Could strong HR leadership have prevented the Great Recession?

I have a theory that good HR leadership could have prevented the Great Recession – not sure why? Hear me out on this one.

The 2008 global recession was triggered by a complex interplay of factors that paralysed the world banking system. At the heart of it (The Big Short is a great film to reference this) was the unethical behaviour prevalent in the financial sector. Behaviour driven by poorly thought-out bonus schemes that focused on short term gain only for the individual.

Irresponsible selling of financial products to individuals who could not afford to ever pay them back created a ticking time bomb that eventually exploded, wreaking havoc on the global economy. So how could HR have stopped the financial meltdown? Simply having a robust Human Resources (HR) function within an organisation to challenge poor cultural norms or poor reward decisions can manage and mitigate harmful behaviours that at the least can potentially damage organisations and at worst entire economies. Still not convinced? To further support my point, let’s move on from 2008 and take a quick look into the infamous Enron and Volkswagen scandals, highlighting how stronger HR influence could have been instrumental in averting or minimising the damage caused.

In the modern business environment HR must play a fundamental role in helping shape an organisation’s culture and its attitude towards ethical standards. Strong HR leadership ensures that the right values, principles, and codes of conduct are deeply embedded in the company’s DNA. As part of the seat at the table it should act as an ethical custodian establishing architecture for maintaining transparency, accountability, and ethical behaviour across all levels of the organisation. It should have the credibility to challenge when things are just not right.

The Enron scandal that unfolded in the early 2000s stands as a classic example of corporate misconduct and the subsequent fallout on employees, shareholders, and the economy. Enron’s leadership orchestrated a massive accounting fraud, manipulating financial statements to deceive stakeholders. A toxic corporate culture allowed unethical practices to thrive, and internal warnings from employees went unheard or were suppressed. Perhaps if Enron had a strong HR department with an independent voice, capable of whistleblowing and safeguarding employees’ interests, the outcome might have been different. HR professionals who are empowered to flag unethical practices can act as a safeguard against executive misconduct. They can foster a culture of openness where employees feel comfortable reporting potential wrongdoings without fear of retaliation.

Next comes the Volkswagen (VW) scandal which erupted in 2015 when it was revealed that the company had intentionally installed software in its diesel vehicles to manipulate emissions tests. This deceitful practice had severe consequences, tarnishing VW’s reputation and leading to substantial financial penalties. Again a robust HR function could have played a crucial role in preventing such deceptive practices. HR is responsible for developing and communicating ethical guidelines and ensuring that these principles are cascaded throughout the organisation. It is instrumental in creating learning and communication frameworks ensuring employees understand their ethical responsibilities and the potential consequences of breaching them.

So where can we really support the ethical agenda?

Recruitment and Training: HR professionals are instrumental in hiring the right individuals whose values align with the organisation’s ethical standards. Comprehensive background checks and rigorous interviews can help identify potential red flags in a candidate’s past behaviour.

Performance Management: A well constructed performance framework communicates the expected performance and behaviour expectations. By linking performance evaluations and reward with ethical behaviour, businesses can incentivise employees to uphold the company’s values.

Whistleblower Mechanisms: HR departments can establish confidential whistleblower mechanisms that enable employees to report unethical practices without fear of retaliation. By fostering an environment of trust and confidentiality, employees are more likely to speak up when they witness misconduct.

And back to where this started with the 2008 recession. When the world economy collapsed it exposed the consequences of allowing unethical practices to thrive within the financial sector. Organisations must embrace the critical role HR plays in managing and mitigating such harmful behaviours.

Strong HR leadership that has the credibility to challenge poor decisions, can support organisations to create a culture of integrity, transparency, and accountability. The Enron and Volkswagen scandals serve as stark reminders of the need for proactive HR intervention to safeguard against misconduct, protecting not only the organisation but also the economy at large.

Having the ability to challenge unethical conduct or poor reward decisions should not be viewed as a formality but as a strategic imperative for long-term company success and sustainability.

Dominic Keogh-Peters is Group Chief Human Resources Officer of Galadari Brothers.

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