Wesbank

Human Capital Risk

SHARE   |   Wednesday, 14 November 2018   |   By Isang Lekhutile

THE WORK PLACE

On a sweltering day of the 03rd of October 2018, a young man hurriedly hitched a ride from his residence to town to collect a notebook for assignments. Upon reaching GC, this lad shockingly realised that his car keys were nowhere to be found. It was a devastating realisation that was hard to stomach. That the young driver had left his car behind at a filing station was mainly for personal safety and other road users due to the malfunctioning headlights and hooter of the vehicle in question. The person was me! Yes me! My genuine intention was to be a safety conscious and compliant driver to prevent posing a huge risk to myself and other drivers using the A1 owing to my half-roadworthy vehicle. On this day, I totally subscribe to the old medical adage that says “prevention is better than cure”. This one inherent risk that could not be mitigated by proceeding to drive and hoping for the best along the way! I had to frantically act by avoiding driving the faulty vehicle at all costs. My biggest concern was safety and eliminating the risk that I could have posed on other road users on the A1 highway.  

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As contemporary HR professionals today our role is to act as paramount partners of management to spot, stop, and advice about potential and real pitfall that may threaten to destroy the cornerstone on which the organisation hinges on. Therefore, it is our supreme role to elucidate these important aspects and associated risks and accordingly advice management. Organisations big or small function in an environment of financial uncertainty and insecurity largely emanating from unforeseen risks in dealing with HR issues. As a result, organisations are open to erratic degrees of risk depending on the risk management maturity of each particular entity and this can adversely affect directly or indirectly their bottom-line. As long as an organisation is involved in any type of business operation it is open to exposure of evolving risks both internally and externally.  

Essentially, constant change in corporate culture and rapid business changes that are key to appropriately reconfigure the operations of the organisations to strategically and competitively position itself ahead of the pack regrettably comes with an elevated risk appetite. Does this mean they should remain static in pursuing opportunities because of being risk averse? The answer is an emphatic No! Some sages aver that risks also present opportunities that entities can embrace and elevate their performance operationally and financially. It is imperative that HR executives have answers and understanding of these risks while also appreciating the beneficial spinoffs resulting from such undertakings. Remember in this age, human capital is the most important capital in achieving competitive advantage. 

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Understanding of these risks and how to effectively manage them can enhance and embed risk awareness within the organisation and significantly improve the overall chances of an organisation achieving its operational and strategic goals. HR related risks can be proactively eliminated, transferred or tolerated and it is management’s choice on which best course of action to take to reduce the overall risk appetite to reasonably acceptable levels. It is therefore critical for HR Professionals to improve their attitude and aptitude in the scope of risk management skills in tandem with their peers in the Risk Management sphere. Currently, organisations and the HR professionals should consider all risks associated with their operation environment and incorporate the necessary risk management safeguards and plans to manage and mitigate risk affecting their realm. It is inescapable that HR Professionals must comprehend how human resource management and risk management are interconnected and related.

The word ‘risk’ entered the English language from the Old Italian word riscare, which means ‘to dare’. The thematic of risk management is not new and began after world war two. Modern risk management started after 1955 and since the early 1970s, the concept of financial risk management evolved considerably. Risk management is one the disciplines which have grown one strength to another and have challenged organisations and their leadership. One reason for risk management to have gained so much publicity and appreciation is the on-going financial crisis. It is not a secret that risk management plays a strategic role in an organisation. Organisations with good risk management strategies and process tend to be stable and successful.  Smith (2002) has defined risk management as actions taken by corporations and individuals to reduce, mitigate or alter risk arising from business. Hong Bo in his PhD paper cited Chapman (2006) suggesting that risk management involves identifying risk, predicting the probability and the potential for serious damage, making decisions on this basis and implementing these decisions accordingly. Other writers have differed on explaining risk management from a point of increasing shareholder value (Meulbroek 2002).

