Relationship between the CFO and HR Manager for Organisational Performance

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1. Proposed Title

The Relationship between the CFO and HR Manager for Organisational Performance: A Maltese Perspective.

2. Background Study

The literature shows sizeable evidence that there is a positive link between the development of Human Resource (HR) policies and the strength of organisational performance for which the Chief Financial Officer (CFO) is a major player. HR is a significant cost for the company. In the USA, the average spending on salaries as a percentage to operating expense ranges from 18% to as high as 52%. These figures solely include salaries, thus we are not taking into considerations other costs on personnel such as new training courses. (Economic Intelligence Unit (EIU), 2012)

CIMA (2012) commissioned a study to find the relevance between HR policies and organisational performance for which the Chief Financial Officer is a major player. The report highlights five major areas where there is a definite link: recruitment, training job for life ethos, teamwork, and organisation.

2.1 The CFO and HR Manager Relationship

Vedd (2001), Economist Intelligence Unit (EIU) (2012) and CFO Research Services in collaboration with Mercer Human Resource Consulting (2003) all analyze the relationship between HR and finance personnel in a defined and direct way.

Vedd (2001) analyzed the relationship between the management accountant and the HR manager in two case studies analyzing the UK Royal Mail and Canada Post. From the interviews conducted he reached the conclusion that the process to formulate the HR strategy is a team effort from all the departments, which includes the vital role of the accountant. Thus, the management accountants and the HR manager are becoming key strategic partners. The main role for the accountants in relation to HR are for HR planning, providing information which may include financial and non-financial measures, help to set HR targets, measure and report HR performance. In turn, HR manager view the accountants as being key analysts and consultants (Vedd, 2001).

The study carried out by (EIU 2012) implies that HR managers and CFOs have a difficult relationship. It goes as far as saying that CFOs’ judge very harshly the HR managers when compared with the Chief Executive Officers (CEOs). In the study that was carried out, 58% say that the HR manager is not of the same calibre of other corporate level executives and 67% of the CFOs suggest that they simply do not understand business well enough. The study suggests that the problem of the relationship may be for four main reasons. Firstly it was due to the conflicting personality types, as CFOs measure something more tangible whilst in HR there is more “science and art involved”. Secondly, it is perceived that they might hinder each other in their professional roles. For example, a training program that the HR manager wants to initiate might be not be approved by the CFO due to financial implications or on the other hand HR might prevent the CFOs intention to cut wages and salaries due to spiralling costs. Thirdly, potential tensions may arise due to return on investment measures. Training programs may take a long time to see the fruit of their benefit, which may trigger the CFO to question the initial outlay on the project. Lastly, CFO might not appreciate the talent of the HR manager due to the simple fact that he may not be present to see the work the HR manager does. The study states that due to the fact that CFOs value HR managers more than CEOs the HR manager might exert more pressure on strategies when meeting alone with the CEO. (EIU, 2012: 6)

A report conducted by CFO Research Services in collaboration with Mercer Human Resource Consulting (2003) states that since the turn of the century there has been a shift to how CFOs view their HR counterparts. Human capital nowadays is crucial for the success of the company. This has resulted in CFOs having a more direct input in the HR function by seeking to apply “financial discipline to these investments”. Fig 1 shows the change of perception from finance personnel on employees and HR in general.

Fig 1

Past

Present

Employees are simply costs.

View them as a source of value.

HR function is seen as just a cost centre

HR is a strategic partner

Finance involved in setting HR Budget

HR take sole responsibility for their budget

Human Capital metrics created and maintained by HR alone

Finance involved in the design as well as their use

Little effort made to try to understand the return on Human Capital outlay

Try to measure return on investment and understand the cause and effect relationship

Human Capital rarely featured in mergers and acquisition pricing

Human Capital is one of the major factors for mergers and acquisition

(CFO Research Services in collaboration with Mercer Human Resource Consulting 2003: 4)

The report concludes that:

