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Saturday, September 23, 2023

Could strong HR leadership have prevented the Great Recession

I have a hypothesis that effective HR leadership could have averted the Great Recession – hear me out. The 2008 global recession was caused by a complex mix of factors that crippled the world banking system. At its core was unethical conduct within the financial sector, as depicted in “The Big Short”.

This behavior was fueled by poorly designed bonus structures emphasizing short-term gains for individuals. Irresponsible sale of financial products to those unable to repay created a ticking bomb that eventually detonated, wreaking havoc on the world economy.

So, how could HR have prevented this financial crisis? Simply put, a robust Human Resources (HR) function that challenges negative cultural norms and flawed reward systems can manage and reduce harmful behavior that harms organizations and even entire economies.

Still unconvinced? Consider the infamous Enron and Volkswagen scandals, which underscore the role of HR in preventing or minimizing such damage.

In the modern business landscape, HR must play a pivotal role in shaping an organization’s culture and ethical standards.

Strong HR leadership ensures the right values, principles, and conduct codes are ingrained in the company’s DNA. As a part of the decision-making process, HR should serve as an ethical guardian, creating structures that promote transparency, accountability, and ethical conduct at all levels. It should have the authority to voice concerns when things go awry.

The Enron debacle in the early 2000s stands as a classic instance of corporate wrongdoing and its subsequent impact on employees, shareholders, and the economy. Enron’s leaders orchestrated massive accounting fraud, manipulating financial records to deceive stakeholders.

A toxic corporate culture enabled unethical actions, while employee warnings were dismissed or suppressed. A strong, independent HR department at Enron might have made a difference. Empowered HR professionals can expose unethical practices and encourage a culture of openness where employees feel safe reporting misconduct.

Then there’s the 2015 Volkswagen (VW) scandal, where it was revealed that the company had installed software to cheat emissions tests. This deceptive practice damaged VW’s reputation and led to hefty fines. Once again, a robust HR function could have averted this misconduct. HR is responsible for outlining and communicating ethical guidelines, ensuring they permeate the organization. It’s vital in creating learning and communication frameworks to make employees aware of their ethical responsibilities and the repercussions of disregarding them.

So, how can we actively support the ethical agenda?

  1. Recruitment and Training: HR plays a crucial role in hiring individuals whose values align with the company’s ethical standards. Thorough background checks and rigorous interviews can reveal potential red flags.
  2. Performance Management: A well-structured performance system communicates anticipated performance and behavioral expectations. By linking performance evaluations and rewards to ethical behavior, organizations can incentivize employees to uphold values.
  3. Whistleblower Mechanisms: HR can establish confidential whistleblower systems that allow employees to report unethical conduct without fear of retaliation. By fostering trust and confidentiality, employees are more likely to speak up when they witness misconduct.

Returning to the 2008 recession, it exposed the fallout of permitting unethical practices to thrive in the financial sector. Organizations must recognize HR’s vital role in managing and mitigating such harmful behaviors.

Robust HR leadership, with the authority to challenge poor choices, can help organizations cultivate a culture of integrity, transparency, and accountability.

The Enron and Volkswagen scandals remind us of the necessity for proactive HR involvement to prevent misconduct, safeguarding not only the organization but also the broader economy.

The capacity to challenge unethical actions or inadequate reward systems shouldn’t be mere protocol; it’s a strategic imperative for sustained company success and longevity.

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