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Common view of researchers of risk management suggests that the concept of risk management is concerned with protection of an organisation’s assets and profits. Oxford English Dictionary (2013) defines risk as the possibility for danger and negatively unexpected circumstance to occur. Most theorists have proposed four possible approaches to managing risk as avoid, reduce, transfer, or retain. In Botswana, this subject has not received so much research but organisations have implemented strategies in managing risk. One of the shortfalls on this subject in Botswana is the research side and publication, hence not much is available to write about based on the local context.

Human Capital is one of the crucial emerging risks in many organisations both in private or public institutions. Human Capital has been – and continues to be - a critical competitive advantage in most industries. Forward thinking organisations use human capital risk for competitive advantage. Considerations of and concerns for the human element are at the core of management of any endeavour, but Risk Management has traditionally not been human-centred. Risk Management focuses on such things as the policies, procedures, planning and bottom line results of a business activity. However, the organisational game is changing. Risk comes in many shapes and sizes, and can come from many directions, both internally and externally.

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All activities in an organisation involve varying degrees of people interaction and risk. In fact, every activity an organisation engages in, every decision it makes or fails to make, involves people and carries an element of risk as well as some opportunity. Human capital commonly known as human resources, includes all the people that make up an organisation's work force.  Human Capital Risk is the capability for the workforce to meet the objectives of the business. Writers have previously commented that historically side of human capital risk assessment was restricted to employee turnover and equitable remuneration. Human capital risk management is all about understanding potential issues that could arise from a poorly managed work force and creating ways to mitigate those risks. Human Capital Risk is the measurement of the gap between the goals of the organisation and the skills of the workforce. The gap identified can be reduced and that process is called Human Capital Optimisation.

Human capital risks can be circumvented by controlling and planning the human side of the corporate equation. Knowledge is all about understanding the organisation processes, procedures, techniques and skill is body of knowledge and having the ability to apply it within an organisation. Succession planning, adequate severance and outplacement, executive coaching and development will ensure that an organisation has the means to deal with current and future challenges.

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It is imperative for current employees to upgrade or adapt their skills to avoid risk of obsolescence of skills. Uncertainties of underperformance of human capital in an organisation arise from skill obsolescence, demand for new skills and capital loss. Human Resources Department provide resourcing, training and development of talent to manage risk skill obsolescence. Risks of skill obsolescence vary according to the type of skill. For example, driving skills do not become obsolete as fast as computer skills. Employees are major assets of every organisation and according to Hafeer (2015), employees determine the direction of an organisation and their success and failure is mainly based on their performance. Training can assist employees to understand how their effort fits into their companies. Hence, employees’ training is essential in maintaining the industry on path. 

Successful human capital risk management involves human resources planning to ensure all organisation’s performance objectives are accomplished. Succession plan defines how the organisation will ensure continuity of operations with available human capital over a period of time. Succession planning is one area of planning that leverage differentiation in the marketplace.

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An organisation without proper detailed Succession planning faces high risk and can experience low employment engagement. Employees are motivated and engagement if they are included in the future plans of an organisation. Failing to plan simplifies planning to fail. This does not need a rule to underline the concept. Succession planning is a process that identifies and prepares employees for future openings due to employees moving into different positions and the loss of employees, both planned and unplanned. Succession plan includes staffing forecasts tied to the organisation’s strategic direction and growth.

Proper sizing and management of the talent pool needs to occur to avoid creating unintended consequences in recruiting, salary and retention costs. Career path development is an example of a high impact programme used in the management of human capital. A career path is defined as a logical and planned progression of jobs within an organisation. In conclusion, organisations that value their employees will invest in human capital risk management plan to retain and increase their competitive advantage.

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The importance of the role of people and HR in an organisation’s business strategy cannot be ignored. In order to identify a company’s top human capital risks, it is important for HR executives to be engaged in the process, working with risk and compliance professionals, along with business leaders, to get a full picture of an organisation’s strategic or operational risks. Advanced analytics can provide deep insights about current risks and projections about future risks. Turnover data, for example, when combined with other information, may raise a red flag about hidden risks such as incompetent management or fraud. Risk managers and HR executives can find that working together with a common goal is an effective way to address the challenges of the human factor in a dynamic workplace. By the way, my car is still at the filing station and I am hoping to resolve the issue this weekend.



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