encourages undesirable ones
Location risk is also people risk

Prior to its acquisition by Oracle in 2009, Sun Microsystems had an unusually robust workforce planning process that played a key role in helping business leaders evaluate the risk tradeoffs when making location decisions. Whether the business wanted to expand into a new country, open a call center, build a new facility, or renew a lease, the workforce planning team had to weigh in. Its job was to research the options and to produce one or more location scorecards, capturing relevant data about the local labor supply, costs, and demographics; economic health; political stability; infrastructure; regulatory environment; and so on. By putting workforce planning in charge of the process, Sun ensured that human capital issues were scrutinized as thoroughly as other factors before leaders made critical business decisions.2
the loss of significant intellectual capital. Together, ERM and business-unit executives did a deep dive to try to understand why the attrition numbers were so far off base. Explosive growth in India meant that the company was constantly hiring. As a result, young managers with little experience and training kept getting more and more direct reports. Indias competitive labor market compounded the problem, as highly qualified managers could easily move to a competitor for more money. The combined loss of talent and intellectual capital along with the cost of training and integrating new hires was causing productivity problems for a division that was meant to help fuel growth for the global organization. In addition, the country manager was being evaluated on his ability to meet the goals set for India and was therefore uncomfortable bringing the matter to the global business leader. Upon discovery, the ERM manager brought this issue to the attention of the global business unit leader, who recognized that the units goals were at the root of the problem. In fact, the leader went so far as to change the mission of the Indian business to better develop people, rather than focusing only on near-term results. Reporting structures changed so that managers with only a year or two of experience no longer supervised a large number of direct reports. The company now does more to develop managers in order to retain them.
The Risk of Ad-Hoc Growth

By analyzing HR data, UBS realized that it would never meet its aggressive growth targets without changing its hiring practices in China. Managers there, accustomed to a high degree of autonomy in decisionmaking, hired ready-now candidates to fill 70 percent of job vacancies. If attrition continued at 20 percent annually, the bank would need to replace 100 percent of its current headcount over the next five years an iffy proposition, given the regions limited supply of qualified talent. Moreover, headcount would have to increase substantially to grow the business. Through strategic workforce planning, the China Management Committee saw the riskiness of continuing this ad-hoc staffing strategy and the benefits of developing a more disciplined approach country-wide.
Source: Mary B. Young, Strategic Workforce Planning in Global Organizations, The Conference Board, Research Report 1457, 2010, pp. 1825.
Barriers to Managing Human Capital Risk

One of the earliest and most attention-getting discussions of human capital risk came in 2007, when the Economist Intelligence Unit (EIU) asked risk managers to rank 13 risks in terms of their impact on business results.3 Human capital topped the list ahead of the next most significant risk categories: regulatory, reputational, IT, and market risks. When the same respondents were asked how effectively their companies manage each of the same risks, human capital dropped nearly to the bottom. The only risks these companies managed less effectively, they said, were climate change and terrorism. The dramatic juxtaposition of these two findingsthat risk managers view human capital risk as the most significant risk in terms of its business impact, yet it is one of the least effectively managed risksled the EIU to draw the following conclusion: These findings point to the need for closer integration between the risk function and the human resources function, as well as a clearer understanding of the risks that companies face with their location and human capital strategies.4
Losing key talent in India

Using human capital metrics, a global technology giant uncovered a significant human capital risk. Companywide attrition was well within acceptable limits, but drilling down by business unit and region revealed a major problem area: attrition in India was unacceptably high for managers with technical skills. Since India was seen as a major growth driver over the next several years, high turnover might hamper growth and risk
Contingent Worker Risks

Recent surveys show that many companies plan to reduce their reliance on fixed labor and substitute flexible labor such as contractors or contingent workers. IBMs 2010 CEO survey, for example, found that 62 percent of chief executives expect to increase flexible labor usage. For this strategy to be effective, however, companies need to manage a host of related risks: co-employment and other legal risks; intellectual property risks; knowledge management risks; the risk of poor cost management, if the company doesnt include contingent workers as part of total labor costs; and the risk of losing internal capabilities that might become strategically important in the future. While flexible labor may help companies deal with uncertainty, its important that they follow this strategy with eyes wide open to its inherent risks.
Source: Working Beyond Borders: Insights from the Global Chief Human Resources Study, IBM Global Business Services, September 2010.
Differing cultures HR and ERM also represent different occupational cultures. Traditionally, risk management professionals have relied on quantitative skills and analyses, while HR work has been less focused on numbers. Each function has attracted people with different skills and competencies, although that is changing. Those with a talent for quantitative analysis were unlikely, until recently, to seek a career in HR. Risk professionals often grew up on the finance or audit side of the business. Given these differences in skills, credentials, and work experience, its not surprising that HR and ERM tend to speak somewhat different languages, although both must be able to speak and work with business leaders. These are not the only reasons why ERM and HR may keep each other at arms length. ERM and SWP capabilities have evolved in recent years (see ERM and SWP Defined, pp. 10-11), but they dont always do so in synch. A company may be farther ahead on its ERM maturity curve than it is in SWP or vice versa. In either case, the function with more sophisticated practices may question the value of partnering with the other to address HCR. While, in some cases, such reservations may be well founded, neither ERM nor HR should make assumptions about the others capabilities without further investigation. (The discussion questions in Starting a CrossFunctional Dialogue, p. 38 can help.) As better data, methodologies, and tools become available, companies will become better at managing both risk and human capital. If, after a preliminary conversation, it seems premature for HR and ERM to partner today, its an option worth revisiting in the future.
By and large, we see little evidence that companies have made much progress achieving a closer integration. A 2008 study of 116 firms concluded boards are largely missing in action when it comes to monitoring human capital. They do focus on succession planning at the top and many of them do see this as an important activity of the board. But, when it comes to them monitoring most of the talent in the organization, its condition and how it is managed, the situation is very different.5 A review of the 2010 10-K filings6 of the largest publically held U.S. companies on the Fortune 100 list shows that only four of the top 10 cite human capital as a critical risk factor. Of these, most mention loss of key personnel as the only concern.7 So why arent human capital risks more prominent on the senior executive agenda? There are many reasons why human capital risk is often omitted from discussions of business risks to a companys performance. Organizational silos HR (the stewards of human capital) and ERM (which often resides within, legal, finance, strategy, or internal audit) are separated by different reporting lines. Because functional areas often operate in silos, there may be little incentive for the HR and the risk management functions to collaborate.
Offshoring Risks
Political instability may lead to significant increases in human capital costs, especially for multinational corporations with captive operations in a developing country, using local staff. Events such as the 2008 Mumbai terrorist attacks result in higher costs to cover everything from increased security to travel to and from corporate headquarters, and the salary differential paid to executives who must spend time onsite monitoring the offshore operations.
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Why Now?
If HR and ERM have operated at a distance from one another, there are compelling reasons for this to change. In fact, it is already beginning to happen. We see growing evidence that human capital risk management, the common territory that lies squarely at the intersection of these two functions, has entered the business vocabulary and is gaining currency. Many factors are driving this change.
Business drivers
Human capital has become an increasingly valuable asset Whether a company competes on the basis of productivity, innovation, customer loyalty, efficiency, speed, or agility, the workforce has a make-or-break impact on those results. Our people are our most important asset, is not just a platitude, although it often sounds that way in annual reports. Today, many companies can measure the costs and benefits of having the right talent, with the right
ERM and SWP Defined

Businesses are created to take risks and to profit from that risk-taking. Enterprise risk management (ERM) is a series of processes driven from the top of the organization that enables managers to consider risk and reward tradeoffs of their decisions. ERM helps executives to meet objectives by taking risks in an informed manner. It involves consideration of uncertaintieseither positive or negativethat could affect objectives. Companies typically start by developing a risk inventory, prioritizing which risks may have the most significant impact to the company in a risk assessment process. Risks are then treated in one of the following ways: Mitigation: taking action to lessen the impact or the likelihood that a risk will occur. Acceptance: allowing the risk to be part of the business plan or operations because management has agreed that the returns are adequate to pay for the risk. Rejection: deciding the downside risk is too high and that this is a business not worth pursuing. ERM provides a framework, language, policies, and processes to think about risk in the context of ones own organization. Beyond those aspects, ERM must be embedded into ongoing business practices and must ultimately provide value to the organization. Effective ERM drives culture change. Each risk has a risk owner, someone who is empowered to make decisions about how to manage the risk and who is accountable for results. Many companies find that ERM enhances communication regarding opportunity and uncertainty and where resources ought to be allocated. ERM is a continuous process that includes monitoring and re-assessing risks and opportunities and the companys ability to meet objectives. Strategic Workforce Planning (SWP) systematically connects business strategy to HR strategy, as shown below. Too often, HR strategy is developed independently of business strategy. SWP corrects that. SWP engages business leaders in a discussion of business challenges and their workforce implications. Because SWP is integrated with corporate strategy, business planning, and financial planning, it enables HR to align human capital investments with long-term business priorities. Virtually all companies use operational workforce planning to construct short-term staffing plans, determine recruiting activities, and track human capital metrics like turnover. What differentiates SWP from this necessary, but more operational, approach is that it engages business leaders in considering longer-term business strategy, the competitive landscape, new technologies,
SWP in Action
As SWP gains credibility and matures, it not only translates business strategy to HR strategy, it becomes an input to business strategy and a source of business intelligence.
Business Strategy
HR Practice
SWP
HR Strategy
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skills, in the right place, at the right time, and at the right cost. They can also analyze the business impacts of not having the necessary human capital. Human capitals measurable impact on business results makes it a critical source of both opportunity and risk. And, unlike any other long-term asset on the companys balance sheet, human capital walks out the door every night; it can choose to do so permanently.
Retirement Wave
Some types of human capital risk may affect an entire industry. The U.S. electric power industry, for example, projects that 30 to 40 percent of its 400,000 workers will be eligible to retire by 2013. By that date, three utility sectorselectric, nuclear energy, and natural gasanticipate that nearly half the incumbents in five job categories will need to be replaced. Utilities must weigh the costs and benefits of hiring replacements well in advance versus reacting in real time. Retirement risk can translate into operational risks, such as power reliability and rates. In nuclear energy, companies also face regulatory risks if they dont have adequate back-up staff to perform certain tasks.a
a Mary B. Young, Gray Skies, Silver Linings, The Conference Board, Research Report 1409, 2007, pp. 2630.
and other potential changes in the operating environment. Then it helps executives explore the workforce implications, staying at a high level. Rather than focusing on precise forecasts, SWP helps identify the range of possibilities the company must prepare for and how each scenario would affect talent supply and demand. SWP uses quantitative and qualitative methods, such as data mining and analytics, forecasting, modeling, and scenario-planning, adopted from Finance, Strategic Planning, Operations Research, Supply Chain, Risk Management, and other functions. The Conference Boards Maturity Model for SWPa describes how companies capabilities in this relatively new methodology typically evolve over three to five years. Once leaders gain confidence in SWP and use it to make business decisions, SWP is not only a mechanism for translating business strategy into HR strategy, priorities, and plans, it becomes an input to business strategy and a source of business intelligence. However, as the research described in this report confirms, very few companies have reached a Mature stage of SWP; most are still developing their capabilities in human capital analytics or perhaps piloting SWP somewhere in their organization.
Human capital makes up a growing percentage of costs, especially as companies become more knowledge-driven. According to a 2003 study, human capital expenses average 36 percent of revenues. Salaries, as a percentage of operating costs, vary by industry. The highest median percentage is in health care services (52 percent), followed by for-profit services (50 percent) and educational services (50 percent). The lowest median percentage is in retail/ wholesale trade (18 percent).8 Growing business uncertainty drives greater human capital uncertainty As Whartons Peter Cappelli writes: The idea that a company can predict accurately what it will be making ten years from nowsomething that was common in industries as diverse as telecommunications, transportation, consumer goods, and financial services until the 1970shas disappeared. The demand for talent flows directly from business and operating demands. So as business forecasts and plans have shrunk from ten years to five years to, in most cases, one year, the ability to predict the talent those plans demand also must be scaled back. The type of talent management that makes sense in this economic context does not pretend that it can eliminate uncertainty through better forecasting and planning. Talent forecasting cannot be any more accurate than the business forecasts on which it is based, and
See pp. 42-43 for model. Mary Young, Implementing Strategic Workforce Planning, The Conference Board, Research Report 1444, 2009, pp. 1925.
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the latter arent very accurate. Because every plan involves commitments and commitments come with costs, long-term plans end up being expensive because they are often wrong. Rather than trying to eliminate uncertainty, the better approach is to find ways to manage it.9 Human capital risks multiply as companies undertake larger, more frequent business transformations, including globalization, mergers and acquisitions, outsourcing, shared service centers, restructuring, increased use of flexible labor, and so on. Human resources must not only help manage such massive changes, it must also assess the human capital risks they entail.
HRs growing use of data, analytics, and modeling is changing the makeup of HR teams Its become quite common for companies to beef up HRs capabilities by redeploying talent from finance, corporate planning, supply chain management, and other numbers-oriented functions to serve in new HR roles, including those on the SWP team. At the same time, many companies are building the business acumen of their HR generalists and business partners. Bolstered by their teams stronger skills and competencies, HR leaders can become solid contributors to risk assessment and risk management at the highest level.
Risk management drivers

