Winning with Governance Risk and Compliance - PwC UK blogs

Winning with governance, risk and compliance

www.pwc.co.uk/riskresilience

Risk Resilience

Spring/Summer 2013

Helping to put your company on the path to risk resilience in today’s uncertain world

Risk Resilience Spring/Sum

mer 2013

How leaders turn overheads into competitive advantage“This might sound amusing to some people” says Werner van Haelst the Co-Managing Director at Integrc (in-teg-ri-see) “but it is really an exciting time in the audit and risk management space.”

He speaks with authority, having spent the last 20 years as an IT auditor, initially with a ‘Big 4’ consultancy, and then leaving to run a specialist consultancy company which eventually merged to form one half of Integrc – a leading specialist in Governance, Risk and Compliance, in particular for organisations that use SAP.

“Audit and risk has often been an unwelcome guest at the party” says van Haelst, “but we are at a tipping point now where it can start to add significant value and at the same time costing less to operate.”

Audit TrailThe history described by Werner is all too familiar; 20 years ago IT systems were becoming more and more central to organisations’ operations and a subject of security and risk assessments. Enron and SOX was the next big stepping stone, increasing the level of scrutiny. Over time, as global trade increased, so did the amount of regulation and control eg through national or EU law or new standards such as those related to electronic trading.

So today we find a wide degree of variation in the approach taken by organisations. Some still operate manual disparate systems, perhaps not reacting until an incident occurs. Others have made some investment in technology but still find things are not perfect. A final group of organisations strive to be more agile by adapting a more holistic view, trying to be ‘ready for the future’ and more transparent for their stakeholders. However, the overall view until recently was that this area was a distraction, a cost overhead and as little should be done as possible to satisfy the organisations risk appetite and external regulation/law makers.

Nowhere to HideThe adoption of the World-Wide Web and more recently Social Media is one of a number of factors that results in a bigger impact on reputation and brand value should things go wrong for an organisation, be it financial, ethical or a product recall. All types of organisation are affected by this, not just B2C. These changes in business climate, together with technology enablement, are acting as a catalyst to big steps forward. On the business side, there has been a steady increase in the amount of time and effort organisations have to put into compliance and governance (for example national or international law, demands of regulators or the impact of a product recall on brand and finances). This increase in activity has had a challenging effect on day to day operations. Seen as a distraction and additional burden to ‘real work’, productivity is hit, costs increased and with such a reluctant participation many senior managers are privately concerned that the data gathered from their business is not a reflection of the true situation.

“But things are starting to change” says van Haelst. “This is one of those situations where new technology is significantly changing the dynamic and providing a step change not seen before in this area. It can genuinely bring

competitive advantage.” How? In simple terms, the same tools used for GRC can also be used to increase performance, to manage businesses better. This has long been a theoretical aspiration of risk management but technology improvements in GRC platforms, such as those from SAP, together with broader technologies such as dashboards and powerful real time analytics are proving the catalyst to making this

reality. “With this approach it’s like having a team of people behind the scenes checking all the important things in your business all of the time, and only telling you when things look like they might go wrong. Because of the power of modern analytics, some areas such as duplicate invoice payment can be detected before the payment run is made.”

we are at a tipping point now where it can start to add significant value and at the same time costing less to operate

This is one of those situations where new technology is significantly changing the dynamic and providing a step change not seen before in this area. It can genuinely bring competitive advantage

“Real integrity is doing the right thing, knowing that nobody’s going to know whether you did it or not”Oprah Winfrey

For more infomation [email protected]

PROMOTIONAL FEATURE

Investment requiredObviously to harness such an opportunity requires an investment of time and money by organisations, but this is offset by the effort to change and update the existing processes. And when the demand for governance and compliance is only likely to increase, more and more organisations are realising that such an investment provides more flexibility and headroom for the future. “We work with a lot of organisations using SAP around the world” says van Haelst “and the theme is common: more and more of them see a link between Risk and Performance, and combined with the technology maturity of the past year I believe that we are about to cross a threshold where organisations can improve performance and decrease costs.”

Werner van Haelst concludes “Organisations face two options; either to carry on with the ‘sticky plaster’ approach and absorb the cost, or to take a fresh look and grasp the opportunity to generate more value.”

Positive Business ImpactBut it’s not just a matter of deploying new technology, as van Haelst explains “You can invest in compliance tools but if you still have an inadequate security and/or control framework implemented, challenges will still remain. This new mandate requires a fresh look at risk and control frameworks, where organisations have to ask themselves what needs to be monitored (content) and how often; not just from a risk perspective but business performance.”

This naturally impacts the whole governance model for many organisations moving from an IT and finance dominated forum to one with much more business influence. “It’s a mindset change which more and more organisations are starting to appreciate and the result is a much more healthy balance of representation.” Reporting and alerts are a key area that results in business buy-in; whilst not all cutting edge, email workflow, dashboard technology, together with powerful background data analytics (also known as ‘Big Data’) means that the various stakeholders (business, assurance, finance, senior management) can all be sent information in a way that is easy to understand. This allows them to either react to a tactical business issue or identify ways to increase performance. Thus, senior management benefit not only from better reporting tools but an increased confidence in what the reports are telling them. “It’s a whole new ‘ball game’” says van Haelst, “our customers start to regard a properly executed deployment as a competitive advantage.”

This realisation has also created new opportunities. “Consultancies like ours didn’t exist 20 years ago but in order to achieve the success described above close integration is required between business demands, operational requirements and technical landscapes. This is why our company is so successful; we offer expert advice and experience in all areas.”

There’s another benefit to be realised too; the high level of automation means that less operational management is required, thus providing organisations the opportunity to centralise operations, often to a low cost location or to an existing finance shared service centre. This obviously provides better synergy for skills as well as improved resilience and consistency in reporting. Van Haelst elaborates “We have offices all around the world, from Asia, Middle East and Europe, and the message is the same: there is a double benefit of improved transparency and lower operating costs.”

organisations have to ask themselves what needs to be monitored and how often, not just from a risk perspective but business performance

“Integrity is what we do, what we say, and what we say we do”Don Galer

“Risk is like fire: If controlled it will help you; if uncontrolled it will rise up and destroy you”Theodore Roosevelt

GrowinG demand

a recent study revealed that 80 percent of employers recognise that health benefits are – amongst other things - a highly effective means of retaining their staffii. and yet, whilst health cover is clearly one of the most valued employee benefits, only 38 percent of businesses provide health insurance to their entire workforceii. This is in large part due to a perception of cost, with many employers unaware of the financial realities of investing in their employees’ health. in fact, businesses may see a return of up to £34 on every £1 they spend on healthcareiii.

Health benefits not only help businesses to attract and retain staff, they can also help employers to engage their staff and improve productivity. Considering that an average of 6.8 days are lost per employee, per year in the UKiv, the need for employers to extend health benefits to every level of their business has never been higher: at any one time, one worker in six will be experiencing mental distress, depression or problems relating to stressv, whilst nearly 75% of GPs cite back pain amongst the three most common conditions for which they issue six notes seven days or morevi.

BreaKinG new GroUnd

with this in mind, Bupa Business Health Solutions has been specially designed to meet the specific needs of every business, at every level. with its unique, modular structure, businesses can now choose the right health solution for them, meeting their priorities, as well as their budget.

TarGeTed HealTHCare

Comprised of four targeted products, Bupa Business Health Solutions looks set to revolutionise the way UK businesses approach their healthcare. which is good news for employers, and good news for the economy.

1. Bupa Select offers comprehensive health insurance, and allows businesses to build their own healthcare package depending on the needs of their organisation and employees.

2. Bupa Foundations is a cost-effective, high-quality healthcare solution that meets the needs of a currently uninsured workforce. with three types of cover, it works in conjunction with the nHS to provide treatment and/or care when employees need it most.

3. Bupa Business Fit is an innovative solution that helps employers to manage two of the key contributors to ill-health; musculoskeletal and mental health.

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PROMOTIONAL FEATURE

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i dame Carol Black: working for a Healthier Tomorrow, 2008.ii employee Benefits/alexander Forbes benefits research, 2012.iii Bupa and the work Foundation identified 31 academic studies

that looked at return on investment for workplace health.iv CiPd absence management Survey, 2012.v Centre for mental Health, mental Health at work.

developing the business case, 2008.vi Health insurance magazine: a guide to rehabilitation, 2012.

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It stands to reason that a healthy workforce means a healthy business. But with ill-health costing the UK economy a staggering £100bn per yeari, conventional health benefits simply aren’t meeting the demands of businesses or their employees.

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3www.pwc.co.uk/riskresilience

Contents

Contents

Managing Editor Sharon LockPwC Adviser Darren FowlerSenior Designer Stephen BeerlingHead of Publishing Operations Andy RobertsProduction Controller Sema DemirGroup CEOs Dean Citroen & Oren WolfGroup CFO James WardFinancial Controller Scott GriffinSales Director Warren Hayward

Published by CW Publishing Group 3rd Floor, 3 Upper Street London N1 0PH Tel: +44 (0)33 3344 1350 Web: www.cwcomms.com

Printed in Spain by Rivadeneyra, S.A. Tel: +34 91 208 91 50

Colour origination by F1 Colour Tel: 020 7620 0644

Paper supplied by Denmaur Papers Plc Tel: 01795 426775

© 2013 CW Publishing Group

C W Publishing Group is a trading name of C W Publishing Limited. Registered office: 3rd Floor 3 Upper Street London N1 OPH Registered in England Number 05835226

CW Publishing Group does not guarantee the accuracy, completeness or timeliness of any information contained in this publication, and shall not be liable for any loss, damage or injury directly or indirectly caused by or resulting from such information or its use.

5 Foreword

8 Corporate governance – towards best-practice corporate reporting

28 Trust: the behavioural challenge

45 Subsidiary Governance: an unappreciated risk

54 Dealing with disruption – Adapting to survive and thrive

Regional Perspectives:

64 Risk in the regions: a view from the South, South East & South West

70 Risk in the regions: a view from the regional chair

72 Technical update seminars: Spring 2013

74 Risk in the regions: a view from the North

76 Author biographies

78 Regional contacts

80 Advertisers’ index

p3 Contents.indd 3 05/04/2013 15:54

How do you embed Compliance in an organisation’s culture?Within the UK, businesses are currently going through a significant period of regulatory change. Financial Services organisations are preparing for the introduction of the Financial Conduct Authority who, from April 2014, will also become the regulator for Consumer Credit. At a European-level, the debate continues as to what the future of Data Protection regulation should look like. One theme that is starting to emerge directly and indirectly is the subject of ‘compliance’, specifically, ensuring it becomes a ‘part of the corporate culture’ and there is ‘senior management engagement’.

But how can your business ensure that compliance becomes a key consideration in decision-making processes? How can compliance receive good ‘PR’ within an organisation? Here are Experian’s top five ‘Es’ to consider;

EducationEmployees need to understand that a compliance department exists within their organisation – making use of internal intranet sites or company publications is a good way of ensuring this. Messages of endorsement from colleagues outside of the Compliance Department can also prove beneficial. Mandatory training is also a valuable way of increasing exposure; the training could focus on key regulatory requirements for the business (e.g. Data Protection).

EfficiencyAn organisation needs to know that approaching compliance is straightforward. To set the ground rules it is worth investing time in drafting a policy which confirms the occasions when compliance should be consulted by the business (e.g. when you are designing a financial promotion). A policy would help avoid ambiguity and is a very clear message to the business. It is worth having one email address for when anyone in the business needs to contact compliance. For example, compliance@.... A shared inbox

PROMOTIONAL FEATURE

also ensures there are no undue delays if somebody in compliance is away on holiday.

EngagementSenior management should always have confidence that any product being sold by their organisation is being done so in a compliant way. One way to achieve this is by drafting ‘how-to’ type documents. For example, a document based on the ‘compliant way’ to sell a product. These should become a key part of the training for any sales function. Other written documents are also important as this encourages a ‘self-service’ approach within the business to reading and understanding the compliance standpoint on certain matters.

EvolutionThe existing regulatory framework is arguably the most important to any business; however, keeping a keen eye on items on the horizon is also worthwhile. Closely monitor regulator websites as they may indicate important changes to regulation that could have an impact on your business. Regulatory changes can also present opportunities to firms.

EvaluationAnd how can you give senior management assurance that your business is compliant? A robust monitoring process is something to consider as this will show that processes are being followed and if errors are made, they will be identified and swift remedial action can be taken.

Obviously, the above points are dependant on the size of the compliance team a business has and is made more difficult dependant on the size of the firm and the diversity of the products it offers.

However, even if only some of the points raised in this article are applied in an organisation, it will bring the organisation much closer to embedding compliance in the corporate culture.

Experian Compliance

Experian.indd 1 28/03/2013 14:28

How do you embed Compliance in an organisation’s culture?Within the UK, businesses are currently going through a significant period of regulatory change. Financial Services organisations are preparing for the introduction of the Financial Conduct Authority who, from April 2014, will also become the regulator for Consumer Credit. At a European-level, the debate continues as to what the future of Data Protection regulation should look like. One theme that is starting to emerge directly and indirectly is the subject of ‘compliance’, specifically, ensuring it becomes a ‘part of the corporate culture’ and there is ‘senior management engagement’.

But how can your business ensure that compliance becomes a key consideration in decision-making processes? How can compliance receive good ‘PR’ within an organisation? Here are Experian’s top five ‘Es’ to consider;

EducationEmployees need to understand that a compliance department exists within their organisation – making use of internal intranet sites or company publications is a good way of ensuring this. Messages of endorsement from colleagues outside of the Compliance Department can also prove beneficial. Mandatory training is also a valuable way of increasing exposure; the training could focus on key regulatory requirements for the business (e.g. Data Protection).

EfficiencyAn organisation needs to know that approaching compliance is straightforward. To set the ground rules it is worth investing time in drafting a policy which confirms the occasions when compliance should be consulted by the business (e.g. when you are designing a financial promotion). A policy would help avoid ambiguity and is a very clear message to the business. It is worth having one email address for when anyone in the business needs to contact compliance. For example, compliance@.... A shared inbox

PROMOTIONAL FEATURE

also ensures there are no undue delays if somebody in compliance is away on holiday.

EngagementSenior management should always have confidence that any product being sold by their organisation is being done so in a compliant way. One way to achieve this is by drafting ‘how-to’ type documents. For example, a document based on the ‘compliant way’ to sell a product. These should become a key part of the training for any sales function. Other written documents are also important as this encourages a ‘self-service’ approach within the business to reading and understanding the compliance standpoint on certain matters.

EvolutionThe existing regulatory framework is arguably the most important to any business; however, keeping a keen eye on items on the horizon is also worthwhile. Closely monitor regulator websites as they may indicate important changes to regulation that could have an impact on your business. Regulatory changes can also present opportunities to firms.

EvaluationAnd how can you give senior management assurance that your business is compliant? A robust monitoring process is something to consider as this will show that processes are being followed and if errors are made, they will be identified and swift remedial action can be taken.

Obviously, the above points are dependant on the size of the compliance team a business has and is made more difficult dependant on the size of the firm and the diversity of the products it offers.

However, even if only some of the points raised in this article are applied in an organisation, it will bring the organisation much closer to embedding compliance in the corporate culture.

Experian Compliance

Experian.indd 1 28/03/2013 14:28


Welcome to the second edition of PwC’s magazine Risk Resilience. Since our first edition, we have seen an increasing focus on the Governance, Risk and Compliance landscape, and as GRC lead I am delighted to share our latest thinking and insights in these areas.

Risk Resilience draws from both collaboration and research that we have conducted with clients, academics and other institutions, as well as from our own expertise and marketplace experience, providing a detailed overview of the topical issues that are currently affecting and driving the GRC landscape.

Within this paper we follow up on the Trust debate from the first edition and put a behavioural lens on it, focussing on embedding a culture of doing the right thing. We also share with you the UK findings from our 16th annual CEO survey (Dealing with disruption - Adapting to survive and thrive), including a foreword from our UK Chairman and Senior partner Ian Powell where the topic of resilience features prominently.

In this second edition, our authors have also explored key issues such as... • Corporate governance – towards best practice corporate reporting• Subsidiary Governance: an unappreciated risk ...and put the focus on the regional agenda with viewpoints from the PwC leads in the South, South East, South West and the North. We also profile Stephanie Hyde and gain insight into her position on the Executive Board, as regional chair.

At PwC we are continually striving to gain a better understanding of the issues affecting businesses both today and in the future as we look to provide insights on the benefits and possibilities that arise from good governance, risk and compliance. We hope this magazine provides you with the practical knowledge required to establish your company as a truly resilient one.

The contact details of your appropriate regional PwC representatives are provided on pages 78-79. Please do not hesitate to contact them for further information. I hope you enjoy this second issue of our Risk Resilience magazine and that our insights and views provide you with some stimulating food for thought – not only in terms of your own organisation, but the wider markets you are operating in.

If you have any feedback on this second edition or if you’d like to see a topic covered in our third edition, your feedback will be very welcome.

You can also access all of PwC’s latest thought leadership and publications at our website: www.pwc.co.uk/riskresilience

Richard Sykes Governance, Risk and Compliance Leader

Foreword

p05 Foreword.indd 5 08/04/2013 11:56

The future of energy and your business

The Energy Market is changing. At a time when energy costs are rising and regulation to cut carbon emissions are increasing, energy can be a complex area, particularly for larger businesses.

Energy suppliers are increasingly dependent on a volatile global wholesale market that makes price fluctuations inevitable, with energy prices sometimes moving up and down by five per cent in a week. The UK Government has also set stretching carbon reduction targets, requiring investment in energy efficiency and alternative forms of generating energy. At the same time energy suppliers have an obligation to make sure that energy remains affordable in a tough economic climate where cost cutting is a priority.

In many businesses energy is outsourced to energy buyers or dealt with by procurement and very rarely talked about as a business issue. However, it is now becoming an increasingly important percentage of operating expenses and significant cost savings can be made. As a result, energy management needs to become a boardroom priority. A recent survey carried out by British Gas found that energy management does not take precedence in the boardroom. Nearly 40% of the financial directors said that the biggest challenge

in managing their energy costs was the fact that their board did not consider energy a priority. If approached as an opportunity instead of just a cost, energy moves from being a backroom discussion to an important management decision. This will allow businesses to remain competitive and thrive in an unpredictable environment.

There are a variety of measures that can be taken to manage risks and reduce costs in a way that is appropriate for your business. It starts with your energy supply.

Energy Supply contracts

When choosing an energy provider, businesses should take into account those with an energy supply product to suit their risk appetite and services to meet their evolving needs, rather than focusing purely on cost. If businesses are looking for price certainty and being able to forecast in today’s changing energy market then they can accurately manage budgets with a fixed price product. Or, if businesses want the flexibility to take advantage of market fluctuations, which may go up or down, they can choose a product that offers more control.

A fixed price product allows businesses to set the unit price for the whole of their contract, helping them to avoid any price changes in the wholesale energy market. This also gives businesses the knowledge that their energy costs are under control and won’t change for the length of their contract.

