Few directors make the journey from HR boss to chief executive despite a rising demand for leaders with strong people skills. But boardroom scepticism may be waning as the two roles move closer together
It's 14 years since American management consultant Dave Ulrich attempted to redefine the role of human resources. Central to Ulrich's model was a realignment of HR activities to fit the strategic goals of the business. In practice, that meant HR departments spending less time on traditional, administrative duties and more time on contributing to the future direction of the organisation.
Ulrich called his theory the business partner model. Its ultimate goal was more significant than a simple outsourcing of menial clerical functions. It was to centralise HR's contribution, making it essential to the sustainability of the organisation. It was time, said Ulrich, for human resources to add real value.
At least that was the idea. The subsequent failure of HR to move up the organisational chain brings into question the viability of Ulrich's model. In January, a report by consultancy Mercer found that while 65 per cent of HR professionals across Europe, the Middle East and Africa perceived themselves as strategic partners to the business, just 15 per cent of the activities they carried out related directly to strategy. Despite claiming otherwise, HR professionals were spending most of their time on compliance and auditing, HR services and record-keeping—tasks just about as far from the centre of the organisation as it's possible to imagine.
Ulrich is well aware of HR's struggle to increase its influence in the boardroom. He says, among other things, HR directors haven't been quick enough to grasp the essentials of business management. Often, he adds, "their eyes glaze over when you mention the numbers". Not exactly a ringing endorsement, either of the profession's capacity to increase its profile, or of HR directors' ability to step up to the chief executive role.
But while the supply might not be up to scratch, the demand for chief executives with HR skills is growing. "The judgement skills that are called upon are changing," says Paul Sparrow, professor of international human resource management at Lancaster University Management School. Finance- and sales-trained chief executives aren't necessarily capable of comprehending "the increasingly complex organisational realities of strategy. A good CEO now has to be very people-savvy. So having responsibility, not just oversight, for major transformation processes and organisation development is a core requirement."
Chief executives tend to come from the areas that their company excels in, says Jo Hennessy, director of research at Roffey Park Institute. So marketing-led organisations tend to produce chief executives with a marketing background, while finance sector firms usually opt for more analytical, numerate leaders. It therefore follows, suggests Owen Morgan, commercial director at HR consultancy Penna, that in companies where people are the asset, "where the knowledge management resides", you're more likely to find a chief executive with an HR background. "It's in these organisations that understanding how best to secure the value from individuals is most important. What type of environment can you create that allows employees to do their best?"
It's a problem that Vineet Nayar tried to solve when he made the step up to chief executive of HCL Technologies in 2005. Faced with declining revenues, Nayar first asked himself a key question: how is value created? HCL's business was selling IT services to large corporations. As a services provider, the answer lay in how well HCL could integrate its products into customers' businesses. Tailored, simple solutions, which not only work but also are delivered on time, are much more desirable than cutting-edge systems that fail. The value, therefore, is found not in the allure of the product, but in the employees responsible for that product.
In Nayar's eyes, HCL's stuttering performance was due to a glaring inconsistency in the company's structure. If employees control the value, why does authority rest with the chief executive? Why is the employee accountable to management? Nayar decided to turn the established corporate pyramid on its head. He made HCL a self-governing company, transferring responsibility to its employees. He developed customer contracts into revenue—sharing partnerships, in which products were co-designed—a move that enabled the firm to increase revenues during the recession. And on the basis that visibility equals accountability, he made the internal workings of the firm transparent.
"HCL is based on the premise that the way employees feel treated is the same way that customers feel treated," says Ulrich. "It's an observation from banking, retail, and other industries, that the employee attitude is a lead indicator of customer attitude." Although not driven specifically by the HR department, HCL's turnaround is a useful example of how centralising the HR function can add value. Nayer's philosophy, which he explains in the book Employees First, Customers Second, is that directors spend far too much time, well, directing. In a post-industrial environment, the leader's job should be more akin to enablement than instruction.
There is a halo attached to many chief executives, writes Nayar. A veneer of competence that discourages employees from taking control of the problems they are often better placed to solve. Nayar's ambition was to belittle his own status, to lose the halo and in a sense relinquish control. He did a dance in front of the entire company to demonstrate vulnerability. He encouraged 360-degree appraisals, in which anyone could comment on anyone else's performance, including his own. At best, his behaviour appears irrational. But to Nayar, these were crucial steps in shedding his celebrity skin.
