By David Creelman

Human capital risk is a weighty subject that is not well understood by most HR professionals—or risk professionals for that matter. The Conference Board of Canada recently held a summit bringing together human resources and enterprise risk experts to bring some clarity to the topic.

The most important lesson from the summit is that human capital risk is not an ill-defined topic shrouded in mystery. We have the tools and processes to tackle it just as we do for other areas of risk. HR professionals should take the time to develop an understanding of this area because their expertise is necessary for effective enterprise risk management.

What is Human Capital Risk?
It is almost always more useful to talk about “business risk with a human capital component” rather than talk about “human capital risk” as a standalone subject.  High turnover could be talked about as a human capital risk, but it is better to focus on a business risk such as the potential failure of a new product launch. The failure may be caused by high turnover, but the starting point is the business issue not the HR topic. We need to step away from an HR-centric view of the world and begin with the organization’s objectives when thinking about risk.

In fact, almost everything that can go wrong in a business has a human capital component. If you are worried about the risk of your Gulf of Mexico oil platform blowing up, or a part of your business breaking federal laws by bribing officials, or a trader losing billions on bad investments then your risk analysis will reveal all of those massive business risks are rooted in human behaviour. If we start with the idea that human capital risk always begins with topics familiar to the HR function then we miss the bigger role human capital plays in business risk.

Risk itself is all about uncertainty. If we know that high turnover is slowing down the product launch then that is a problem to be solved, not a risk to be managed. That may seem like an academic distinction to the HR professional anxious about turnover. However, it is important that we do not pollute risk management with all the day-to-day problems HR is struggling with. Risk management is about assessing uncertainties that have a material effect on the organization’s performance and then deciding whether to accept or mitigate that risk.

Who Owns Human Capital Risk?
Assessment of human capital risk should be driven by the Enterprise Risk Management (ERM) function. Human resources will play a key role in supporting and guiding the ERM people. However it is a mistake for HR to try to own risk assessment.  The importance of this becomes clear when we think about a case like offshore oil rigs blowing up.  HR plays a crucial role in helping ERM understand the human side of the risk and to suggest ways to mitigate this risk. However, for HR to position oil rig disasters as a human capital risk clearly makes no sense.

One of the conclusions of Conference Board research on human capital risk is that there needs to be a formal process to assess this risk and a standing group responsible for oversight of human capital risk. Ensuring assessment of human capital risk is part of the ERM mandate fulfils both these conditions.

To be clear this doesn’t mean that HR can sit back and wait for the phone to ring with a call from ERM. Many ERM functions do not have a good handle on HR risk. HR has to step up and help ERM make sense of human capital issues. It is a partnership where both contribute expertise to the process ERM leads.

Ownership of what to do about risk must lie with business managers. Working with ERM, HR may point out that a business unit is running a risk of employee lawsuits. That assessment is helpful, however it is up to the business head to decide if that is a risk to be eliminated, mitigated or accepted.  ERM and HR work together to help the businesses identify and assess risk, not make the decision on what should be done.  HR may not agree with the business leader, but it is not up to HR to decide which risks are acceptable to the business.

Once HR gets involved in working with ERM risk, it may become apparent that the language HR uses is different from how the business talks about risk. HR’s willingness to adopt the language of business risk will have a big impact on its ability to contribute to the conversation on human capital risk.

Where HR Might Go Wrong
The Conference Board summit also served to highlight some common places HR might go wrong in its work on human capital risk. One is that that HR tends to overcomplicate things. Another is that in the US, HR professionals have been too eager to cry wolf over perceived risks that have not actually manifested themselves like an impending talent shortages or baby boomer retirements. Another problem is HR treating risk assessment as a compliance exercise where those who step outside the lines are punished.

The key is to take the lead from the ERM department and avoid an HR-centric view of risk. By developing a close partnership with the ERM function, HR has an opportunity to add value and build credibility. It is time to develop a good understanding how human capital risk fits into the broader world of business risk and bring that understanding to the organization.

David Creelman is CEO of Creelman Research, providing writing, research and speaking on human-capital management. He works with a variety of academics, think tanks, consultancies and HR vendors in Canada, the U.S., Japan, Europe and China. Mr. Creelman can be reached at dcreelman@creelmanresearch.com.