An Indian Maharaja in a religious procession, about 1825-1830, (Courtesy: V&A Museum, London)
Ideas for Leaders #595

How Corporate Governance Impacts Human Resources

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Key Concept

Through the use of four archetypes, a team of researchers describes the impact of different corporate governance systems on company decisions involving human resources. The team also argues that a corporate sustainability mental frame can overcome the inherent contradictions and challenges in each archetype.

Idea Summary

Corporate governance systems are the systems through which a company is controlled and directed. Public corporations will have boards of directors responsible for ensuring that management is acting in the best interests of the company.

Strategic human resource management (SHRM) is based on the belief that human resource decisions must be aligned with the strategy of the company.

How does corporate governance impact the decisions related to strategic human resource management? To answer this question, a team of researchers developed four archetypes of corporate governance systems:

The shareholder value model. In this model, market logics dominate: the interests of the shareholders are paramount. The culture is unitary: the firm is a harmonious team (top to bottom) united in the pursuit of shareholder value.

The communitarian stakeholder model. Pluralist, democratic logics drive this model, which recognizes and focuses on the legitimate interests of other stakeholders — from employees to the community at large.

The enlightened shareholder value model. This is a hybrid model that represents a tempered version of the shareholder value model. The unitary culture built on shareholder value dominates, but with some (enlightened) recognition for the business case of other interests (e.g., stakeholder interests, social values).

The employee-ownership model. This is a second hybrid that represents a tempered version of the communitarian governance model. Employees own or partially own the firm. They recognize the needs of all stakeholders but are also focused on gaining a return on their investment as shareholders — in essence, a pluralist culture that combines democratic and market logics.

Each of these different corporate governance typologies impacts a firm’s human resource choices and the implementation of those choices in different ways.

Shareholder value firms have control and calculative HR policies intended to ensure employee compliance and employee efficiency (e.g., through close supervision and no hesitancy to fire). A few high value employees receive a disproportionate level of compensation, otherwise there is very little investment in human capital and social capital (relationships).

In contrast, communitarian stakeholder firms feature a commitment to people exemplified through training to increase skills and job security, and a collaborative culture exemplified through an effort to give employees a voice in the firm. Communitarian stakeholder firms trade the low-trust board-employee mentality of shareholder value firms for a dynamic high trust approach.

The hybrid models offer a mix of these two HR approaches. Enlightened shareholder value firms temper the control/calculative practices of shareholder value firms with commitment/collaborative practices. While a few “star” employees are highly paid, the firm tries to engage less value-adding and less scarce employees.

The employee-ownership hybrid tempers the high commitment/collaborative practices of the communitarian stakeholder model with some control/calculative practices. Thus, the firm pushes training and development but contracts will include transactional features such as incentive-based pay for performance.

Business Application

Each of the four models has important challenges to overcome. The transactional human resource relationships of the shareholder value model promote short-termism and low trust. The communitarian model can be unrealistic — can all stakeholder interests be truly satisfactorily addressed? The enlightened shareholder value and employee-ownership hybrid models have their own drawbacks. The inclusive HR rhetoric of the enlightened shareholder value is refuted by practices such as rewarding a few high-value employees at the expense of job insecurity for the majority of employees. Meanwhile, employee-ownership firms promote employee involvement, but as shareholders, employee owners support transactional HR practices to protect their investment.

One way to overcome these inconsistencies and challenges is through a corporate sustainability frame, which mandates a set of corporate values and a culture that ensures the long-term survival and prosperity of the firm. Through independent boards, corporate sustainability not only helps resolve the challenges described above, but also reinforces the legitimacy of the firm — that is, the general perception that a firm is not violating societal norms, values and beliefs.)

The research team describes the elements that a corporate sustainable approach to human resources might entail. A sample of these elements include:

  • Creating a high trust dynamic across all levels of employment.
  • Implementing employee share ownership linked to a long-term commitment to firm and market value.
  • Reinforcing the legitimacy of the firm through sustainability, ethics and diversity.
  • Training employees on environmental, ethical and diversity issues.
  • Enabling employee involvement in sustainability initiatives and decisions.
  • Linking performance appraisal and rewards to sustainability, ethics and diversity.

While not a separate archetype, the objectives and culture of sustainability-driven firm provide a potential frame for resolving the tensions highlighted in different models above.

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Authors

Institutions

Source

Idea conceived

  • February 2016

Idea posted

  • April 2016

DOI number

10.13007/595

Subject

Real Time Analytics