Sunday, 22 March 2009

Corporate Reputations, Executive Pay and Shaping the Future of HR

This coming Friday I'm co-hosting an event in Glasgow for a group of senior HR professionals in Scotland with the CIPD as part of their flagship 'Shaping the Future' programme. At that event, we are going to debate a series of questions on the current economic and financial services crisis, which are particularly relevant in Scotland given its large financial services sector. Two of these questions relate to how the present situation came about and what HR professionals can do about it.

On that issue, a series of events have taken place in the town near where I live that illustrates some of the problems of this crisis for the Scottish economy. The events relate to the decision taken by Ohio-based multinational NCR, one of the world's leaders in the design, development and production of ATMs, to cease manufacturing in Dundee and relocate to Hungary and China. This closure is particularly close to my heart since NCR Dundee was something of a personal laboratory for me for a period of ten years. The Dundee plant had developed and manufactured NCRs first ATMs in the early 1980s. It then became one of Britain's great development and manufacturing success stories, winning the best factory in Britain award twice, the Queens Award for Exporting and one of the very few British companies to feature on a Harvard Business School video as an excellently-led company. These achievements were gained on its way to becoming the world leader in its field for some twenty plus years, in and bringing great pride and much needed quality jobs to Dundee. I wrote a number of articles, book chapters and cases about the NCR Dundee story explaining why, three of which were the role of serendipity in strategic decision-making, committed and engaged leadership that had the Dundee plant's interests at heart, and HR practices way ahead of their time but largely based on the 'old deal' of high commitment in return for job security and career development.

The final closure of the manufacturing function of ATMs in Dundee (some design and development is still located there, but for how long?) is a good example of some of the causes of this present economic and financial crisis, which is, in part at least, a failure of leadership and corporate governance, and perhaps a failure of senior HR leaders to engage in this debate. I say this because at the same time as manufacturing was being closed down in Dundee, the site that had given NCR much of its revenue and had helped it survive as a global concern since the early 1980s, its CEO in the USA, Bill Nuti, was awarded a $5.6 million bonus. The local newspaper in Dundee, reflecting on this local tradegy, calculated that Nuti's bonus was enough to pay the manufacturing workforce a salary for a year of £22,000, maybe enough time to see the company through the present crisis until demand rose again in the financial services industry. While the local paper's reasoning may be misplaced, it does raise issues that lies at the heart of HR's ability to secure high commitment and high performance working, which is the aim of the CIPDs Shaping the Future initiaitive - senior leadership and their pay.

I've just finished researching and writing a book chapter with a colleague on corporate governance and HR, so I have a number of figures at my fingertips that show how socially unhealthy senior executive salaries have become in relation to the normal worker in the USA, the UK and in other countries. Some might say this socially-generated 'disease'is a product of a system of shareholder value which gave CEOs enormous power, unchecked by weak boards (and weak HR), to arrogate to themselves a huge share of company profits, is now being called into question. Witness the punitive tax on bonuses at AIG introduced by the US government and the public outcry over Sir Fred Goodwin's pension and rewards at RBS in the UK.

The question is: why did this take so long to emerge as a potentially socially dislocating disease in damaging trust relations between employees and their employers? Even the chief protagonist of shareholder value, Jack Welch the former leader of GE who was apparently instrumental in promoting the idea in a speech he made in the early 1990s to the Business Rountable, has just recanted, claiming shareholder value as a principle of governance was a 'dumb idea' (see the great debate on the FT blog between Henry Mintzberg and Colin Mayer). And as academics with an interest in such matters, we have known the statistics for some time on the rapidly growing disparity between CEO pay and typical employees in the US, which grew from 42 times the average US worker in 1980 to 400 times in a twenty year period 1980-2000. This pattern of growth was less marked in most European countries but the pattern was evident neverthless, particularly in the UK, Switzerland, France and Germany. Moreover, most of this growth in disparity came about because of equity-based options, though salary and bonuses have accounted for a significant portion of total CEO (and other senior executive) remuneration. The rub is that most of these rewards are not linked directly to CEO performance directly, which is diffcult to measure but what evidence we have is not particularly supportive of their claims to adding value. And in many cases these bonuses have been awarded despite relatively poor long term performance and declining corporate reputations, as we are now beginning to see.

So why has HR as a profession been relatively silent on one of the worst demonstrations of leadership power over the last twenty years? I raise this because there is evidence to suggest that this among other things has has caused a widespread lack of trust by employees in senior managers and declining levels of employee commitment over the same period? What lessons are there from the NCR case and in the problem of executive pay for shaping the future of HR? This is important, not because HR could have prevented NCR closing down its Dundee manufacturing, which has been the story of much of manufacturing industry in developed countries, but because it is difficult to generate high commitment, high performance working in a context where the share of returns to ordinary employees has not grown much over the last 20 years and in countries like the USA has probably declined. My recent comments about the need for HR to promote higher values has to be seen in this light; technical solutions to engaging employees are unlikely to work unless basic issues of fairness are addressed, perhaps starting with some reforms in corporate governance that limit the powers of CEOs to dominate boards in the way in which many have do so in the recent past.

2 comments:

cv said...

Graeme,

This question about why HR has been relatively silent about fairness issues related to executive vs. rank & file employees' compensation made me question some of the assumptions I have about HR as a discipline and a function.

My perception is that HR is (still) viewed as applicable to regular employees but not to C-suite executives. While executive evaluation and pay is assessed by the Board and the Exec Compensation Committee (if there is one), HR is for "everyone else".

And, there is no expectation that HR has any oversight or influence on either the Board's decisions or the executives' decisions. Even when HR professionals and scholars argue for Strategic HR, it still means bringing HR to the table as a partner in developing and executing firm strategy, and not necessarily engaging HR in any analysis and planning around executive behavior.

If this assumption is true at all, then the economic crisis is showing us some important gaps in how we think about what HR can and should be doing... And maybe the next step is for HR advocates proactively to broaden their circle of concern and to make this part of their 'strategic' purview. Maybe it speaks to a need for more wholesale rather than incremental re-imagining of HR?

Also, I always find the calculation of how many 'regular' workers could remain employed for the same cost as the CEO's bonus to be compelling. Even more than the ration between the lowest paid and highest paid workers, the job (1) for jobS (many) comparison seems to hit home. Especially now, when we know some of those folks at the plant whose jobs could have been spared if funds were allocated more rationally (e.g., reinvested rather than paid as exec bonuses) or if a sense of fairness characterized the business itself.

Graeme's HR Blog said...

Yes, CV, I agree that this is the typical view of HR, but it does differ from country to country, sector to sector and firm to firm. For example, having taught/ worked in both the US and UK, I find that HR is treated more seriously in the latter, partly because of a greater need and partly because the professional institution, the CIPD, has helped it raise its status more than SHRM. Also in sectors such as public sector organizations such as healthcare in the UK and labour intensive industries such as vehicle manufacture and retailing, HR is a main board appointment. I guess the work I've been doing for the CIPD in particular is about HR raising its game and making an impact in strategically important areas such as company reputations/governance, so it is more of an aspiration for some (but a reality for others). For example, I'm working with two groups of HR people just now, some of whom are main board directors. That's the reason I've written the chapter on HR and governance and what underlies most of the reputation stuff I've been banging on about.

The second comment you make is spot on as far as I'm concerned, especially in the US where average workers salaries have really been hit by comparison to highly paid over the last twnety years and, indeed, in absolute terms (so the stats tell us).

Need to meet up at the AOM