ERM, itself, is evolving in ways that necessitate bringing HCR into the mix. Today, risk management is less likely to focus solely on compliance and regulatory issues When companies first instituted risk management, they focused on risk transfer using insurance, compliance with worker-safety and pension laws, financial reporting regulations, and the companys own internally defined business practices. Today, while compliance and regulatory issues are still important, they arent usually the ones that bring companies to their knees. Thats more likely to happen as a result of the risk/reward tradeoffs that underlie myriad business decisions. Large risk events that are devastating to businesses often occur when several risks, including human capital, interact at the same time. The April 2010 oil spill in the Gulf of Mexico, for example, resulted from a combination of factors: the use inferior quality cement in the underwater oil rig, systemic inattention to process safety, inadequate training, and many decisions to ignore safety warnings or other red flags.10 Risk management is having to address qualitative as well as quantitative risks Not surprising, given its roots in finance, ERM has traditionally focused on quantifiable risks, such as the revenues lost when Johnson & Johnson had to pull 43 different childrens remedies from store shelves in 2010. With growing sophistication, however, leaders have recognized that many key risks cannot be easily measured or ignored. ERM must assess and manage qualitative issues, including strategic risks, such as the decision to enter a new geography, and reputational risks, such as the damage that sticking accelerator pedals inflicted on Toyotas global brand. As ERM gains experience in assessing and managing qualitative issues, it makes sense to bring human capital into the enterprise risk portfolio.
Human resources drivers

The HR function has also changed, making it a more viable player in ERM. Over the past decade, quantitative analysis has become increasingly important to HR. Though seldom at the forefront of their companies efforts to integrate and analyze enterprise-wide data, human resources is a beneficiary. Thus far, companies have achieved varying levels of sophistication using HR data to drive decision-making. While risk professionals still express surprise to learn that HR has numbers, many HR teams now use data-driven methodologies, such as workforce analytics and strategic workforce planning (see ERM and SWP Defined, pp.10-11), to shape their HR strategy and inform strategic business decisions. These same analytics and models can become valuable inputs to the ERM process.
The Risk of Employee Dissatisfaction

Sysco, the global food-service company, has quantified the relationship between employee satisfaction and critical business outcomes such as revenues, costs, employee retention, and customer loyalty. If employee satisfaction drops within an operating unit, Sysco can project the impact on financial measures and evaluate alternative actions to reverse the trend.
Source: Thomas H. Davenport, Jeanne Harris, and Jeremy Shapiro, Competing on Talent Analytics, Harvard Business Review, October 2010, p. 56.
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Mitigating HCR
Arcelor Mittal, the global steel company, uses workforce planning to assess the risks posed by attrition, employee mobility within the organization, and other factors. Rather than simply comparing talent supply and demand and taking steps to reduce any gaps, the company weighs the risk trade-offs. For some positions, theres an ample supply of internal or external talent. Others are more difficult to fill because they require company-specific skills and knowledge, or because of talent shortages. The company compares the cost of risk mitigation versus the cost of risk exposure on a position-by-position basis to develop a long-term workforce plan.
At The Conference Board 2010 Human Capital Metrics conference, no fewer than six presenters alluded to human capital risk, including Ken Carrig, executive vice president, human resources, at Comcast, whose keynote presentation was titled Leverage Human Capital Analytics to Better Manage Risk.13 Elsewhere, Orlando Ashford, senior vice president and chief HR officer, Marsh & McLennan Companies, told a conference audience, As the War for Talent characterized the 1990s, the critical capability and value creator for HR over the next decade will be human capital risk management14 (emphasis added).
Risk has become increasingly important at the board level In the wake of the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated that U.S. financial services firms must have a board-level risk management committee. Across other industries and geographies, boards are carefully reconsidering risk-oversight governance because regulators, governance experts, and shareholders are doing so. Risk management in context replaces rigid definitions of which risks matter In the early days of ERM (see ERM and SWP Defined, pp. 10-11), experts put forth fairly rigid models that specified exactly which risks must be included. With more experience, however, companies have moved toward risk management in context. This more flexible approach takes into account the unique mix of external factors (such as the companys regulatory, political, and economic environment) and internal factors (such as the corporate culture) influencing the companys risk profile. With greater flexibility, companies can define for themselves which kinds of HCR they should be monitoring. The ISO 31000 Risk Management Principles and Guidelines published in 2009 promote this more flexible approach.11
In short, conditions are ripe for companies to take a systematic approach to managing human capital risk. ERM and HR are the logical partners to take the lead. While many firms are still building their capabilities in ERM and SWP, the executives who lead these processes neednt postpone contact until theyve gotten every last detail perfect. Both functions have data and tools that can help the other, although their current sophistication varies greatly from company to company.
What Went Wrong in the Gulf of Mexico?

The Gulf of Mexico oil spill is one of the largest industrial accidents in history. Analyzing the root causes, the U.S. Chemical Safety Board cited, among other factors, the companys decentralized management system and entrepreneurial culture. A lengthy investigation by Fortune magazine concluded that the breakdown in safe drilling practices was the product of a corporate culture that venerated risk taking even as years of merger-driven growth and successive rounds of cost-cutting consumed its leaders focus.a Organizational structure, culture, leadership competencies (such as sound judgment) and change management, now seen as contributing factors, typically fall within HRs responsibilities. They may not be routinely included in a companys risk assessment and management processes, however.
a Peter Elkind and David Whitford, An accident waiting to happen, Fortune, February 7, 2011, pp 105142.
A New Opportunity
This combination of business, HR, and ERM drivers builds a powerful case for why companies need to include human capital as part of their overall risk portfolio. Recently, weve seen growing evidence that human capital risk is becoming a buzzword in some HR circles:
Since 2008, leading consulting firms have published white papers on human capital risk.12
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What HR Brings
At minimum, HR has descriptive statistics that measure important variables and trends: for example, changes in the average age of the companys workforce over time and comparisons among different segments of the workforce, business units, or geographies. Most HR departments can now use historical data to make projections, such as the size and shape of the companys workforce at some future point based on past patterns of attrition, internal movement, and so on. By comparing projected talent supply to the workforce that the company will actually require, based on its business plan, HR can pinpoint future gaps and gluts. Combining these analyses with knowledge about the internal and external labor market, HR can see which roles will be most difficult to fill. While most companies are still developing these capabilities, those that have acquired some sophistication in human capital analytics can project the dollar impact of any specific role that remains vacant: for example, the revenue lost when a retail store can only operate one checkout line between 5 p.m. and 6 p.m. or when a call center is operating 10 percent below its desired staffing level. HR organizations that are fairly mature in SWP can also do scenario modeling. They can project the longterm impacts of various HR tactics and choose the best alternative. For example, what are the costs and benefits of increasing college recruiting vs. hiring more expensive, mid-career talent? HR can also use scenario modeling to weigh the outcomes of various strategic options that the business may be considering: What would be the labor cost implications of locating our new call center in City A, B, or C? By combining HR data with business plans and business data, HR can also prioritize human capital challenges and advise leaders where to invest resources. For example, it can compare the return on human capital investment across operating regions to decide where expanding the workforce will pay the biggest dividends.15
HR organizations that have developed a robust SWP process to guide such decisions are already managing human capital riskalbeit using a different vocabulary than their peers in risk managementand advising the CEO and board about critical issues and their business impacts. Yet there is much that HR can gain from collaborating with ERM to raise the visibility of HCR.
Mobility Run Amok

In an effort to build a pool of potential senior managers, a company adopted a highly regarded best practice in leadership development: rotational assignments. The program backfired, however. Developing new products typically took three or more years from inception to market. Yet high-performers were moved every 16 months or sotoo soon for them to acquire deep technical knowledge or to be held accountable for the outcomes of their decisions. The fallout from this mobility process (combined with other factors) was huge: quality plummeted, costing the company more than $1 billion annually. Rather than importing best practices and applying them across the organization, companies can use human capital analytics to assess the risks and benefits of specific practices. In this case, they might investigate current mobility patterns within the workforce, their impacts on individual and business performance, and the risks and benefits of alternative scenarios (speeding up or slowing down mobility; moving people laterally vs. upward).a
a Haig R. Nalbantian and Richard A. Guzzo, Making Mobility Matter, Harvard Business Review, March 2009, pp 311.
15
What ERM Brings

First and foremost, ERM often has a direct path to the senior executive team and the board. In the wake of corporate scandals during the last 10 years, such as Enron, Parmalat, and WorldCom, regulators began to focus more heavily on risk. Initially, with the Sarbanes-Oxley Act of 2002 in the United States, the focus was on financial reporting risk and internal controls. Regulations, including the 8th European Company Law Directive and Clause 49 of the Companies Act in India, have focused on internal controls in jurisdictions around the globe. Much of risk oversight has fallen to audit committees at the board level. In the United States, New York Stock Exchange Listing Rules require audit committees to discuss risk assessment and risk management. While such laws cant ensure the effectiveness of risk oversight, they do necessitate some sort of structure to capture and report risks. Risk management is often guaranteed a regular slot on the boards agenda, which means senior executives are likely to be well informed on these matters. In short, risk managements access and visibility to C-level executives and the board make it a valuable ally for HR. While SWP may be an effective proxy for HCR management, it may not enjoy the same stature or entre as ERM. Bringing human capital risk inside the tent of ERM provides a direct link to top decision makers. By definition, ERM captures risks from across the organization, assesses them, looks for interdependencies and interactions among risks, and helps executives establish priorities: Based on impact and likelihood, which risks deserve the closest scrutiny and monitoring? Which risks must be addressed immediately, by what means, and by whom? ERM presents the CEO and board with its assessment of enterprise-level priorities. Human capital risks should not be absent, although they typically are. ERM is the scorekeeper determining which issues get considered. It can become HRs ally in making sure that human capital issues are part of the mix. ERM has a well developed vocabulary that most business leaders and board members understand and use. Translating human capital risks from HR-speak to more familiar risk terminology may help leaders see that human capital risks are, in fact, business risks, not just the province of HR.
Finally, ERM has developed a number of tools that HR may find useful in SWP and in assessing and managing human capital risk. Risk inventories, risk heat maps, risk grids, and risk/opportunity assessment templates may be easily adapted to human capital issues. Tools such as Monte Carlo simulations and root cause analyses may be useful new additions to HRs tool kit, as may the questions risk professionals use to assess a businesss risk appetite.16 In short, ERM and SWP are both relatively new capabilities. Both approaches can inform each other. Together they may be able to begin getting their collective arms around the companys human capital risks.
Bad HR Decisions Can Turn into Reputational Nightmares

When a global communications company expanded into India, a cost-conscious executive scanned the local organization in search of excess staff. Tea wallahs were one glaring example. These low-wage workers served just a single functionserving tea to executives and their guestsso the company immediately eliminated these positions. Then, the unimaginable happened: A former tea-wallah took his own life, out of apparent grief and shame at having lost the only job hed ever known. Thats when the company reconsidered its decision. The tea wallahs pay was a pittance compared to the reputational damage that such a tragedy might cause, just as the company was trying to build its local brand.
16
Our Research
The Conference Board has a longstanding interest in the evolution of both ERM and SWP, topics we have been researching and reporting to our members for more than five years. In 2009, we became interested in the potential for companies to combine these capabilities to manage HCR. We explored these ideas through a series of crossfunctional presentations, sharing our research on ERM with HR and SWP leaders and our research on SWP with ERM executives. In doing so, we learned several important things: (1) the need to manage human capital risk makes intuitive sense to both HR and ERM executives; (2) HR and risk management have little contact in many organizations; and (3) very few companies include HCR as part of their overall enterprise risk management process (assuming they have one). Based on these exploratory findings, we designed a survey to capture baseline data in answer to the following research questions: 1 How mature are companies ERM and SWP processes? 2 How does human capital risk stack up against other
kinds business risks? Which human capital risks are most important?
One hundred sixty-one companies participated in the survey. Respondents work in either risk management or HR, allowing for comparison between the two functions. (See Research Methodology, Limitations, and Future Steps, p. 34, for further details about the survey sample, methodology, and limitations.)
HCR Assessment and Management

