1. Introduction
Corporate governance in a generic perspective is regarded as a framework constituting the different components (e.g. organizational systems and corporate culture) which focus on the facilitating the business towards growth. Scholars such as Keasey and Wright (1993) have considered corporate governance as a combination of structure and systems for achieving corporate success. This approach has received some level of acceptance among the scholars, however, the approach of Parkinson (1994) has generated greater degree of support, which perceived corporate governance as comprising activities related to monitoring and control in an effort to regulate the organizational process and maintaining high level of value for the shareholders. For this paper, the concept of corporate governance as a framework for supervision and control of managerial actions has been integrated into the discussion, identifying the linkages between Corporate Governance and human resource management practices of an organization. The discussion further implies that corporate governance directs the organizational activities through influencing the activities of managers, as well as shaping the direction and structure of human resource management at an organization.
2. Approaches to Corporate Governance
There are two approaches to corporate governance; shareholder and stakeholder. The shareholder approach to corporate governance emphasizes the shareholder approach to corporate governance associates a great deal of importance to the value creation through earning the optimum level of profits for the organization, while preserving the interest of the shareholders. The stakeholders approach offers an alternative means of regulating the performance of the managers by maintaining the focus on the different stakeholders of the organization and keeping their positive involvement in the organizational processes to gain high level of profits (Parsa, 2010).
Both of these approaches have a common underlying theme, which is related to bringing a sense of accountability among the management in an organization, including the concept of socially responsible behavior of the corporation, its management and employees (Solomon, 2007). The shareholders and stakeholders, both constitute a group of actors that can have a significant impact on the policies of the organization reflected through the rewards offered to the managers and the variables considered in identification of behaviors worthy of incentives.
The failure of the large scale organizations and more recently, the financial crisis has created the pressure for the boards in organizations and governments to develop the regulations and policies that support the organizations in managing their operations in an effective manner. The Financial Reporting Council (FRC) has created a code in effort to address the existing flaws in the existing corporate governance structures and processes in the financial institutions. The code outlines the responsibility of the board to monitor the work processes, output and keep track of the human resource aspect of the organization (Clarke, 2007).
Konzelmann et al. (2006) have conducted a study with the intention to identify the connection between corporate governance and HRM and concluded that the degree of effectiveness of tools adopted for regulating the performance of the workers is influenced by governance approach. Keeping this point into consideration, the linkages between corporate governance and human resource management (HRM) practices can be observed.
3. Effect of Corporate Governance on HRM
The corporate governance framework used by an organization effects HRM practices and policies as it involves the identification of controlling and supervision mechanism that can support the organization in attaining the main goal of value creation (Huse, 2007; Parsa, 2010). The pattern through which the management is rewarded and controlled differs among both of these approaches, offering different focal point for the human resource practitioners. Konzelmann et al. (2006) have the governance structure provides a firm with the guidance about the stakeholders whose interest should be at the core of the organizational activities. The shareholder approach associates a great deal of importance to the interest of shareholders, using the managers as a tool for achieving organizational growth and enhanced performance. The stakeholder approach adds the interest of managers as one of the integral parts of achieving organizational growth and profitability objectives. Both of these approaches have their strengths, as well as the limitations that have raised concern among the critics.
3.1 Shareholder approach to Corporate Governance and HRM
Using the shareholder’s approach, the organization is expected to fulfil the responsibilities pointed out by different regulatory authorities and government, and at the same time achieving the expected standards of shareholders related to profitability (Parsa, 2010). The human resource management practices under this framework can be seen as effecting the structure of rewards offered to the managers and the criterion used by the board which identifies the performance worthy of being rewarded. Furthermore, the monitoring mechanisms put in place by the board for supervising the managerial activities is guided by the objectives set by the shareholders. The role of HRM in this situation is as a means of ensuring that the managers play an active role as the agents, fulfilling the objectives of the company owners and investors.
The human resource management activities under the influence of shareholder approach considers rewarding the performance of managers who are able to work as effective agents of profitability for the shareholders. Offering incentives to the employees and managers is one of the key functions of human resource management and the direction of this function of HRM is dependent on the way the board of directors and other shareholders deem appropriate and representative of their interest (Peterson and Ferrell, 2005). The performance that meets the criterion identified by the shareholders is rewarded through offering the managers some part in the shares of the company (Edwards and Bach 2013), which demonstrates the way corporate governance can influence HRM practices.
[large]Clarke (2007) has asserted that the shareholder approach which is also termed as the outsider approach requires that the shareholders are provided access to the information about the performance of the company and such disclosure guides the shareholders to make alterations in their investment levels. Therefore, the corporate governance that holds the shareholders as central, focuses on yielding results that when disclosed are seen as positive by the board and shareholders. Another component that is a part of the shareholder approach is the monitoring of the managers which is carried out with the underlying premise that the managers can engage in activities that are not aligned with the interest of the company shareholders, hence supervision of their work performance is important. It also suggests that the performance of the managers needs to be supervised and controlled in order to keep it connected with the expected outcomes of the shareholders (Grahl, 2010).
Charreaux and Desbrières (2001) have viewed the shareholder approach as offering limited understanding of the way corporate governance and value creation involves the human resource management practices. This approach to corporate governance can lead to issues in the long-term profitability of the organization and causes problems in the performance of the employees as seen through the case of Enron. The management at Enron was under pressure to meet the criterion identified by the shareholders, consequently leading to the decisions taken by the managers that violated the audit guidelines and code of conduct (Cohan, 2002).
The shareholders may end up taking decisions that do not support the employees, society or community in further development, but fulfils the interest of the board, investors and owners of the organization. Gospel and Pendleton (2003) have indicated that shareholders may consider the investment in human capital development as an unnecessary expenditure, therefore offering limited prospects for training to the personnel. The investments made with the intention of value creation for shareholder creates a misbalance between the expectations of the different stakeholders and the activities of the company. The HRM function becomes a tool for value creation as the managers are propelled to achieve the objectives provided by the shareholders. Value creation from shareholder perspective can also take the extreme case of gaining benefit at the expense of the community, which has been seen as a limitation of this approach. Another criticism that the shareholder approach has received is that it is suitable in specific countries (for e.g. USA and UK) which are dominated by the liberal market mechanism (Parsa, 2010), reducing its level of effectiveness for other nations.