Not all change requires such selfless exposure. But the financial crisis and recession have forced many corporations to dispense with a sticking-plaster approach to change management in favour of a more sustainable transformation, driven in part by the HR function. At Siemens, for example, talent management and judicious culture creation have underpinned the company's move into clean energy. And at Unilever, management has switched its strategy from a decade-long focus on costs to sustainable growth. It's now the HR department's job to shift the corporate culture from efficiency to innovation.
Not every chief executive demonstrates an awareness of the need for change, not to mention the humility to achieve it. Research by Roffey Park highlights an alarming disconnect between top executives and lower-level management. UK firms, concluded its report, are worryingly deficient in their ability to create a company-wide sense of purpose—the common values that enable entire organisations to pull in the same direction.
Roffey Park's research shows higher-level managers report a much more positive collective sense of purpose than lower-level managers. This is a discrepancy, says Hennessy, which any organisation with a desire to improve must address. "On the board it is easy to be persuaded that employees feel united in a common cause. The net effect of this false belief will be that directors are less active as leaders inside the organisation than they need to be," she explains.
It's a particularly dangerous time for a leader to be out of touch. On the back of a deep recession, the need to manage talent and corporate culture, not to mention the requirement to align those activities with new business models and markets, is at its most critical. The problem, says Sparrow, is that replacing obsolete business models is inherently risky. To do as HCL did and restructure the organisation in the face of falling market share and tumbling revenues is to force change at a time when "the old model has already weakened the organisation." As a result, there may be neither the will nor the skill to implement the necessary change.
Even in better-performing companies, external pressures, such as increased financial regulation, are forcing sharper recruitment strategies to ensure that the people coming in don't import the mistakes of old. "There was a saying after the Enron collapse that Enron failed not despite its HR, but because of its HR," says Sparrow. The HR systems in place at the company actively "engineered inappropriate organisational behaviour. Today we are asking the same question with the credit crunch."
In addition, says Sparrow, all companies, regardless of their performance, face increasingly "complex, ambiguous and continuously changing environments inside the organisation". The need to reconfigure recruitment procedures to deal with these external and internal pressures requires leaders to match the strategic competence of the new recruits they wish to acquire. Or to put it another way, you can't hire the right talent unless you know what you're looking for.
There are also generational problems to contend with. While the majority of business leaders are baby-boomers or generation X, their subordinates are increasingly recruited from generation Y. Research shows that this group's expectations of the world of work have been unaffected by the deepest recession since the 1930s. They still value transparency over growth, equality and respect for talent over status and hierarchy.
Celebrity chief executives, says Morgan, will need to mind their egos. "If you have a baby-boomer leading a team of generation Y-ers then there's an implicit understanding that they will need to do things differently. If they don't, the culture of the business won't be right."
Morgan says a crucial part of HR's increased influence is its ability to sell the benefits of employee engagement. "Organisations are tapping up the HR function more than they've ever done to ensure engagement levels are maintained at a high level. It comes out in whichever surveys you look at: those organisations with high levels of engagement among employees tend to be those that consistently outperform their peer group, and there's a recognition that HR plays a key role in that."
Performance is undoubtedly the language of the chief executive's office, and HR directors who can demonstrate an ability to engender results will at least go some way towards dispelling traditional board scepticism. Moreover, says Morgan, the two roles are beginning to merge. "The role of the CEO is gravitating towards ensuring people are engaged and have a clear idea of the vision of the organisation," he explains. "Engagement is about ensuring that employees are motivated and therefore more likely to give discretionary effort. There is a direct link back to hard business metrics."
Although Ulrich's model moves the HR department much closer to the chief executive, it doesn't necessarily follow that more leaders will come from HR backgrounds as a result, he says. Why are we so keen to promote HR people into the top job, he asks. "People say the only way we know HR is a successful profession is if HRDs become CEOs. I bristle at that. HRDs can influence talent, they can build culture and they can build great leadership from behind the scenes. Having an HR person who does those things is incredibly important. They don't need to be CEO to deliver value."
HR's growing influence will be measured by other means, says Ulrich. Besides, the two roles are not only merging but also complementary. Sparrow reckons that HR directors can draw attention to the sorts of organisational designs that will be needed to make the strategy sing. And they can advise on the best way to coax the organisation into a new way of working.
He says: "They have unique insights into whether the organisation and the employees trust in the strategy and senior leadership, and whether senior leadership should trust in the employees to deliver." A level of insight that most chief executives would find irresistible.