Human capital risk assessment is the process of identifying people and workforce risks, assessing the likelihood of their occurrence and impact (including interactions among risks), and establishing priorities as to which risks need to be elevated to senior management and the board. Human capital risk management is the treatment of these risks, either by accepting, mitigating, or rejecting them. Risk treatment includes establishing accountability through a risk owner, monitoring changes, and regularly reporting progress to senior executives and the board.
3 How well do leaders understand HCR? 4 Do companies have a formal process to assess HCR?
A standing group to oversee HCR? Who participates?
5 How effectively do companies assess and manage HCR? In addition to capturing a snapshot of where companies are today, the survey was designed to test the relationships shown in the conceptual model below (Figure 1). We hypothesized six factors (shown left) would be related to each of the outcomes (shown right): effective assessment and effective management of HC risk.
Figure 1
Factors related to effective HCR assessment and management: a conceptual model
Leaders understanding of HC risk Who participates in assessing HCR Formal process to assess HCR Standing group to oversee SWP maturity ERM maturity Effective HC risk management Effective HC risk assessment
17
Research Findings
In presenting the results of our research, we first discuss the answers to the five questions listed earlier. When significant, we also note differences based on region, industry, and company size. Then we report on the relationships between the individual input variables and the two outcome variables shown in Figure 1, noting significant17 differences. Finally, we analyze which combination of the input variables differentiates companies that effectively assess human capital risk and (in a separate analysis) effectively manage HCR from those that do not. The fact that HCR ranked lower in our survey than in the 2007 EIU study, where it topped the list, might largely be explained by the economic crisis that occurred during the intervening three years. The Conference Boards CEO Challenge survey administered during that time found a similar shift in priorities during the financial crisis, when 14 out of 20 people-related issues sank in the rankings. Finding qualified managerial talent, which was within the top 10 in the 2007 and early 2008 surveys, dropped eight places and fell out of the top 10 after the September 2008 collapse of financial markets.18 Top management succession fell from a rank of 18 in July/August 2008 to 29 in October of that same year. Most recently, however, the 2011 CEO Challenge survey finds that talent (a new category) emerges as a top 10 challenge, placing second globally and reflecting the revitalized drive for growth.19 Table 2 compares the rankings of ERM and HR respondents. Human capital risk was the most significant risk for HR respondents but ranked sixth among ERM respondents. Strategic risk topped the list for ERM, but was only fifth for HR. These differences are consistent with the pattern found throughout our findings: the pervasive disconnect between the views of ERM and HR respondents.
How Does HCR Rank against Other Risks?

We asked respondents to rank 11 types of risk based on their business impact. Table 1 shows the mean rankings. Regulatory risks ranked as most significantlikely as a result of the 2008 financial crisisfollowed by operational and strategic risks. Human capital ranked fourth of 11 risks. Crime, terrorism, and physical security was ranked lowest. While human capital trails strategic and operational risks, these risks often result, in part, from human capital risks. For example, not having the right skills and capabilities, or having a compensation system that provides incentives to maximize short-term returns over longer term strategic objectives, may contribute to strategic and operational risk. These are examples of the interactions among various types of risk that ERM is designed to capture and assess.
Table 2
Risk rankings based on impact on business: ERM vs. HR

HR Human capital risk 1 2 3 4 5 6 7 8 9 10 11 Risk 6 3 2 5 1 4 7 8 9 10 11
Table 1
Risk rankings based on impact on business overall

Rank Regulatory risk Operational risk Strategic risk Human capital risk Reputational risk Financial risk Supply chain risk Political and/or country risk IT risk Natural hazard risk Crime, terrorism and physical security 1 2 3 4 5 6 7 8 9 10 11
Operational risk Regulatory risk Reputational risk Strategic risk Financial risk Supply chain risk Political and/or country risk IT risk Natural hazard risk Crime, terrorism and physical security
18
How Effectively Are Risks Being Managed?

Although all respondents ranked the 11 risks based on their business impact, only risk executives were asked to rank how effectively their companies are managing each risk. HR executives, we assumed, might not be sufficiently knowledgeable to rank the effective of their companies management of non-HR risks, so we did not ask them for those rankings. HCR ranked second to last; political and/or country risk was the only type that risk executives believe their companies manage less effectively. Risk respondents think that companies manage terrorism and natural hazards external risks over which they have little to no control more effectively than the risks associated with their own employees. How can we explain this finding? One explanation is that ERM knows comparatively little about HCR and lacks information about how it is being managed. A second explanation is that ERM respondents view HCR as soft or unmeasurable, a perception that belies the growing use of quantitative data and analytics in HR. Numbers are credible in business conversations, while qualitative measures may seem less reliable. Quantifiable risks are also more readily managed. An abundance of financial risk-management tools make it relatively easy to manage the tradeoffs between risk and return. Hence, financial risk seems the most transparent. Likewise, many other risks that survey respondents ranked as more effectively managed than HCR also are also easily quantified. Reputation risk and strategic risk, which involve qualitative factors, are notable exceptions.
Table 3
It is important to note the significant gap between HCRs business impact (ranked fourth) and how effectively it is managed (ranked tenth). The implication of this finding: Companies should pay more attention and commit more resources to assessing and managing human capital risk the same conclusion drawn by the EIUs research in 2007.
Which Human Capital Risks Have the Biggest Business Impact?

We asked all respondents to rate the significance of 21 specific types of HCR in terms of their impact on the business. Table 4 shows these risks in rank order, based on the percentage of respondents who rated them as very significant. Risks associated with talent and skills rose to the top of the list. Roughly 70 percent of respondents say that the shortage of skills within the companys workforce is very significant. A majority also rated three other issues as highly significant: succession and the leadership pipeline; the gap between talent capability and business goals; and the shortage of critical skills in the external labor force. Compliance and regulatory issues ranked second.
Table 4 Human capital risks ranked by significance Percent rated very significant Shortage of critical skills within your companys workforce Compliance/regulatory issues Succession planning/leadership pipeline Gap between talent capability and business goals Shortage of critical skills in the external labor force Employee engagement Ethics Loss of critical knowledge through attrition Labor costs Intellectual property loss or violation Managing talent through mergers and acquisitions Diversity Companys inability to compete for critical talent Excessive turnover/Failure to retain critical talent Alignment of pay and performance Executive compensation Outsourcing and vendor management Globalization/offshoring Unionization/labor relations Excessive risk-taking Use of contingent workers 69.9% 59.1% 55.8% 52.1% 51.3% 49.1% 43.1% 38.7% 38.1% 37.7% 34.8% 32.7% 32.3% 27.8% 26.5% 25.0% 22.3% 20.9% 16.3% 13.1% 10.8%
Rank 1 2 3 4 5 6
Risks ranked by how effectively they are managed

Rank Financial risk Operational risk IT risk Supply chain risk Regulatory risk Reputational risk Strategic risk Natural hazard risk Crime, terrorism and physical security Human capital risks Political and/or country risk 1 2 3 4 5 6 7 8 9 10 11
7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
19
A review of these risks rankings by HR versus ERM revealed that the two functions hold considerably different views. Both rank the internal shortage of critical skills first and succession planning among the top four human capital risks for companies. Across the board, HR respondents ranked every HCR but one (compliance/regulatory) higher than ERM respondents did. Chart 1 shows those human capital risks with statistically significant differences in their importance to ERM and HR respondents.
Chart 2
Disparity in importance of select human capital risks, by region

Percent of respondents rating risks very signicant
North America Europe 25.0% a 37.5% 57.1% a 18.0 b Executive compensation 32.5 45.0 b Asia-Pacic
Company's inability to compete for critical talent
16.3 There are several explanations for Outsourcing and vendor management 36.8 c these differences: First, HR executives 23.8 c are steeped in human capital issues and are likely to give greater weight to a,b The difference between North America and Asia-Pacic is signicant at the 90 percent level. issues they manage on a daily basis. c The difference between Europe and Asia-Pacic is signicant at the 90 percent level. Second, risk executives may not be well informed about the human capital risks and their potential impacts. Alternatively, they see a broader array was a very significant risk for more than half (57 percent) of risks and, in comparison, view speof companies in Asia-Pacific, but just one-quarter of cific human capital risks as less significant. Whatever the those in North America. Asia-Pacific companies were explanation, these data once again point out a disconnect also more likely (45 percent) to rate executive compensabetween risk and HR executives, a pattern found elsetion as very significant than were North American where in the survey results, as shown below. companies (18 percent). European companies view outOur analysis also found significant differences based on sourcing and vendor management as a greater source of region (Chart 2). Inability to compete for critical talent risk than do Asia-Pacific companies.
Chart 1
Disparity in importance of select human capital risks, ERM vs. HR

Percent of respondents rating risks very signicant
HR Shortage of critical skills within your companys workforce Shortage of critical skills in the external labor force Risk 74.3% 61.1% 57.9 37.7 54.6 37.7 44.3 25.9
How Mature Are Companies ERM and SWP Capabilities?

One of the hypotheses underlying this research is that companies with mature ERM will assess and manage HCR more effectively than companies with Early or Middle stage ERM, and the same would be true for SWP maturity. Based on previous research by The Conference Board, we constructed maturity scales for ERM and SWP to assess whether companies were at the Early, Middle, or Mature stage of ERM or SWP. (For more details, see Research Methodology, Limitations, and Future Steps, p. 34, and pp. 41-43 for the maturity models.)
Employee engagement
Labor costs
Note: The difference between Risk and HR is signicant at the 90 percent level.
20
Chart 3
Chart 5
ERM Maturity
19.0 Early 60.3% Mature
SWP maturity
38.4 Early 16.1% Mature
20.7 Middle 45.5 Middle n=58 n=112
ERM maturity
Within our sample, 60percent of companies have Maturestage ERM practices (Chart 3). However, because this sample was made up of companies that participate in The Conference Boards risk-related programs, its unlikely to be representative of the larger population. Previous research and ongoing contact with a more diverse sample of companies suggests that the majority is likely to be at the Early or Middle stage of ERM.20 Despite this limitation, our research findings still enable us to examine the relationship between ERM maturity and HCR. The results of this analysis, discussed later, are among the studys most interesting. Two-thirds of the companies based in North America have Mature ERM (Chart 4). Forty percent of AsiaPacific-based companies are in the Early stage, compared to 33 percent based in Europe and 11 percent in North America. These regional findings are interesting when compared to those for SWP maturity.
Chart 4
SWP maturity
Based on The Conference Boards SWP maturity scale, the survey found that 16 percent of participating companies are at the Mature stage of SWP, 46 percent are at the Middle stage, and 38 percent are at the Early stage (Chart 5). There was a marked difference between the portion of Asia-Pacific companies (40 percent) with Mature-stage SWP, as compared to just 7 percent of those in Europe and 14 percent in North America (Chart 6). By and large, the results for SWP maturity are relatively consistent with anecdotal evidence that The Conference Board has collected since 2006. These qualitative data suggest that few companies have reached a Mature stage of SWP; in fact, many companies are just getting started. It is likely that the survey findings overstate the level of maturity that might be found in a broader sample of companies, again due to how we recruited our survey sample (see Research Methodology, Limitations, and Future Steps, p.34).
Chart 6
ERM maturity by headquarters region

Mature 65.8% Middle Early
SWP maturity by headquarters region

Mature Middle Early
60.0 53.3 48.1 40 33.3 23.7% 20 10.5 13.3 14.3% 7.4 0 North America Europe Asia-Pacic North America Europe Asia-Pacic 40 41.4% 44.3% 44.4 40.0
21
Chart 7
Comparison of ERM and SWP maturity overall

ERM SWP
60.3%
Not surprisingly, 91 percent of respondents indicated that their CHROs understand human capital risk to a great extent. CEOs are reported to have the next highest understanding (78 percent). About two-thirds of other leader categoriesbusiness units (68 percent), the CRO (67 percent), and the CFO (65 percent) understand human capital risks to a great extent, but only 60 percent of boards. These findings raise concerns about board-level understanding of HCR. Independent directors have limited time to spend in their oversight roles. If HCR is one of the top four risks, but is one of the least well managed risks, it is imperative that the board understand this gap. It is notable that 25 percent of respondents answered Dont know in regard to the CROs understanding of human capital risks. Nearly one-third (30 percent) of all HR respondents chose this response option, as did 15 percent of risk respondents. That so many are unsure about their CROs grasp of human capital risk is further evidence of a cross-functional disconnect. A CROs primary job is to help drive discussions about the risks inherent in each business and function throughout the company. If the CRO is leading such discussions in human resources, many of our survey respondents are unaware of them. Again, our analysis found significant differences based on the respondents functions (Chart 9). HR professionals (67 percent) were more likely than risk professionals (45 percent) to say that their boards understand HCR to a great extent.
45.5 38.4
20.7 16.1%
19.0
Mature
Middle
Early
One point is strikingly clear: ERM has a major head start on SWP (Chart 7). While 60 percent of companies in our study have achieved the Mature stage of ERM, only 16percent have done so in SWP. Twice as many companies are at the Middle stage of SWP (46 percent) versus ERM (21 percent), and, again, twice as many are at the Early stage of SWP (38 percent) than ERM (19 percent).
The fact that ERM maturity is much more common than SWP maturity can be explained, in part, by the fact that ERM has been around longer than SWP. In addition, ERMs development has been accelerated in the United States by regulatory requirements such as Sarbanes-Oxley and Dodd-Frank. As previously discussed, our research results probably overstate the prevalence of Mature ERM and, to a lesser extent, Mature Chart 8 SWP in companies overall. Nonetheless, when Leaders understanding of human capital risk we combine the survey findings with our earlier research on ERM and SWP and with extensive anecdotal evidence, we can conclude with confi90.5 Chief HR Ofcer dence that many companies ERM practices are much more developed than their SWP practices. 77.6 CEO
8.2 1.3
19.3
3.1
How Much Do Company Leaders Understand about HCR?