The flexible product allows businesses to take advantage of current prices as the wholesale market changes so that they can make decisions that match their business needs. British Gas also offer a product that allows businesses to buy and sell any part of their energy requirements, 24 hours a day, 7 days a week.

British Gas helps their customers get the right product for their business by carefully assessing their requirements for supply and consumption. Once the energy supply contract is in place British Gas then looks to understand any additional needs and helps businesses to manage their energy costs and risks.

Understanding your energy usage

For the majority of businesses this starts with the installation of a smart meter. Smart meters help to put an end to estimated bills and cut the amount of time spent

on administration by allowing businesses to pay accurate bills, based on precise readings. Crucially, when combined with data analytics, smart meters allow businesses to take control of their energy use. Businesses are able to understand where they are wasting energy, and set targets for energy reduction that can be used to drive change within their organisation. Smart meters give businesses the insight to make significant commercial savings.

British Gas has installed more than 250,000 smart meters in UK based businesses, with another 100,000 planned by the end of 2013. This gives them unique insight into the needs of different sized customers and a deep knowledge of the industry sectors they serve.

A risk-free partnership

A number of businesses have taken this one step further by working in partnership with an energy services provider to make large scale energy efficiency changes. The cost of these changes is covered by the provider and then is recouped as part of the energy bill making the approach risk free for the business.

These energy performance contracts allow companies to establish long term goals to cut consumption and costs over the course of 10-15 years. The service provider funds the installations and improvements up front so the business doesn’t have to spend anything. The costs of these changes is then paid back out of the savings made to their energy bill over the course of the contract,

in the same way a loan would be. However, because the business is now spending less on energy thanks to the efficiency measures, the annual cost is still less than the bill would have been originally.

British Gas is currently working with the Home Office to reduce costs and emissions. In the first year the partnership has already achieved cash savings of £500,000 which has contributed to an overall saving of £1 million across the entire department. The partnership has also resulted in reducing the department’s emissions by 17%.

Competitive advantage for the future

The evidence is clear. Energy efficiency needs to move up the corporate agenda. The technology now exists for businesses to take control of energy usage and gain a better understanding of where energy is used in their organisation and the savings that can be made. This combined with getting the right product for their supply means that businesses that act first will find themselves best equipped to thrive in the competitive, low-carbon energy market of the future.

For more information, contact

0845 070 [email protected]

PROMOTIONAL FEATURE

The Energy Market is changing_v3[1].indd 2-3 06/02/2013 17:34

8 www.pwc.co.uk/riskresilience

Corporate governance – towards best-practice corporate reporting

Reporting is a fundamental part of the UK Corporate Governance Code (the Code). It is through appropriate reporting of governance that companies earn the right to the flexibility that a principles-based framework allows.

It is expected that companies will comply with most of the provisions of the Code most of the time – and indeed a report from the Financial Reporting Council (FRC) in December 2011, ‘Developments in Corporate Governance’, showed 50 percent of FTSE 350 companies claiming full compliance and 80 percent of the remainder complying with all but one or two of the Code’s provisions.

However, the UK framework crucially allows boards to exercise their judgement in respect of their governance arrangements as long as they explain their reasons for non-compliance with the Code. This judgement is not generally challenged by regulators; it is the responsibility of shareholders to consider the judgements and the explanations that are provided when a company does not follow a certain provision.

The FRC’s revisions to the Code for years beginning on or after October 1, 2012 include a number of measures that are intended to enhance engagement and stewardship by building the confidence of stakeholders in company reporting. The hope is that this will encourage the taking of a long-term view in decision-making and counteract the risk of a repeat of the short-termism that is often seen as a root cause of the financial crisis.

Governance reporting is an integral part of the FRC’s changes, which include enhanced audit committee reporting. But governance reporting also has a wider role to play in building investor confidence and

The European Commission and ‘comply or explain’

“There is some scepticism in Brussels about the effectiveness of the ‘comply or explain’ approach to corporate governance, and the willingness and ability of shareholders to hold boards to account. Some in the UK may feel that its track record should speak for itself, but in the current environment there is a need to demonstrate that ‘comply or explain’ continues to deliver strong and effective governance, and is taken seriously by companies and investors. Failure to do so could result in an approach which could be more prescriptive about the way companies organise themselves, and could give more power to regulators at the expense of shareholders.”

FRC: ‘Developments in corporate governance’

encouraging the taking of a long-term view. Governance is not just about confidence in the financial statements; it is about confidence in the company in general. It is also about showing how the company’s business model, strategy and objectives, risk, performance and reward are governed.

Governance reporting is a real opportunity to reap the benefits of the good practice that exists within companies, and to build the confidence of investors and other stakeholders and therefore company value. Few companies take this opportunity successfully.

Corporate governance – towards best-practice corporate reportingReporting is a fundamental part of the UK Corporate Governance Code (the Code). It is through appropriate reporting of governance that companies earn the right to the flexibility that a principles-based framework allows. Here John Patterson explores the steps companies can take to move towards best-practice reporting of corporate governance.

p08-26 Coporate Governance.indd 8 20/03/2013 16:04







Personal reporting“Chairmen are encouraged to report personally in their annual statements how the principles relating to the role and effectiveness of the board (in Sections A and B of the new Code) have been applied. Not only will this give investors a clearer picture of the steps taken by boards to operate effectively but also, by providing fuller context, it may make investors more willing to accept explanations when a company chooses to explain rather than to comply with one or more provisions. Above all, the personal reporting on governance by chairmen as the leaders of boards might be a turning point in attacking the fungus of ‘boiler-plate’ which is so often the preferred and easy option in sensitive areas but which is dead communication.”

FRC: Preface to the Corporate Governance Code

The role of auditorsThe role of auditors in ‘reviewing’ the corporate governance statement is set out in the Listing Rules and under auditing standards. The responsibilities are restricted to reviewing nine specific provisions of the code (C.1.1, C.2.1, and C.3.1 to C.3.7) and the going concern statement that is required of UK incorporated companies under Listing Rule 9.8.6R (3). Other than this responsibility, auditors read the corporate gov-ernance statement for consistency with the financial statements and for any material mis-statements of fact based on the knowledge they obtain from their other audit work. They will not want to be associated with any misleading statements in the governance report, but this does not mean they will look for disclosures relating to every provision of the Code.

With a few exceptions, despite the huge potential benefits outlined above, the reporting of corporate governance in the UK could do more to embrace the spirit of the Code. The FRC has recognised this and in the Preface to the Code it recommends personal reporting by the chairman of the company as a way of improving the situation.

Why are companies missing the opportunity for effective communication with stakeholders that governance reporting represents? Why are boards risking the flexibility to exercise their judgement that the UK framework affords?

Current governance reporting practice – why companies are missing their opportunities

The Listing Rules and the ‘checklist mentality’Although relatively few of the detailed provisions of the Code require specific disclosures (and these are listed in Schedule B to the Code), the Listing Rules require companies to provide a narrative statement of how they have applied its Main Principles. Many companies find that the easiest way to demonstrate this is to explain how they have complied with each of the provisions that relate to the Main Principles. The result of this approach is often apparently standardised disclosure, as companies repeat the wording of the Code provisions.

This leads to a lengthy report that reads like ‘boiler-plate’ and can make it difficult for the reader to identify important information from mere procedure – to ‘see the wood for the trees’.

Reinforcing this, many companies have also experienced a negative reaction from shareholder groups or proxy advisers that take a mechanistic approach to checking compliance if they attempt to omit mention of a specific provision. Our advice on this is to resist. A number of leading governance reporters do not run through each and every provision of the Code in their disclosures. Similarly, external auditors have no mandate to insist on a ‘box ticking’ report.

Corporate reporting challengesA number of the challenges that apply to corporate reporting in general play out in governance, and there are also a number of specific challenges in governance reporting:

• Standardised disclosures are seen as a safe option in corporate reporting. To give company-specific information – for instance, about particular events or challenges that the company faces – is seen as potentially risky even where it is not obviously commercially sensitive.

• It takes courage to ‘lead the way’ in reporting, moving away from precedent in the form of similar disclosures published previously by others. Of course, larger organisations may have more resources at hand to allow them to do this, but there are many examples of creative approaches outside the FTSE 100.

• Corporate reporting is used by a number of different audiences, each with differing needs; companies worry that too much

‘...the reporting of corporate governance in the UK could do more to embrace the spirit of the Code.’




Cutting clutter

Those preparing annual reports should refer to the FRC’s ‘Cutting Clutter’ publication. This includes a specific disclosure aid on governance reporting, but its real importance lies in its emphasis on only reporting information that is material, and in a way that is open and honest, clear and understandable, and interesting and engaging.

customisation will mean their reporting fails to meet the needs of a particular group.

• The various elements of the front half of the annual report are often drafted separately, leading to differing approaches and styles and also to a lack of integration, perhaps beyond some basic cross-references. This is particularly limiting for corporate governance as it can be related to many areas of the organisation – in fact, to almost everything in the annual report.

• Governance deals with particularly sensitive areas: board-level governance focuses specifically on the activities of the directors, and their individual characteristics, relationships and even the evaluation of their performance.

‘Corporate reporting needs to be owned by those able to see the big picture and who have a vested interest in making sure it is communicated.’

To help address these challenges, it pays for there to be oversight that ranges across the whole annual report. Assemble a group who will be aware of the overall plan and messaging. Also ensure that the project plan

allows enough time for initial mapping out of the content and for review and integration after the content is drafted.

Most importantly, corporate reporting needs to be owned by those able to see the big picture and who have a vested interest in making sure it is communicated; the directors should be involved early enough to be able to influence the process. The FRC’s encouragement of personal reporting on governance by the chairman recognises this, and governance reporting particularly benefits from these strategies.

The FRC’s changes to the Code from October 1, 2012 also include a requirement that the board, with the advice of the audit committee, should set out the basis on which they consider that the whole annual report is “fair, balanced and understandable” and “provides the information necessary for users to assess the company’s performance, business model and strategy”. These changes emphasise the direct responsibility of the board and the audit committee for good reporting.




Going beyond compliance – starting to take the communication opportunityBecause current governance reporting is often uninspired, it’s not difficult to make an impression. Here are some quick wins to consider.

Don’t just report on processMeaningful governance reporting does not just report governance processes. It reports how governance activities have been applied

to the ‘backbone’ of the annual report. Useful tips include: • Don’t just list what the board and its




Going beyond compliance – starting to take the communication opportunityBecause current governance reporting is often uninspired, it’s not difficult to make an impression. Here are some quick wins to consider.

Don’t just report on processMeaningful governance reporting does not just report governance processes. It reports how governance activities have been applied

to the ‘backbone’ of the annual report. Useful tips include: • Don’t just list what the board and its




‘...to comply with the Code, every company has to give information about the roles of directors and the composition of the board and its committees.’

committees are responsible for; explain what they actually did.• Give real-life examples of what they did; mini case studies can work well.• Explain how governance was applied to key challenges or events in the year. Do this particularly where there has been controversy; readers will not be impressed by silence on subjects they expect to see covered.

Go beyond the bare factsTo take one example, in order to comply with the Code, every company has to give

information about the roles of directors and the composition of the board and its committees. The biographies of directors generally show that they are well-qualified and experienced individuals and, following the FRC’s 2012 revisions to the Code, companies will also have to explain their

policies on diversity and their progress towards any measurable objectives set.

Companies can go beyond these bare facts by:• Explaining the directors’ most relevant skills or experience for the particular board.




• Showing how the skills and experience of the directors complement each other.• When reporting on the board evaluation, explaining why a particular conclusion was reached and what actions arose; not just setting out the process and reporting the overall conclusion.

All of this can make a real contribution to building the confidence of stakeholders in the robustness and effectiveness of the board.

Communicate what makes the company distinctiveThe business model is part of what makes a company distinctive – it should capture the essence of the commercial proposition. Establishing the business model is very much part of governance. Ensure also that challenges and issues

in particular industries are addressed; too many governance reports could be picked up from one annual report and dropped into the report of another company in a different industry.

Focus on the key messages and use structure to help with this To start with, decide on a small number of key messages for the reader to ‘take away’ and ensure that they are clearly communicated. To help do this, think about how the report can be structured. Consider

communicating key messages separately from the other required disclosures and ‘standing data’. This can be done simply by ‘boxing out’ from the rest of the text. Increasingly, these messages are introduced in the chairman’s personal reporting rather than in the main body of the governance report.

A number of the disclosure requirements in the Code may be met by placing information (such as the terms of reference of committees) on the company’s website. The provisions that allow for this are listed in Schedule B to the Code.

‘...decide on a small number of key messages for the reader to ‘take away’ and ensure that they are clearly communicated.’


The Life of PI: Key considerations …In today’s evolving environment, of the key decisions a business makes, Professional Indemnity (PI) insurance isone that can genuinely mean the difference between continued financial wellbeing and failure. All firms are looking to control costs, including those relating to insurance. It is a challenge to obtainsustainable and proven cover that minimises cost without introducing additional risk to the business.

Griffiths & Armour Professional Risks acts as manager for the professional indemnity division of Griffiths & Armour.Griffiths & Armour Professional Risks Ltd is an appointed representative of Griffiths & Armour which is authorised and regulated by the Financial Services Authority in the United Kingdom.

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Any business or professional providing advicecannot ignore the risk of a professional negligenceallegation. In law, such an allegation must bedefended or admitted; either way, there will be costimplications. This is where PI insurance providesthe ultimate safety net when all else fails.

The benign insurance market conditions that haveexisted since 2003/04 have led even the mostinformed consumers to perhaps take the futureavailability of cover for granted.

The insurance sector is clearly responsive to theissues of the day - for example, establishedinsurers have been selective about exposuresrelating to the property sector, which has impactedon sections of the legal and surveying professions.Whilst insurers’ caution related to the individualclaims experience or risk profile in some cases.This was primarily driven by systemic risk concernsflowing from conditions in the wider economy.

With such market considerations in mind, renewal of cover should also be seen as an opportunity to consider your own liabilitiesand how they are managed. There are ways to protect against the impact of liabilities and over the years, we have looked to supportfirms in areas such as contract review and risk management, in parallel with our insurance placement services.

Firms should look to manage their liability resulting in an improved risk exposure and thereby their ability to source sustainablypriced, adequate and effective PI insurance through:

How we perceive and procure PI insurance: it is, after all, a professional firm’s ultimate safety net. The crisis in our banking sectorand the recent demise of some insurers, demonstrates the need to make better decisions about risk and the need to adoptsustainable pricing models. If the objective is to source the cheapest insurance premium in the market, you should not be toosurprised if the cover is found lacking or proves to be a short term solution.

As specialist PI insurance brokers, we remain committed to supporting our clients risk management activities, whilst providing informedadvice on their critical risk transfer decision. For advice and guidance on the effectiveness of your safety net, please contact:

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improving client selection criteria

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Achieving good practice in governance reporting is the first step. To really build stakeholder confidence means tackling matters of importance that are rarely addressed properly in governance reporting or that continue to be particularly sensitive, such as some aspects of remuneration reporting.

The challenge for companies is to move the game on. The Code and the guidance around it need to be applied in a wide range of circumstances, so they do not deal with the ‘content’ of disclosures in detail. This allows companies to add real value; best-practice corporate reporting gets to the heart of what stakeholders want to know and governance reporting should be a part of this.

Building confidence in the annual report as a wholeFollowing the financial crisis, the FRC has been behind two initiatives related to building confidence in not only financial reporting, but also the annual report as a whole.

Revisions to the CodeAs discussed above, under the FRC’s revisions to the Code after October 1, 2012, boards will have to set out the basis on which they consider that the whole annual report is “fair, balanced and understandable” and “provides the information necessary for users to assess the company’s performance, business model and strategy”. If this is to go beyond a description of process, boards will need to disclose the key points considered in arriving at their conclusion.

To help them with this, the audit committee is to report on “the significant issues that it considered in relation to the financial statements and how these issues were addressed”. Currently, only a few best-practice reporters discuss the key judgements and estimates made by the board in the preparation of the financial statements; this will in future be part of the Code itself.

Towards best-practice reporting of corporate governance

The Sharman Inquiry into going concern and liquidity risk assessmentsGoing concern disclosures have often been viewed as a technicality, particularly where there is no perceived problem within the usual time horizon of 12 months (in the UK) from the date of signing the financial statements. Currently, although the FRC issued guidance in 2009 designed to improve

the quality of going concern disclosures, relatively few companies have taken this fully on board.

The Sharman Inquiry, which reported in 2012, signalled a move away from the current model – where a company only highlights going concern risks when there are significant doubts about the entity’s survival – to one that integrates the directors’ going concern reporting with the

‘Stakeholders are interested in each element of the content ‘backbone’ of the annual report, and in how governance has been applied to each of them.’




other elements of their discussion of strategy and principal risks.

These are both real opportunities to build confidence in the annual report, and we encourage companies to embrace them when they become applicable.

Getting to the heart of what stakeholders want to know – ‘applied governance’Stakeholders are interested in each element of the content ‘backbone’ of the annual report, and they are also interested in how governance has been applied to each of them. But they are not interested in mere descriptions of process. To build their confidence in the board and in the company as a whole, stakeholders should be provided with information on how governance has been applied. This is not to confuse governance with ‘management’ or ‘control’; the focus is on how the board and its committees have been involved in the right things, and at the right time.

The particular content of ‘applied governance’ disclosures will, of course, vary from company to company and it is beyond the scope of this chapter to go into detail, but we have provided illustrative examples below for each element of the backbone.

Business model – people and relationshipsMany organisations rely on the expertise of their people, built up over many years in some cases, leading to close working relationships that create value in the business. In our experience, the importance of people and relationships is seldom recognised in annual reports in any depth, though in such businesses we would expect it to be a high priority year in, year out for the board and perhaps the nomination committee.

People and relationships: reporting to build confidence in the company and the board:• recognition that this is a key feature of the business model;• discussion of employee satisfaction, including retention and professional development;• evidence that there is succession planning and a pipeline of talent; and• appropriate recognition of the relationship between diversity in the company and understanding the customer base.


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However, there is rarely much discussion of how the underlying decisions and judgements were reached by the board, or of how they continue to monitor outcomes.

Risk – appetite and managementAlthough there has been an improvement in recent times in the quality of the disclosures of principal risks and uncertainties in annual reports, there is rarely any meaningful connection between these disclosures and the governance of risk. This is despite the re-emphasis of the board’s responsibility for risk in the Code.

This reworded principle focuses on ‘risk appetite’ without using the specific term. In the narrative disclosures of how the main principles of the Code have been applied, it is therefore particularly important to focus on this aspect of risk, which is the key link between risk and strategy and very much a board responsibility.

The Turnbull Guidance, published by the FRC in October 2005, provides

Risk appetite and management: reporting to build confidence in the company and the board:• how the board engineers ‘risk resilience’ into the company, including resilience against ‘black swans’, or unforeseen risk events; and• how risk is measured and reported to the board and how governance is applied to it.

Board responsibility for risk

“The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.”

