Mar 26, 2012
Black swans are low-probability events that have far-reaching impact. Such events used to be exceedingly rare, but in today’s hyperconnected world, they are increasingly common and have enormous destructive potential. The euro crisis is a textbook example of how increased connectedness, interdependence and scale can turn a local problem into a global threat. Other recent examples include the following:
- The 2008 financial crisis that began with subprime mortgages in the United States but eventually triggered a worldwide recession
- The Gulf of Mexico oil spill that sent shock waves through global energy markets
- The tsunami in Japan that disrupted global supply chains and caused countries around the world to reconsider their use of nuclear power
- The Arab spring uprisings that are continuing to reshape the world’s political landscape
- Local flooding in Thailand that caused a worldwide shortage of hard drives
On the surface, none of these events would be considered a people-related risk. But as organizations dig deeper, it becomes clear that people are at the core of each major risk — if not as part of the problem, then as part of the solution. To help navigate this increasingly uncertain environment, many leading organizations are expanding the role that HR leaders play in managing risk across the enterprise.
HR’s role in risk management used to focus on the tactical, administrative, legal and regulatory risks that were directly under its domain — such as ERISA (Employee Retirement Income Security Act) compliance, workplace discrimination and sexual harassment — and on making sure its own systems and processes passed the annual risk audit. Now, forward-thinking HR organizations are partnering with the core risk functions — e.g., Risk, Legal and Internal Audit — to better identify, prioritize and monitor people-related risks, including black swan events that could threaten the entire business.
What’s driving this trend?
- Black swans are becoming less rare. In a hyperconnected world, small trigger events that in the past might have been locally isolated now have the potential for global impact. Also, the dizzying pace of change increases the number and frequency of trigger events, making it hard for organizations to stay on top of all the risks they are facing.
- People risks are headline news. Whether it’s a management team that cooks the books or a nationwide shortage of math and science talent, the tremendous impact that people-related risks can have on a company’s bottom line, market value and prospects for future growth is becoming better understood by business leaders.
- The view of human capital risks is expanding. HR risk management used to revolve around regulatory compliance and the avoidance of lawsuits. Now, the focus is expanding to include the broad range of people-related risks that can undermine a company’s performance and prevent a business from executing its strategy. The growing significance of these risks has raised expectations about what HR can and should be doing to identify, prioritize, monitor, mitigate and report on people-related business risks.
- Regulation is increasing. Although regulatory compliance is no longer the sole focus of Risk Management, it remains an important catalyst for action. In many cases, new regulatory requirements provide the initial impetus for broader improvement efforts. Also, regulators today are making examples of companies that fail to comply. The growing complexity of HR regulations and associated financial penalties, as well as the reputational risk for noncompliance, are raising the stakes and increasing the degree of difficulty in managing these nonnegotiable risks.
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