We asked survey respondents to gauge the extent to which top decision makers understand human capital risk: board members, the chief executive officer (CEO), the chief HR officer (CHRO), the chief risk officer (CRO), the chief financial officer (CFO), and business leaders (Chart 8).
Business units
68.4%
25.3%
6.3%
Chief Risk Ofcer
67.3
24.5
8.2
CFO
65.4
26.9
7.7
Board
59.5 A great extent A moderate extent
30.1
10.5
Small/no extent
22
There are several possible explanations. While risk executives may report top risks to the board or its audit committee, HR executives are less likely to participate in risk discussions at board meetings. A 2005 study that
examined executive attendance at board meetings supports this view.21 While 91 percent of CFOs and 85 percent of general counsels attend all of their companies board meetings, only 19 percent of HR leaders do so. Thus, risk executives may be in a better position than their HR counterparts to judge the boards grasp of HCR. By contrast, HR professionals may have a more accurate gauge of the CEOs understanding. ERM is typically not privy to conversations between the CEO and CHRO. While some of our HR survey respondents may not themselves participate in those one-on-one discussions with the CEO, they may help prepare reports for the CHRO to discuss with the CEO. The divergence of responses between risk and HR is evidence that neither group has a clear enough picture of what each is reporting to senior management and the board.
Chart 9
Boards understanding of human capital risk: ERM vs. HR
ERM
45.3%a 67.0a A great extent a, b
45.3%b 22.0b A moderate extent
9.4%
HR
11.0
Small/no extent
The difference between HR and ERM is signicant at the 90 percent level.
Table 5
Leaders understanding of human capital risk vs. ERM and SWP maturity
ERM Mature n=33 A great extent Board A moderate extent Small/no extent A great extent CEO A moderate extent Small/no extent A great extent CFO A moderate extent Small/no extent A great extent Chief Risk Officer A moderate extent Small/no extent A great extent Chief HR Officer A moderate extent Small/no extent 51.5% 36.4% 12.1% n=33 72.7% 24.2% 3.0% n=33 66.7% 27.3% 6.1% n=26 73.1% 19.2% 7.7% n=32 90.6% 6.3% 3.1% n=32 A great extent Business units A moderate extent Small/no extent 81.3% 15.6% 3.1% Middle n=10 20.0% 70.0% 10.0% n=11 81.8% 18.2% 0.0% n=11 63.6% 27.3% 9.1% n=9 66.7% 11.1% 22.2% n=9 100.0% 0.0% 0.0% n=10 60.0% 30.0% 10.0% Early n=9 55.6% 44.4% 0.0% n=9 55.6% 44.4% 0.0% n=9 77.8% 0.0% 22.2% n=6 83.3% 0.0% 16.7% n=9 100.0% 0.0% 0.0% n=9 66.7% 33.3% 0.0% Mature n=16 87.5% 12.5% 0.0% n=17 100.0% 0.0% 0.0% n=17 82.4% 17.6% 0.0% n=11 81.8% 18.2% 0.0% n=17 100.0% 0.0% 0.0% n=16 93.8% 6.3% 0.0% SWP Middle n=46 69.6% 21.7% 8.7% n=47 85.1% 12.8% 2.1% n=47 66.0% 27.7% 6.4% n=34 67.6% 29.4% 2.9% n=47 91.5% 8.5% 0.0% n=47 72.3% 23.4% 4.3% Early n=37 54.1% 27.0% 18.9% n=42 66.7% 26.2% 7.1% n=37 51.4% 37.8% 10.8% n=23 47.8% 39.1% 13.0% n=42 83.3% 14.3% 2.4% n=42 47.6% 40.5% 11.9%
The significance between highlighted percentages within the same row is significant at the 90 percent level.
23
Table 6 shows regional variations in regard to leaders understanding of human capital risks. Asia-Pacific respondents are more likely (86 percent) than their North American counterparts (51 percent) to say that the board understands HCR to a great extent. These differences can be readily explained by their regional context. The Asia-Pacific companies (primarily from India and China) operate in high-growth markets where the supply of skilled talent is arguably the largest barrier to continued growth,22 so boards are likely to be well versed on this issue. When U.S. boards discuss HCR, they focus primarily on succession planning, compensation, and loss of key personnelissues that affect the senior leadership teamrather than on a broader view of workforce issues.
Table 6
Leaders understanding of human capital risk by region

North America n=93 A great extent Board A moderate extent Small/no extent A great extent CEO A moderate extent Small/no extent A great extent CFO A moderate extent Small/no extent A great extent Chief Risk Officer A moderate extent Small/no extent 50.5% 38.7% 10.8% n=99 71.7% 24.2% 4.0% n=96 60.4% 30.2% 9.4% n=68 66.2% 25.0% 8.8% n=97 A great extent 87.6% 10.3% 2.1% n=96 Chief HR Officer Europe n=39 66.7% 17.9% 15.4% n=41 80.5% 17.1% 2.4% n=39 74.4% 20.5% 5.1% n=27 59.3% 29.6% 11.1% n=41 95.1% 4.9% 0.0% n=41 Asia-Pacific n=21 85.7% 14.3% 0.0% n=21 100.0% 0.0% 0.0% n=21 71.4% 23.8% 4.8% n=15 86.7% 13.3% 0.0% n=20 95.0% 5.0% 0.0% n=21
Standing Group to Oversee Human Capital Risk
A moderate extent Small/no extent
Fewer than half of companies A great extent 70.8% 56.1% 81.0% Business (41percent) have standing groups to A moderate extent 21.9% 39.0% 14.3% units oversee HCR. Whether companies Small/no extent 7.3% 4.9% 4.8% have such a group did not vary sigThe significance between highlighted percentages within the same row is significant nificantly based on the respondents at the 90 percent level. function (ERM vs. HR), industry, or company size. However, it is interesting to note that more than half of the Asia-Pacific respondents participates in assessing HCR and about the effectiveness said they have a standing group, compared to 41 percent of their companies HCR assessment process (Tables 7 in North America and 35 percent in Europe. and 8). Companies with Mature SWP (71 percent) or Middlestage SWP (44 percent) are more likely to have a standing group than those with Early-stage SWP (16 percent). ERM maturity was not related to whether companies have a standing group (Chart 10). While we did not inquire about the makeup and operation of these standing groups, anecdotal accounts indicate that some companies use existing forums, such as the corporate risk committee or council, while others have developed groups specifically to discuss human capital risks. However, our survey finds significant differences in the views of ERM and HR executives regarding who Standing groups help to surface the thorniest human capital risks and to show how some businesses units may be addressing them. The discussion is especially helpful in prioritizing these risks. It is human nature to assume the risks that we personally face are most important. A standing group made up of people from diverse functions and business units may shine a light on other, more pressing risks that the enterprise should tackle first. A standing group for HCR would likely include business leaders or their direct reports who have a unit-level perspective on human capital issues, HR leaders who bring an enterprise-wide perspective, and representatives
24
Chart 10
Who participates in assessing human capital risk?

We asked respondents to indicate which of the following functions participate in assessing HCR: human resources, enterprise risk management, internal audit, and the business (Chart 11). Not surprisingly, human resources was the most prominent participant (81 percent), followed by the business (63 percent), enterprise risk management (38 percent) and internal audit (23 percent). There was a small number of additional write-ins, which included the participation of the board, the CEO, the executive team, finance, legal, and strategy. ERM respondents and HR respondents differed in their answers (Chart 12). Not surprisingly, ERM respondents are more likely (56 percent) than the HR respondents (28 percent) to say that ERM participates in the assessment process. Almost twice as many HR respondents (27 percent) than ERM respondents (15 percent) said that internal audit participates in the HCR assessment process. One possible explanation for these differences is that unless companies develop a formal process for assessing HCR, the details of that processincluding who participatesmay be unclear or open to interpretation. This conclusion was not supported by further analysis, however. The divergence between ERMs and HRs understanding of who participates in assessing human risk held steady, regardless of whether companies have a formal assessment process. Who participates in assessing HCR also varies based on the maturity of companies ERM and SWP processes, as shown in Table 7. More than two-thirds (69 percent) of companies with Mature-stage ERM report that ERM participates in assessing HCR, versus 50 percent of Middle-stage companies and just 27 percent of Early-stage companies.
Standing group that oversees human capital risk by ERM and SWP maturity level
Mature Middle Early 50.0% ERM 30.0 55.6
70.6%a SWP 16.2a,b 44.4b
a The difference between Mature and Early stage is signicant at the 90 percent level. b The difference between Middle and Early stage is signicant at the 90 percent level.
from other relevant functions, such as legal, compliance, finance, environmental health and safety, and strategy, and an experienced ERM professional to facilitate the discussion. Depending on the maturity of the companys ERM process, a standing corporate risk committee is likely to meet quarterly or more frequently, if the process is in its early phases. That group may be the right place to evaluate human capital risks at the enterprise level. While these results provide a snapshot of the prevalence of standing groups to oversee HCR, the survey did not dig deeper into this topic. The Conference Board plans to conduct future research to investigate the nature, composition, and workings of these standing groups, where they exist.
Chart 11
Assessing Human Capital Risk

Human capital risk assessment is the process by which companies identify people-related risks, weigh the likelihood of their occurrence and impact, including their potential interactions, and then set risk management priorities. The survey asked three related questions on this topic: 1 Who participates in assessing human capital risk? 2 Does your company have a formal process to assess
human capital risk?
Who participates in human capital risk assessment

Human Resources The business Enterprise Risk Management Internal Audit Other 23.3 62.8
81.4%
37.8
7.0
3 How effectively does your company assess human

capital risk?
25
Chart 12
Chart 13
Who participates in human capital risk assessment: ERM vs. HR

HR Enterprise Risk Management Risk 28.3%a 55.9%a 27.4b Internal Audit 15.3b 79.6 84.7 62.8 The business 62.7 8.8 Other 3.4
Who participates in human capital risk assessment by region

North America Europe 36.1% Enterprise Risk Management 37.2% 47.6% Asia-Pacic
23.1 Internal Audit 20.9 28.6
Human Resources
79.6 Human Resources 81.4 90.5 57.4a The business 65.1 85.7 a
a, b
The difference between HR and Risk is signicant at the 90 percent level.
a The difference between North America and Asia-Pacic is signicant at the 90 percent level.
SWP maturity, in contrast, turns out to be more broadly related to who participates in assessing HCR. The more mature a companys SWP process, the more likely it is that ERM, human resources, and the business all participate in the process.
Table 7
Who participates in human capital risk assessment by ERM

