Ten years on, has HR learned any lessons from the financial crash?

3 Sep 2018

Stephen Bevan, Director, Employer Research and Consultancy

There has been a fair degree of adverse reaction to the decision by former Lehman Brothers employees in several cities around the world to hold reunion parties this month to mark a decade since the collapse of the organisation helped to trigger the global financial crisis (GFC). For some, these ‘celebrations’ are a reminder of the perceived indifference that some in the financial sector displayed towards those ‘ordinary’ folk who, in the decade which followed, were on the frontline of austerity measures, a spike in unemployment and stagnant wage growth. For others, it’s just a bunch of ex-colleagues innocently meeting up for a few jaeger bombs.

Whatever your ‘take’ on these reunions, they have inevitably led some people (me included) to reflect on what we – and in my case the HR profession – may have learned since the dark days of 2008.

HR has always had an 'ethical stewardship' role. Most employment regulation and HR best practice is intended to set minimum standards of conduct that has at its core an ethical underpinning based on standards of fairness, transparency and equal treatment. But when there is something more sinister and even corrupt going on in a business, what role should HR professionals be playing in preventing or mitigating an ethical crisis which echoes – in extremis – the Lehman Brothers scenario?

One of the frequent laments about the GFC is that, despite clear evidence about their culpability, few, if any, senior executives in the banks most closely involved in the crash ever found themselves in court, let alone in jail. Despite this, it has been recognised that standards of leadership, and the culture and prevailing climate which these leaders promote and sustain, can play a crucial part in encouraging – even tacitly – unethical, risky behaviours and shady business practices.

One tangible change, in the UK financial sector at least, has been the establishment by the Financial Conduct Authority (FCA) of the Senior Managers & Certification Regime which is an attempt to ensure that the cultural messages and behaviours from the top of financial sector businesses set high ethical standards and tough expectations about accountability and transparency, especially in roles which expose the business to significant risk. Although some argue that this FCA ‘regime’ lacks teeth and remains over-reliant on self-regulation, it at least provides HR professionals with something they can use to drive-up standards in the way that leaders are developed and appointed, and the way that their performance is assessed and rewarded.

Despite this, I think there are two other areas where HR should also have been able to play a stronger role in guiding ethical practice since the GFC.

Executive remuneration

In recent years there has been real concern that deliberations of some remuneration committees have not been guided in any meaningful way by the advice of HR specialists. The risks of bonuses or share options containing 'perverse' incentives or focusing inappropriately on short-term gain or ignoring the wider principles of distributive justice within an organisation are well documented. Despite increased scrutiny by both activist shareholders and by the press, the gap between CEO and median pay in UK businesses has continued to widen. The latest High Pay Centre/CIPD data, for example, shows that CEO pay rose by 11 per cent in 2016-17 and that the mean pay ratio in FTSE 100 companies was 145:1 (up from 128:1 in the previous year). So, HR faces a big challenge if it is to re-establish a credible and moderating influence here, especially as there is considerable doubt that the requirement to publish pay ratios will make as much of a difference as is hoped.

Complicity through inaction

The second area is the risk of HR complicity through inaction. There have been too many examples in recent times when HR professionals have seen (or even colluded in) systematic bad practice or turned a blind eye to unethical decisions which have been driven by aggressive business targets or the Darwinian clamour to out-perform the competition. One study in a US bank, for example, found that HR had (in the run up to the GFC) designed an incentive scheme to increase loans to SMEs which the bank knew would increase repayment defaults.

While these things are rarely clear-cut, I wonder whether more willingness to speak out by some in HR roles might have had a stronger and more meaningful mitigating effect. It may be that the idea of HR being the ‘moral compass’ of business is more acceptable since the crash than before it. For example, Harvey Francis, Executive VP at Skanska UK has been very open about how past lapses in ethical oversight in the business led to an overhaul of procedures and expectations, with HR at the core of the reform of business practices.

In so far as the Lehman Brothers reunions offer us an uncomfortable reminder of the dire consequences of businesses losing control of their ‘moral compass’, they should also prompt HR professionals to engage in some critical self-reflection about their confidence and authority to ‘call-out’ and mitigate any unethical practices they witness over the next, and hopefully less turbulent, decade.

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Any views expressed are those of the author and not necessarily those of the Institute as a whole.