Human Capital Risk Management-What’s Missing?

Tony Ridley

 

In spite of the considerable investment and development around the preservation of assets and the mitigation of risks across conventional corporate assets such as facilities, information, equipment and products, the same methodology and motivation remains far less advanced in regards to human capital.

Before any organization even explores risk management strategies for their human capital it is fundamentally important that they first determine the value at risk. Not only is it a case of valuing the contributions of the individual or groups of personnel but differentiating the value in which they contribute to the company, whether it be through the provision of specific skills and services or the commercial value they present the company. These distinctions also need to be made between job functions or management/executive levels. No two individuals are contributing to the company in the same manner, much less two diverse business functions.  How many companies even know this definitive financial value of their people?

Following the basics of valuation, and any other unique considerations that the company may have (mobile work force, fixed laborers, knowledge capital, research and development) a unit cost can then be applied for prioritizing strategies or expenditure. For example, an individual that reflects a unit cost/investment per hour of $1 will be less likely to addressed as a priority when compared to an individually that presents a unit cost/investment per hour of $100. However, if there are significant numbers of the basic unit cost of $1 at risk, that group as a whole may be a greater priority than that of a single or limited $100 per unit cost individual.

Threats and residual risks associated with human capital are many and varied. Over time a detailed and thorough analysis can be conducted to determine the probability, velocity of onset and other governing factors that will provide a single or annual loss expectancy to the company. A single loss expectancy, such as death, may cost the company significantly more than just the forecast value identified in the first stages. Conversely, an annual loss expectancy, especially in light of the fact many companies are unable to even quantify this loss, may equate to millions of dollars in lost productivity, administrative burden or opportune costs.

To truly understand or appreciate the current or potential losses to a company through their human capital it is imperative to model the disruptions and time loss (inclusive of management and departmental support) to a cellular and group level. If someone falls ill, how long are they unproductive? What does it cost the company? Should the become a victim of crime or their business activity disrupted due to a natural disaster, what is the cost to the company? When applied to our entire human capital asset base, what is our single and annual loss expectancy?

“You can’t improve what you can’t measure” If you are making a truly informed decision on where your assets are distributed, you can then make informed decisions around strategies to preserve their value. You also enjoy the benefits of comparative investment/management. Most companies are surprised to discover that despite their commitment to their people, they actually devalue their contribution by not acknowledging them as an asset and preserving it accordingly. Are you one of those companies?

Companies that have undertaken to approach the management of their human capital consistent with other corporate assets have found the process highly rewarding and very confronting. Conversely, those adverse to such strategies or behind the curve continue to loose more money than the cost of such preparation and mitigation. They too find over time that penny wise turned out to be pound foolish.

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Comment by wk chan on February 20, 2011 at 2:04pm
continuation.
.. (of the acquired company) left despite G-to-G intervention.

So, how to address such risk :-
a) "Culture of Identity" (which will lead to "Identity Politics") as opposed to Culture of Shared Beliefs),
b) avoid engaging in M&A activities with companies under CME, or
c) acquisition must be 100% ownership of the acquired company.

Pls advise
Comment by wk chan on February 20, 2011 at 1:59pm
Dear Lawrence, 
I agree with Marcel, lets stick to the discussion topic. However, I would like to enter into a discussion with you if you post separately on "neuro economic, artificial intelligence or accelerating intelligence", tks
Dear Marcel,
Thanks for your generous comments, pal.
Since your comments touch on Culture, I would like to expand further on the "Culture of Shared Beliefs" with you including members of the Community.

The challenge to the "Culture of Shared Beliefs" (CSB) is all about people's preferences and cultural background, and CSB is used for post-merger activities since during the course of action or the way of doing things, their members - who care about the success of the merged firm - may openly disagree on the best approach. To eliminate this is by way of a well-defined "shared beliefs and values on the merged entity's behaviour & performance". However, this course of action, as per illustrations contained in my earlier comments, will result in coordination taking more time to realise, influence activities will increase and overall distortion of communication will increase by and among employees from different pre-merger firms. If this is not managed properly it will lead to Culture Clash which is quite common especially when one of the pre-merger entities is from countries with coordinated market economies (CME) that display strong undercurrents of nationalism eg Germany, France, China, Japan and South Korea, amongst others. I've seen few mergers involving companies (both of established names within which one from the West and the other from the East) under CME resulted in culture clash with cost of clash felt immediately at operational level and ended up in controlling shareholder acquiring more shares in the merged entity whilst the senior management (of th
Comment by Marcel Wiedenbrugge on February 20, 2011 at 7:54am

Dear Lawrence, 

 

Thank you for your compliments, but aren't we moving a little bit too far away from the original topic? May I suggest to go back to the 'what is missing' part? A lot of great things have been said in this thread?  As WK Chan correctly mentioned ''In my view, any model that is human invented is subject to intellectual abstractions designed to manipulate arbitrarily chosen, and that believing in the model may blind themselves. ''

This sentence gives much food for thought, actually it says that we should be careful relying too much on human invented models, which I agree. I think WK Chan practical examples are interesting, especially because of the introduction of the impact of cultural aspects. In my experience human behavior is often based on past experience, assumptions, perceptions and personal interpretations. When not managed properly, this can easily lead to a lot of misunderstandings, conflicts, etc.

