The Relationship between Human Resources Management and Corporate Governance - Term Paper Example

How HR can contribute to CSR? (Words 1322) Table of contents Introduction 3 2. Human Resources and Corporate Governance 3 2 Influence of HR on Corporate governance – modes, consequences 3 2.2 Compensation of managers – ethical issues 4 2.3 Role of HR framework in increasing organizational attractiveness 5 2.4 The impact of HR management on Corporate Social Responsibility 6 3. Conclusion 6 References 8 1. Introduction The development of organizational activities in the global market has led to the increase of competition but also to the increase of the risks involved in firms’ daily operations. Top managers and executives have been often criticized as of their contribution in the development of inter-organizational conflicts; the reason is that the rules related to the compensation of the above individuals come to opposition with the interests of the rest of employees. Current paper aims to highlight the main aspects of the relationship between the human resources management and the corporate governance – especially regarding the role of HRM in the development of corporate social responsibility. Reference is made to Humphrey Group and specifically to the firm’s compensation ethics as used for evaluating the compensation of the firm’s top managers. The findings of relevant academic studies are presented and analysed aiming to show that HR can support the development of corporate social responsibility in Humphrey Group – as also in firms with different structural and operational characteristics. 2. Human Resources and Corporate Governance 2.1 Influence of HR on Corporate governance – modes, consequences The role of HR in corporate governance cannot be doubted. In fact, this role has many different aspects. In all organizations, HR department cooperates with the CEO in order to identify potential breaches of the firm’s ethical rules. Beatty et al. (2003) examined the above issue and came to the conclusion that HR managers could cooperate with CEOs in order to control the corporate wrong-doing, a series of unethical practices which cause severe damages to most organizations in the global market. The study of Beatty et al. (2003) presents the results of a survey conducted among the participants of the Human Resources Forum; 112 highly experienced HR professionals – among 300 – accepted participating in the survey. The survey, which was conducted among focus groups, aimed to highlight the level at which ethical standards can interact or opposed with professional practices and rules within modern organizations. One of the most important findings of the above study has been the fact that, quite often, HR managers are asked to serve contradictory organizational needs, or else, to serve interests, which are opposed. These are the interests of stakeholders who are favoured by different organizational initiatives. On the other hand, it seems that HR professionals may not be always aware of their role. Instead, they are informed on the activities and decisions on which their power is justified, i.e. accepted by the Board of Directors (or the organization’s leader) but they are not aware of their actual capabilities regarding their role. At the next level, the study of Beatty et al. (2003) refers to a quite important issue: ‘the financial measurement and the rewarding systems’ (Beatty et al. 2003, p.258) are often poor. In this case, executives need to identify a solution in order to ensure the fairness in their compensation. In most cases, the response of the firms to the claims for compensation, pension and so on, are expected to be negative – in case such claim is presented to the Board of Directors. In this context, the intervention of executives in the books of their organizations is often unavoidable, even if it is not legally justified. The most important finding of the survey conducted in the context of the study of Beatty et al. (2003) is the following one: in most organizations, ethical standards are highly promoted. However, in practice the limitation of violation of ethical rules across the organizations is proved to be a challenging task. 2.2 Compensation of managers – ethical issues The violation of ethics in modern organizations, as explained above, can take place because of different reasons. However, it seems that certain facts and conditions are most responsible for the violation of ethical rules across organizations. The study of Frey et al. (2005) highlighted the above fact. More specifically, Frey et al. (2005) stated that the high remuneration of executives and top managers is the most common reason for the violation of ethical rules in modern organizations. At the next level Frey et al. (2005) argued that the use of agency theory within organizations increases the risk for ethical failures because of the following reason: agency theory is based on the rule that the remuneration of top executives should be based on the organizational performance. However, it is argued that this rule is unjustified, leading to the breach of ethics in organizations in order for major financial interests to be served. In the context of the above issues, Frey et al. (2005) suggest that ‘fixed pay, procedural fairness and organizational citizenship behaviour’ (Frey et al. 2005, p.96) should be promoted in all organizations, securing the lack of contradicting interests, as explained above. Finally, Frey et al. (2005) test a series of theories applicable on the compensation of executives – such as the agency theory, the team production approach and the common pool approach (Frey et al. 2005, p.98-100); the above researchers suggest that the agency theory, despite its weaknesses, would continue to be used for the resolution of conflicts regarding the violation of ethics in organizations. 2.3 Role of HR framework in increasing organizational attractiveness The involvement of HR framework in corporate governance has many aspects. The research developed by Turban et al. (1996) led to the conclusion that HR framework can positively affect organizational attractiveness. This target is achieved under the following terms: corporate social performance can positively influence potential employees. In fact, through a successful corporate social performance scheme, organizations would ensure the attractiveness of appropriately skilled employees. Indeed, the research developed by Turban et al. (1996) revealed that firms with higher corporate social performance are likely to attract employees more effectively compared to firms with low corporate social performance. From this point of view, HR managers continuously monitor corporate social performance – for any potential violation of its rules by the firm’s employees. At the next level, the corporate social performance of modern organizations can attract employees. Therefore, HR interacts with corporate social performance, a fact indicating the power of HRM within modern organizations. 2.4 The impact of HR management on Corporate Social Responsibility Despite the value of Corporate Social Responsibility, in practice, the establishment of the specific framework in modern organizations is quite problematic. In accordance with the study of Sharma et al. (2009) this phenomenon can be explained as follows: HRM professionals are not adequately involved in the development (design and implementation) of Corporate Social Responsibility within modern organizations. It is also explained that even if the above professionals are asked to participate in such activities, again their role is quite limited, having to deal with issues of minor importance, such as the development of philanthropic events for promoting the relevant practices of their organization. The involvement of HRM professionals in the above activities would include the improvement of the relationship between employees and stakeholders, ‘the increase of employee morale, and the increase of societal approval for the firm’s existence’ (Sharma et al 2009, p.211). 3. Conclusion The development of unethical practices within organizations of various sizes is unavoidable. The establishment of effective HRM policies can help firms to promote their ethical rules – meaning the respect of ethics in all organizational departments but also the development of all necessary measures for the punishment of those who are involved in unethical organizational practices. Moreover, since the violation of ethics in modern organizations is related with severe organizational damages, it is necessary that unethical initiatives in such organizations are identified and eliminated on time, i.e. before their targets are achieved. HR management could help towards the increase of effectiveness of control across the organization, i.e. the improvement of the performance of its corporate governance. Under these terms, the participation of a representative of the HR department in the meeting of the Board of Directors – referring to Humphrey Group - would highlight the value of the specific department in the promotion of ethics, including the Corporate Social Responsibility, across the organization. References Beatty, R. W., Ewing, J. R., & Tharp, C. G. (2003). HR’s Role in Corporate Governance: Present and Perspective. Human Resource Management, 42(3), 257-269. Frey, B. S., & Osterloh, M. (2005). Yes, Managers Should be Paid like Bureaucrats. Journal of Management Inquiry, 14(1), 96-111. Sharman, S., Sharma, J. & Devi, A. (2009). Corporate social responsibility: the key role of human resource management. Business Intelligence Journal, 2(1), 205-213 Turban, D. B., & Greening, D. W. (1996). Social Performance and Organizational Attractiveness to Prospective Employees. The Academy of Management Journal, 40(3), 658-672. Read More