Mature ERM Enterprise Risk Management Internal Audit Human Resources The business SWP Enterprise Risk Management Internal Audit Human Resources The business n=35 68.6% 17.1% 82.9% 65.7% n=18 50.0% 44.4% 88.9% 83.3% Middle n=12 50.0% 16.7% 91.7% 66.7% n=51 31.4% 21.6% 90.2% 68.6% Early n=11 27.3% 9.1% 81.8% 54.5% n=43 14.0% 25.6% 62.8% 46.5%
The survey found one significant difference based on region: 86 percent of respondents from Asia-Pacific said that their businesses were involved in HCR assessment, versus only 57 percent in North America and 65 percent in Europe (Chart 13). This finding is consistent with the feedback we have received when presenting these research results to corporate audiences in the United States, Europe, and Asia-Pacific. Indian companies seem to get that HCR is a significant business risk, as expressed by S.Varadarajan, chief human resource officer at Quatrro, at the beginning of this report.
Does your company have a formal process to assess human capital risk?
Survey responses were almost evenly split between companies that do (52 percent) and do not (48 percent) have a formal process for assessing HCR (Chart 14). Once again, ERM and HR executives held divergent views. ERM respondents were more likely (64 percent) to have a formal process than HR respondents (46 percent). What might account for this difference?
26
Chart 14
Formal process for assessing human capital risk: overall and ERM vs. HR
HR ERM Overall
46.2% a 63.8 a 52.0
of ERM respondents who reported having a formal process to assess HCR (over 60 percent) was quite consistent, regardless of their ERM maturity (Chart 15). The fact that ERM maturity and formal assessment appear unrelated is important. It suggests that the robustness of a companys ERM capabilities provides no guarantee that its human capital risks are formally assessed or that ERM is aware of that assessment, if it exists. The relationship between SWP maturity and having a formal process to assess HCR is stronger. Seventy-one percent of companies with Mature-stage SWP and 53 percent of those at the Middle stage have a formal process for assessing HCR, compared to just 26 percent at the Early stage of SWP. Thus, the more mature a companys SWP process, the more likely that the company has a formal HCR assessment process. It is important to note, however, that SWP and HCR assessment are not necessarily the same, as some companies with Middle- or even Maturestage SWP do not have formal process for assessing HCR.
a The difference between HR and ERM is signicant at the 90 percent level.
Does your company have a formal process for assessing human capital risk? is a question built on the assumption that having a formal process is objectively knowable by all respondents, regardless of their role or function (ERM or HR). It is possible, however, that ERM respondents are more aware of the formal process for assessing HCR than are their HR colleagues, particularly if ERM is responsible for overseeing that process. Alternatively, if ERM is not responsible for assessing HCR, ERM may assume incorrectly in some casesthat HR has a formal process for doing so. While our research does not provide a conclusive explanation, the findings further demonstrate that ERM and HR are not well aligned. Are companies with a Mature ERM and/or SWP process more likely to have a formal HCR assessment process? No and yes, according to the survey results. The percentage
How effectively does your company assess human capital risk?

What ultimately matters, however, is how effectively companies assess HCR, one of two outcome variables shown in Figure 1 (p. 16). In response to this survey question, 31percent of all respondents answered effectively, 45percent somewhat effectively, and 24 percent ineffectively (Chart16). Roughly the same portion of ERM (33 percent) and HR respondents (30 percent) said their company assesses HCR effectively. Several factors were found to be significantly related to effective assessment of HCR.
Chart 15
Formal process by ERM and SWP maturity level

Mature Middle Early 70.6% a SWP 25.6 a, b 53.1 b
To our great surprise, ERM maturity was not significantly related to effective assessment (Table 8). However, SWP maturity was: The majority of companies with Mature-stage SWP (65 percent) assess HCR effectively.
Chart 16
Effectiveness of human capital risk assessment: ERM vs. HR

65.5%
ERM
66.7 62.5
HR
30.4%
42.2%
27.5%
ERM
32.7 31.1 Effective
51.0 45.0 Somewhat effective
16.3 23.8 Not effective
a The difference between Mature and Early stage is signicant at the 90 percent level. b The difference between Middle and Early stage is signicant at the 90 percent level.
Overall
27
The extent to which leaders understand HCR was related to effective HCR assessment: Companies in which leaders understand human capital risk to a great extent assess HCR more effectively than companies in which leaders have less understanding. The participation of ERM and internal audit is significantly related to effective HCR assessment. This may be the case simply because ERM and internal audit already
Table 8
have a risk assessment process that they use across many areas of the organizations. Survey respondents may believe that an established process assesses HCR more effectively.
What combination of factors makes a difference in effective HCR assessment?

Having identified which individual variables were significantly related to effective HCR assessment, we analyzed which combination of variables differentiates companies with effective HCR assessment from others. This statistical analysis goes beyond the simple bivariate relationship between each input variable and the outcome, discussed above. It narrows the field by selecting a smaller bundle of factors that, taken together, significantly increases a companys likelihood of effectively assessing HCR. We found that a combination of four factorsa formal assessment process, HRs participation, the businesss participation and a standing group to oversee HCRis predictive of effective HCR assessment. Other factors that our earlier bivariate analyses found to be related to effective assessment may add value and be worth doing, but they werent what separated the leaders in HCR assessment from the rest of the pack.
Effectiveness of human capital risk assessment by ERM and SWP Maturity

Mature SWP Effective Somewhat effective Not effective ERM Effective Somewhat effective Not effective n=17 64.7% 29.4% 5.9% n=29 34.5% 51.7% 13.8% Middle n=47 36.2% 48.9% 14.9% n=10 30.0% 50.0% 20.0% Early n=37 5.4% 40.5% 54.1% n=9 33.3% 44.4% 22.2%
Teasing Out Significant Differentiators

Because our two outcome variablesHCR assessment and HCR managementwere measured on an ordered, three-point scale (effective, somewhat effective, not effective), we used ordinal logistic regression modeling to determine factors that differentiate more effective outcomes from less effective ones. The explanatory factors we included in each model were: (1) who participates in assessing HCR, (2) does your company have a formal process for assessing HCR, and (3) does your company have a standing committee that oversees HCR. Like other multiple regression methods, an ordinal logistic regression requires complete data for each casei.e., company. Surveys with missing responses cannot be included in the analysis. To maintain as large a sample size as possible, we chose to drop a few variables from the ordinal logistic regression: including the 25 percent of respondents who answered Dont know in regard to the CROs understanding of HC risk, we omitted leaders understanding of HCR from this analysis.
ERM and SWP maturity ERM respondents answered

questions related to ERM maturity, but HR respondents did not. HR respondents answered regarding SWP maturity, although ERM did not. Thus, both groups were missing data for one of the independent variables. For this reason, we omitted both ERM maturity and SWP maturity from the ordinal logistic regression. What we gain from the ordinal logistic regression is a clearer picture of which factors set apart companies with leading practices in HCR assessment and management. What we lose is the opportunity to put all of the variables in our model to the same test, although the bivariate analyses tell us the strength of the association between each of the input variables and the two outcomes.
Leaders understanding of human capital risk

Because of the large number of missing cases,
28

The Holy Grail of all of these efforts is to be able to effectively manage an organizations human capital risks. As Chart 17 illustrates, companies were most likely to rate themselves as somewhat effective.
Chart 17
Effectiveness of human capital risk management overall
25.0 Not effective
31.6% Effective
It makes intuitive sense that the more senior executives understand HCR, the more likely they are to effectively manage those risks. Our findings support this in regard to two types of leaders (Table 9). Companies whose boards have a great understanding of HCR are more likely to manage those risks effectively (42 percent) than are companies whose boards have some understanding (21 percent). When the CFO understands HCR to a great extent, companies are more likely (40 percent) to manage it effectively than companies whose CFOs understanding is only moderate (18 percent). Nearly half (46 percent) of companies that have a formal process for assessing HCR manage it effectively, versus 17percent of companies without a formal process. Having a standing group to oversee these risks is also linked to effective HCR management. The majority (56percent) of companies with a standing group manage
43.4 Somewhat effective n=152
Table 9
Senior executives understanding of HCR versus effective HCR management

A great extent n=86 Effective Board Somewhat effective Not effective 41.9% 46.5% 11.6% n=117 Effective CEO Somewhat effective Not effective 36.8% 46.2% 17.1% n=95 Effective CFO Somewhat effective Not effective 40.0% 42.1% 17.9% n=70 Effective Chief Risk Officer Somewhat effective Not effective 44.3% 44.3% 11.4% n=132 Effective Chief HR Officer Somewhat effective Not effective 34.8% 43.9% 21.2% n=100 Effective Business units Somewhat effective Not effective 39.0% 40.0% 21.0% A moderate extent n=43 20.9% 41.9% 37.2% n=29 6.9% 41.4% 51.7% n=39 17.9% 53.8% 28.2% n=26 15.4% 53.8% 30.8% n=13 0.0% 38.5% 61.5% n=37 13.5% 59.5% 27.0% Small/no extent n=14 7.1% 35.7% 57.1% n=4 25.0% 0.0% 75.0% n=12 8.3% 33.3% 58.3% n=8 25.0% 12.5% 62.5% n=2 0.0% 0.0% 100.0% n=10 10.0% 20.0% 70.0%
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Table 10
Effectiveness of human capital risk management by ERM and SWP Maturity

Mature SWP Effective Somewhat effective Not effective ERM Effective Somewhat effective Not effective n=17 70.6% 23.5% 5.9% Middle n=45 37.8% 42.2% 20.0% Early n=39 10.3% 41.0% 48.7%
SWP maturity is a better predictor of effective HCR management than ERM maturity. While just 38 percent of companies with Middle-stage SWP manage HCR effectively, 71 percent with Mature-stage SWP do so. With ERM, the maturity level has less impact, as shown in Table 10. The majority of ERM respondents at all three levels of maturity manage HCR somewhat effectively.
n=29
34.5% 51.7% 13.8%
n=11
27.3% 54.5% 18.2%
n=9
22.2% 55.6% 22.2%
What Combination of Factors Makes the Difference?

The final step in our analysis was to statistically test which combination of factors differentiates companies that effectively manage human capital. Three factors were significant: 1 A formal process to assess human capital risk 2 A standing group to oversee human capital risk 3 The businesss participation
human capital risks effectively, as compared to 14 percent of companies without a standing group. When internal audit and/or the business participate in the assessment process, the company is more likely to manage HCR effectively. The results by region did not vary greatly (Chart 18), although a higher percentage of Asia-Pacific companies (38 percent) manage HCR effectively than do companies in Europe (31percent) and North America (30 percent).
The fact that all three factors also differentiate companies with effective HCR assessment makes them extremely important for company practice. Again, this short list doesnt invalidate the importance of other factors that, taken individually, were found to be related to effective HCR management. For example, in the majority of companies that effectively manage HCR, the CEO understands HCR to a great extent, but CEO understanding isnt what distinguishes companies with effective HCR management from others with less effective practices.
Chart 18
Effective HCR management, by region
North America Europe AsiaPacic
30.4%
43.5% 43.6 42.9
26.1%
30.8 38.1
25.6
19.0 Not effective
Effective
Somewhat effective
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Research Conclusions
The survey results provide companies with important new insights regarding human capital risk. Where HCR ranks in relation to other risks Overall, human capital risk ranks fourth out of 11 risks, based on its impact on business performance, and tenth on the list in terms of how effectively companies are managing these risks. This ranking puts human capital ahead of several other types of risk, such as financial, reputational, supply chain, and IT risks, that companies typically include as part of their ERM process. However, ERM respondents ranked HCR as one of the least effectively managed risks, second only to political and/or country risk. Taken together, these two rankings point to a glaring shortcoming in current practices and stress the importance of systematic HCR management. Which human capital risks have the greatest business impact Out of 21 specific types of human capital risk (see Examples of Human Capital Risk, p. 7), five top the list, based on their business impact: 1 Shortage of critical skills within the companys
workforce
What differentiates companies with effective HCR assessment? The combination of four variables emerges as statistically significant: having a formal process to assess, HRs participation, the business participation, and having a standing group to oversee HC risk.
Effective HCR management

Factors that are significantly related to effective HCR management Companies with a formal process for assessing HCR and/or a standing group that oversees HCR are significantly more likely to say they manage HCR effectively than somewhat effectively or not effectively. Other factors related to effective HCR management: the board and the CFOs understanding of HCR; the board and internal audits participation in assessment; and SWP maturity. ERM maturity is not related to effective HCR management, however. What differentiates companies that effectively manage HCR? When we look for which combination of variables makes the difference, we find that a standing group thatoversees human capital risk, a formal assessment process, and business participation in assessment significantly increases the likelihood of a companys effectively managing HCR. Many companies lack the three most critical elements of effective HCR assessment and management Nearly half lack a formal assessment process, and 59 percent do not have a standing group to oversee HCR. In 37 percent of companies, the business doesnt participate in assessing HCR. These findings point to specific actions companies can take if they want to become better at managing HCR.
2 Compliance/regulatory issues 3 Succession planning/leadership pipeline 4 Gap between talent capability and business goals 5 Shortage of critical skills in the external labor force The maturity of SWP and ERM Companies ERM capabilities are far more mature than their capabilities in SWP.
Effective HCR Assessment