 

So  in my opinion, the only effective thing a company can do is to create the right circumstances, a business culture, that offer people the freedom to freely and openly communicate, collaborate, educate and develop themselves (both personally as business wise). In a multi cultural environment it is of the utmost importance, that internal communication is focused on strong common goals and commonly shared and lived values. 

 

Ultimately, by doing so, over time you will build a strong, stable and sustainable business culture and equally workforce. According to Sun Zi, change is a permanent and constant factor in life, and there is no guarantee of a dominant state that will last forever. As such, excellent high value workers may leave the company (and with it a lot of knowledge and experience), but if they do it in a good way and talk positively about your company, then the damage is limited. Don't make it too complicated and focus on what you want to achieve

Comment by Lawrence Carsom on February 20, 2011 at 6:47am

Excellent comments everyone!  No exceptions.  Quantum science explorations are now telling us about emergent properties of living systems the never before existed.  Cutting edge explorers are now also "Strongly Suggesting" that even the electron exhibits properties "Attributes" of life like Awareness and the ability to adapt ie  ... energy is aware, it reacts to its environment and maintains its survival status in ever changing contextual fields.  And since everything is energy … this would imply that belief systems also think ... and perhaps ... just perhaps ... has man totally fooled ... and has man's thoughts totally under their control.  And has man totally convinced that he is the sum total of his belief systems “Opinion Libraries.”

 

Think not?  Answer this.  "Since words are symbols for beliefs … and negated-beliefs …. Can you think and reason without any beliefs?"     Now muse over that for a few meditative sessions and get a real kick out of life … that is …  if you dare to follow that rabbit.

 

L Carson “Seeking to listen to God’s thoughts.”

Comment by wk chan on February 1, 2011 at 3:53am

Lawrence, Marcel and Robert,

Thanks for sharing your thoughts and concluding my comments on subject matter, I give below some of the methods used by MNCs in addressing organization's risk. These MNCs employ more than 5,000 staff each and with credit rating ranging from AA+ to A+.
a) Group Instruction Manual (Corporate, Operating Control and Internet Governance) outlining duties/responsibilities and transaction limit for each executive. The Instruction Manual updates frequently which also covers fraud cases around the world.
b) Internal Audit Dept at HQ level reports directly to the CEO/MD/Board of Directors whereas at Regional and Country levels, directly to Internal Audit HQ. Auditing, to be conducted every quarterly or half yearly for Group Instruction Manual compliance. This department is strictly out of bounds by all senior management save for CEO/MD/BOD.
c) Where potential malfeasance dictated, both the executive and staff concerned will be suspended with immediate effect pending further investigation, and with Staff Union Head advise accordingly. Depending on the severity of the case, the Dept Head may be suspended as well.
d) Although Not Mandatory, discourages male and female staff from getting marry, should that happen, either one will only be entitled for promotion opportunity and, in the meantime, both cannot be in the same department or inter-connected departments. All Senior Management must not be seen to be having meals with staff during lunch time unless for special occasion eg birthday/dept party or some form of dept gathering.
e) Emphasize on IMIS report by all executives on daily basis, any variances of more than 5% must be reported to the respective Dept Heads for further action and reporting to higher authority if the case warrants it. 
f) Use of Data Center facilities for security back-up.



 

Comment by Lawrence Carsom on January 31, 2011 at 9:09pm

Robert, Marcel and Wk Chan,

My goodness, this is truly turning out to be a very interesting thought-transporting … “group think” session.  I thank you all for raising my level of curiosity upon embarking upon am new path of discovery.

With my last 10 years of focused research in mind and brain matters I have come to - and have proceeded past the fork in the road of human evolution.  Many so called “scientists” are still bound by the notion that it is the effect that drives the source of thought causation.  To say this in conventional terms, it seems to me that the bulk of neurologists are still captivated (imprisoned) by the “notion” that its brain neurology that sires the mental states of human thought.  This would both reverse as well as make a mockery of the very cause-effect direction declared by Louis Sullivan’s’ famous quote (Frank Lloyd Wright’s mentor) … “That form ever follows function.” (Slow down a moment and deeply reflect upon his insightful words.  Our problem is that we rarely recognize flashes of insight and genius when they appear.)

Instead of titling Rock's new book, "Your Brain at Work" … as suggested in the article we were just revered to (an excellent read and I thank you)  … perhaps it should have been entitled  “Your Mind’s Predominate Influence on How Your Brain Works.”  It is a matter of “Mind over Matter” and not brain over mind.  So bringing this philosophical discourse down deep into the realm of practical applications in our lives, what does this really mean in terms of how we can better understand the nature of this topic “Human Capital Risk Management-What’s Missing?”

 

Risk vs. Opportunity.  What are the drivers of both and how do they relate to the cosmic energy generator of change?  What are vs. what can become … the architectural forces of man’s fate and what should those forces of intelligence be focusing upon in order to engineer higher human states of dignity, peace and joy in the world we all are desperately seeking?