FRC: UK Corporate Governance Code, Main Principle C.2

M&A activity: reporting to build confidence in the company and the board:• the key issues that went to board level;• significant risks that the board considered in relation to the deal (price and terms, for example);• how the board is monitoring/driving synergies (restructuring decisions, for example); and• the outcome of post-investment reviews.

Strategy and objectives – mergers and acquisitions activityA lot of time is devoted to the financial reporting issues around M&A activity, such as acquisition accounting and impairment reviews, and there is generally extensive disclosure of underlying and adjusted profitability numbers, exceptional items, and even tracking the financial benefit of synergies. The financial statement disclosures are often accompanied by commentary in the front half of the annual report, typically including some indication of future developments.

more information on how the board’s responsibilities around risk management and internal control should be addressed.

However, it has not tended to generate disclosures that cover everything stakeholders would be interested in.




Example – supply chain governanceAn example of how reporting could be improved is governance of the supply chain, which is fundamental to the operation of companies and is frequently partially outsourced or dependent on joint ventures or associates. This brings with it a number of governance challenges that are rarely addressed in the annual report. The Turnbull Guidance requires disclosure where joint ventures or associates are excluded from the risk and internal control systems of the group but nothing more specific than this. There is also a tendency for such issues to be seen as ‘below board level’ and not part of the governance to which the annual report disclosures relate.

To build confidence in the company and the board, reporting might detail how a decision to outsource or place reliance on a third party was seen by the board as consistent with the company’s risk appetite. It could also address the question of what the board has done to make sure it’s clear where the responsibilities of the company stop and start – avoiding the risk of ‘falling between stools’.

Anti-bribery measures:reporting to build confidence in the company and the board:• how the board tracks the group’s re-sponse to the new anti-bribery regime – is it part of ongoing monitoring?; and

• continuous reassessment of the risks based on experience.

Group and subsidiary governance: reporting to build confidence in the company and the board:• how the structure of the group/business maps to territories or legal entities;• how the governance structures inter-relate; and• an outline of where responsibilities lie.

Control – group and subsidiary governanceAnnual report governance disclosures tend to focus on the group, but there can be a disconnect between the group governance structures and those that operate in (often very significant) individual territories. This can lead to a lack of clarity around responsibility for matters that do not map easily to the group structure, such as local legal or regulatory requirements (including tax and pensions), and also to uncertainty as to the responsibilities of directors in local statutory entities.

Control – anti-bribery measuresThe UK Bribery Act 2010 came into force in the middle of 2011 after much initial uncertainty and delays in guidance on the expectations for ‘adequate procedures’. With its widening of liability to those acting on a company’s behalf worldwide, the Bribery Act represents a major source of ongoing reputational risk that boards should be measuring and managing.

Many companies currently note that processes have been put in place (as the

Bribery Act requires) but few provide disclosures beyond the bare facts.

‘...the Bribery Act represents a major source of ongoing reputational risk that boards should be measuring and managing.’


Using technology to ease the headache of automatic enrolment for employersDescribed by many as the biggest change in pension legislation in a generation, automatic enrolment is an important building block in the government’s pension reform agenda. Intended as a stepping stone to encouraging employees to save more for retirement, itsimplementation and administration are likely to present considerable challenges for employers.

For larger organisations auto-enrolling now, as well as those employers planning ahead of their staging date, crucial decisions have to be made. Employers need to consider how the additional pension contributions will be funded; the processes and systems they’ll use to demonstrate compliance with their new duties; and how the resourcing of additional administration will be dealt with.

Employers should consider whether their existing pension provisions could be extended to other employees; the most appropriate earnings definition as a base of calculation for their workforce; and the impact on cash flow and overall wage bill.

The risk profile of pension administration is changing radically with employers expected to consider employee qualifying criteria, opt outs and re-enrolments amongst other things. The new employer duties are a legal requirement and an inability to demonstrate compliance could result in substantial fines. Employers should ensure

pension and payroll departments develop expertise in the new rules to make the process as smooth as possible.

To avoid administrative meltdown and to ensure full compliance with the new duties, it will be important to maintain absolute synchronicity between the employer’s own records and those of its scheme administrators. Performing a data cleansing exercise with existing scheme providers in advance of staging dates will make implementation a lot easier.

Technology will be crucial to auto-enrolment success. Importantly, employers should look for a technology solution that’s right for them, including reviewing what’s available through their payroll provider and any associated costs. They should also look to adopt a technology solution that can integrate seamlessly with their existing HR, payroll and flexible benefits systems whilst planning for any internal IT development work that may be involved.

There is a lot to think about, so don’t leave it too late.

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Remuneration: reporting to build confidence in the company and the board:

• showing that the remuneration committee and its chairman have been active during the course of the year, including taking advice from appropriate parties and engaging with stakeholders on a timely basis;

• being clear about the performance-reward link in all variable elements of remuneration, and particularly the alignment of that performance with business objectives;• providing clear disclosure of amounts earned in the year and the entitlements for future years;• dealing head-on with specific known issues – especially where these have been raised by shareholders;• recognising any industry-specific challenges, and discussing how they have been addressed, but being careful not to imply over-reliance on market benchmarks;• dealing with the remuneration of senior employees below board level; and• clear disclosure of potential or actual exposure to compensation for loss of office.

Performance – governance over non-financial measuresNon-financial measures are intrinsically bound up with governance, and this will become more significant as corporate reporting moves towards integrated reporting, driven by initiatives launched by groups like the International Integrated Reporting Council to link financial performance with non-financial areas such as the environment and corporate social responsibility. A number of companies are already providing performance statements on environmental issues such as the consumption of finite resources.

As these developments continue, stake-holders will become more and more interested in how the board has engaged with them.

Governance over non-financial measures: reporting to build confidence in the company and the board:• does the board consider these issues throughout the elements of the ‘backbone’ of the annual report, from business model to reward?• are the issues dealt with by the board or are they wholly delegated to a subcommittee?

Reward – reporting remunerationThe reporting of the directors’ reward is part of the ‘backbone’ of the annual report, and there is a particular focus on its alignment with the rest of that backbone. This alignment is a key concern for many investor groups, including proxy advisers, who regularly recommend that shareholders vote against or consider withholding their votes on the remuneration report at the annual general meeting. In respect of the remuneration policy part of the report, this is to change to a binding vote from 2013, when it is planned that the Enterprise and Regulatory Reform Act will come into force.

Companies’ remuneration policies will come under even more scrutiny and careful disclosure will be one way to avert a crisis. It is certainly not in anyone’s interest to create uncertainty, which may give rise to unnecessary questions.

‘Companies’ remuneration policies will come under even more scrutiny and careful disclosure will be one way to avert a crisis.’




A number of specific challenges can arise for newly listed or smaller listed companies, though some of these may also apply to any company.

Newly listed companiesAlthough adequate financial reporting procedures should be in place prior to listing, it may take time for companies to work towards full compliance with the Code (or compliance to the extent thought appropriate for the particular organisation).

As all Premium Listed companies must now apply the Code, those that are incorporated overseas and are therefore accustomed to other governance frameworks may take time to adjust their arrangements. This may result in a need to explain more

Reporting for newly listed, Standard Listed and smaller listed companies

departures from the Code than is the case with other companies and – for those provisions of an ongoing nature where arrangements were put in place during the year – the periods of non-compliance and compliance.

We recommend that this is done clearly in the governance report, with areas of non-compliance at the end of the period being identified separately. Strictly speaking, all

instances of non-compliance for provisions of an ongoing nature should be included in the compliance statement required under Listing Rule 9.8.6 (6), but we believe that it is adequate for them to be mentioned in the narrative statement under LR 9.8.6 (5), provided that the non-compliance is clearly described and the compliance statement identifies those provisions that have still not been complied with at the end of the period.

‘As all Premium Listed companies must now apply the Code, those that are incorporated overseas and are therefore accustomed to other governance frame-works may take time to adjust their arrangements.’


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Financial Risk Management is about protecting an organisation’s profitability. Discussions around risk management tend to focus on the negative effects. However, the same attention should be given to value enhancement characteristics. Adverse movements in interest/inflation rates reduce profitability and ultimately, investor returns. The same is true of foreign exchange and commodity price risk, although their greater volatility is likely to have a more pronounced effect if mis-managed.

Organisations are increasingly expected to have in place a risk management regime and associated governance protocols. The techniques to quantify financial risk range from simple sensitivity analysis to advanced stress testing under different scenarios.

The methods to manage, control or alleviate financial risk usually involve the use of derivative instruments. While there are relatively few types of derivatives, the ways they can be applied is almost infinite. This allows a tailored hedging structure to be created. The initial risk analysis process is crucial. Too often, issues such as potential for a sale of all, or part, of the business, the opportunity for refinancing or just the degree of variability from the income/expense forecasts contained in the business plan, are often not given adequate attention when determining the most effective hedging strategy.

After the optimal strategy has been designed, the challenge of gaining fair and transparent pricing then arises. This has become an increasingly complex process, not only due to the opaque nature of these instruments, but also due to the different components of how this price is constructed. This may include dealing spreads, credit spreads, collateral requirements and counterparty profit. These issues are often left until so late in the process that there is little scope to negotiate whatever costs the providing bank feels fit to charge.

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Confidence comes from being prepared

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Risk Analysis

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1. 2. 3. 4. 5.

RISK

JCRA is a regulated, independent financial risk consultancy. We advise on the strategic management of interest rate, inflation rate, foreign exchange and commodity risk. In addition, our leading edge pricing and valuation capability creates price transparency. This allows our clients to access best value from their financial counterparties.

Financial Risk Management is about protecting an organisation’s profitability. Discussions around risk management tend to focus on the negative effects. However, the same attention should be given to value enhancement characteristics. Adverse movements in interest/inflation rates reduce profitability and ultimately, investor returns. The same is true of foreign exchange and commodity price risk, although their greater volatility is likely to have a more pronounced effect if mis-managed.

Organisations are increasingly expected to have in place a risk management regime and associated governance protocols. The techniques to quantify financial risk range from simple sensitivity analysis to advanced stress testing under different scenarios.

The methods to manage, control or alleviate financial risk usually involve the use of derivative instruments. While there are relatively few types of derivatives, the ways they can be applied is almost infinite. This allows a tailored hedging structure to be created. The initial risk analysis process is crucial. Too often, issues such as potential for a sale of all, or part, of the business, the opportunity for refinancing or just the degree of variability from the income/expense forecasts contained in the business plan, are often not given adequate attention when determining the most effective hedging strategy.

After the optimal strategy has been designed, the challenge of gaining fair and transparent pricing then arises. This has become an increasingly complex process, not only due to the opaque nature of these instruments, but also due to the different components of how this price is constructed. This may include dealing spreads, credit spreads, collateral requirements and counterparty profit. These issues are often left until so late in the process that there is little scope to negotiate whatever costs the providing bank feels fit to charge.

In order to manage financial risk efficiently, organisations need to understand the best way to mitigate it and how to construct a flexible hedge. Independent, professional advice will ensure a correctly priced solution is achieved.

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JCRAFinancial Risk Consultants

For more information contact:

Jackie Bowie [email protected]. +44 (0)20 7493 3310

Confidence comes from being prepared



‘Comply or explain’: explanations

Where appropriate, companies should take into account the FRC’s February 2012 guidance on the three elements of a meaningful explanation:

“It should set out the background, provide a clear rationale for the action it is taking, and describe any mitigating actions taken to address any additional risk and maintain conformity with the relevant principle. The explanation should indicate whether the deviation from the Code’s provisions is limited in time and, if so, when the company intends to return to conformity with the Code’s provisions.”

Standard Listed companiesAlthough Standard Listed companies (regardless of their place of incorporation) do not have to report against the Code under the Listing Rules, if they apply any code (one applicable in their country of incorporation, for instance) on either a voluntary or mandatory basis, they must report against it to comply with the Disclosure and Transparency Rules.

Smaller quoted companiesThe Quoted Companies Alliance (QCA) issues guidelines for smaller quoted companies on how they may implement the Code appropriately. The Code still applies to all Premium Listed companies, and the only relaxations from it are for those provisions that the FRC has applied exclusively to FTSE 350 companies, mainly around the composition of audit and remuneration committees, the re-election of directors and external facilitation of board performance. Our recommendation is that smaller companies aim to implement the Code to the extent that it applies to them, and refer to the QCA guidelines where they believe that a specific provision does not suit their circumstances.

‘The QCA issues guidelines for smaller quoted companies on how they implement the Code appropriately.’


Candidate sourcing made easyWith unemployment levels high, it would be easy to assume that recruitment is a business function with few current challenges. Speak with your recruitment team and you will quickly realise this could not be further from the truth. The channels from which companies can now recruit, and the candidate information that is available, have never been more fragmented. Finding candidates is easy, but being confident that you are seeing the right candidates is actually harder than ever.

It seems like only yesterday that job boards and CV databases were a recruiter’s only option from which to find good candidates online. The emergence of vast communities of individuals based around the major social and professional networks, such as LinkedIn, Facebook and Twitter has changed all of that. Developing technologies such as mobile result in additional complexity. It is now widely accepted that as a recruiter you need to go to where the candidate is rather than expecting the best ones to come to you.

“The amount of money that companies waste using inappropriate channels is staggering.”

Managing all of these channels is clearly time consuming and expensive, but even more of a challenge is identifying the most appropriate channel to utilise for the given role you are looking to fill. The amount of money that companies waste using inappropriate channels is staggering. For over 10 years now, Broadbean Technology has sat firmly in the middle of the online recruitment world. We provide the technology that hundreds of leading corporate employers such as BP, BSkyB and Morgan Stanley, as well as some of the leading recruitment agencies including Hays, Adecco, and Manpower use Broadbean to manage their online recruitment. Our clients post in excess of 1 million job adverts every month, receive more than 4 million candidate applications in response, and carry out more than 1 million candidate searches too.

As the global leader in providing candidate sourcing technology, we have witnessed the increasing levels of fragmentation and understood that companies need more help bringing all of this activity together.

Fully integrated into your recruitment management system, Broadbean provides you with one central point from which to access all potential recruitment channels. You can:• Post your jobs to the largest network of

job boards and aggregation channels in the world;

• Search for candidates across a wide range of CV databases, social media channels or the wider web;

• Engage your employees through referral technology; creating fully searchable talent pools of candidates interested in working for your brand;

• Develop a mobile recruitment strategy ; and

• Enhance the searchability of your career site

All of this activity is tracked to enable you to understand what works for you and what doesn’t. We also mine the extensive amount of ‘Big Data’ that we have as a result of our market position, to actually provide valuable intelligence to help determine the best channels from which to recruit the specific role you are working on.

Broadbean’s candidate sourcing platform represents the next generation of sourcing technology. Not only will it save you money, but perhaps more importantly it will help you employ the best people.

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Trust is becoming increasingly linked to an organisations culture and behaviours, and here Richard Sexton poses some key questions all boards should consider.

The past two years have seen radical change in the relationship between business and society. Events ranging from the credit crunch to oil spills to ‘payment for failure’ have put businesses’ behaviour under the microscope. The widespread perception of a growing disconnection between corporate behaviour and ethical conduct has triggered a sense that global public trust in business has declined.

This is the second in our series of papers on trust. In PwC’s first paper, Trust: the overlooked asset, which featured in the Autumn/Winter 2012 edition of Risk Resilience, we explored the importance of trust and the complexities and dilemmas facing businesses as they strive to earn and sustain it. In this second paper, we focus particularly on how trust has become increasingly susceptible to an organisation’s culture and behaviours and pose some key questions all boards should consider.

Drawing on the findings of the ethicability® research programme (see page 41) into how

individuals’ ‘moral DNA’ manifests itself in behaviour, we examine four factors that are critical for any business: corporate purpose, and belonging; leadership; behaviour; and authenticity. In exploring these areas, we stress that any organisation is essentially a community, whose members crave a genuine sense of shared purpose and belonging. Coming to work for the monthly pay cheque is no longer enough.

The ethicability® research also shows that different people in different contexts, life stages and occupations have different motivations, and different perceptions of what ‘doing the right thing’ means. Many people who get to the top of organisations have a particular moral DNA profile – a situation that should be managed through established checks and balances. Further findings underline why diversity is so

important for any successful and sustainable business.

Finally, with compliance dominating much of business life, we ask whether businesses are striking the right balance between creating compliance-led processes on the one hand, and improving behaviour by embedding the right culture on the other. In PwC’s view, this balance needs to shift from compliance to culture.

Amid the current debate over the need for a new settlement between business and society, we believe these issues are critical. There is a growing sense that the relationship between business and society cannot be restored by regulation alone. Our aim in this paper is to stimulate thinking around what more is needed to enable trust in business to flourish. To achieve this, it may be the time to open and explore the Pandora’s Box of corporate culture and behaviour.

Embedding a culture of doing the right thing

Our aim in this paper is to stimulate thinking around what more is needed to enable trust in business to flourish. To achieve this, it may be the time to open and explore the Pandora’s Box of corporate culture and behaviour.

Trust: the behavioural challenge

p28-41 Trust.indd 28 20/03/2013 16:43

29exportforprosperity.com 29www.pwc.co.uk/riskresilience


cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.” Similarly, with the move away from shareholder value as the primary compass for setting corporate purpose, companies are looking beyond the pure profit motive to identify and pursue more socially-relevant and sustainable reasons for existing, thereby creating a new corporate purpose. If they carry out their chosen role in society successfully, they will make a profit and grow their business – but only as a result of fulfilling the new purpose they have set for themselves. For some this is not something new. Entrepreneurs and business writers have over

many decades written extensively on success being driven by the customer and employee experience – unfortunately it appears the corporate world has a short memory.

Towards total corporate contributionThe broadening of corporate purpose to encompass a business’s total contribution to society rather than just the financial returns it generates can be seen in many industries. In June 2009, HSBC Group Chairman Stephen Green delivered a speech entitled ‘Restoring Governance and Trust’ at the British Bankers’ Association’s Annual International Banking Conference. He told the audience: “Let’s be clear what the raison d’être of banking is: it is to provide financial services on a sustainably profitable basis to our customers… It is the job of Boards (and indeed their senior management) – it is the corporate and social

Change on both sides In the context of the debate over a new settlement between business and civil society, it is clear that progress towards this outcome will require change on both sides of the relationship. On the side of society, people’s attitudes and expectations of business are undergoing fundamental shifts, partly due to the decline in trust seen in recent years. To earn and build trust, these changes in public expectations must be mirrored on the business side by a new sense of corporate purpose: an aspiration that looks beyond the generation of financial returns to the real reason why a business exists. Let’s be clear, wealth creation is a fundamental social good, the question is how is this wealth created and can it be created in a more responsible way?

This question demands boards to carefully consider how wider issues of corporate responsibility and ethics are captured in decision-making processes, alongside – and even ahead of – financial considerations. Across the world, there are growing signs that such a shift is already under way.