Factors significantly related to effective HCR assessment include having a standing group to oversee human capital risk and a formal process for assessing it. The extent to which leaders (the board, CEO, CHRO, CRO, CFO, and business) understand HCR is significantly related to effective assessment, as is the participation of internal audit and ERM in the assessment process. SWP maturity is significantly related to effective HCR assessment, but ERM maturity is not.
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Siloed Functions, Siloed Processes

Disconnects between HR and ERM the survey finds significant differences between ERM and HR executives regarding the following:
Regional Differences
Companies headquartered in Asia-Pacific stand apart While the survey finds a number of regional differences, the most interesting pattern emerges in regard to AsiaPacific companies. Compared to companies headquartered elsewhere, they are:
The business impact of all risks The business impact of human capital risks Having in place a formal assessment process How effectively their companies assess HCR Who participates in assessing HCR The boards understanding of HCR
More likely to have a board that understands HCR More likely to have the business involved in assessing HCR More likely than North American companies to say that the inability to compete for critical talent and executive compensation as significant human capital risks. Less likely than European companies to view outsourcing and vendor management as a significant risk Less mature in ERM More mature in SWP More likely to have a formal process for assessing HCR* More likely to have a standing group to oversee HCR* The most likely to say they assess HCR effectively* The most likely to say they manage HCR effectively*
The pervasiveness of these differences strongly suggests that, in many organizations, ERM and HR are not on the same page in regard to many aspects of human capital risk and are reluctant to step into each others territories. This disconnect may well be the greatest obstacle to improving HCR management. No matter how effective a companys ERM and SWP processes may be, they do not, in and of themselves, ensure effective HCR management. Rather than running parallelbut separateprocesses that perpetuate functional silos, ERM and HR need to build a common understanding of HCR and an architecture for managing it.
*This difference, while interesting, was not statistically significant.
Because our sample was relatively small for Asia-Pacific companies, these conclusions are preliminary, although they clearly call for further investigation. However, the regional differences we found are consistent with those in The Conference Board 2011 CEO Challenge survey: AsiaPacific executives chose talent as their foremost issue, higher than their counterparts in other regions.23 Given the importance of talent to Asia-Pacific CEOs, its not surprising that companies in the region have more mature SWP processes and greater understanding of HCR at the board level than companies based elsewhere. The results of our HCR research deepen our understanding of the issue, current company practices, and the views of two key stakeholdersERM and HR. The research findings also provide a foundation for future research, discussed on page 36, and suggest practical steps companies can take.
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Practical Implications
The results of this research have practical implications for companies that want to assess and manage HCR more effectively. 1 Start the conversation between HR and ERM Many
elements of effective HCR assessment and management probably already exist in your organization. The trick is to find them and fit them together. The conversation between risk and human resources must start by educating each other about what is already known and understood. The questions presented in the Appendix (see Starting a Cross-Functional Dialogue, p. 38) may serve as a starting point. If human capital risks are not within the scope of current ERM work, bringing the CRO and CHRO together is the first step. HR can show ERM leaders what they have to offer in terms of human capital data, analytics, and modeling capabilities. ERM tools can help HR frame human capital risks in a way that business leaders and senior corporate leaders understand.
4 Leverage what youve already got HR has significant

workforce data and analytics that can help winnow critical priorities from a lengthy laundry list of human capital risks. If your company has already implemented SWP, the information and insights it produces can fuel discussions about HCR. While our research found that companies with Mature stage SWP are more likely to manage HCR effectively than those at the Early or Middle stages, SWP maturity is not a prerequisite for starting the conversation. ERM can provide tools such as self-assessment surveys or can help to lead risk workshops. While risk assessment surveys may include several questions on HCR that are already being answered by business unit executives, they may not be capturing the broader perspective of corporate HR. HR leaders can use these tools to compile risk data and perceptions from across the HR organization.
2 Develop a common language to describe human

capital risk Much of what HR producesHR strategy, hiring forecasts, staffing plans, human capital metrics, and so onis all about HCR management. It may not be recognized as such, however, because it uses HR language. ERM language is not inherently superior, but it has the advantage of already being accepted by the business. ERM vocabulary can fairly easily be applied to human capital. Using a common language will help to communicate human capital risks across the organization. Royal Bank of Scotland went so far as to reject the term strategic workforce planning in favor of human capital risk, because it would be readily understood by anyone who operates in the financial world.24
5 Develop a formal process for assessing HCR Having a

formal assessment process tops the list of factors that contribute to effective HCR assessment and management. While our research did not investigate what this process should look like, there is unlikely to be a single answer. Rather, ERM and HR leaders should work together to identify existing risk-assessment processes that might serve the purpose, rather than starting over with a new process. Not every risk deserves to be escalated to an enterprise level. However, there are likely to be some common risks across businesses and geographies that demand greater attention, analysis, and resources. It takes a companywide understanding of human capital risks to effectively prioritize and decide which risks to treat locally and which to elevate to a higher level. It may require more than one cycle to learn what the appropriate thresholds are for escalating risks. (See Inventory of Human Capital Risks, pp. 3940, for an illustration of capturing and assessing HCR.)
3 Frame human capital risks as business risks and

quantify, when possible The light bulb may go on for some executives when the discussion moves from HR issues, such as attrition, to their impact on performance measures, such as efficiency, cost, or productivity. To the degree possible, quantify human capital risks. Business leaders are comfortable understanding risks that can be measured.
6 Assessment must be followed by risk treatment The

company must also assign risk ownership, develop and execute risk mitigation plans, assign accountability for the mitigation, and ensure robust reporting and monitoring. These same steps are necessary for effective SWP.
33
7 Consider what form of standing group could effectively manage HCR Having a standing group to oversee HCR is the second factor that differentiates companies with effective HCR management, although the design or structure for such a group is not specified. The CHRO, CRO, and others should evaluate what would work best for the organization.
9 Raise critical human capital risks to the board level

Most boards customarily discuss compensation and succession planning. These topics can provide a springboard to their review of a broader range of human capital risks.25
10 Businesses should ultimately own these risks, so get

them involved Business should participate in the risk process, from the inventory and assessment through devising risk mitigation strategies. Executives and managers who are responsible for achieving certain targets will have the best idea about how to treat risks to meet those objectives.
8 Rethink risk governance HRs participation is a key

factor that differentiates effective HCR assessment. The CHRO needs to be part of a corporate risk committee, which is not a common practice. CHRO insights can be particularly valuable in understanding how human capital risks impact other business risks and vice versa. Without HRs input, critical risks may be overlooked. Business units are likely to raise specific human capital risks as part of the units overall business risk assessment, which is then folded into the corporate-wide assessment. However, HR has the enterprise-level view and can add important insights and perspective regarding common risks across the entire organization. Human capital risks are integrally linked to corporate strategy and the board should explicitly consider them.
34
Research Methodology, Limitations, and Future Steps

The research was designed to collect baseline data about human capital risk, a topic that has not been studied extensively, and about company practices for assessing and managing this type of risk.
Methodology
We conducted an online survey in two versions: The version intended for HR respondents included questions based on The Conference Boards maturity scale for strategic workforce planning; the version for risk professionals included questions derived from The Conference Boards maturity scale for enterprise risk management. Both versions included identical questions about human capital risk. The SWP maturity scale was developed from The Conference Board maturity model of strategic workforce planning.26 Based on our previous research (see p. 45) and ongoing relationships with more than 100 companies that have implemented SWP, this model describes how companies SWP capabilities typically evolve over time. Responses to the SWP maturity questions were scaled to create three levels of SWP maturity: Early, Middle, and Mature. (See pp. 4243 for the maturity scale.) The ERM maturity scale was similarly constructed based on The Conference Boards previous research and its ongoing relationships with companies with an interest in ERM. Companies responses to the survey questions that focused on ERM were scaled to create the same three levels of maturity (see p. 41). The first wave of invitations to participate in the survey was e-mailed in July 2010, followed by two additional waves in September and November 2010.
Risk Management Invitations were sent to those who had attended The Conference Boards annual ERM conference and to five of its Councils whose members oversee or are linked to ERM:
Strategic Risk Management Council Council on Strategic Risk Management Council of Chief Audit Executives Chief Audit Executives Council South Asia Council on Governance and Risk Management
Human Resources Invitations were sent to members of 13 HR-related Councils of The Conference Board:
Human Resources Executive Leaders Council Strategic Workforce Planning Council Council of Talent Management Executives I & II Midmarket Human Resource Executives Global Human Resources Council I & II Council on Strategic Workforce Planning European Council on Strategic Workforce Planning South Asia Council on Human Resources Asia-Pacific Human Resources Council China Human Resources Council Asia-Pacific Talent, Leadership Development and Organizational Effectiveness Council
In all, 818 persons were invited to participate in the survey; of these, 172 did so, resulting in a response rate of 21percent.
35
Survey Sample
One hundred sixty-one companies participated in the survey. In the few instances where we received more than one HR response from the same company, we used the data provided by the most senior respondent. In no case did we receive two risk responses from the same company. Two-thirds (66 percent) of survey respondents are HR professionals; 34 percent are responsible for ERM. In a handful of cases (11), we received both an HR response and an ERM response from the same company (although each completed a different version of the survey).
Respondent company profiles

Industry Agri/mining Manufacturing Financial serivces Non-financial services Energy/Utilities Pharma/Medical Total Revenues Less than 1 billion $1 to less than $5 billon $5 to less than $10 billion $10 to less than $20 billion $20 to less than $40 billion $40 billion or more Total Full-Time Employees Less than 1,000 1,000 to less than 10,000 10,000 to less than 50,000 50,000 to less than 100,000 100,000 or more Total Region North America Europe Asia-Pacific Total n=172 5.2% 36.6% 11.6% 26.7% 11.6% 8.1% 100.0% n=149 10.1% 17.4% 20.1% 18.1% 12.1% 22.1% 100.0% n=140 3.6% 25.7% 34.3% 20.7% 15.7% 100.0% n=172 62.8% 25.0% 12.2% 100.0%
n=59 25.4 Europe 10.2 Asia-Pacic 64.4% North America n=113 24.8 Europe 13.3 Asia-Pacic 61.9% North America n=172 34.3 Risk 65.7% HR
HR vs. Risk response rate
HR
Risk
36
Limitations
Real-world research is seldom conducted without some compromises. We acknowledge a few here. 1 In nearly all cases, we had either an ERM or an HR
respondent from each company. Thus, when we compare HR to ERM responses, we are also comparing two different subsamples of companies. It is possible, therefore, that the observed differences in the outcome variables arent due to the respondents function, but rather to the companies themselves. To test this possibility, we compared the company characteristics of the two functional groups and found no significant difference based on company size, region, or industry.27 These results support the conclusion that the differences between ERM and HR responses reflect functional differences rather company differences.
Next Steps in Research

In addition to identifying practical steps companies can take to address HCR, this study also provides a foundation for future research. While The Conference Boards research agenda will be shaped, in part, by feedback on this initial study, we have identified several questions that will advance our understanding of HCR: 1 What can we learn from companies that have already
established a process and structure for managing human capital risk? What led these companies to get started? What obstacles did they encounter or overcome?
2 What does a formal process for assessing human capital

risk look like? (We assume that it need not be the same for every company.) Which factors should companies consider in developing their own formal process for assessing HCR?
2 The survey did not assess respondents level of

responsibility. As a result, it is likely that respondents perspective may range from a broad, strategic view to one that focuses on a specific discipline within ERM or HR. Within the HR sample, job titles include chief human resources officer; executive vice president, corporate human resources; director, talent development, Asia; vice president and deputy head, global human resources; as well as more specialized titles such as manager, workforce planning and analytics; or general manager, global workforce development. Within the ERM sample, respondents included vice president, chief risk officer; head of internal audit; director, risk management; and advisor, corporate governance. Because job titles can be misleading, they are an unreliable indication of hierarchical level or perspective. Nonetheless, our failure to control for organizational level within ERM and HR is likely to have had some impact on the research findings, although the extent of that impact is unknown.
3 What should the governance structure be to manage

human capital risk?
4 How do companies measure the effectiveness of human

capital risk management?
Clearly, the differences found between companies based in Asia-Pacific versus other regions warrant further investigation, which we will pursue.
3 Despite efforts to increase the number of responses

from Asia-Pacific, only 12 percent (n=21) of our sample comes from that region, too few for us to draw research conclusions with confidence. This is particularly regrettable because the data we do have suggest that Asia-Pacific companies may be much more experienced in managing HCR than those in other regions, a hypothesis we plan to test in future research.
Appendix
Starting a Cross-Functional Dialogue Inventory of Human Capital Risks, Crompton Greaves Ltd. ERM Maturity Model SWP Maturity Model
38
Appendix
Starting a Cross-Functional Dialogue
Questions for HR to Ask of ERM Questions for ERM to Ask of HR
Questions to learn about current processes and capabilities
What is the mandate of ERM today? How has ERM evolved at our company over the past several years? Has the financial crisis been a major influence in the changes youve seen? What value does ERM deliver to the organization? What does the ERM process look like and how is it integrated with other planning processes in the businesses and functions? Who participates? At what organizational level do you conduct ERM (BU, region, enterprise)? What are the inputs? Who provides this information? How do you get the attention of participants? What are the outputs? Can you show me some examples? How are the outputs used, and by whom? What are the strengths of our current ERM process? Where do we need to improve? Do you quantify or measure human capital risk? If so, how? How can HR help to provide an enterprise wide view of HC risk? What can HR/SWP do to help ERM?
How has HRs ability to manage human capital (supply, demand, gaps, business impacts) evolved at our company over the past 10 years? What areas of human capital represent the largest risks to our company? Do we have a strategic workforce planning process? If so, how is it integrated with other planning processes in the businesses and functions? Who participates? At what organizational level do you conduct SWP (BU, region, enterprise)? What are the inputs? Who provides this information? How do you get the attention of participants? What are the outputs? Can you show me some examples? How are the outputs used, and by whom? What are the strengths of our current process? Where do we need to improve? How do you quantify or measure human capital risk? How do SWP and other HR processes add value to the organization?

