Financial Times: All-round gain offered

By Ross Tieman
Compliance with legislation, regulations, directives and codes has never been more challenging. Though business conduct has always been constrained by law, today the volume of legislation and rules, and the pace of change, have increased so much that meeting the requirements has turned compliance into a corporate discipline in its own right.
Some company chairmen complain that compliance is distracting them from strategic management. Others shrill about the mounting costs.
This has come about because, in Europe and the US especially, legislators have taken companies to task over their behaviour. In the US the Sarbanes-Oxley Act, designed to prevent corporate scandals, has established tough new standards for company directors, while in the UK and continental Europe companies must comply with voluntary governance codes, or explain their failure to do so.
Companies operating within the European Union must also comply with a tidal wave of new pan-European directives.
All this change coincides with corporate globalisation. National industrial or services champions have been spurred by market opening into global rivalry. Today they must comply with the rules in more jurisdictions than ever before at a time when the rules almost everywhere are changing by the month.
Yet every cloud has a silver lining – for the bold. The challenge of compliance has become so great that mastering compliance has become a tool to achieve competitive advantage.
Compliance requires leadership from the top. The Combined Code on Corporate Governance, effective in the UK since 2003, gives board directors new responsibilities. The code encourages quoted companies to separate the roles of chairman and chief executive, ensure that more than half the directors are independent, and calls for committees to oversee the key functions of audit, appointments and remuneration. Its effect, increasingly, is to create a single board that combines the functions of the supervisory board and the management board common in continental Europe, obliging the freewheeling chief executive to work within a collegiate framework.
US governance laws, codified and backed by tough penalties, leave the executive chairman in charge but require the chairman and the finance director to certify a rigorous paper-trail of evidence that the company is meeting its obligations.
Can such measures deliver better corporate governance? Investors see a link between high standards of governance and corporate longevity. Think of Cadbury Schweppes, the UK chocolate and fizzy drinks company whose former chairman, Sir Adrian Cadbury, was one of the pioneers of corporate governance reform.
Shares in Shell, the Anglo-Dutch oil group, plummeted last year after it understated its oil reserves and incurred a record £17m fine from Britain’s financial and securities regulator, the Financial Services Authority. But its corporate governance reforms that followed prompted a significant re-rating by the markets.
Anthony Carey, a partner at accountant and adviser RSM Robson Rhodes responsible for board evaluation, was project director for Britain’s Turnbull working party on risk management. He says: “A strengthened selection process and improved definition by the Combined Code on Corporate Governance of the role of the non-executive director makes it easier for non-executives to constructively challenge management and also to contribute on strategic issues.”
He says boards should focus on the value that reform can deliver, and check there are key performance indicators to ensure it is achieved.
Overhauling the boards of companies takes time. Last October, the Association of British Insurers, representing many of the country’s biggest investors, analysed the annual reports of 477 UK quoted companies and found that only 46 per cent of FTSE 100 companies stated that they were fully compliant with the code.
But Peter Montagnon, the ABI’s investment director, is encouraged by that. “If companies still don’t have the right balance on the board, that doesn’t mean they aren’t seeking it,” he says.
Achieving good governance with compliance is “about strategic decision-making and management risk,” he says. “It has little to do with the mechanical implementation of a rule book.”
Directors alert to corporate governance obligations have become focused on compliance throughout their organisations.
Perhaps the biggest compliance challenge today for companies operating in Europe is to comply with the stream of directives from Brussels designed to create a single European market in financial services. The regulatory landscape has become increasingly codified and complex.
Abesh Choudhury, an associate in the London office of US law firm Cleary Gottlieb Steen & Hamilton, says: “The thrust of a lot of new regulations is to focus ultimate responsibility on senior management.”
Paul Nelson, head of the financial markets practice at law firm Linklaters, concurs. “We have seen over the past 15 years a real professionalisation of the compliance industry,” he says.
A company’s compliance director for Europe will typically be a member of its European board. And a typical European financial institution will employ 100-200 in its compliance department.
One specialist recruitment agency reckons that 2 per cent of opportunities advertised in the UK financial services industry are now in compliance. Graduates with just three years’ compliance experience are earning more than £40,000 a year, and for top posts salaries are well into six figures.
Because skilled compliance officers are in short supply, salaries soared 17 per cent last year.
No wonder that universities, working with industry, are now offering courses to fill the gap.

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