Moving away from shareholder value In the 1980s and 1990s, business went through a period when a remorseless focus on shareholder value was the accepted mantra behind corporate purpose, and the rationale for accepted modes of corporate and workplace behaviour. Today, companies are re-evaluating the prominence and positioning of shareholder value in their thinking and communications and are recognising the need to balance it with a wider range of issues, including employee wellbeing and the sustainability of their operations. This change mirrors recent comments by the Nobel Prize-winning economist Joseph Stiglitz about the use of economic statistics as a proxy for a ‘successful’ society. In September 2009, he wrote in The Guardian newspaper: “The big question concerns whether GDP provides a good measure of living standards. In many

Today, companies are re-evaluating the prominence and positioning of shareholder value in their thinking and communications and are recognising the need to balance it with a wider range of issues.

Corporate purpose and belongingWhy does your business exist?

p28-41 Trust.indd 29 20/03/2013 16:43



cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.” Similarly, with the move away from shareholder value as the primary compass for setting corporate purpose, companies are looking beyond the pure profit motive to identify and pursue more socially-relevant and sustainable reasons for existing, thereby creating a new corporate purpose. If they carry out their chosen role in society successfully, they will make a profit and grow their business – but only as a result of fulfilling the new purpose they have set for themselves. For some this is not something new. Entrepreneurs and business writers have over

many decades written extensively on success being driven by the customer and employee experience – unfortunately it appears the corporate world has a short memory.

Towards total corporate contributionThe broadening of corporate purpose to encompass a business’s total contribution to society rather than just the financial returns it generates can be seen in many industries. In June 2009, HSBC Group Chairman Stephen Green delivered a speech entitled ‘Restoring Governance and Trust’ at the British Bankers’ Association’s Annual International Banking Conference. He told the audience: “Let’s be clear what the raison d’être of banking is: it is to provide financial services on a sustainably profitable basis to our customers… It is the job of Boards (and indeed their senior management) – it is the corporate and social

Change on both sides In the context of the debate over a new settlement between business and civil society, it is clear that progress towards this outcome will require change on both sides of the relationship. On the side of society, people’s attitudes and expectations of business are undergoing fundamental shifts, partly due to the decline in trust seen in recent years. To earn and build trust, these changes in public expectations must be mirrored on the business side by a new sense of corporate purpose: an aspiration that looks beyond the generation of financial returns to the real reason why a business exists. Let’s be clear, wealth creation is a fundamental social good, the question is how is this wealth created and can it be created in a more responsible way?

This question demands boards to carefully consider how wider issues of corporate responsibility and ethics are captured in decision-making processes, alongside – and even ahead of – financial considerations. Across the world, there are growing signs that such a shift is already under way.

Moving away from shareholder value In the 1980s and 1990s, business went through a period when a remorseless focus on shareholder value was the accepted mantra behind corporate purpose, and the rationale for accepted modes of corporate and workplace behaviour. Today, companies are re-evaluating the prominence and positioning of shareholder value in their thinking and communications and are recognising the need to balance it with a wider range of issues, including employee wellbeing and the sustainability of their operations. This change mirrors recent comments by the Nobel Prize-winning economist Joseph Stiglitz about the use of economic statistics as a proxy for a ‘successful’ society. In September 2009, he wrote in The Guardian newspaper: “The big question concerns whether GDP provides a good measure of living standards. In many

Today, companies are re-evaluating the prominence and positioning of shareholder value in their thinking and communications and are recognising the need to balance it with a wider range of issues.

Corporate purpose and belongingWhy does your business exist?

p28-41 Trust.indd 29 20/03/2013 16:43

30 exportforprosperity.com

responsibility of those Boards – to oversee the provision of financial services, not just on a profitable basis but on a sustainably profitable basis.”

An increasing number of companies recognise the need to focus more carefully on their total corporate contribution – and all are critically aware of the risk that the simple statement, or strapline, can be seen by some as a cynical response rather than a genuine commitment. Companies who have given serious thought to this issue recognise that in today’s connected and web-enabled world, even the smallest gaps between the positive words and the hard actions to back them up will be quickly exposed and probed in the global media. However, when these commitments are seen to be genuine, they earn trust.

Industry variations: where do you sit? While the move towards a new socially-relevant corporate purpose applies across all industries, the findings of the ethicability® research suggest that this presents greater challenges in some sectors than others. Individuals working in different industries tend to have widely differing profiles in terms of their moral DNA. Homemakers, religious workers, the caring sectors and the police tend to have high moral DNA. In contrast, at the other end of the scale – with low moral DNA scores – we find sectors such as government, technology, oil and utilities.

The varying motivations prevalent in different employment groups have major implications for businesses. To be truly

effective, the corporate purpose must extend right across the organisation, shaping every action by every employee. Organisations operating in those industries whose workforces tend to return lower scores for moral DNA may find it harder to embed and live their new corporate purpose in ways that stand up to scrutiny. Furthermore, they may be introducing risks to the business that ‘insiders’ are blind to because certain behaviours have become so ingrained in the culture.

Belonging: a critical enabler for corporate success While different industries vary in their moral DNA, an important element in creating and sustaining a successful business with a shared, socially-valuable sense of purpose is a shared sense of belonging. This is achieved through close alignment between the values and purpose of the organisation and those of the individuals it employs – an alignment that logic suggests should translate into more engaged staff and, in time, an enhanced customer experience. One obvious example of this alignment is the high moral DNA scores of care workers.

One important consideration for organisations trying to build a strong sense of belonging is the gender make-up of their workforce. Here the ethicability® research shows that females tend to have a stronger sense of ‘belonging’, and males a stronger sense of ‘purpose’. This difference shows up most clearly in females’ more pronounced ethic of care (see figure 1). So women place greater emphasis on the common good

Key questions all boards should consider Is making a profit the driving raison d’être of your business? Is this good enough?

Should we be surprised that generation Y is interested in working for organisations that contribute to society?

What are the unintended consequences of the profit motive in your company’s day to day decision making? Are they life threatening?

and serving the community – a collective sense of ‘belonging’. Conversely, men focus on achieving objectives by following rules and applying individual reason – a linear ‘purpose’.

In the context of business, it is important to stress that some women have a strong focus on purpose, and some men on belonging. But in general, women are more likely to take decisions based on the good of the people around them, whereas men take them based on what is good for themselves. Some recent events in the corporate world could be put down to men focusing on purpose to the exclusion of belonging, and ignoring the interests of the wider community.

To rebuild and restore trust, it may be that we need to create a new type of corporation that reflects the ethic of care more fully in its behaviours, thinking and decisions.

An increasing number of companies recognise the need to focus more carefully on their total corporate contribution.

Figure 1Ethical decisioning by gender

FemaleMale47

48

49

50

51

52

53

Ethic of obedienceEthic of CareEthic of Reason


p28-41 Trust.indd 30 20/03/2013 16:43


responsibility of those Boards – to oversee the provision of financial services, not just on a profitable basis but on a sustainably profitable basis.”

An increasing number of companies recognise the need to focus more carefully on their total corporate contribution – and all are critically aware of the risk that the simple statement, or strapline, can be seen by some as a cynical response rather than a genuine commitment. Companies who have given serious thought to this issue recognise that in today’s connected and web-enabled world, even the smallest gaps between the positive words and the hard actions to back them up will be quickly exposed and probed in the global media. However, when these commitments are seen to be genuine, they earn trust.

Industry variations: where do you sit? While the move towards a new socially-relevant corporate purpose applies across all industries, the findings of the ethicability® research suggest that this presents greater challenges in some sectors than others. Individuals working in different industries tend to have widely differing profiles in terms of their moral DNA. Homemakers, religious workers, the caring sectors and the police tend to have high moral DNA. In contrast, at the other end of the scale – with low moral DNA scores – we find sectors such as government, technology, oil and utilities.

The varying motivations prevalent in different employment groups have major implications for businesses. To be truly

effective, the corporate purpose must extend right across the organisation, shaping every action by every employee. Organisations operating in those industries whose workforces tend to return lower scores for moral DNA may find it harder to embed and live their new corporate purpose in ways that stand up to scrutiny. Furthermore, they may be introducing risks to the business that ‘insiders’ are blind to because certain behaviours have become so ingrained in the culture.

Belonging: a critical enabler for corporate success While different industries vary in their moral DNA, an important element in creating and sustaining a successful business with a shared, socially-valuable sense of purpose is a shared sense of belonging. This is achieved through close alignment between the values and purpose of the organisation and those of the individuals it employs – an alignment that logic suggests should translate into more engaged staff and, in time, an enhanced customer experience. One obvious example of this alignment is the high moral DNA scores of care workers.

One important consideration for organisations trying to build a strong sense of belonging is the gender make-up of their workforce. Here the ethicability® research shows that females tend to have a stronger sense of ‘belonging’, and males a stronger sense of ‘purpose’. This difference shows up most clearly in females’ more pronounced ethic of care (see figure 1). So women place greater emphasis on the common good

Key questions all boards should consider Is making a profit the driving raison d’être of your business? Is this good enough?

Should we be surprised that generation Y is interested in working for organisations that contribute to society?

What are the unintended consequences of the profit motive in your company’s day to day decision making? Are they life threatening?

and serving the community – a collective sense of ‘belonging’. Conversely, men focus on achieving objectives by following rules and applying individual reason – a linear ‘purpose’.

In the context of business, it is important to stress that some women have a strong focus on purpose, and some men on belonging. But in general, women are more likely to take decisions based on the good of the people around them, whereas men take them based on what is good for themselves. Some recent events in the corporate world could be put down to men focusing on purpose to the exclusion of belonging, and ignoring the interests of the wider community.

To rebuild and restore trust, it may be that we need to create a new type of corporation that reflects the ethic of care more fully in its behaviours, thinking and decisions.

An increasing number of companies recognise the need to focus more carefully on their total corporate contribution.

Figure 1Ethical decisioning by gender

FemaleMale47

48

49

50

51

52

53

Ethic of obedienceEthic of CareEthic of Reason


p28-41 Trust.indd 30 20/03/2013 16:43



LeadershipSubstance over form?

type of scrutiny the best response is to be able to tell it how it is – to point to the leadership, the tone from the top and the actions of the board. The critical question perhaps for boards to ask is, how does this picture look today? Experience shows that it is a lot easier to make this appraisal when you are in control of the agenda rather than in the glare of publicity.

Understanding the motivations of senior management In all these board-related issues – and across the organisation as a whole – diversity of thought is increasingly recognised as being important to business success. The profiles of individuals’ moral DNA revealed by the ethicability® research reinforce this view. While the findings on moral DNA are not absolute – there will always be exceptions at every level and in every sector – the general outcome is that business leaders have a tendency to be arrogant in their pursuit of a corporate and personal goal, take little account of people in their decisions, and are frequently driven by personal status rather than the common good.

Figure 2 charts ten values making up the moral DNA of leaders up to board level. What is clear is that the people reaching the board are strong in eight of the values. But two values are getting lost – or ignored – on the

involved in oversight roles in an organisation – must focus not just on ensuring that processes and controls are working, but also on living and exhibiting the right corporate culture and behaviours. Regulators, non-executive directors, risk managers, auditors and internal auditors all have a role to play in identifying and tackling inappropriate behaviour, including knowing when to express concerns and just say ‘no’.

Boards under scrutiny PwC’s ‘Tone from the top’ research study confirms that while some progress has been made in setting the right example at the top of organisations, there is still a long way to go. In cases where management is failing to create the right culture and behavioural norms, the buck must stop with the board, and especially the Chairman and CEO.

Today, external stakeholders are more focused than ever before on the make-up and behaviour of the board – particularly when problems occur. This scrutiny extends to examining whether the board is exhibiting vital leadership qualities, ensuring the right checks and balances are in place and operate when needed – before the event rather than after it. However, as we know, this assessment goes further to consider the diversity of skill sets, boardroom inter-relationships and behaviours and critically NEDs’ degree of independence from the CEO. Faced with this

‘Tone from the top’ trumps process If a culture that embraces and encourages ethical behaviour is a prerequisite for an organisation to do the right thing in the pursuit of building and sustaining trust, then PwC’s view is that the right leadership – the tone from the top – is a prerequisite for creating and embedding such a culture.

People will only do the right thing consistently and reliably if they are in a wider culture that celebrates and rewards it. While such a culture needs to exist at all levels of an organisation, the behaviour and values that create and sustain it needs to be set from the top, by leaders who consistently exhibit the behaviours and values they expect of their people.

Making it personal What is more, these behaviours and values must be heartfelt to have a real impact. PwC chairman Ian Powell comments: “In setting the right tone from the top, the key to success is leaders finding their own voice. The tone has to be authentic and consistent. Then it is down to the passion and commitment of the whole board to take it on. If the tone is not set from the heart, then it will fail.”

As we discuss later in the context of corporate reporting, authenticity is key. A leader who is setting the tone from the heart will find it much easier to win over the workforce to adopt the same values. If the organisation as a whole believes the tone is not authentic, then it will not adopt or absorb it. So the whole board – indeed everyone

Some boards are beginning to understand that courage and bravery are values that are critical if boards are to make the right decisions.

Figure 2Moral DNA by level of leadership

Excellence

Courage

Hope

Wisdom

Self-control

Trust

Honesty

Humility

Fairness

LoveLevel 1

Employee47.047.548.048.549.049.550.050.551.051.552.052.553.053.5

Level 2Supervisor

Level 3Manager

Level 4Executive

Level 5Board

p28-41 Trust.indd 31 20/03/2013 16:44



Checks and balances The question for boards that this picture presents is arguably a simple one to ask but more difficult to answer. Put simply, is the behaviour and tone established in the boardroom right and is it reflected in how the organisation is run on a day to day basis?

Answering the question is more challenging, but something PwC believes boards should be trying to answer. To do this, boards need to dig below the surface and use their exposure to the organisation to assess the behavioural norms which are present and which influence the pulse and dynamic of the business. Is challenge accepted? Are employees encouraged to be transparent in their views and concerns? How do incentive structures influence behaviour? Critically, boards need to be skilled in recognising cultures of fear or good news where the organisation is driven to meet senior management’s expectations regardless of reality.

By building this picture, boards can be in a position to ensure that routine business processes and other checks and balances are sufficient to act as an early warning system to identify those circumstances when some form of intervention is needed. The principal checks and balances exist in most businesses today – the role of the Chairman and NEDs, the role of compliance and risk functions and scrutiny from internal and external auditors.

journey to the top: humility, and love, which translates into words such as compassion, kindness and charity. Levels of compassion and kindness are at their lowest just below board level, possibly as ambitious executives scramble to take that final step to the top. And while those who reach board level do regain some of these attributes, it would appear that their drive for success sees their humility dive even further.

It is interesting to observe that while the word ‘love’ is seen almost everywhere else in life, it is rarely used in business. But it is an emotion that is highly relevant to the way people treat others in a corporate context. Closely related to the ethic of care, love is a quality in which women outscore men, suggesting that the relative absence of love among corporate leaders partly reflects the gender imbalance. One outcome is that business leaders – who are primarily male – can become domineering, arrogant and cold in their decision-making.

True, many of these business leaders bring tremendous advantages to their organisations in areas such as strategic vision, entrepreneurial drive, the ability to execute, negotiation skills, and so on. These are reflected in their strong scores on values such as courage and wisdom. In this regard, some boards are beginning to understand that courage and bravery are values that are critical if boards are to make the right decisions. The challenge is having the right mix of people around the table.

Key questions all boards should considerAs a business leader, do you think ‘doing the right thing’ means the same in both your personal and professional life?

How would the board describe the ‘tone from the top’?

Would you terminate a profitable relationship with another business if you believed it was acting unethically in another part of the world? Should the CEO’s word be final?

Do you know if constructive challenge is something encouraged in the organisation?

Do you care whether your employees feel connected to the board, or is it enough that they do what their line manager tells them to?

If a board is capable and well qualified, does it matter if the members are all white, middle-aged men with the same backgrounds?

The key question however, is whether all these functions are correctly primed to spend enough time and effort focused on the culture and behaviours rather than processes which, while important, are only part of the answer.

In reality, the key check and balance is the one exercised by the board. The quality and substance of its leadership, governance, oversight and its interaction with those individuals acting in a support role will set the tone and example by which the whole organisation acts. In effect it is the body who determines what doing the right thing means. It is therefore unsurprising to know that regulators such as the FSA and enforcement agencies such as the SFO are increasingly examining this facet of a company, how leadership operates and the cultural and behavioural norms it has established. They, like others, are aware of the need to focus on the behavioural ‘red flags’ which are indicators of likely unethical and fraudulent business practice.

To rebuild and restore trust, the time may have come for boards to pay more attention to the tone being set from the top, both the manner in which board decisions are arrived at and how the CEO leads the organisation on a day to day basis.

The time may have come for boards to pay more attention to the tone being set from the top.


p28-41 Trust.indd 32 20/03/2013 16:44

“The prevailing model of insurance buying is deeply flawed”

This statement in a new report by Mactavish should send shivers down the spines of business owners in the UK. The Mactavish reports are by far the most in-depth study yet of the procedures used to arrange corporate insurance in the UK marketplace. If you would like to read the full report, then this is available on www.mactavishgroup.com but their findings include:

1. A lack of understanding of

UK insurance law by business owners and the duties it imposes on them;

2. Brokers failing to demonstrate to business owners the real value of insurance, particularly in the current economic climate where access to capital is, at best, challenging; 3. Business owners failing to

understand the risks to their businesses and brokers failing to identify what is a ‘material fact’ and the

“87% of the customers consulted by Mactavish were unaware of how onerous the duty of disclosure is for them.”

Contact Belmont International today for more information

Tel: 01732 744700 Email: [email protected]

Becket House, Vestry Road, Otford, Kent, TN14 5EL

The flaws unearthed by Mactavish were evident at the highest level of corporate life and arguably the risk to business owners at the medium level of business is greater in that balance sheets may not sustain a large uninsured loss and alternative finance is not easily available.

The only real solution for business owners, who are concerned about their protection and understanding of these issues, is a ‘drains up’ review of their business and their operational risks. Business owners should be encouraged to give up some of their time towards becoming satisfied that there will be no nasty surprises for them in the future.

5. The process of conveying risk information between business owners, brokers and insurer is deficient, leaving the business owner with the ultimate risk of claims being rejected; 6. Business owners do not know what risk information has been conveyed by their broker to the insurers leaving them exposed to the consequences of ‘non-disclosure’.;

7. Post loss procedures for potential large losses are not considered or clarified between business owners, brokers and insurers.

4. Policy wording and ‘what ifs’ are not examined between business owners and brokers until a significant claim occurs;

Our business is to insure you stay in business

Authorised and Regulated by the Financial Services Authority Reg: 1427492

www.pwc.co.uk/riskresilience

Creating value in a turbulent world.

We help our clients to align their risk and business strategies so they’re more successful. Because putting risk at the centre of your business is now more important than ever before. To fi nd out more visit www.pwc.co.uk/riskresilience

© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member fi rm of PricewaterhouseCoopers International Limited, each member fi rm of which is a separate legal entity.