Questions about HCR
To what degree does HCR factor into the overall risk profile today? For purposes of building the risk profile, does ERM track HR compliance? How can we look at some of the interrelations between HCR and other types of risks in a meaningful way? How do we ensure that assessing and managing HCR isnt an HR-only exercise? How do we bring HR into ERMs risk conversations with the business, executive team, and board?
What are the underlying assumptions about human capital in our business forecasts? (e.g., are we assuming an adequate internal and external supply?) Which of these assumptions should be reexamined or do we know to be incorrect? What is the risk that our organizational structure does not support our strategic intent? What is the risk that our company culture does not support our strategic intent? Do we have sufficient resources to achieve expected growth in all business areas? In which specific areas (key roles, critical skills, functions, locations, etc.) are we most at risk? Where might excess resources hinder results? What is the risk that we do not attract or retain the right talent to achieve our strategic targets? What are our leadership competencies and how do we ensure those and nurture them in a rapidly growing company? Which HR policies, programs and practices pose potential risks? How do we manage those risks?
Questions about Future Collaboration
How could HR enhance its current practices to capture, assess, and manage the people issues that might also be called human capital risks? What ERM tools might we find useful? How could ERM help HR enhance our current processes for capturing and prioritizing HC risks? If HR were to become a formal participant in ERMs risk assessment and management process, what would that look like?
What might be the benefits of HR partnering with ERM to assess and manage HCR? What are the obstacles or drawbacks? How might this work? Who should be involved? What initial steps could we take?
39
Inventory of Human Capital Risks, Crompton Greaves Ltd. (Avantha Group)

Categories of HCR with a Representative Example and Mitigation Tactic
Risk (Bulleted factor is absent, inadequate or ineffective) I. HR ENTERPRISE RISKS HR Strategy Mitigation Responses
Linkage of HR strategy & plans with business strategy and plans, both short- and long-term
HR Mission & plans are appropriately aligned with the business, the organizations size and complexity
Competence of the HR Function
Use of business systems and IT to facilitate HR
Development and use of IT portal to manage the entire life cycle of employees from recruitment to separation, including Talent Management, Training and Development and Competencies.
Leadership Development (LD)
Formal LD processes lead to reactive recruitment
LD activity is linked to business drivers and companys future business directions
Competencies & Evaluation of Potential
Inadequate measures of requisite skills and competencies that affect productivity/business objective
Competencies measured by department/unit/division heads, 360-degree evaluation, external evaluation
Talent Acquisition & Retention
Attrition of superior talent
Clear KPIs for Unit Head and HR to minimize attrition of key talent and superior performers
Succession Planning
Impact on business continuity due to an inadequate number of successors
1-2 successors exist for all key positions and development for these potential successors is conscious and progressive
HR Responses to Change
Negative impact or misalignment between employees national cultures
Conduct cultural sensitivity training programmes and Employee engagement surveys at pre-determined intervals and tracking of action plans, with periodic reviews
II. HR PROCESS RISKS Recruitment & On-boarding
Clear recruitment processes to deliver best-fit selections
Recruitment processes are designed to evaluate candidates based on job description and competency framework
Goal Setting & Performance Management
Absence of goal setting processes which have clear metrics, accountabilities and time frames
Goals setting is linked to business imperatives, job roles and responsibilities Performance Management System has adequate built-in checks and balances
Training & Development
Linkage between training initiatives and organisational objectives, goals and business drivers
Training and Development plans address the short, medium and long term plans of the organisation and are linked to business drivers
Source: Avantha Group (reproduced with permission).
40
Categories of HCR with a Representative Example and Mitigation Tactic (continued)

Risk (Bulleted factor is absent, inadequate or ineffective) II. HR PROCESS RISKS continued Remuneration Mitigation Responses
Ineffective benchmarking of remuneration with industry
Market percentile positioning is based on comparisons with relevant comparators/competitors
Separation
Bad publicity by separating employee; employer brand impact in communities
Transparent, well-documented/communicated separation processes
Employee Engagement
Ineffective employee engagement initiatives leading to critical outcomes including absenteeism, attrition, customer satisfaction operational performance
Comprehensive plans to create an employee engagement culture
Communication
Disengagement of employees due to inadequate information flows and transparency
Established forums where employees can express their views and suggestions
Employee Behavior & Conduct
Negative impact of employee behaviour on the work environment or other employees
Comprehensive policies and procedures for employee behavior and conduct
III. OTHER HR RISKS Regulatory HR Compliance
Regulatory sanctions and notices due to non-compliance
Accountabilities are predefined for all HR compliance areas
Environmental Health & Safety (EH&S)
Negative regulatory sanctions and notices
Documented and well communicated EH&S policy
Labor Unrest
Disturbance of relationships with unions and workforce, leading to loss of production and sales
Welfare of workforce is reviewed at pre-determined intervals and actions taken
Employee Records
Inappropriate access to employee records
Establishment of formal, robust, legally compliant, confidential and consistent processes for recording, storing and accessing employee records
Source: Avantha Group (reproduced with permission).
41
ERM Maturity Model

ERM Maturity Components
Early Stage, Year 1 Middle Stage, Years 2 4 Mature Stage, Years 3 5+
Driven by board of directors Focus on controls and monitoring Business risk inventory Develop assessment process to prioritize risks Develop common risk language Heat maps and risk registers for reporting to senior management and board ERM developed to help avoid surprises Risk workshops with businesses and functions Oversight of ERM assigned to person
Driven by board of directors and senior management Focus on controls, monitoring and compliance Beginning to think about risk limits or tolerances Collect appropriate data based on key risks Developed risk governance including processes to assess risk and standing group to evaluate and discuss risks Risk reporting to audit committee or other relevant committee and full board ERM integrated into business processes Work with businesses on risk mitigation planning Tied to strategic and operational planning processes
Driven by business unit leaders Accepted throughout organization as effective way to deal with risks transparently Ability to expand focus across businesses and functions to encompass wide range of risks to organization Develop risk appetite or risk philosophy Risk tolerances stem from risk appetite Enterprise-wide transparency into risks Access to critical data; developed key risk indicators tied to key performance indicators ERM program used for better resource allocation and better decision-making ERM integrated with corporate processes ERM provides competitive advantage to company ERM tools used to help identify opportunities ERM used to help identify emerging risks Well-defined metrics
42
SWP Maturity Model

The Conference Boards SWP Maturity Model
Dimension Reach Early Pilot project(s) Middle Enterprise wide Mature Key supply chain partners: colleges, contracting firms, joint ventures
Planning Period
12-18 mos.
2-3 years
3-5 years+
Who Drives?
HR pushes SWP
BUs w/ HR support. SWP may be pushed out by HR, business may pull SWP , or both. Progress in 2-way educational process that is at the heart of SWP.
Senior executives/ business leaders pull SWP, use it as a lever and use output to make business decisions
Scope
May entail all jobs or just critical ones.
Selective focus on critical jobs/ skills (i.e., workforce differentiation/ segmentation).
Internal talent plus some external (e.g., contingent workers).
Prerequisites: People
Critical business issue that SWP can address. Business champion.
Broader, cross-functional support/ partners. Biz leaders get SWPs value. Integration w/ business planning, strategy Ongoing dialog w/business. HR business partners skilled, confident in facilitating process. Common taxonomy of jobs/skills. Prioritized short list of roles and/ or skills. Companywide metrics enable comparisons across BUs, geographies.
Data and metrics re suppliers. Integration of some systems with sourcing partners, vendors. Employees may have visibility to components.
Relationships Processes
Data Inputs
Current and historical workforce data. Spreadsheet analysis. Business plans.
Consistent data (One version of the truth). LT Business strategy. Performance data (actual vs. plan) and mid-cycle adjustments. External data. Alt. business scenarios.
Data re External stakeholders (suppliers, joint ventures, etc.) .
Alternative labor sources (contractors, retirees). Employee skills assessments.
Source: Mary B. Young, Implementing Strategic Workforce Planning, Research Report 1444, 2009, pp. 19-25
43
The Conference Boards SWP Maturity Model (continued)

