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Risk management is increasingly a hot topic in today’s business world. With greater reliance on big data, the impact of the regulatory environment, and increased public scrutiny, a company’s competitive advantage depends on how well its managers and employees can build strategies around risk.
How can risk be an opportunity generator through its human resource functions?
Yet, historically risk is treated as a defensive strategy, overlooking how risk can be an opportunity generator through its human resource functions.
What has led to this problem?
Traditionally, risk management emerged from an economics view, examining the trade-off costs associated with uncertainty. Although debatable as to the exact timing of its emergence, this tradition grew from a structural problem needed to protect consumers and organizations from marketplace risks found in the insurance and financial services industries.
Responses to such risks took a classical management approach of how best to standardize behavior needed to reduce costs and protect assets. By the 1990s, risk strategies spread to include better cost measurement and containment through compliance procedures, training, and policy-making.
However, as research shows, managing risks for their cost and compliance implications alone may focus attention too narrowly on the details, thus limiting organizational performance over time.
Risk and HR?
An independent search on the terms “risk management and human resource management” reveals that compliance management remains the dominant approach.
- how to protect liability in big data and vendor contract breaches
- how to reduce the probability of a bad hire and discrimination lawsuits in talent identification
- how training and performance management are used to reduce reputational not just legal risks
- how culture and communication can buffer any negative consequences of mismanaged action
The missing part of this equation is how risk can be viewed as a growth opportunity and in the context of human resources and change, it relates to a thornier problem of how to build for greater “ambidexterity” into an organization.
The missing part of this equation is how risk can be viewed as a growth opportunity
Similar to the two-faced, Roman God of Beginnings and Transitions –Janus – the concept of organizational ambidexterity centers on how best to manage organizations through volatility by aligning and adapting organizational performance.
Interest in the organizational ambidexterity concept spawned a popular variant initiated by James March during the 1990s by examining how to exploit competencies while enabling the exploration for innovations. Current traditions leverage this particular definition of ambidexterity prominently and also look at ambidexterity not just from the organizational view, but also in the context of individual behaviors.
What is organizational ambidexterity?
Much like the term for two-handedness, organizational ambidexterity reflects a philosophy that there are two metaphorical hands needed to manage organizations effectively: the hand of control and the hand of flexibility.
Both are equally needed for competitive survival. The limitations of current risk management practices involve an inability or refusal to build for greater ambidexterity into organizations as a top-down and bottom-up strategy beyond targeting risk mostly as a compliance exercise.
To bridge this gap, there are several key issues that remain unaddressed and specific to risk in human resource management in both research and management practices around risk. They include the role of self-interest, identity, and resource dependency.
People by nature are motivated by self-interest. When personal goals are misaligned to organizational goals and interests, this problem can surface in what is called goal-displacement or the principal-agent problem in organizations.
People by nature are motivated by self-interest.
The role of the principal-agent problem
The principal-agent problem, also known as the agency problem, refers to whether employees’ interests, serve primarily themselves, their companies’, or another stakeholder group.
The agency problem arises whenever an employee decision or practice can affect the company’s bottom-line and is often related to whether employee behavioral incentives are appropriately rewarded to achieve organizational goals.
When alignment fails to happen, or is misinterpreted, it is often referred to as goal displacement.
In a classic article by Steven Kerr titled, “On The Folly of Rewarding for A, While Hoping for B”, Kerr provides many examples of goal displacement ranging from education to the military. Kerr’s article emphasizes that, in the principal-agent relationship, such actions and interpretations of goals are a matter of perspective and are prone to conflicting outcomes and interpretations.
An example of this problem in education are professors who are rewarded based on their research productivity rather than on their teaching scores; goal-displacement and the principal-agent problem, in this example, constitute an organizational risk to teaching quality in university settings
A different example is when CEOs are rewarded for only historical results, failing to look for newer approaches and creating a long-run competitive risk for the organization.
These risks are by-products of framing either too tightly or too loosely competencies; they can also compromise the search for innovations in performance management and rewards systems — again surfacing the ambidexterity issue that remains relatively silent in risk management research and practice.
Learning and its relation to the principal-agent problem
Related to this problem is how individuals learn. Learning behavior while often assumed to be cognitive is also driven by emotions and relationships.
A good example is a performance appraisal where errors as well as achievements are likely to be reviewed and attention refocused to align individual goals and performance to organizational interests. At first glance, a performance appraisal may appear to be an objective process.
However, when given a performance appraisal – and especially a negative one — individuals may react to information defensively regardless of whether the emotion is publicly displayed or not. The response here, even when silent, is emotional and relates to a deeper problem: how people learn is related to their identity and what they value. Similar to a camera lens, identity focuses attention as to what is important.
A great testing ground for identity and organizational impact is in cross-cultural studies. The work of Geert Hofstede shows how individuals might respond differently to uncertainty based on cultural orientation, which can be related to a company’s risk management practice.
However, a major limitation of this perspective is that uncertainty needs further specification in terms of technological, financial, and social capital risks. While cultural identities may influence holistically a risk orientation, it remains unclear as to what other dimensions of uncertainty avoidance require further differentiation and attention.
Finally, a remaining area needed for consideration is the role of resource dependency. The role of resources and their constraints have long been talked about by management scholars. Jeffrey Pfeffer and Gerald Salancik have written on how organizations are dependent and defined by their resources found in their external environment.
Dependency on resources, however, is not just external, it is also internal and can include such things as time, material, monetary, non-monetary, or human resources, all of which define how organizations can achieve their goals.
Resources also influence how individuals interpret their own role in a company and frame cognition. A simple example is a lemonade stand that runs out of lemons. Abundance or scarcity of a resource such as lemons can lead either to status-quo behavior or the need to define creative and resourceful solutions for a given problem.
Yet resource dependency, much like identity and the role of self-interest, remain less talked about as key variables in risk management as related to HR practice and the ambidexterity issue in organizations. Perhaps, this is where the greatest failures and opportunities in risk management lie.