27846-1 Colour.indd 1 19/09/2012 15:10:09



workforce. Not in a ‘big brother’ sense, but more as a mechanism to understand how the organisation is likely to respond to complex business issues, significant risks, competing value sets and unexpected crises. While this is a developing science, the moral DNA survey starts to expose the sort of issues which organisations may increasingly want to better understand.

For example, page 36 sets out three of the top-line findings from this year’s ethicability® research:

• Balancing Venus and Mars: Figure 3 clearly shows women score highly on ‘love’ which is consistent with the ethic of care and business as a place of belonging. Men score

processes of self assessment, this again can too often be seen as a compliance burden rather than a commercial lever.

What makes the company tick? Perhaps companies need to invest more time in understanding the behaviours that drive the collective conduct of the organisation. Who are held out as role models and why? What behaviours are celebrated? And how do they align with the words and aspirations in the code of conduct?

Furthermore, while it is not the norm today, we may be moving closer to the day when organisations routinely undertake work to profile the moral DNA of their

Understanding culture and behavioural normsAssuming the board is setting the right tone from the top, the next step may be to win hearts and minds to ensure this tone is embraced and echoed at every level. The mechanism used by most companies to establish a common culture and set of behaviours has traditionally been the code of conduct. It is the mechanism whereby the board and corporate centre has tried to set expectations around behavioural norms and the high level parameters which should underpin day to day decision making.

Unfortunately, issuing a code of conduct to staff on their first day, and then letting them leave it in a drawer, will never be enough to influence behaviour to any meaningful degree. Yet, as our ‘Tone from the top’ research shows, this is effectively what many businesses are doing today. While the best companies have established training and

Who are held out as role models and why? What behaviours are celebrated?

BehaviourBeyond the code of conduct?

p28-41 Trust.indd 35 20/03/2013 16:44



highly on ‘wisdom’ and ‘self control’ which is consistent with the ethic of reason and economic purpose in business. The potential impact of these differing motivations on business decision-making should not be ignored.

• Occupation and ‘moral DNA’: Homemakers, religious workers and health workers score highly on moral DNA, along with people working in education and law enforcement. However, do the leadership and operational responses for occupations with the lowest scores – which include government, technology, oil and utilities – need more careful consideration?

• Ethic of reason advances with age: One of the clearest findings is the way individuals’ attitudes to principles and rules shift over time. As figure 4 shows, most people’s ethic of reason – the tendency to behave in accordance with their own principles and perception of what is ‘right’ – increases with age. Simultaneously, their ethic of obedience – the readiness to comply unquestioningly with rules imposed by others – declines. As the working population ages, these trends bring significant implications for corporate cultures.

Balancing behaviour and process Whether exhibited by men or women, these contrasting behaviours and motivations have implications for the risks businesses face, not least around the processes for ensuring compliance with regulations. Our view is

Key questions all boards should consider Would the people in your business behave ethically if you had no rules forcing them to do so?

Would you expect your accounts, legal and internal audit teams to behave like your sales team?

Does the tone from the top resonate throughout the business? What does the remuneration and incentive system say about expected culture and behaviours?

Where do you draw the line on unacceptable behaviour and what sanctions do you impose on those that cross the line?

that businesses should rethink their entire approach to risk and compliance, and seek to cultivate behaviours that are based not on following rules, but living by principles.

The requirement for organisational behaviour to be shaped by people-based principles rather than rules-based processes will be further strengthened by the advent of the Bribery Act. This Act introduces a spectrum of general, active and passive bribery offences, and a specific offence relating to the bribery of foreign public officials. It also includes a specific corporate offence of failing to prevent bribery.

To manage the new risks under the Bribery Act, the expectation is that boards will need to

show clear leadership and training will need to be provided throughout the organisation not only to ensure compliance, but also to foster a principles-based anti-bribery culture. Failing to respond effectively to the requirements of this act have obvious legal and commercial ramifications and while this issue has a narrow focus, it provides the most urgent rationale today for taking the thinking in this paper seriously.

Any organisation is only as good as its weakest link. As this paper highlights, these links are individual people, more often than not reflecting the behaviour cross section of society in all its strengths and weaknesses. What this paper questions is whether sufficient time and effort is spent by companies thinking through the culture and behaviour of the organisation and the implications for its appetite to risk, its compliance with regulations, its decision-making processes, and its succession planning for the top roles.

Individuals’ attitudes to principles and rules shift over time.

Figure 4Moral DNA by age

Ethic of Obedience

Ethic of Care

Ethic of Reason

16-2046

47

48

49

50

51

52

53

54

21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65 over 65

Figure 3Moral DNA by gender

Male

Female

53

52

51

50

49

48

47

48

49

50

51

52

53

Hon

esty Trust Fairness

Humility

C

oura

ge

Wis

dom

Self c

ontrol Love Excellence H

ope


p28-41 Trust.indd 36 20/03/2013 16:44

“Organizations which manage their contracts and compliance effectively will be at a tremendous competitive advantage.”

Many companies have a divisional focus rather than enterprise-wide basis for contract and compliance management. Divisional ”islands of information” also restrict an organization’s overall visibility to risk exposure and potential dangers.

Effective contract and compliance management enables improved risk management and greater extraction of value from commercial relationships.

PROMOTIONAL FEATURE

Increasing regulation.Recent studies have shown over 75% of respondents to be observing increased regulatory activity with over 65% citing ”conducting investigations“ as a prime focus of regulators. Areas that are attracting increased focus include money-laundering, insider-trading, breaches of anti-trust law, bribery and corruption, stock market disclosure and breaches of directors and officers duties.

The need to manage risk exposure. The modern business environment is forever driving the number and complexity of contracts ever higher. Unfortunately organizations are still trying to manage contracts and compliance in a fragmented, manual and ad-hoc manner. The results are excessive risk, lost revenue and higher costs. Risks are not visible and so are not managed. Visible risks can be acceptably managed and priced correctly and unacceptable risks, once recognized, may be mitigated, passed on or insured against.

Company officers are being increasingly held personally accountable should negative unforeseen circumstances strike a company’s operations. Thus board members are increasingly demanding information systems which provide capture of relevant, reliable and up-to-date information.

Third parties are increasingly demanding visibility and audit trail records of contracts as part of their own risk management and/or regulatory reviews. Risk management is not simply a departmental issue. It is an enterprise-wide concern.

A company can have only one reputation, protect it.What constitutes a company’s reputation? What is the value of this reputation? How much of this reputation is based upon intangible assets?

A loss of corporate reputation is viewed as one of the greatest risks to the modern enterprise.

Corporate reputation is based upon an image formed from a sum of experi-ences. It may take decades to form but only days or perhaps even hours to destroy. Any unforeseen risk event which negatively impacts a company’s perception or reputation may immediately impact materially its corporate valuation and stock price.

Not only must a company directly protect its own reputation but it must also have sufficient visibility into its relationships with commercial partners in order that they are not allowed to operate in a fashion to negatively impact and destroy years of effort and investment in reputation and brand positioning.

Litigation and dispute resolution.Commercial and regulatory disputes are increasingly being resolved by negotiated settlements, with typically over 70% of legal disputes resolved out-of-court and judicial determination being required for less than 15% of cases. It is clear however that for both judicial and negotiated settle-ments the party with the most accurate and proactive access to data and documents will be best placed to succeed and negotiate or conclude a beneficial resolution.

About Symfact.Symfact is the leading provider of Contract and Compliance Management Solutions enabling enterprise customers around the world to maximize revenues, minimize costs and actively manage Governance and Risks all on a single technology platform.

www.symfact.com

Symfact.indd 1 04/04/2013 16:20


AuthenticityJust as cultural and behavioural change must extend beyond compliance with a code of conduct, so an organisation’s reporting on who it is, what it does, and why it does it must go beyond the regulatory and legal requirements. Only by revealing its genuine DNA clearly and consistently will an organisation become truly trusted in what it says – and thereby in what it does.

Living in a goldfish bowl Indeed, companies now find that their true DNA is revealed whether they like it or not. Instantaneous global communications and the internet mean that all businesses now operate in a goldfish bowl, constantly scrutinised by stakeholders, NGOs, and media organisations ranging from global news providers to campaigning bloggers. Gone are the days of being able to manage the messages to different stakeholders and mould external perceptions of the business.

Beyond transparency As a result of these developments, the requirement to present the true face of the business now encompasses much more than ‘transparency’. It means not only revealing the essence of the company, but also ensuring that this essence itself is actually worthy of people’s trust. For this reason, we have chosen the word ‘authenticity’ rather than ‘transparency’. However, trying to achieve authenticity raises many questions, reaching back to the need to identify the organisation’s true raison d’être. What really is the essence of the business? How do leaders and staff reflect that in their everyday

behaviour? How completely can the board expose its actions and discussions? And how does the level of authenticity achieved measure up against competitors and business partners?

Will people like what they see? To answer such questions, the business needs to hold up a mirror to reality so that others can see it clearly for what it is. Initially, only organisations that are confident that people will like what they see may be willing to do this. But, over time, all organisations may well have no choice.

Trying to achieve authenticity raises many questions, reaching back to the need to identify the organisation’s true raison d’être.

Have you taken the mirror test?


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important that boards reassess and critically question what they disclose about their own activities in the knowledge that too much of today’s reporting focuses on the form rather than the substance of what boards do.

Furthermore, for this aspect of reporting to be meaningful it needs to reflect the business’s underlying principles, the personality of its leadership and the manner and tone in which the business is run. This is not always easy, and evidence would suggest this type of reporting will not be produced by a committee or a team that see reporting as an unfortunate compliance requirement.

Many would argue the best barometer of trust is an organisation’s transparency and the quality of the stakeholder engagement that follows. Put simply, it is what those outside the organisation – customers, suppliers, investors and society at large – think that matters in building trust. As this paper indicates, the behavioural challenge covers many areas and for some determining how to effect change will be difficult. What is clear, however, is that transparency and stakeholder engagement are an easy starting point provided the organisation has the stomach for what it might be told. It might not, however, be what the organisation would like to hear.

Why? For society as a whole, non-regulatory disclosures on issues such as corporate behaviour and governance are becoming an increasingly important part of the information exchange that underpins companies’ license to operate. For boards, it may become the mechanism through which their risk is mitigated and their AAA rating maintained.

Research bears out this shift. For the first time in its ten-year history, the 2010 Edelman Trust Barometer shows that trust and transparency are as important to corporate reputation as the quality of products and services. In the US and in much of Western Europe, these two attributes rank higher than product quality – and far outrank financial returns, which sits at or near the bottom of 10 criteria in all regions. This is in stark contrast to 2006, when financial performance was in third place in a list of 10 attributes shaping trust in businesses in the US. Again, this underlines the shift we noted earlier away from shareholder value as the sole basis of corporate purpose.

Culture is everyone’s responsibility So, what does the rising importance of trust and transparency mean for businesses’ communication and reporting strategies? With stakeholders looking for clarity and honesty from businesses, the days of ‘never explain, never apologise’ are over. Boards that think they can present a certain face to the outside world while their business behaves

quite differently behind closed doors are in for a rude awakening.

This is because today there are no closed doors. Everything is in the public domain for all to see on the internet: the way companies release and ‘spin’ information, the way their people interact with one another and the outside world, the way they treat their suppliers, and the experience their customers get every day. A detailed view of the business is out there, whether or not it is the view the management wants to present.

That view encapsulates how people perceive the business’s culture – and since the perception is grounded in actual behaviour by the business and its people, it is difficult to dislodge it from people’s minds. This constant exposure also means that building and demonstrating the corporate culture is the responsibility of everyone in the business.

Substance not form So, today, every employee is an ambassador, and every action from the shop floor to the boardroom contributes to authenticity. But as has been mentioned on a number of occasions in this paper, the actions of the board and the example it sets has a disproportionate impact on an organisation’s authenticity and ultimately whether it is trusted. So it is

Key questions all boards should considerWhat aspects of your business would you worry about appearing on the front page of the paper?

How do key external stakeholders describe your corporate culture? Do you recognise the description?

When your employees read your annual report, do they see a company they recognise?

How well do you communicate externally who you are and what you stand for?

How much serious direction and input does the board give to the companies reporting and key communications

With stakeholders looking for clarity and honesty from businesses, the days of ‘never explain, never apologise’ are over.

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of ‘regulated trust’ that people will follow the rules, but not that they will necessarily do the right thing. Enron – and arguably the run-up to the banking crisis – demonstrated that black-and-white rules can and will be circumvented by those with the time, intellect and intent to do it. So you cannot regulate your way to trust: instead it has to be earned, through voluntary behaviour based on sound principles of honesty and integrity.

The shifting landscape of trust brings major implications for UK business, fundamentally reshaping the way it interrelates and interacts with civil society and government. Given the changing dynamics, PwC’s view is that the time has come for a new settlement between business and society – one based on less regulation and more responsibility. Creating such a settlement will require an open and forthright public debate.

In our view, all of today’s organisations should be on a journey towards the new

In PwC’s view, the gap between fine words and genuine action that restores and builds trust will not be closed by further regulation. Even though regulators have an obligation to consider the ethics and culture of the firms they regulate, we believe that regulation is a false remedy for a lack of trust. Society’s expectations of business and political leaders are based on their compliance not with detailed rules, but with broader principles and standards of behaviour.

Regulation will only drive the right behaviour if it is backed up by the right embedded ethical values. Furthermore, experience shows that while you cannot legislate for trust, you can certainly see the effect when it disappears. As Ed Smith and Richard Reeve point out in their paper ‘Papering over the cracks?’, trust is like oxygen, underpinning the law of contract, reducing transaction costs and speeding innovation – and as it gets thinner, the consequences for business and society are hugely damaging.

To try and prevent this damage, societies have traditionally used legislation to plug the gaps when trust is leaking away. But there is an argument that the regulatory reflex has the opposite effect, by creating a form

Towards a new settlementsettlement with society. Progress toward this goal will require active involvement and engagement from three groups of stakeholders: the senior executive management of businesses; the individuals who are custodians of trust in those organisations, such as the chairs of audit committees; and the authorities and organisations charged with being responsible for maintaining the balance and wellbeing of the economic system.

For all these stakeholders, we believe that an important guiding principle will be recognition of the close linkage between public trust and corporate culture. People trust – or, alternatively, distrust – organisations because of their personal experience of how the people in those organisations behave. So businesses must seek to identify, develop and embed the right culture and behavioural norms that will earn both public trust and business success. That is the journey ahead.

Less regulation, more responsibility?

You cannot regulate your way to trust: instead it has to be earned, through voluntary behaviour based on sound principles of honesty and integrity.


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PwC’s ongoing collaboration with Professor Roger Steare, Visiting Professor of Organisational Ethics at Cass Business School, has formed an important part of helping to inform our thinking on the whole area of business culture, values and behaviours. Jointly with The Times Online, we have been supporting Professor Steare’s ethicability® research programme which is an ongoing study into individuals’ moral and ethical characteristics and motivations.

This scientifically rigorous study has seen more than 30,000 people take the ethicability® test since 2008, including 7,000 between June and September 2010, providing a wealth of insights and correlations between behaviours and values. Overall, the findings underline the importance of a business having a clear sense of purpose; the need to create a sense of belonging among employees; and the critical role played by a clear set of moral

The ethicability®

research programmevalues, reinforced by the people at the top of the organisation.

The ethicability® moral DNA test can be taken at www.ethicability.org.

What is moral DNA? The research methodology defines moral DNA as embodying the balance between three strands of human motivation, each reflecting a different view of ‘doing the right thing’. These three strands are:

• Ethic of Obedience‘What’s right is doing as you’re told. Don’t think, just obey.’ This command-and-control conscience is characteristic of a moral infant.

• Ethic of Care‘What’s right is doing what’s best for all of us.’ This motivation is characteristic of a moral grown-up, and is especially strong in women, reflecting their desire for a sense of belonging.

• Ethic of Reason‘What’s right is a matter of personal conscience. I’m taking personal responsibility.’ This motivation is also characteristic of a moral grown-up, and is especially strong among men, reflecting their desire for a sense of purpose.

Many of the findings and analysis from the research are highlighted in this paper.

The findings underline the importance of a business having a clear sense of purpose.

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Cyber and Privacy Risks – Won’t somebody make them go away?Are you feeling lucky? According to reports by government bodies and security vendors on cyber and data risks, you had better hope to be. No other risk subject seems to have garnered so much media and political attention in recent years. Whether the risks are from external or internal parties, resulting in business costs, customer liabilities or reputational harm, the column inches grow.

Yet the attention given to such risks in the UK is arguably much lower than in the US where there has been a rise in the use of insurance for such exposures. Change is coming as both governmental, insurance and business think-tanks in the UK consider the business implications of the increasing value of intangible data and dependence upon IT networks. A review of the current FTSE 100

2010 company reports by Liberty’s specialty insurance division LIU, showed only just over half (53 of 98 available or 54%) recognise cyber risks as critical to their business.

One more sound-bite. Last year the World Economic Forum listed “cyber attacks” as fourth in the top 50 likely global risks over the next 10 years1. It is imperative that UK boards ensure that risk management has been fully applied to cyber exposures, and insurance can help many.

Game-changers?Cloud Computing. A recent study by Cisco estimates that global traffic generated by cloud computing services will increase 6 fold from 2011 to 20162. Are we all fully prepared for the dynamic whereby we and many of our

competitors put our data in the hands of a third party?

Hacktivism? The “hacktivist” has been well documented in the last couple of years and the phenomenon of non-financially motivated activists in the internet world is set to continue. Around a third of privacy breaches result from hacking or other types of malicious attack. 40% of targeted cyber-attacks are aimed at companies with fewer than 500 employees3. Yet 36% of organisations have also said that negligence was the root cause of breach, often that of a company’s own staff and contractors4, plus failings in risk management and risk transfer.

Regulation. The rise in US state legislation starting with California almost a decade ago saw an exponential rise in the appointment of

Liberty International.indd 1 01/03/2013 14:08

PROMOTIONAL FEATURE

Accountability & Risk ManagementThe last 10 years has undoubtedly seen a new era of risk and governance leading to a greater accountability for companies and their boards for material risks. Such accountability should bring a refreshing change to risk management and a desire to make best efforts in tackling risks commensurate with IT, outsourcing reliance and just-in-time supply chains. Liberty offers a valuable counter-measure to these threats with innovative and flexible insurance and claims support for some of business’ most critical exposures.

For more information contact the author, Matthew R. Hogg:T: +44 (0)20 7860 6208E: [email protected] : www.liueurope.com

Chief Privacy Officers, consumer litigation and insurance. Whilst a trickle-down effect is only natural to UK companies with US interests (the Securities and Exchange Commission also upped the ante) the real driver is the likely prescriptive European regulation on consumer data protection. The proposals to have emanated so far include fines of up to 2% of global annual turnover and compulsory notification of breaches amongst others.