“The CFO’s view of human capital is evolving. Where once the typical finance executive saw it as a cost to be contained, many are coming to see human capital as a source of value and competitive advantage. And as finance executives come to recognize human capital’s importance, they are starting to search for ways to measure and manage this asset more effectively.” (CFO Research Services and Mercer Human Resource Consulting, 2002: 32)

2.2 HR policies aiding organisational performance

Studies with a broader perspective are associated with HR policies linking them with company performance. A strong level of commitment from management aims to identify the employee with the goals and values of the firm to stimulate commitment from the employee towards the firm (Walton, 1985). Wood and Albanese (1985) and Wood (1996) have connected a number of HR policies that stimulate this sense of ideology:

  • the development of career ladders and emphasis on trainability and commitment;
  • a high level of functional flexibility with the abandonment of potentially rigid job descriptions;
  • the reduction of hierarchies and the ending of status differentials;
  • a heavy reliance on team structure for structuring work and problem solving;
  • exemplary job design to promote intrinsic satisfaction;
  • a policy of no compulsory lay-offs or redundancies;
  • new forms of assessment and payment systems; and
  • A high involvement of employees in the management of quality.

Patterson et al. (1997) also found a positive relationship between employee attitudes, organisational culture, HR management and company performance. The study concluded that when morale is high in the workforce, the company will benefit from this. In this study, the key HR polices were perceived as the acquisition and development of employee skills (by means of recruitment and subsequent performance appraisals) and job designs (by means of flexibility, job responsibility and team working).

Drawing on the work of CIMA (2012) nine points emerged that linked HR policies to improved organisational performance:

  1. A mix of financial and non-financial measures leads to improved organisational performance.
  2. The role of employees is critical in achieving an organisation’s targeted performance.
  3. Teamwork has a major impact on an organisation’s performance.
  4. Organisational culture (with regards to employees) has a major impact on an organisation’s performance.
  5. When employees are viewed as assets rather than simply costs, there is a positive impact on an organisation’s performance.
  6. There is a link between training and an organisation’s performance.
  7. Benchmarking is a useful technique for exploring the relationship between HR policies and an organisation’s performance.
  8. Specific HR policies can be linked to an organisation’s performance.
  9. Statements could be made in an organisation’s published report about the impact of HR policies on an organisation’s performance.

None the less, literature acknowledges that there are some limitations that may hinder the link between human capital and performance. Becker & Gerhart (1996) and Guest (1997) mention reverse causation, this is like the “chicken and egg scenario”- does human capital processes lead to increased performance or is the alternative explanation equally as likely: higher performing firms will have more resources to invest in better human capital management?

2.2 The Theory of HR Accounting

Probably the most telling link in theory between HR and accounting is the concept of HR accounting. The idea is to capitalize human resource cost as an asset in the balance sheet. Thus, the companies would be encouraged to strengthen the knowledge of their people to affect the bottom line. The development of HR accounting in the last half-century as a field signals the interest there is to yield value to what the contribution of employees is (Cascio, 1991). Unfortunately for advocates of this field there are no accounting standards for HR, which explains why it failed to take off as a concept. This concept is accepted in economics as human resource is one of the four forms of capital, but in accounting HR is still treated as a cost.

Ferguson and Berger (1985:29) agreed that it is tempting to include the value of human resources in the balance sheet but it would be a complex process and ultimately futile. Scarpello and Theeke, (1989 :25) also stated that;

“Human resources accounting (HRA) advocates demonstration of a valid and generalisable means for measuring human resource value in monetary terms, we are compelled to recommend that researchers abandon further consideration of possible benefits from HRA”

3. Rationale for the Research

For a successful business, there needs to be synergy between different departments. Perhaps, the two of the more important departments are the HR along with the Finance Department. One has to note that the CFO is in command of the business entity’s major resources, except for human capital.

Organisation for Economic Co-operation and Development (OECD) economies are increasingly based on knowledge and information. Knowledge is now recognised as the driver of productivity and economic growth. Despite this, HR amounts to one of the biggest cost driver of a company that the CFO has limited control over. Should we view HR as assets due to there ever increasing importance in the business or the traditional view as costs? Thus with this in mind, the collaboration needed between the CFO and HR manager for amongst other things recruitment, company policies, training, employee benefits are more important than ever before.

