International Human Resource Management 1 International Human Resource Management Name University Course Date International Human Resource Management 2 Human Resource Issues as a Cause of Global Financial Crisis The Global Financial Crisis the rocked the world in 2007 through 2009 nearly collapsed the entire global financial system. According to Gunnigle, Lavelle and Monaghan (2013), the Global Financial Crisis started in the United States of America following the burst of the housing bubble in 2007 and through contagion and spillover effects spread to the rest of the world. Studies conducted to investigate the root cause of financial crisis of 2007 point to financial innovation, de-regularization of the financial system, greed and excessive leveraging by financial institutions. Choudhry, Marelli and Signorelli (2010) assert that at the heart of the blame for the crisis are financial derivative products such as collaterised debt obligations and subprime mortgage backed securities, which were later branded as toxic assets. Other scholars like Akinbami (2010) opine that the cause of the Global Financial Crisis was as a result of financial deregulation. Government and regulators relaxed their regulatory and oversight mandate, leaving the financial markets to market fundamentalism to correct anomalies. With most of the studies blaming financial innovation and deregulation as the root cause of the Global Financial Crisis, few, if any, studies have explored human resource issues that contributed, partly or wholly, to the crisis. According to Cascio (2010), inability by financial institutions to manage human resource risks is partly to blame for the Global Financial Crisis. Management of financial institutions breached risk management policies in order to achieve above board performance. Consequently, failing to control the risk inherent in people, this from a human resource management point of view caused the crisis. For instance, performance-based pay system exerted pressure on employees to improve on their individual performance, and as a result led to employees to ignore the tenets of prudent risk management in order to achieve better International Human Resource Management 3 performance by taking outsized risks. Coupled with poor reporting and disclosure structures, employees disregarded ethics as they pushed risk limits to get better pay. For example, loan officers who used to work for mortgage lending companies selling mortgage-backed securities were paid based on the number and size of mortgage loans they sold; therefore, a loan officer who failed to sell loans would receive no commission. Since the mortgage lender did not penalize on bad loans, loan officers were tempted to sell loans even to high risky borrowers, NINA, NINJAs and subprime borrowers. Organizations have adopted lopsided reward systems that do not value ethics instead putting great emphasis on performance. For example, financial institutions such as investment banks and stock brokerage review performance of their employees based on the number and size of the deal closed. Similarly, a ranking of the best investment banks is based on the number and size of the deals closed, ignoring performance based on prudent corporate values, although financial institutions have well defined corporate values. Consequently, loan officers, investment bankers and stockbrokers trample upon corporate values and effectiveness to achieve successful performance. Cascio (2010) observes that although Enron believed in respect, integrity, communication and excellence, no performance measure was developed to measure achievement of these corporate values. It is, therefore, evident that the human resource management is partly to blame for the financial crisis, although their intentions were unintended. Target based reward systems commonly referred as performance based pay systems, individualized incentives and poor people management were the highlighted HR issues that partly fuelled the Global Financial Crisis, and averting another Global Financial Crisis would require immediate solutions to these human resource management issues. Organizations operating in industries characterized by intense competition, particularly financial institutions need to adopt a performance based system that recognizes financial performance and International Human Resource Management 4 non-financial performance that is corporate ethical values and culture. In addition, organizations need to enhance people management practices and supervision in order to manage prudently risks stemming from people. Human Resource Challenges Due to the Global Financial Crisis The Global Financial Crisis of 2007-2008 did not only threaten the entire global financial system but also caused the global recession, which started in the United State of America spreading to other global economies, emerging, developed and developing economies. According to
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