Costs to the business and insuranceBusiness Interruption (BI) and assets. In 2011 a government report found the cost to UK business was severe at over £20bn a year5. Stories were rife about “cyber-squatters” taking up home on innovative companies’ servers and studying confidential research and development data sometimes leading to business failures. The same report estimated that cybercrime cost UK businesses £9.2bn in theft of intellectual property (IP). BI is not something only internet-based companies need fear. It is a very real threat to those using sophisticated IT infrastructure for design, manufacture, provision or procurement of goods and services.

Risk management should be a priority. Liberty has insurance products that can help to protect against the lost value of digital assets, BI and IP. Unlike many insurance policies, Liberty can also insure operational mistakes and errors rather than simply third party attacks.

Reputation. What are the implications of large-scale breach or IT infrastructure failure? Most analysis of events causing reputational harm demonstrates that the strength of the message emanating from the board after the event can do much to mitigate the reputational harm. How concrete is your message with regards to risk awareness, risk mitigation and risk transfer?

Liberty offers insurance products that can mitigate the consequences of lost customers

and, deals and PR costs caused directly as a result of these events, including for a period beyond that of the initial business interruption.

Liabilities. Your business can find itself facing a myriad of contractual, regulatory and civil liabilities following a breach. In 2010 the Information Commissioner’s Office gained the power to fine organisations up to £500,000 for data breaches, and the financial sector is further regulated by the FSA. These regimes can be confusing and expensive to interpret, let alone defend, particularly where multi-jurisdictional elements are involved.

Liberty’s insurance products can provide a solution to legal expenses, damages, settlements, fines and penalties arising from a data breach or a network failure.

Other costs. A data breach or problem with network integrity can cause additional costs to business such as forensic investigations, notifying individuals of a breach or even call centres and credit monitoring expenses. Liberty has a sophisticated product to help take care of these. Additionally, coverage can provide peace of mind and guidance by ensuring the right vendors are in place to support you.

1 Global Risks 2012, Seventh Edition, World Economic Forum 2 Cisco Global Cloud Index: Forecast & Methodology, 2011-2016 White Paper, 2011 3 2011 National Small Business Study, NCSA & Symantec, October 2011 4 2011 Cost of Data Breach Study: UK, Ponemon Institute, March 2012 5 The Cost of Cyber Crime, Cabinet Office & Detica, 2011

Matthew R. Hogg

Liberty International.indd 2 01/03/2013 14:08

INTANGIBLE ASSETSTANGIBLE SOLUTIONSWhether your business is competing in an innovative market, reliant upon IT networks and outsourced business processes, or operating with a just-in-time supply chain model, we realise that the biggest risks facing many businesses have changed significantly over time. Our approach is to be innovative and flexible offering fast and creative insurance solutions to protect your most critical assets and the challenges you face in the 21st century. If you would like to find out more, contact Liberty on +44 (0)20 7860 6208 or visit our website:

www.liueurope.com

ADDED EXPERTISE

Liberty Mutual Insurance (LMI) is a trading name for Liberty Mutual Insurance Europe Limited; a company registered in England (Registered number 1088268). Authorised and regulated by the Financial Services Authority (FSA number 202205) © 2012 Liberty Mutual Insurance Europe Limited. All rights reserved.

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Subsidiary Governance: an unappreciated risk

The main aim of any subsidiary governance framework is to protect shareholder value first and foremost. However, companies must consider the practical issues that cause either reputational damage or financial penalties that go to the heart of shareholder value. Quite often when you look at corporate governance failings, they have occurred at subsidiary level. The management of legal entities, internationally, is therefore on the radar.

Increased regulationIn recent years, domestic and international regulatory developments and the enforcement of those regulations have forced multinational companies to focus on the governance and management of all entities within their group.

Since the financial crisis, regulators such as the FSA have focussed their attention on governance and compliance, with increased intrusion and prosecutions for compliance

failures. During 2012, the FSA levied a record £311m of fines (2011: £60m, 2010: £89m) for regulatory breaches, as well as continuing to name and shame companies for failure to implement good corporate governance. This demonstrates that if companies fail to exercise good governance throughout their organisation, they will not only incur substantial financial costs, but also find themselves subject to reputational damage.

With regulation, risk and responsibilities for directors all increasing with respect to the management of legal entities, having a strong global subsidiary governance framework can prevent costly financial and reputational damage explain Jonathan Gibson, Kate Elsdon and Lee Johnson, from PwC Legal’s Entity Governance & Compliance Team.


p45-51 Governance_New2.indd 45 04/04/2013 10:17

www.pwc.com/gx/en/corporate-reporting

Getting the edge

Good corporate governance is part of the DNA of your organisation. We can help you to communicate this successfully.

To fi nd out more visit www.pwc.com/gx/en/corporate-reporting.

© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member fi rm of PricewaterhouseCoopers International Limited, each member fi rm of which is a separate legal entity.

27846-2 Colour.indd 1 19/09/2012 15:10:30



Increased risk and cost Historically, there has been a lack of awareness of the risks associated with foreign entities as well as the costs of managing those entities; it is, in effect, an unappreciated risk. In many multinational groups the internal subsidiary governance is often not fit for purpose, tending to be overlooked or assumed to be another function’s responsibility. In some cases therefore, businesses don’t really understand the risks attached to subsidiaries until something goes wrong.

The legal risks associated with subsidiary governance include personal exposure for directors and officers, legal and regulatory

group, but also to understand the purpose of each of those entities, and maintain a record of that information for 10 years.

These regulatory developments around corporate governance at the subsidiary level have forced a shift in regulators’ focus, from business units to legal entities. Operating complex and unwieldy group structures only serves to magnify the additional governance and compliance burden and comes at a time when resource has never been more constrained, meaning that governance functions are having to deliver more for less; exercising effective subsidiary governance and robust legal entity management can help achieve this.

A continual lack of global harmonisation around legislation and regulation also means it is no longer appropriate for groups to focus only on parent company governance. For example, the UK Corporate Governance Code (the Code) only applies to listed companies and doesn’t specifically refer to the management of subsidiaries. However, the principles that underpin the Code are good, common sense, governance principles and should be applied throughout any group.

In addition, there is movement towards recognising the role subsidiaries have in terms of corporate governance, reporting and managing risk. For example, in South Africa, King III has introduced a requirement for listed companies to explain, in their annual report and accounts, how they manage the risks associated with subsidiary governance. In the US, the Foreign Accounting Tax Compliance Act is focussing attention at the legal entity level, forcing companies (mainly financial institutions) to categorise the entities they have in their

‘Corporate governance should be an integral part of a company’s risk management framework with regular internal audits of governance and legal entity management processes and controls.’




Company Secretaries are the custodians of governance and are increasingly taking responsibility for assisting directors manage their responsibilities. Co-ordinating the induction and ongoing directors’ training programmes is a fundamental role for the Company Secretarial function.

Some groups are tackling this by adopting a tighter control around the composition of subsidiary boards and exercising greater focus on the calibre of subsidiary directors, with a ring-fenced group, or “slate” of individuals often being identified as being those people with the appropriate skill set to act as directors of subsidiaries. This makes the task of ensuring directors receive sufficient training, both on induction and on an ongoing, and tailored basis, far easier. However, using a ‘slate’ of directors also makes it even more important for those directors to know what is happening in each of the entities they are appointed to; a good information flow is therefore critical.

Emerging best practice around subsidiary governance Corporate governance is critical to any organisation, yet getting it right can be a major challenge and is one of the largest unappreciated risks within most multinational groups. There are a number of challenges facing such organisations looking to achieve governance function efficiency

on how legal entity governance risks are managed; directors are legally responsible for the actions of their companies, wherever based, and must understand their duties. The issues surrounding directors’ responsibilities are amplified by a lack of harmonisation of legislation internationally and by insufficient guidance or support for subsidiary directors around their duties and liabilities when appointed to multiple boards in multiple jurisdictions.

Whilst there are some common themes around directors’ duties, including a duty of care, exercising independent judgement and managing conflicts of interest, many jurisdictions have key differences. For example, parent company directors may owe fiduciary duties to subsidiary companies, there may be a cap on the number of directorships an individual may hold, plus there is a wide range of personal and criminal liabilities that apply to directors. Company Secretaries have a role to play in helping directors who hold several directorships across a group understand, and comply with, each set of local requirements.

compliance failure and potentially unauthorised commitments (for example, orphan companies, directors being arrested on arrival in a country or being placed under house arrest, or transactions being rendered void); in addition, multinationals with numerous foreign subsidiaries carry greater financial, tax, commercial and operational risk. Identifying, understanding and mitigating those risks is a key role for any governance function. Likewise, corporate governance should be an integral part of a company’s risk management framework, with regular internal audits of governance and legal entity management processes and controls. A key failure in recent times has been the lack of audits focussed on governance and legal entity management controls, but there is now an emerging trend of companies making greater use of their second line of defence functions to carry out assurance based reviews of subsidiary governance and compliance.

Increased responsibilitiesThere is increased interest from shareholders, regulators and the public

‘Company Secretaries have a role to play in helping directors who hold several directorships across a group understand, and comply with, each set of local requirements.’




consistent management and control of those issues thereby avoiding those crisis structures.

Commercial approach If carried out effectively, legal entity management is a strategic activity and can enable the Company Secretary, through thought leadership around governance, to ensure they are helping the organisation manage and reduce risk. In addition, this level of group-wide

there must be a good understanding of the business, with the governance framework applied in a way that works for each individual entity.

Another challenge is making sure that what works during business as usual also works in a crisis situation. Organisations need to be able to adapt quickly, using a flexible standard-based approach rather than a prescriptive approach. A subsidiary governance framework ensures the ongoing and

and effectiveness and to implement a strong and robust global subsidiary governance framework. On a global scale, the challenges present themselves when there is a lack of consistency and control over the management of legal entities. Historically, governance has been managed in a reactionary way, but more recently this is changing and governance is now being approached in a far more proactive manner, often via the use of a subsidiary governance framework.

Flexible consistencyMultinational groups are reliant on the individuals in each jurisdiction adhering to the governance standards in place, leading to differing levels of compliance. The big issue for multinationals is ensuring that there is consistency across international entities; the ability to police it but without stifling operational activities.

Groups are taking a range of approaches to legal entity management, depending on their business needs. Some operate under a centralised, head office controlled framework whilst others devolve responsibility to operating divisions or jurisdictions, with an assurance mechanism in place to monitor compliance. Similarly, approaches can range from a codified basis, with head office mandating the use of approved policies, to a standard or principles based approach, offering flexibility to meet business needs as well as local legal and regulatory requirements.

A commercial subsidiary governance framework will ensure legal entity governance and compliance, but in an appropriate manner. Many groups manage their legal entities by classifying them according to whether they are regulated, trading, non-trading, dormant companies etc, on a risk basis. Trading companies are classified as high risk and apply the entire governance subsidiary framework, while the dormant companies are deemed to be low risk and only apply certain standards, ensuring the right balance is struck between managing the compliance burden and adding value through governance.

Increasingly, subsidiary governance frameworks are being used to align the legal entity structure with the operational structure of businesses, allowing the day to day business operations to continue whilst also enabling effective and legal decision making. This is often achieved via a robust business-wide delegation of authority framework. To work effectively,

‘If a governance framework has been in place for a number of years, it should be refreshed on a regular basis to ensure it remains fit for purpose.’



small issues and corporate failures can cause the most reputational damage.

Technology is playing an increasing role in legal entity management, underpinning and supporting the governance framework. Legal entity management systems now go further than simple data retention and can be configured to help support the governance framework, for example automating approval processes and providing clear audit trails for decision making. This has been evidenced recently by one of our clients, Parker Hannifin, winning the US Corporate Secretary Award for the Best use of Technology in Governance.

Finally, informal audits of subsidiary governance frameworks should be carried out on a regular basis to monitor the level of compliance internationally and to assess any areas of weakness.

Role of the Company Secretary The role the Company Secretary plays in managing legal entity governance has changed dramatically in recent years and perhaps a more befitting title for the role is now Governance Director or Leader. In today’s regulatory environment, the

and cost control and reduction, and would ensure the company is as agile and as efficient as possible.

The most effective way to manage the cost and risks attached to complex and unwieldy group structures is to embed a continuous entity reduction programme into the subsidiary governance framework under which legal entity owners have to justify the existence of each entity on an annual basis. Some groups also make an internal recharge per entity to help prohibit the creation of more entities. Complex group structures only serve to amplify regulatory, legal and compliance burdens.

AssuranceThe on-going maintenance and assurance of the subsidiary governance framework is critical to its success. One of the main problems for organisations is that although they may have the policy documents in place, often they are left gathering dust and aren’t managed properly. If a governance framework has been in place for a number of years, it should be refreshed on a regular basis to ensure it remains fit for purpose. As in most cases, prevention is better than the cure, particularly as a slow drip feed of

governance can also control and reduce costs, simplify operations and enhance agroup’s reputation for good governance inthe market place. Many organisations are incurring significant cost because they are not managing compliance and governance in, perhaps, the way they should, in terms of efficiencies and utilising resources. A subsidiary governance framework essentially links back to the overriding business objectives, which feature risk management,

A governance frameworkIn the UK, plc corporate governance has a well-established and embedded framework that is adhered to. However, there is a risk that groups can get complacent. If a governance framework has been in place for a number of years, it will need to be refreshed often to ensure it is always fit for purpose. When things go wrong from a governance perspective, it is normally in reaction to a crisis situation. Companies need to ask if the framework that works well on a day-to-day basis will also be supportive enough for the board if they are faced with a crisis situation.





Company Secretary plays a more strategicenabling role, making sure directors areprotected and proactively ensuring legaland regulatory governance compliance,throughout a group.

The purpose of the Company Secretary is now much more commercial and strategic and is focused around anticipating business needs and being proactive in terms of managing those needs. Today’s Company Secretaries must embed themselves within the business so that they can pre-empt risks before they happen.

A subsidiary governance framework can assist Company Secretaries in managing the compliance burden, but also provides an opportunity for them to add real value to the business by creating efficiencies, minimising risk and reducing costs.

ConclusionFailing to plan and put in place a robust subsidiary governance framework that is adhered to, is planning to fail.

Contact detailsKate ElsdonDirector

Lee JohnsonDirector

Tel: +44 (0) 20 7212 5103Mobile: +44 (0) 7595 850 630Email: [email protected]

Kate is a Chartered Secretary (FCIS) and has extensive experience in advising Boards of Directors on matters of Corporate Governance in the listed environment, private and public sectors. Kate has recently been working with large multinational companies, assisting them to review, design and implement effective international governance frameworks. Before joining PwC Legal, Kate was the Company Secretary of a FTSE 250 media company.


Lee is a qualified Chartered Secretary and has over 20 years of experience working in professional services and supporting multinational clients with a variety of entity governance and compliance projects. Lee also specialises in helping clients review and improve the effectiveness of their governance function and entity governance framework.

Jonathan GibsonPartner


Jonathan is a qualified Chartered Secretary (FCIS) and leads PwC Legal’s Entity Governance & Compliance business globally. The business consists of over 400 corporate secretarial specialists, spanning 100 countries. Jonathan has over 20 years of experience in overseeing engagements with clients of all sizes across the globe, but particularly FTSE 100 and Fortune 500 groups who have sought assistance with improving their foreign subsidiary management.

Managing the unappreciated risks around global subsidiary governance and compliance is a key issue facing all governance functions.

By taking a few key strategic steps, Company Secretaries have a key role in helping businesses manage those risks.


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Dealing with disruption

Leaders and their organisations are now operating in a world where uncertainty and volatility have increased to unprecedented levels, and economic growth varies widelybetween countries and regions. It’s against this background that we have conducted our 16th PwC Annual Global CEO Survey.

Our study shows that UK CEOs have been focusing on short term challenges; that they expect economic di� culties to continue, and that they are concerned with building resilience into their organisations – both to meet those challenges and seize futureopportunities.

Resilience combines a short-term ability to ride out the immediate impact of shocks, with the fl exibility to ‘future-proof’ the organisation by adapting, over the longer term. Resilience is a quality that’s becoming ever more important in today’s highly connected world, where previously isolated risks have become both contagious and

commonplace. In this context, our study highlights three priorities that UK CEOs are intending to focus on: fi rst, reshaping their operations for growth in a changing world; second, building – and in some cases re-building – relationships and trust, and fi nally, fi nding and keeping the talent they need to succeed.

This year’s research covers more than60 countries and includes the views ofover 1300 CEOs, as well as many PwCspecialists, providing valuable insightswhich we hope will stimulate debateover the coming months.

Ian PowellChairman and Senior Partner

Foreword: The hunt for growth and resilience

Our study highlights threethemes on which UK CEOs say they want to focus their attention:

1. Reshaping their operations for a changing world.

2. Building – and in some cases re-building – relationships and trust with stakeholders.

3. Finding and keeping the talent they need to succeed.

Dealing with disruptionAdapting to survive and thrive

over the coming months.

Ian PowellChairman and Senior Partner

16th Annual Global CEO SurveyCountry Summary: Key fi ndings in the UK

p54-62 CEO Survey.indd 54 21/03/2013 09:44



Across the globe, profound structural changes are creating a new world order. With the European economy largely flat and the US remaining fragile, opportunities to expand areconcentrated in growth markets. UK CEOs are actively reshaping their businesses for this, with three-quarters anticipating changes in their company’s organisational structure over the coming year.

Some 83% plan cost-reduction initiativesin 2013, well above the global average.Strategic deals are also on the agenda, with over half of UK respondents having entered a new strategic alliance or joint venture in the past year, and 60% – the highest proportionin Western Europe – planning to do the same in the coming year.

While 30% are contemplating crossborderM&A, a much higher proportion are planning a domestic deal – 43% of UK CEOs, compared to a Western European average of just over aquarter and just 11% in Germany. This suggests that UK businesses see more opportunity than their European counterparts to generate growth in their mature – and currently subdued – home market.

However, it may also be a signal that UK CEOs are more concerned about the risks associated with overseas acquisitions or are struggling to find acceptable international targets. Either way, the focus on the lowgrowth home market is perplexing. This overly domestic focus is borne out by the fact that only a third of UK CEOs say China’s GDP growth rate falling below 7.5% would be bad news for their business. This is a far lowerproportion than in Germany, which has more exposure to China’s economic fortunes through higher exports and more China-based operations.1

Also, at a time when the UK Governmentis encouraging businesses to invest ininnovation to drive high-value exports, UK CEOs are half as likely to name R&D as a top three priority over the next 12 months as Western European CEOs (17% versus 41%). And only half of UK CEOs say they intend to increase R&D capacity over the coming year,compared to two-thirds of German and three-quarters of French CEOs. Instead, UK CEOs say they’re keener to invest in growing their customer base and improving operational effectiveness.

The challenge is to understand how and where UK businesses will generate growth

Reshaping for a changing worldin the future. Our experience shows that many recognise the need to be present in fast-growth economies, but end up targeting the UK, US or Western Europe because these markets are more familiar and promise returns on investment within a shortertimeframe. We believe sustainable, longer-term growth requires a longer-term view. Additionally, with many CEOs often in the position for shorter terms, the role company boards and strategy teams play in supportinglonger-term change is a vital one.