This research is intended to find out I will find out amongst listed companies the strength of the relationship between the two functions for the benefit of the Organisational Performance. Other Research carried out in the local scenario has dealt with the relationship with other functions such as the Marketing Manager, hence this proposed research will compliment the studies carried out thus far.

4. Objectives

The objectives of my study are four fold:

  1. To determine to what extent communication and synergy exists between the two organisational functions.
  2. To analyse how CFOs and HR managers link up to shape up company policies for organisational strategy.
  3. To ascertain to what degree would the CFO give credit to HR strategy and human capital to their respective company financial performance
  4. To establish whether the existing theory regarding the relationship of the roles hold up in the local context

5. Research Methodology

Given this is the first study in the local context that looks into the relationship of the CFO and Human Resource manager I will opt to use a qualitative method to investigate the relationship. By using this method I will explore the relationship in a more complete way. My intention is to conduct a number of semi-structured interviews with CFOs and HR Managers of the listed entities in the Malta Stock Exchange. This would get the views of both personnel that are vital for the research. The semi-structure interview will guarantee that their answers are not tied up with a rigid interview, but rather the questions prepared would act as a guide to lead me as the interviewer.

Qualitative research entails an iterative process rather than linear process hence qualitative data analysis (QDA) procedures will be applied throughout and depending on the level of theoretical saturation achieved further interviews will be conducted.

6. Support Individuals

My intention is to base my research on the listed entities of the Malta Stock Exchange which have a CFO and HR manager.

At this early stage of the dissertation process the CFO and HR Manager of GO p.l.c, GlobalCapital p.l.c, Malta International Airport p.l.c, Middlesea Insurance p.l.c and Simonds Farsons Cisk p.l.c have agreed to participate an interview to aid me in collecting data.

PriceWaterhouseCoopers have also agreed to help me contact the listed companies which are also their clients. I have also asked Mr. Nick Xuereb (Air Malta’s CFO), who was at a time the manager of both the finance and HR function of Air Malta, to support me by means of an interview so that I could gather more insight about the relationship of both functions. Mr. Bernard Farrugia (HR and Data Input Coordinator- Air Malta), has also accepted to help me to contact the respective HR managers and CFOs of the listed companies.

The respective correspondence between the support individuals can be found in the appendix.

7. References

Becker, B. & Gerhart, B. (1996). The impact of human resource management on organisational performance: Progress and prospects. Academy of Management Journal, 39: pp. 779-801.

Cascio, W. F. (1991). Costing human resources: The financial impact of behaviour in organisations. Boston: PWS-Kent.

CIMA (2012). Human resource policies,accountingandorganisational performance. Research executive summaries series. Vol 5, Issue 4

Ferguson, D. H. & Berger, F. (1985). Employees as assets: A fresh approach to human resource accounting. The Cornell HRA Quarterly. 25 (4): pp. 24-29

Guest, D. E. (1997). Human resource management and performance: A review and research agenda. International Journal of Human Resource Management, 8: pp. 265-276.

Patterson, M., West, M., Lawthom, R. & Nickell, S. (1997). The impact of people management practices on business performance. Issues in People Management. London: Institute of Personnel and Development.

Scarpello, V. & Theeke, H. A. (1989). Human resource accounting: A measured critique. Journal of Accounting Literature, 8: pp. 265-280

Vedd, R. (2005) Management Accounting and Strategic Human Resource Management: A

Comparison of the UK Royal Mail and Canada Post'. Problems & Perspectives in

Management, 92-103.

Wood, S. & Albanese, M. (1995). Can we speak of a high commitment management on the shop floor? Journal of Management Studies. 30: pp. 215-247.

Wood, S. (1996). High commitment management and organisation in the UK. The International Journal of Human Resource Management, 6: pp. 41-58

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