Dimension Outputs & Outcomes Early Middle Mature
Headcount & labor costs projections (OWP). Workforce analytics, forecasts, action plans. SWP tools (interview guide) and more refined process. HR business partners gain experience, skills, confidence regarding SWP facilitation. Business leaders begin to see SWPs value.
Statistical insights regarding key relationships between drivers and outcomes. Alternative scenarios and impact on biz and workforce. ID critical roles. Line of sight across BUs, geographies. Reliable analysis, insights, forecasts to inform, influence business decisions. Mid-cycle report of plan vs. actuals.
SWP is an input to business strategy and planning Business leaders get relationship between talent and business outcomes and use SWP to make decisions. Data-driven modeling produces optimal solutions, improves utilization. Strategic sourcing strategy: Drives supplier relationships Enables volume leverage, economies of scale
Communication: How outputs are shared
Push: HR/SWP deliver reports to business. Business has limited access to tools, data. Tools, output may suffer from over-complexity.
Pull: BUs can generate own reports, models, scenarios. Often through dashboards. BUs submit requests to SWP for more analysis. Simplifying of tools, output to match varied user needs. Form and language fit company culture.
Web-based tools enable employee access to selected areas and career resources. Trusted external partners may have limited access.
Source: Mary B. Young, Implementing Strategic Workforce Planning, Research Report 1444, 2009, pp. 19-25
44
Endnotes
1 The terms human capital and human resources are sometimes used interchangeably, but are not in this report. Here, human capital refers to the people, skills, and competencies that create organizational capabilities ultimately deliver business value. Human resources refers to the functional area, as an umbrella, and its various sub-functions, such as staffing, compensation and benefits, employee relations, training and development, and so on. 2 Mary B. Young, Strategic Workforce Planning in Global Organizations, The Conference Board, Research Report 1457, 2009, 26-33. 3 Economist Intelligence Unit, Best Practices in Risk Management: A Function Comes of Age, 2007, pp 45. 4 Ibid., p. 5. 5 Edward E. Lawler III, Human Capital Management: What Are Boards Doing? Center for Effective Organizations, Marshall School of Business, University of Southern California, CEO publication G 08-16 (552), 2008, p. 1. 6 Form 10-K is an annual filing of public companies with the U.S. Securities and Exchange Commission. It is a comprehensive summary report of the companys performance and includes company history, organizational structure, equity, holdings, earnings per share, subsidiaries, and the like. It must be filed within 60 days of the end of the fiscal year. 7 Wal-Mart, Bank of America, Hewlett-Packard and JP Morgan Chase mention human capital in the Item 1a. risk factors. ExxonMobil, Chevron, General Electric, ConocoPhillips, AT&T and Ford Motor do not. 8 CFO Research Services and Mercer Consulting, Human Capital Management: The CFOs Perspective, CFO Publishing Corp., 2003, www.cfo.com/whitepapers/index.cfm/displaywhitepaper/103 39475?topic_id=10240327; SHRM, Salaries as a Percentage of Operating Expense, SHRM Metric of the Month, November1,2008, www.shrm.org/Research/Articles/Articles/Pages/ MetricoftheMonthSalariesasPercentageofOperatingExpense.aspx. 9 Peter Cappelli, Talent on Demand: Managing Talent in an Age of Uncertainty, (Boston: Harvard Business Press, 2008), pp. 910. 10 Peter Elkind and David Whitford, An Accident Waiting to Happen, Fortune, February 7, 2011, Vol. 163, No. 2, pp. 105132 (available at http://features.blogs.fortune.cnn.com/2011/01/24/ bp-an-accident-waiting-to-happen/). 11 ISO 31000: 2009, Risk Management Principles and Guidelines, International Organization for Standardization, 2009. 12 For example, see World Economic Forum, Global Talent Risk Seven Responses, January 2011, http://www3.weforum.org/ docs/PS_WEF_GlobalTalentRisk_Report_2011.pdf (last accessed May 13, 2011); Towers Watson, Strategies for Growth: Talent and Performance Issues Lie at Heart of an Emerging Global Growth Agenda, December 2010. http://www.towerswatson.com/assets/ pdf/3371/Towers-Watson-Strategies-Growth.pdf; Ingrid Selene, Taking a Risk Approach to Managing Your Human Capital, Asia Connect, Vol. 3, No. 6, September 2010, Aon Consulting, http:// www.aon.com/thought-leadership/asia-connect/2010-sep/ risk-approach-to-managing-human-capital.jsp (last accessed May 13, 2011); Ernst & Young, 2008 Global HR Risk: From the Danger Zone to the Value Zone Accelerating Business Improvement by Navigating HR Risk, 2008, www.ey.com/US/en/Services/Tax/ Human-Capital/Human_Capital_HR_risk_report (last accessed May 13, 2011); Marcus Morrison and Nicholas Garbis, Human Capital Risk Management, Infohrm, 2009, http://informimpact. com/downloads/?id=6 (last accessed May 13, 2011); OrcaEyes, Inc, HRs Role in Effective Enterprise Risk Management, OrcaEyes Insights, October 2010, http://www.orcaeyes.com/insights/ HR_Role_in_HC-ERM.pdf 13 The Conference Board 2010 Human Capital Metrics Conference, New York, October 1415, 2010. 14 Orlando Ashford, Managing Human Capital Risk, Aberdeen Groups Human Capital Management Summit, March 24, 2010. http:// summits.aberdeen.com/1/Orlando%20Ashford.pdf. 15 For examples, see the Sun Microsystems and 3M case studies in Mary B. Young, Strategic Workforce Planning in Global Organizations, The Conference Board, Research Report 1457, 2009, pp. 1017, 2633. 16 An in-depth discussion of ERM tools can be found in: Ellen S. Hexter, Risky Business: Is Enterprise Risk Management Losing Ground? The Conference Board, Research Report 1407, 2007. 17 Throughout our analysis, significance was measured at the 90% level (alpha= (p) less than or equal to 0.10). 18 Charles Mitchell, Ellen S. Hexter, and Linda Barrington, CEO Challenge 2008: Top 10 ChallengesFinancial Crisis Edition, The Conference Board, Research Report 1440, 2008, pp. 67. 19 Charles Mitchell, The Conference Board CEO Challenge 2011: Fueling Business Growth with Innovation and Talent Development, The Conference Board, Research Report 1474, 2011. 20 Ellen S. Hexter, Risky Business: Is Enterprise Risk Management Losing Ground, The Conference Board, Research Report 1407, 2007 pp. 2627. 21 Edward Lawler, Whos in the Boardroom and Does It Matter: The Impact of Having Non-Director Executives Attend Board Meetings, Center for Effectiveness Organizations, University of Southern California, G 05-15 (487), 2005, p. 5. 22 Working Beyond Borders: Insights from the Global Chief Human Resource Officer Study, IBM Global Business Services, September 2010. 23 Charles Mitchell, The Conference Board CEO Challenge 2011: Fueling Business Growth with Innovation and Talent Development, The Conference Board, Research Report 1474, 2011. 24 Greig Aitken, Group Head of Human Capital Strategy, Royal Bank of Scotland Group, from a presentation to The Conference Board European Council on Strategic Workforce Planning, November 4, 2010. 25 Matteo Tonello, The Role of the Board in Turbulent Times: Leading the Public Company to Full Recovery, The Conference Board, Research Report 1452, 2009, pp. 3738. 26 See Mary B. Young, Implementing Strategic Workforce Planning, The Conference Board, Research Report 1444, 2009, pp. 1924. 27 The only exception is that the companies represented in the ERM sample were slightly more likely (7 percent) than those in our HR sample (1 percent) to have fewer than 1,000 FTEs.
45
Additional Resources from The Conference Board

Companies that would like to pursue human capital risk management or better understand either ERM or SWP may benefit from the resources available on The Conference Boards website at www.conferenceboard.org.
Acknowledgements
This research owes much to the executives who participated in the survey and to the thoughtful comments and questions we received from 2008 through 2010, as we presented The Conference Boards emerging thinking on Managing Human Capital Risk to risk and human resource professionals in India, Europe and the US. We are grateful to colleagues who contributed to the survey research, data analysis and final report Lindsay Collins, HenrySilvert, and Judit Torok and to Steve Petrie, who provided additional statistical expertise. The report benefited from careful review and feedback provided by various readers: Rebecca Ray, David Learmond, Gad Levanon, Chuck Mitchell, and Matteo Tonnello from The Conference Board; Nicholas Garbis of GE Energy and Stacy Chapman, founder of Aruspex. Marta Rodin edited the report and transformed the manuscript to the finished product you are now reading. Finally, we want to acknowledge the extraordinary opportunity for conducting cross-functional research that we have been afforded. The Conference Board produces knowledge and facilitates peer-to-peer learning across many topic areas: Economy and Markets; Corporate Leadership; Human Capital and HighPerforming Organizations. The breadth of these interests and the diversity of executives who engage with The Conference Board provide a remarkable platform for conducting practical research. Sometimes it also provides the opportunity to reach across functional boundaries, as we have done here. Without the breadth of The Conference Boards mission and the global reach of its membership, this research would never have happened.
Enterprise Risk Management

Publications
Risk Oversight Handbook forthcoming (fall 2011) Building Risk Awareness into Performance: Integrating ERM and Performance Management Managing Reputation Risk and Reward Assessing the Climate for Enterprise Risk Management in India Risky Business: Is Enterprise Risk Management Losing Ground Emerging Governance Practices in Enterprise Risk Management From Risk Management to Risk Strategy
Directors Notes Series

Risk Oversight Practices: Insights from Corporate Directors Risk Oversight Practices: Two Success Stories
Councils
Strategic Risk Management Council Council on Strategic Risk Management South Asia Council on Corporate Governance & Risk Council of Chief Audit Executives Council of Chief Audit Executives
Strategic Workforce Planning

Publications
Strategic Workforce Planning Quarterly Strategic Workforce Planning in Global Organizations Implementing Strategic Workforce Planning Gray Skies, Silver Linings: How Companies Are Forecasting, Managing and Recruiting the Mature Workforce Strategic Workforce Planning: Forecasting Human Capital Needs to Execute Business Strategy
Councils
Strategic Workforce Planning Council Council on Strategic Workforce Planning
Animated Model of SWP in Action

www.conferenceboard.org/publications/describe.cfm?id=1663
46
About the Authors

Mary B. Young is principal researcher in human capital at The Conference Board. Young leads The Conference Board program of research on strategic workforce planning (SWP) and has been a major contributor to mature workforce research at The Conference Board. Trained in organizational behavior and organizational development, she has studied strategic workforce plannings emergence and evolution as a business process in more than 100 companies. Drawing upon her skills as a long-time journalist, she has completed 20 in-depth case studies describing how companies implement SWP and has presented her research findings at scores of corporate meetings in the United States, Canada, Mexico, Asia-Pacific, and Europe. Youngs research on SWP is available in four research reports from The Conference Board: Strategic Workforce Planning in Global Organizations, Implementing Strategic Workforce Planning, Gray Skies, Silver Linings: How Companies Are Forecasting, Managing and Recruiting a Mature Workforce, and Strategic Workforce Planning. Youngs research on human resource issues has been cited in the New York Times, Wall Street Journal, Financial Times, USA Today, Time, BusinessWeek, and National Public Radios Morning Edition. With more than 20 years experience in organizational research, she has produced studies for the Center for Organizational Research, the Human Resources Policy Institute, the Work/Family Roundtable, the National League for Nursing, the International Association for Public ManagementHuman Resources, the American Public Power Association, and the Canadian Broadcasting Corporation. Young received her doctorate in organizational behavior from Boston Universitys Graduate School of Management. She earned a M.Ed. in organizational development at the University of Massachusetts at Amherst and a BA in English from Case Western Reserve University. Ellen S. Hexter is principal of Hexter & Company, a risk consulting firm. She is senior advisor, enterprise risk management, for The Conference Board and previously led The Conference Boards work in enterprise risk management, developing research and executive programs in this area. Hexter is managing director, enterprise risk management, at Recursion Ventures, a security solutions firm, and works with Hesleden Partners, a Londonbased research and consulting firm focused on reputation management. She is a faculty member of The Conference Board Directors Institute, working with boards of directors to provide director training in risk management practices and the role of the board in ERM oversight. She has collaborated extensively with The Conference Board Governance Center since its inception. Hexter currently manages seven executive councils at The Conference Board, including the European and the U.S. Strategic Risk Management Councils, the South Asia Corporate Governance and Risk Management Council, and the Council of Financial Executives. She has managed The Conference Boards research on ERM and is the author or co-author of Building Risk Awareness into Performance: Integrating ERM and Performance Management; Managing Reputation Risk and Reward; ERM in India; Risky Business: Is ERM Losing Ground?; and From Risk Management to Risk Strategy. She also contributes to the Directors Notes series. Hexter received an A.B. from the University of Michigan and a MBA from Cleveland State University. After receiving her MBA, she worked as an equity securities analyst for Cowen & Co. and Deutsche Bank in New York. Her career on Wall Street included positions as a corporate credit analyst and a mergers and acquisitions specialist. She is a chartered financial analyst and a member of the CFA Institutes taskforce on not-for-profit board code of conduct. Hexter serves as an arbitrator for the Financial Industry Regulatory Authority. She chairs the board of Ethics of New Castle, New York, and is treasurer of the board of the Chappaqua Summer Scholarship Program.

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research report

Managing Human Capital Risk

Managing Human Capital Risk

Research Report Managing Human Capital Risk

In short, our research finds:

Research Report Managing Human Capital Risk

5 To ensure that human capital risks are factored into the

6 The chief human resources officer should be a member

7 While compensation and succession planning may

8 Businesses must own their human capital risks and

The report concludes with practical tools, including:

2 Risk management language is already familiar to the

3 When human capital risks (such as attrition) are

4 If HR has developed some expertise using human capital

Research Report Managing Human Capital Risk

Why Human Capital Risk Matters: A Call to Action

Human Capital Risk Dened

Research Report Managing Human Capital Risk

Human Capital Risk in Action

Rooting out the human causes of operational risk

ILLUSTRATIONS OF HUMAN CAPITAL RISK

Staffing Issues in a Pandemic

Examples of Human Capital Risk Poor alignment of HR strategy

Excessive turnover/ failure to

Compliance/regulatory issues Low employee engagement Inadequate or declining

Inability to compete for critical

Shortage of critical skills within

Alignment of pay and

Shortage of critical skills in the

Behaviors and practices that

Loss of critical knowledge

Gap between talent capabilities

Employee wellness impacts

Outsourcing and vendor

Over/under use of external talent

Excessive labor costs Managing talent through mergers

Ineffective selection processes

Organizational culture that does

Research Report Managing Human Capital Risk

Location risk is also people risk

ILLUSTRATIONS OF HUMAN CAPITAL RISK

The Risk of Ad-Hoc Growth

Barriers to Managing Human Capital Risk

Losing key talent in India

Research Report Managing Human Capital Risk

ILLUSTRATIONS OF HUMAN CAPITAL RISK

Contingent Worker Risks

ILLUSTRATIONS OF HUMAN CAPITAL RISK

Research Report Managing Human Capital Risk

ERM and SWP Defined

Research Report Managing Human Capital Risk

ILLUSTRATIONS OF HUMAN CAPITAL RISK

Research Report Managing Human Capital Risk

Risk management drivers

Human resources drivers

ILLUSTRATIONS OF HUMAN CAPITAL RISK

The Risk of Employee Dissatisfaction

Research Report Managing Human Capital Risk

ILLUSTRATIONS OF HUMAN CAPITAL RISK

ILLUSTRATIONS OF HUMAN CAPITAL RISK

What Went Wrong in the Gulf of Mexico?

Research Report Managing Human Capital Risk

ILLUSTRATIONS OF HUMAN CAPITAL RISK