1 Source: PwC UK Economic Outlook November 2012, page 26

Lower R&D may point to a shorter-term view“For some time, there have been signs that business leaders have become increasingly short-term in their outlook. Risk aversion and scepticism about the benefits of R&D have institutionalised a cycle of lowered expectations that looks more to quarterly performance rather than a longer-term view of where new growth might come from. These figures suggest that short-termism is now entrenched in the minds of UK business leaders.” Norman Lewis, Director, PwC

Figure 1: Priorities for UK CEOs over the next 12 months

Q: What are your top 3 investment priorities in the next 12 months?

52%Enhancing

customer service

54%Improving

operationaleffectiveness

62%Growing yourcustomer base

33%Filling

talent gaps

40%New M&A /

joint ventures /strategic alliances

Source: PwC 16th Annual Global CEO Survey

p54-62 CEO Survey.indd 55 21/03/2013 09:44



Across the globe, profound structural changes are creating a new world order. With the European economy largely flat and the US remaining fragile, opportunities to expand areconcentrated in growth markets. UK CEOs are actively reshaping their businesses for this, with three-quarters anticipating changes in their company’s organisational structure over the coming year.

Some 83% plan cost-reduction initiativesin 2013, well above the global average.Strategic deals are also on the agenda, with over half of UK respondents having entered a new strategic alliance or joint venture in the past year, and 60% – the highest proportionin Western Europe – planning to do the same in the coming year.

While 30% are contemplating crossborderM&A, a much higher proportion are planning a domestic deal – 43% of UK CEOs, compared to a Western European average of just over aquarter and just 11% in Germany. This suggests that UK businesses see more opportunity than their European counterparts to generate growth in their mature – and currently subdued – home market.

However, it may also be a signal that UK CEOs are more concerned about the risks associated with overseas acquisitions or are struggling to find acceptable international targets. Either way, the focus on the lowgrowth home market is perplexing. This overly domestic focus is borne out by the fact that only a third of UK CEOs say China’s GDP growth rate falling below 7.5% would be bad news for their business. This is a far lowerproportion than in Germany, which has more exposure to China’s economic fortunes through higher exports and more China-based operations.1

Also, at a time when the UK Governmentis encouraging businesses to invest ininnovation to drive high-value exports, UK CEOs are half as likely to name R&D as a top three priority over the next 12 months as Western European CEOs (17% versus 41%). And only half of UK CEOs say they intend to increase R&D capacity over the coming year,compared to two-thirds of German and three-quarters of French CEOs. Instead, UK CEOs say they’re keener to invest in growing their customer base and improving operational effectiveness.

The challenge is to understand how and where UK businesses will generate growth

Reshaping for a changing worldin the future. Our experience shows that many recognise the need to be present in fast-growth economies, but end up targeting the UK, US or Western Europe because these markets are more familiar and promise returns on investment within a shortertimeframe. We believe sustainable, longer-term growth requires a longer-term view. Additionally, with many CEOs often in the position for shorter terms, the role company boards and strategy teams play in supportinglonger-term change is a vital one.

1 Source: PwC UK Economic Outlook November 2012, page 26

Lower R&D may point to a shorter-term view“For some time, there have been signs that business leaders have become increasingly short-term in their outlook. Risk aversion and scepticism about the benefits of R&D have institutionalised a cycle of lowered expectations that looks more to quarterly performance rather than a longer-term view of where new growth might come from. These figures suggest that short-termism is now entrenched in the minds of UK business leaders.” Norman Lewis, Director, PwC

Figure 1: Priorities for UK CEOs over the next 12 months

Q: What are your top 3 investment priorities in the next 12 months?

52%Enhancing

customer service

54%Improving

operationaleffectiveness

62%Growing yourcustomer base

33%Filling

talent gaps

40%New M&A /

joint ventures /strategic alliances


p54-62 CEO Survey.indd 55 21/03/2013 09:44

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of major companies crumbling beneath scrutiny that will have been expected, on issues that could have been foreseen.

By having a Risk Inquiry, a company opens itself to the possibility that all may not be perfect, and change might be necessary. But far better to do this calmly and reflectively than wait for your imperfections to be trumpeted in a newspaper or across Twitter, then try to impose changes in a state of crisis.

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When there is a sudden spike in media interest in your company, a good communications strategy is essential. There are immediate steps that can be taken – eliminating inaccurate speculation and demonstrating openness and responsiveness – and there are instances of a well-handled crisis actually improving the reputation of a company. But we work on the principle that it is better to get to an issue before it becomes a controversy, and to deal with a controversy before it becomes a crisis.

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Pagefield can offer instant and effective assistance in these areas. Our issues and crisis practice is headed by the former director of the Press Complaints Commission, Stig Abell, who has more than a decade of experience in advising individuals and institutions at the centre of press attention.

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We have developed this process into a unique risk assessment product: our 360° Risk Inquiry. This is a forensic examination of a business’s risks, which has at its heart a mock investigation by a former senior journalist. Made available only to the client, it identifies the areas of possible exposure, and includes an article written as if for publication. We then

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every possible line of external inquiry. It’s an approach Pagefield has applied to organisations across many sectors and territories, so we know it works.

At this point, action can be taken to address problems while they are

manageable and solvable. That may mean changing a policy or practice that could face legitimate criticism, or developing an agreed argument in response to a potential query.

More importantly, perhaps, it compels an institution to look at itself as if through an outsider’s eyes. Almost every company feels that it knows where risk lies, how audiences will react, and how it would respond. In reality, companies are often caught off-guard by media firestorms, and their confidence can evaporate as the heat intensifies. This has been a summer

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PROMOTIONAL FEATURE

Pagefield Issues and Crisis ManagementSome say all news is good news, but recent corporate victims of adverse publicity might disagree. Pagefield knows that when it comes to the media assault, nothing can beat careful preparation

of major companies crumbling beneath scrutiny that will have been expected, on issues that could have been foreseen.

By having a Risk Inquiry, a company opens itself to the possibility that all may not be perfect, and change might be necessary. But far better to do this calmly and reflectively than wait for your imperfections to be trumpeted in a newspaper or across Twitter, then try to impose changes in a state of crisis.

For further information please contact:

Stig Abell, Partner

T: 020 3327 4069

E: [email protected]

www.pagefield.co.uk

When there is a sudden spike in media interest in your company, a good communications strategy is essential. There are immediate steps that can be taken – eliminating inaccurate speculation and demonstrating openness and responsiveness – and there are instances of a well-handled crisis actually improving the reputation of a company. But we work on the principle that it is better to get to an issue before it becomes a controversy, and to deal with a controversy before it becomes a crisis.

Preparation ahead of any external attention is the best way to protect reputation; prevention will always be better than cure. We make sure a client is in control of events, anticipating scrutiny and ensuring that when it comes it can be met with confidence.

Pagefield can offer instant and effective assistance in these areas. Our issues and crisis practice is headed by the former director of the Press Complaints Commission, Stig Abell, who has more than a decade of experience in advising individuals and institutions at the centre of press attention.

When Pagefield delivered the communications for the Diamond Jubilee Pageant (and you may recall the splendid, sodden spectacle of 1,000 boats on the River Thames last summer) we developed more than 35 separate scenarios, each with a risk assessment, and a proposed mitigation strategy. This doesn’t mean issues did not arise (hypothermia in June, for example), but it did mean that many had been addressed in advance.

We have developed this process into a unique risk assessment product: our 360° Risk Inquiry. This is a forensic examination of a business’s risks, which has at its heart a mock investigation by a former senior journalist. Made available only to the client, it identifies the areas of possible exposure, and includes an article written as if for publication. We then

interview the key stakeholders in the business, and the result is a risk book that identifies

every possible line of external inquiry. It’s an approach Pagefield has applied to organisations across many sectors and territories, so we know it works.

At this point, action can be taken to address problems while they are

manageable and solvable. That may mean changing a policy or practice that could face legitimate criticism, or developing an agreed argument in response to a potential query.

More importantly, perhaps, it compels an institution to look at itself as if through an outsider’s eyes. Almost every company feels that it knows where risk lies, how audiences will react, and how it would respond. In reality, companies are often caught off-guard by media firestorms, and their confidence can evaporate as the heat intensifies. This has been a summer

PWC Promo single page 2_layouts.indd 1 27/02/2013 15:33




Building relationships and trust

Events over the past few years appear to have undermined trust in public and private institutions. Against this background, an ability to establish trust among all stakeholders is a vital part of the resilience companies need to foster.

This is underlined by the fact that regulators now talk openly about changing the ‘culture’ of organisations – reinforcing the view that companies need to focus on cultures and behaviours alongside policies, procedures and mission statements.

UK CEOs score higher than most other CEOs on the intention to build a framework

Widening stakeholder relationships“A few years ago, Imperial would have seen shareholders as the key stakeholder, and almost the only stakeholder we really focused on. It’s absolutely valid and right for a plc to focus on driving shareholderreturns, but the reality is you do that through focusing on otherstakeholders. That’s the key shift that we’ve made over the last couple of years: if we want to drive thoseshareholder returns we’ve got to get other stakeholders right.That means changing our approach in terms of our employees, in terms of our customers and in terms of our suppliers.”Alison Cooper, CEO, Imperial Tobacco Group

to support a culture of ethical behaviour over the next year. However, 60% of UK CEOs say they’re not concerned about trust in their own industry.

One area where trust appears to be under strain is executive remuneration. But while 60% of UK CEOs admit that executive incentive pay structures are too complex, only three in ten say they’re taking action to change them.

CEOs that actively engage in building and sustaining trust may find that they will help to create and sustain longer-term value for all stakeholders.

91% 80%

82% 37%77%

79%UK

Spain

USJapan China and HK

India

Figure 2: CEOs strengthening their engagement programmes with users of social media

Q: For those stakeholders with some or significant influence, to what extent are you strengthening your engagement programme?

p54-62 CEO Survey.indd 57 21/03/2013 09:45



Virtually all UK CEOs talk aboutstrengthening their organisation’s engagement with customers, and 87% are planning to change their strategies for customer growth, retention and loyalty. At the same time, 91% – against a global average of 78% – are seeking to strengthen theirengagement programmes with users of social media.

However, establishing the rightapproach to reputation management in the age of social media and rising transparency is a major challenge. In its Global Risks 2013 report, the World Economic Forum highlightsthe rising threat from ‘digital wildfires’ that can turn local events into global corporate

Social media changes the game with consumers“Leaders who recognise how their relationship with consumers has changed forever also knowthat data is the ingredient that will help them thrive.”Matthew Tod, Partner, PwC

crises in a few hours. Companies need to understand how to manage such risks whilst using the insights social media provides to build competitive advantage.

Our experience shows that the companies that make the most effective use of social media tend to do two things. First, they

use social networks not as a one-way communications channel, but as a forum for hosting dialogue, learning, and seeing themselves from their stakeholders’ point of view. Second, they use it not just to react to events, but also to monitor, anticipate and head off future issues.

Finding talent, developing talentUK CEOs portray themselves as custodians of a reliable pipeline of future leaders, with 84% claiming to have an active succession planning programme in place. And nine out often say their strategic decision-makingprocesses involve managers below board-level, the highest proportion of any major economy, bar the US.

However, there seem to be challengeshere. The availability of key skills remains a concern for two-thirds of UK CEOs, higher than anywhere else in Western Europe.

In addition to this, a similar proportionare planning to increase investment in building a skilled workforce over the next three years, while an even higher proportion – 83% – see a need to change their talent management strategies in the next year. This seems to indicate that while UK CEOs voice a deep commitment to developing people, many organisations are still finding it difficult

to implement and enforce the right strategy to ensure an effective talent pipeline. Another reason why organisations may be

The need to invest in skills“In the US and the UK, the statistics on the number of kids doing science, technology, engineering and maths show that we’re not creating enough people with the necessary skills today to fuel the industry in the future. So an awful lot of work has to be done by companies like ours to ensure understanding of the jobs and rewards that are there, to keep people doing subjects that, in both the US and the UK, they view as harder.”Steve Holliday, CEO, National Grid Group Plc

struggling to develop the talent they need is because they oversee fewer dedicated executive development programmes than the global average, and are much less likely to actively encourage future leaders’ globalmobility and international experience.

When asked what should be theGovernment’s priorities for business, four out of five CEOs point to creating and fostering a skilled workforce– the highest response rate in any country surveyed, and well above the global average of 57%.

These findings may be a reflection ofthe worrying tendency for some UKcompanies to take a short-term view and stay in their comfort zone, or look to government to drive talent strategies. Skills and talent are the lifeblood of the UK’s economic future–and smarter, more forward-lookingcompanies will invest in them.

p54-62 CEO Survey.indd 58 21/03/2013 09:45

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Figure 3: The leadership pipeline

Q: Do you deploy any of the following to develop your leadership pipeline?

A. Shadowing senior executivesB. Rotations to di� erent

functions/challengesC. Encouraging global mobilityand international experience

Germany UK France US Source: PwC 16th Annual Global CEO Survey

Looking forward:the hunt for growth

As UK CEOs attempt to build greater resilience in their organisations, they must also scour the horizon for new sources of growth. When asked which non-domestic market is most important to their overall growth prospects next year, UK CEOs put the United States fi rst at 24%, followed by China (19%), Germany (11%) and France (11%).

This represents a slightly more dispersed focus than last year, when 40% cited the

US, with China and Germany equal second on 26%. UK CEOs in this year’s survey also quote a wider variety of other markets, such as Singapore and the UAE. But a greater proportion also said they were unsure where to look. It’s against this changing backdrop that companies need to build a platform for future global growth. Currently, UK CEOs have a tendency to look closer to home, with 38% – a higher fi gure than in any other major

Western European country – citing organic domestic growth as their main opportunity to expand. Only 14% regard organic growth in an existing foreign market as the key opportunity, against 36% of German and 37% of French CEOs.

These fi ndings may be infl uenced bythe markets in which companies have ‘existing’ operations: for example, over a third of German fi rms have operations in East Asia, against only 14% of UK companies. This disparity should be of critical interest both to the UK business community and government.However, more positively, UK companies’

Figure 4: This year’s global investment priorities

Q: Which one of these do you see as the main opportunity to grow your business in the next 12 months?

R&D andinnovation

Manufacturingcapacity

Securing rawmaterials orcomponents

Enhancingcustomer

service

New M&A /joint ventures /

strategic alliances

Filling talentgaps

Growing yourcustomer

base

Implementingnew technology

Improvingoperational

e� ectiveness

10

20

30

40

50

60

0

70 %Germany

UK

China & Hong Kong

US

Brazil

Russia

Global Total


p54-62 CEO Survey.indd 61 21/03/2013 09:45



stronger presence in markets such as the Middle East and Australasia suggests they can close the gap if they commit themselves to doing so.

The opportunity to build revenues in growth markets is underlined by the confi dence of companies based in them. In Western Europe (including the UK), around one-third of CEOs are ‘very confi dent’ over revenue growth for the next three years. However, the proportion of Mexican CEOs voicing strong confi dence over future revenue growth is 61%, rising to 79% across Africa, and an overwhelming 85% in India. The long-term impact of such di� erences is refl ected in the latest update of PwC’s ‘World in 2050’, which has E7 counties overtaking G7 in terms of purchasing power just four years from now, and in absolute GDP terms before 2030.

Global economic shifts“The shift in the global economic centre of gravity is clear; but there are still major challenges for the emerging economies to sustain their recent strong growth. At the same time, there are huge opportunities for Western companies in the emerging markets – but also great competitive challenges from fast-growing emerging market companies. UK businesses are relatively strong in the kind of tradable services that may grow strongly in future decades due to rising demand from the BRICs and other emerging economies – such as creative industries, business and fi nancial services, university education and healthcare/pharmaceuticals. So we should see the rise of these emerging markets as an opportunity to be grasped for UK business rather than a threat.”John Hawksworth, chief economist at PwC

For UK businesses seeking growth, these shifts encapsulate both the challenges and the opportunities ahead. How long will current uncertainties persist? How reliably can they look forward, and how far? Where should

they target growth, and why? UK businesses have been concentrating on survival, but the route to growth will mean embracing change, resilience, and extending their plans over the longer term.

Figure 5: Where UK fi rms have key operations

Q: In which regions does your business have key operations?

25%

11%

8%

22% 10% 25%

21%

14%

17%89%

North America

Latin America

Africa

Middle East

WesternEurope

Central and Eastern Europe/Central Asia

East Asia

South-EastAsia

Australasia

South Asia


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Risk in the regions: a view from the South, South East & South West

Laura Nyogeri shares her insight and experiences of working with clients across the South Region to help organisations understand the challenges they face in delivering sustainable business performance through good governance.

Across the regions, Boards and senior management are engaged in balancing the competing demands of ongoing volatility in the markets against the need to comply with legal and regulatory frameworks, as well as their internal policies and procedures.

In response to this, governance-related activity has traditionally focussed on managing external matters such as investor expectations and corporate reporting; signalling to the market; and demonstrating board effectiveness through appropriate reward and remuneration structures, supported by a robust committee structure to oversee and challenge the organisation and provide confidence to investors and other stakeholders.

However, the need to react swiftly to changing market conditions is causing many Boards to challenge their traditional perceptions of governance and, increasingly, to focus on the adequacy of their internal governance frameworks, policies and procedures.

Organisational reachAs our 2013 CEO Survey highlights (page 54), organisations that are agile and forward thinking are better able to respond to and capitalise on opportunities in the

market. A common mistake is to confuse agility with speed – responding too quickly to opportunities in the short-term can have damaging longer-term effects, where capitalising on the opportunity results in a loss of control and visibility across the organisation.

The ability of the Board to retain visibility and control in changing circumstances varies according to the structure, complexity, maturity and culture of an organisation. For smaller organisations, CEOs and directors often feel able to reach out and touch the sides of their business. However, as organisations change, their ability to do this becomes increasingly challenging. Whether the change is driven by the need to cut costs in order to protect margins and deliver challenging savings agendas, or rapid growth where an organisation has successfully out-manoeuvred its competitors, breakdowns in internal controls can limit the longevity of these short-term successes.

Breakdowns in internal controls often result from weaknesses associated with a lack of clarity on accountabilities between functions. However, where the root cause of the breakdown is not fully understood or inappropriately confined to a specific area, this can mask misalignment or gaps in accountabilities, resulting in false confidence over the organisational reach of CEOs.

“Growing up”Where organisations have undergone rapid change, particularly where this has involved pervasive or complex change programmes,

the existing governance infrastructure may no longer be fit for purpose. Younger, less mature or smaller companies can operate successfully without many written rules, relying heavily on CEO’s or CFO’s closeness and ability to influence decision makers. For a young and ambitious FTSE 250, for example, this offers freedom and the capacity to respond rapidly to changing circumstances and new opportunities.

