With the debate over the future of capitalism and risk management, HR must have the courage to rise to the challenge and grab control of the moral compass.

The current crisis in the financial sector should never have happened. Sarbanes-Oxley and similar regulations were supposed to prevent any repetition of the failure of organisational control systems evident in the collapses of Enron, WorldCom and Tyco. They didn't - and the reason is that regulation and control systems alone are not enough to minimise risk. For HR, this failure provides a great opportunity to prove its business and strategic thinking, provided it has the courage to take it.

As the recession deepens, effective risk management is of increasing importance. The pressure on client-facing staff to 'get business in' at any cost will be high, leading to the temptation to cut corners. The response may be increased regulation but all too often this is counter-productive.

Tight control systems may reduce risk but they can restrict the organisation's ability to adapt to change and respond quickly to customer needs. They can also slow or prevent the development of innovative products or processes that reduce operational costs or increase profit. The equation is regarded as keeping risk low but sacrificing flexibility and responsiveness.

There is some truth in this; in the past five years there are numerous examples of organisations that lost potential business as tighter compliance requirements took longer to process new business compared with their less risk-averse competitors. There is evidence to suggest this contributed to the credit crisis by encouraging organisations to loosen controls to make sure they didn't lose out to those competitors. But if there had been a strong moral compass we might not be where we are now. Individuals who showed legal, but morally dubious, behaviour might have recognised their actions were contrary to their organisation's values.

The most devastating indictment of the failure of the moral compass is when senior management ignores or even dismisses those who warned them of building risk, because it does not fit in with the delivery of their business strategy. Examples of this are now creeping out in the financial sector globally. Yet the large majority of the staff in banks that did maintain a strong moral compass were unaware of the time bomb their less moral colleagues were building just down the road. This demonstrates what happens when the moral compass is seen as optional in parts of an organisation rather than 'the way we all do things here'.

Even with tight systems, reasonably clever individuals can subvert control systems in the drive to earn money or not disclose mistakes. Messrs Leeson (Barings, $1.3 billion) and Kerviel (Societe Generale, $7 billion) proved that.

So in reality regulation and compliance systems alone cannot minimise risk, be it financial, legal, operational or, in particular, reputational. What is right or wrong has to be clear in the mind of every employee. This is HR's great opportunity to demonstrate its business understanding and relevance in a new area - to lead the building of a moral compass. Better still, the moral compass is an extremely cost-effective way of minimising risk compared with more formalised systems.

HR should be the creator of this moral compass, together with the senior management team. HR, as guardian of the organisation's values, should ensure that every employee knows, through line managers, what is right and wrong. HR should stand up to managers who are moving from what is right towards what is wrong. HR business partners do not need to understand the full technicalities of the business process to know this; it is demonstrated by behaviour. There are clear signs of building danger, such as requests from the business to move from deferred compensation to cash upfront.

There are further bonuses for HR's image. Embedding the ethics and values of the organisation in the entire employee population not only has the effect of reducing risk but also adds value by supporting other key principles, such as encouraging staff to deliver excellent customer service, find ways of saving money, work out better methods of doing things and better sell the organisation's qualities to customers, potential staff and the wider public.

For the CEO, chief legal officer (CLO) or chief risk officer (CRO), the benefits of a strong moral compass are in making the job easier - and, if this happens, HR gets the credit.

But isn't this the CLO/CRO's job, you may ask? Law/regulations and morality are not always the same thing. Reputational risk can be created by perfectly legal activity that fails to comply with current social norms. The legal function can help the organisation keep out of trouble by ensuring it obeys regulation but it can't ensure it stays out of trouble by doing the right thing. HR can. This is the area where HR can demonstrate its capability by suggesting action to cover both types of risk.

In reality you can not stop things going wrong, as a chief group risk officer of a US global bank told me back in 2006: "We know statistically in this organisation of 80,000 someone somewhere must be doing something wrong every hour of the working day. The systems should catch it before it gets critical, but with strong ethics and values it doesn't even reach the systems."

Do not ignore the small and frequent mini disasters that never reach the newspapers. They will chip away at your organisation and, if unchecked, fertilise a culture where mega disasters can germinate. Even if they don't grow bigger, the effect of smaller issues that, for example, give a negative view of your organisation to 15% of your customers, will have bottom line impact over time.

HR has an important role to play in making the moral compass work at operational level. In recruitment it makes sure the right people come in and that they are inducted to be aware of correct behaviour. HR should ensure promotion and remuneration rewards that behaviour. The problem is that, if every day the individual's line manager is sending signals that contradict this, all the work HR does will be mitigated - and the compass will fail.

Having a moral compass is a critical strategic leadership issue that defines the way everyone behaves. The CEO is the driver, the CLO and CRO are the monitors. HR is the facilitator. Every line manager should be an implementer and exemplar of good behaviour.

The compass needs to be founded on business strategy and the values by which the strategy is delivered. These values must be developed by staff, as well as senior management, and be simple and understandable so employees take ownership and use them day-to-day.

The compass has to be embedded through all touch points between organisation and individuals - appraisal, communication events, development, discussion with line managers and those chosen to be examples of success. Here, HR is the key influencer.

But it is not all bad out there. There are many companies doing things right that keep going. We should applaud them as examples of the benefits of a good moral compass. But will the G20's undertaking to tighten regulation of the financial sector not remove the need for a moral compass? The answer is no, as unregulated activities will emerge over time and present risk that only the moral compass will impact upon.

Having a strong moral compass not only minimises risk but also improves performance via better employee engagement from better leadership. This is an ideal opportunity for HR, for what can be more business-focused than HR coming up with a strategy to minimise risk? Not only is having a strong moral compass best for your company it is also the right thing to do. It's good for business, good for the soul and great for HR.

**** - Appraise and reward people positively if they do it

- Make sure all line managers buy into it, demonstrate it and expect it of your people

- Integrate this into all touch points with staff

- The values are the overarching principles; the behaviours are what everyone does day-to-day to make them a reality

- Create new values or reaffirm valid old ones by working bottom- up to create values and behaviours that everyone can commit to

- Review areas where the business sees a possible legal or reputational risk

- Draw up a proposal for the senior management team on minimising risk via a moral compass

- Include customers and clients in discussions about how you can be better

- Measure via organisational processes and systems

- Champion people that do it well as examples to others

Chris Roebuck is founder of Transformation and former global head of talent management, UBS.