 

So what is the purpose of life on this planetary speck and who has sufficient agency to declare the answer?  Of what value does the power of thought have … if our lenses of awareness … are back biased with ancient assessorial belief systems?  And finally, is the brain mass the temporal source of the mind field … or is it an issue of … mind over matter?

 

If we fail to go Meta to our inherited behavioral driven cognitive thinking, emoting  and behavioral habits … we shall go nowhere of elevated value.  The pervasive question is perhaps … what is the true nature of life … and our role therein?  After standing upon the pillars of those Universal Principiums … risk and opportunity becomes mere child’s play with rolling, fancy collared marbles.

 

Thanks Gents.  Your shared notions have served as thought-transporters for this explorer and I love where they have taken me.  I now have a new set of multi-colored purees.

 

Good Day!

Comment by Azizbek Omorkulov on January 31, 2011 at 11:52am
Totally agree with Mr. Ridley. Particularly i believe that i can't really improve job efficiency if you can't measure it. Some can say that it is impossible to measure human resource contribution, but there are a lot of ways to do it.
Comment by wk chan on January 31, 2011 at 10:38am

 

Thank you for sharing your thoughts, Lawrence. I agreed wholeheartedly that conviction is our enemy due to our pervasive ignorance resulting in almost everything that we know is based on information about Exonerations which are largely Unrepresentative. Mitigating this is by way of group intelligence for extended minds for higher levels of survivability", the most. 

Lets focus on subject matter, and my comments are follows :-

Emotional Intelligence Model, Human Value at Risk etc.
In my view, any model that is human invented is subject to intellectual abstractions designed to manipulate arbitrarily chosen, and that believing in the model may blind themselves.  Also, benchmarking work practices for workers is a bit like the process of quality management, an internal checking of the Organizations standards to see if there is further potential to cut waste and improve efficiency but give no indication of where the performance stands in absolute terms eg the model showed better and better results but the competitors are improving even more, then better and better is not enough.

To make the discussion more meaningful, 
I pen down below, in succinctly, some common human 

observed behaviors :-

i) CFO faced with two challenges - leading his finance team as well as playing on the senior management team where the dynamics can be fraught with tension as members compete for resources, the CEO's favor and even his job. To excel at the latter requires a heavy reliance on one's supporting cast thus emphasizing the former. It isn't easy. The best team coalesce around a point of ignition which is difficult to achieve. 

ii) middle-level and junior-level management staff 
tend to invert the order of priority and thus focus on organizational savvy and show-and-tell ie impressing senior management, by doing task that will


get noticed by superiors, and staying "in the loop" on office gossip and getting to know people who could help their careers.
 

iii) excellent employee felt uncomfortable with new superior due to higher caste thereby effecting his performance, which such case is common in India. Likewise, pushing Muslim staff during fasting month will get negative repercussion as in the case of  the Middle East.

iv) in a post-merger integration of two entities (say, Jerman company with a Chinese company), despite instituting "Shared Belief" culture for the merged entity, the following events may occur at staff level,
- a manager in the merged entity is more likely to delegate if his subordinates come from the same pre-merger firm than if they come different pre-merger firms,
- an employee in the merged firm will on average have higher satisfaction and motivation if he and his manager come from the same pre-merger firm than if they come from different pre-merger firms, and
- a subordinate in the merged firm will collect more info (to convince others) when he and his manager come from different pre-merger firms than when they come from the same pre-merger firm.


Can the model captures such phenomenons? Lets be practical, even at Board of Directors level, honesty and integrity are easy to assert but difficult to implement. We can control/managed staff cost but not manging workforce which is tantamount to mis-managing. At best, the model is for specific pursuit and should be rest on studies and not for implementation. For staff motivation, linking pay to performance is still the best strategy as it encourages competition.

Comment by robert hart on January 31, 2011 at 9:35am

Good point about the difficulty and risks of managing . Did you know that 88% of al risks

are caused bij the human factor. In my opnion mostly where people have to communicate (tactical and strategic risks).  The problem with human capital issues are there is a bad communication between the board and the HR departments. Do they realy understand each-other? Can you realy modelling human capital? Do you really measuring emotions?

Comment by Marcel Wiedenbrugge on January 31, 2011 at 6:21am
Lawrence, Wk Chan,

I like your argumentation and the direction this discussion is heading towards, just as I like the more analytical approach of Wk Chan . Thank you for sharing your knowledge and ideas. About what drives human behavior or should we say Human Value at Risk is nicely described in an article about Neuroscience by David Rock (http://www.edbatista.com/2010/03/scarf.html ). The SCARF model (Status, Certainty, Autonomy, Relatedness ,Fairness) model gives a rather structured limbic - neuroscience - answer to the question why so many people and organisations have difficulties with dealing with change.

Many organizations and people are stuck in the traditional way their business processes and procedures are being set up. It is how we perceive risk and respond to it. We have to change the mindset, think and act in terms of what we like to achieve / see / happen not what we don't want to achieve / see / happen. A more positive and collaborative approach of the term risk so to speak would be the first step to universal improvement. You just need some good graphical models to explain it and spread the news.

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