However, as organisations grow and mature, a natural part of “growing up” involves taking on more responsibility. Failure in the supply chain begins to impact adversely on the reputation of the organisation – it is no longer possible to

Risk in the regions: a view from the South, South East & South WestOur South Region GRC team, led by Mark Stock and Richard Cleary, take a look at how today’s fast changing world creates more uncertainty for organisations, and the role of governance in helping them respond to this.

p64-68 View from the regions.indd 64 05/04/2013 16:42



outsource this risk. This necessitates a cultural shift in attitude and approaches to risk management and risk appetite, as well as a fundamental review of the functional standards and accountabilities. This helps to improve resilience by offering early warnings and responsive capability where accountabilities are understood and enforced.

Embarking on this journey of “growing up” with forward-thinking organisations is a refreshing experience: time is taken to pause and consolidate their governance structure to ensure it remains fit for purpose and, critically, before business performance starts to suffer. The drive to capture existing

decision-making behaviours and delegation arrangements more formally supports the transition to a more formalised control environment. This supports a greater delegation or autonomy in the longer-term, as well as the retention of organisational reach, and ultimately helps to embed a sustainable platform for future growth.

For those who are further along the journey, there is recognition that governance policy and rule bases have become too constrictive. This serves to limit responsive capability to crisis and unplanned events, and can also increase the risk of process misalignment and breakdown in internal controls, particularly where there are large

savings agendas to be delivered or extensive change programmes fail to consider the implications for the governing rule base and control environment.

Managing competing priorities: the dichotomy of the BoardroomExternal corporate governance matters are easier to respond to, as there is often a compelling pressure either from investors, the market or regulators which results in a reporting obligation or the need to signal to competitors. It is all too easy to put off the decision to re-assess internal governance arrangements. Without a material


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breakdown in controls, there is no burning platform to address, and, with increasing pressure on already limited resources, internal governance often slips down the agenda.

Is there a right time to review internal governance arrangements? Forward-thinking organisations are no longer willing to wait until a material breakdown in controls occurs, which can cause lasting and untold reputational damage. Instead, they are thinking proactively about how they are governed and controlled, and how to strike the right balance between influence (informal) and control (formal) to effectively manage performance and deliver business objectives.

Talking a common language: value managementGetting the topic of internal governance onto the Boardroom agenda is a common challenge. The first step is recognising that governance plays a key role in management performance, protecting and creating value for stakeholders. By ensuring that the Board are focusing on the right areas and the right level of checks and balances are in place, business objectives can be delivered, without exposing the organisation to unnecessary risks. The relevance of governance, therefore, lies in its ability to support effective value management.

Typically, compliance-led cultures go hand in hand with increase risk aversion and heavy investment in policies, processes,

and procedures. Not only can this limit the responsive capability of the organisation to respond to changing circumstances, it can ultimately be value destructive in the longer term.

Figure 1 illustrates the role of governance in effective value management through striking the right balance between risk-taking and oversight and control, without unnecessarily limiting the organisation. Too little control (ignorance) can destroy existing value if too much uncontrolled risk is taken on. At the opposite end of the scale, too much control stifles value creation.

“Value optimisation” (VO) represents the sweet spot in this balance. What constitutes VO will depend on the nature of the organisation and its risk appetite. For some, this will sit further to the left of the dotted

role in establishing and maintaining that degree of control, oversight and influence to help organisations navigate between the opposing ends of the spectrum. The significance of this role is often overlooked, but when properly defined, functional standards and interactions can be aligned around this to support both sustained value creation as well as to support value protection (minimising the risk of internal control breakdowns and improving the agility to respond to crises or changing circumstances). This alignment to the organisation’s risk appetite is the key to effective value management.

In our experience, organisations that move too quickly from one end of the value continuum to the other often undermine longer-term value optimisation by

‘...governance plays an integral role in achieving sustainable value management and optimisation in the longer term.’

VO line; for others this will be more to the right. Over the lifecycle of the organisation, particularly for maturing organisations going through adolescence, the VO trajectory typically moves from right to left as the organisation becomes more established and achieves a sustainable competitive advantage in the market.

While there is no one-size-fits-all solution, the governance infrastructure plays a pivotal

undermining existing functional controls and standards. A common symptom of this is the knee-jerk reaction to cut or postpone, or to cut longer-term strategic projects and initiatives in order to deliver performance or preserve margins in the short-term. This indicates that the governance infrastructure is not delivering the right degree of checks and balances to deliver sustained value management. Moreover, over-corrections and knee-jerk reactions can result in lasting cultural shifts and encourage gaming, non-compliance and other value-destructive behaviours across the organisation.

The three lines of defence (3LD) model underpin this by explicitly allocating responsibility and accountability for control to each business unit or function within an organisation. This enables growing or maturing organisations to better define their boundaries and set clear rules to govern behaviours and interactions, to support the effective delegation of responsibilities.

This provides an ongoing check and balance to organisational activity and decision-making, and in this respect, governance plays a key role in maintaining agility through the age-old adage of more haste, less speed. Ultimately, this supports more targeted assurances and monitoring, which improves with greater CEO/Director reach as well as building investor confidence, and is a growing area of focus for leading internal audit functions.

Value

Valueoptimisation

Ignorance:destroying

existing value

through insufficient

controls

Too bureaucratic:stifling value

creation through over

control

Control

Figure 1




Integrating resilience and sustainable value management into governance structures: key questions for your Board Whether success means delivering significant cost-reduction initiatives, achieving FTSE 100 status or just consolidating an organisation’s position in the market, governance plays an integral role in achieving sustainable value management and optimisation in the longer term. Forward-thinking organisations are taking the time to pause and consolidate their governance infrastructure and achieve this goal, before a material breakdown in control arises.

From setting the tone at the top, to defining the operating model and boundaries between key functions, to incentivising and encouraging the right behaviours and sanction non-compliance, governance plays a pivotal role in executing the organisation’s strategy. Through appropriate monitoring, oversight, feedback and communications, performance and operational risk can be effectively managed. Together, these support a proportionate and pragmatic approach to managing organisational and performance risk, and represent the fundamental building blocks of good governance.

Implemented successfully, these allow local dispensations to be awarded and subject to an appropriate level of oversight, without exposing the organisation to

intolerable levels of risk or undermining the operating of the control environment. Minimum control standards can be defined to ensure that control activities do not unnecessarily limit the activities of the organisation, but are sufficient to support effective value management.

We recognise that getting the balance right between these building blocks is not easy, and there can be a tendency to place over-reliance on key areas such as tone at the top, monitoring or risk management. To assist Boards in assessing the adequacy and continuing relevance of their existing arrangements, our experience shows there are seven key areas of focus. These are:

1. Organisational change: After a period of rapid growth (organic or acquisition) or change, are you experiencing a feeling of instability - have you outgrown your governance infrastructure?

2. Behaviours: Does your business model drive the right behaviours and satisfy regulatory requirements? How well aligned are the behaviours of managers and decision-makers with the goals and strategic priorities of the Board, and how is non-compliance sanctioned?

3. Alignment: How well aligned are risk management, strategic planning and

performance monitoring management frameworks to enable you to capitalise on opportunities in the market?

4. Accountabilities and boundaries: Are there clearly defined functions and business units, with a clear view of limits of authority and of what is centralised and what is decentralised?

5. Value management: Are you striking the right balance between executing your strategy (value creation) and managing risks through appropriately defined controls (value protection), or do cumbersome and restrictive policies and procedures restrict your room to manoeuvre?

6. Supplier dependencies: How well understood and managed are business critical supplier dependencies? Has there been a deterioration in the quality of those relationships? With this in mind, are your business continuity and disaster recovery plans robust enough to enable you to respond successfully to unplanned events or crisis?

7. Learning lessons: How well do you learn from experience, incidents and near misses to build resilience? How do you monitor, evaluate and respond to whistle blowing?

Contact detailsMark StockPartner

Richard ClearyDirector

Laura NyogeriGovernance Specialist

Mark is a Partner and Business Unit Leader for Risk Assurance in our South East practice. He has worked with organisations across the world to achieve superior business performance through establishing and strengthening governance arrangements.

Richard is a Director and Business Unit Leader for Risk Assurance in our South West practice. He has managed and advised Boards through major change projects and is experienced in systems optimisation.

Laura supports Mark and Richard in leading our GRC practice across the South region and works with clients across the private and public sector to define, challenge and optimise their governance arrangements.


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Risk in the regions: a view from the regional chair

Today’s fast changing world creates more uncertainty for businesses and makes it harder to understand where new risks are coming from. Risks can emerge rapidly, spread quickly and can be difficult to identify and control. With that in mind, poor risk management, ineffective governance and unethical behaviours can undermine a businesses reputation and impact its finances.

A recent PwC survey found that only 45 percent of companies are comfortable with how well their most critical risks are being managed. But there continues to be a perception that it is only the largest, multinational companies that need to worry about risks to their business and reputation.

The ‘horsemeat’ scandal abruptly brought the risks inherent in supply chains to the forefront of the minds of not just food retailers, but all businesses. As the scandal progresses, more and more big company names hit the headlines. But, if we look behind the headlines, we see that the companies in the supply chain were mainly smaller, regional businesses and this really

brings home the fact that it is not just the big multinational companies who need to worry about risk.

With this in mind, we recently embarked on a campaign through our regional offices across the UK to speak to our clients about risk and resilience and help them understand the very real threats to their businesses – regardless of where they are based or how large or small they are. For example, a small North East based haulage company needs to think carefully about the risk to their business of a prolonged period of heavy snowfall. On the other hand, a large Welsh manufacturer looking to expand into emerging markets might need to think about attracting, recruiting and retaining an appropriately skilled workforce. Both very different risks, but of equal importance to the companies involved. So if you’re a regional business, how can you start thinking about what risk resilience means to you? The easiest way to start is to ask yourself some simple questions such as: Can our business articulate its risk appetite and how is this communicated? How often do we hear about new and different risks that our business is managing? How much does risk feature in our strategic discussions?

To help you then build on from managing risks when they emerge to achieving resilience to risk, you should then look at making three key changes: Firstly, develop a risk aware culture; secondly, start to bring an explicit focus to risk appetite; and lastly, make sure you have aligned risk with your strategy.

Developing a risk aware culture means moving away from just identifying, measuring and prioritising risks specific to the day to day running of your business and thinking wider about your industry and the political and financial environments

you operate in. This is not about becoming overly risk averse though; it’s more about just looking at the bigger picture and encouraging a culture in which risk is managed in a co-ordinated way across different interests, departments and external relationships. In some cases, it may even mean joining up with other companies in your industry or region to think collectively how you might manage a particular risk or learn from a situation another company has already experienced.

It is often the case that employees regard risk management as ‘someone else’s job’. They can fail to see how it could impact them directly and view it as a distraction from their day job. In fact, it must become a part of everyone’s job, every day. There’s no one-size-fits-all approach to risk, and no ‘right answers’ to the dilemmas it raises. Indeed, there’s a degree to which differing opinions can be positive: an organisation that can manage disagreement as an asset, learn from failure and link different assets and processes through useful conversations underpinned by rigorous analysis, will be well-placed to weather the storm.

Neither of the last two areas we’ve talked about will be effective though if you haven’t aligned risk and your overall business strategy.

Consider your risk planning along the lines of what is most strategically important to your business. By focussing on what is important, you can ensure your risk

Stephanie Hyde, Head of Regions, talks about how the firm helps regional businesses think about risk resilience.

Stephanie Hyde, Head of Regions


p70-71 Stephanie Hyde_New.indd 70 08/04/2013 15:50



Today’s fast changing world creates more uncertainty for businesses and makes it harder to understand where new risks are coming from. Risks can emerge rapidly, spread quickly and can be difficult to identify and control. With that in mind, poor risk management, ineffective governance and unethical behaviours can undermine a businesses reputation and impact its finances.

A recent PwC survey found that only 45 percent of companies are comfortable with how well their most critical risks are being managed. But there continues to be a perception that it is only the largest, multinational companies that need to worry about risks to their business and reputation.

The ‘horsemeat’ scandal abruptly brought the risks inherent in supply chains to the forefront of the minds of not just food retailers, but all businesses. As the scandal progresses, more and more big company names hit the headlines. But, if we look behind the headlines, we see that the companies in the supply chain were mainly smaller, regional businesses and this really

brings home the fact that it is not just the big multinational companies who need to worry about risk.

With this in mind, we recently embarked on a campaign through our regional offices across the UK to speak to our clients about risk and resilience and help them understand the very real threats to their businesses – regardless of where they are based or how large or small they are. For example, a small North East based haulage company needs to think carefully about the risk to their business of a prolonged period of heavy snowfall. On the other hand, a large Welsh manufacturer looking to expand into emerging markets might need to think about attracting, recruiting and retaining an appropriately skilled workforce. Both very different risks, but of equal importance to the companies involved. So if you’re a regional business, how can you start thinking about what risk resilience means to you? The easiest way to start is to ask yourself some simple questions such as: Can our business articulate its risk appetite and how is this communicated? How often do we hear about new and different risks that our business is managing? How much does risk feature in our strategic discussions?

To help you then build on from managing risks when they emerge to achieving resilience to risk, you should then look at making three key changes: Firstly, develop a risk aware culture; secondly, start to bring an explicit focus to risk appetite; and lastly, make sure you have aligned risk with your strategy.

Developing a risk aware culture means moving away from just identifying, measuring and prioritising risks specific to the day to day running of your business and thinking wider about your industry and the political and financial environments

you operate in. This is not about becoming overly risk averse though; it’s more about just looking at the bigger picture and encouraging a culture in which risk is managed in a co-ordinated way across different interests, departments and external relationships. In some cases, it may even mean joining up with other companies in your industry or region to think collectively how you might manage a particular risk or learn from a situation another company has already experienced.

It is often the case that employees regard risk management as ‘someone else’s job’. They can fail to see how it could impact them directly and view it as a distraction from their day job. In fact, it must become a part of everyone’s job, every day. There’s no one-size-fits-all approach to risk, and no ‘right answers’ to the dilemmas it raises. Indeed, there’s a degree to which differing opinions can be positive: an organisation that can manage disagreement as an asset, learn from failure and link different assets and processes through useful conversations underpinned by rigorous analysis, will be well-placed to weather the storm.

Neither of the last two areas we’ve talked about will be effective though if you haven’t aligned risk and your overall business strategy.

Consider your risk planning along the lines of what is most strategically important to your business. By focussing on what is important, you can ensure your risk

Stephanie Hyde, Head of Regions, talks about how the firm helps regional businesses think about risk resilience.

Stephanie Hyde, Head of Regions





‘By focussing on what is important, you can ensure your risk planning strikes the right balance between operational detail and strategic oversight.’

This is understandable and all senior executives need to continue to research markets carefully to ensure they have fully appreciated the risks and be clear about the rewards they expect to see before proceeding with any strategic investment. But they should also be heartened that many of the companies that are making such investments are achieving what they set out to and, in some cases, much more.

The automotive sector in the Midlands is a prime example of this, where businesses like Jaguar Land Rover have been actively investing both here in the UK and in the

planning strikes the right balance between operational detail and strategic oversight. For example, although all risks need to be considered, if you are a shipping company based in one of the major port cities such as Portsmouth or Dover, fluctuations in the value of sterling could have a real impact on your bottom line. You would expect that those companies might place more emphasis on dealing with currency risk versus internal fraud.

It is worth re-iterating that this is not about creating a risk-averse culture where no one takes measured risks that could, in fact, enhance your company’s growth prospects. Experience has shown us that by becoming risk resilient, companies can often then see and take advantage of opportunities where others shy away.

For example, in our recent CEO survey, a third of UK CEOs said they are ‘very confident’ about achieving revenue growth in the next three years. Despite this, there is relatively little real evidence that M&A activity and other, larger strategic investments are happening. While the continuing economic uncertainty is partly to blame for the high level of cautiousness, there are also some signs that the austere climate is affecting executives’ confidence on a personal level too. They are worried that any decision to go ahead with a large strategic investment now could have a career-limiting impact if it didn’t work out for the best.

after graduating from Brunel University and having completed internships in the energy and defence industries. She spent her early career at PwC working with small and growing businesses.

Stephanie qualified as a chartered accountant in 1998 and has spent the majority of her career working as an auditor with multinational clients such as GlaxoSmithKline. She was made a partner at PwC in 2006 and, shortly after that, took on a leadership role in the firm’s South East practice.

In 2011, Stephanie was asked to join PwC UK’s Executive Board and, in doing so, she

faster growing economies, like Brazil and China. Other companies that have invested in setting up business operations in the BRIC economies or striking up joint ventures are also finding that their decisions have proved good ones.

Stephanie Hyde, Head of Regions, is a member of the PwC UK Executive Board with responsibility for overseeing the firm’s regional practice, covering 26 offices across England, Scotland, Wales and Northern Ireland. Stephanie joined PwC in 1995

became the youngest board member in PwC UK’s history.

Stephanie has worked with a range of companies from owner managed businesses through to multinational listed clients and is passionate about the important role regional and private businesses have in encouraging growth back into the UK economy.

When she’s not helping multinational companies to grow, Stephanie enjoys spending time with her husband and two young sons.



Technical update seminars: Spring 2013

Introduction

The PwC 2013 Technical Update Seminars provide a comprehensive update on recent and forthcoming developments and topical issues in IFRS and UK GAAP, with a focus on the increasing pace of accounting change.

Our financial reporting presenters have first-hand experience dealing with the practical issues faced by companies in applying existing complex accounting standards and in interpreting the implications of new accounting standards. The seminars will cover not only recent IFRS and UK GAAP changes, but also provide a focus on existing accounting complexities and common errors in financial statement presentation and disclosure.

The past few years were marked by unprecedented turmoil in global markets and the coming years will see the fastest pace of accounting and regulatory change since IFRS conversion in 2005. Keeping abreast of these financial reporting and governance developments is a critical challenge for all companies.


Date and venue

These seminars will run from 9.00am to 1.00pm on the following dates:

Wednesday, 22 May

Thursday, 20 June

All seminars will be held at Holborn Bars, 138-142 Holborn, London EC1N 2NQ.

Please indicate your choice of date when you apply. Details will be sent with your joining instructions.

Programme

Financial reporting• Financial reporting update, including recent developments in UK GAAP and an IASB project update

•Focus on hot topics impacting companies’ financial reporting, including recent developments in the Eurozone, the credit crisis and financial reporting initiatives

•Technical accounting update focusing on complex areas

The total resource for UK and International financial reporting

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Imre GubaImre is a London based Senior Manager in our ACS Group. His specialism includes business combination and equity accounting as well as matters concerning joint arrangements. Imre currently has a liaison role with our London mid-tier assurance practice as well as a number of FTSE 100 clients. In a more broader role, he develops guidance for PwC’s manual of accounting, is involved in response letters to standard setters and delivers various accounting training.

Avni MashruAvni is a London based Director in our ACS Group, which provides IFRS and UK GAAP accounting advice to both staff within the firm and our clients. Avni has specialised in providing accounting advice in a number of areas during her time in ACS including accounting for business combinations, revenue recognition, employee benefits, share-based payment and first-time adoption of IFRS. More broadly, she provides advice to some of the firm’s largest FTSE 100 clients, develops guidance for PwC’s Manual of Accounting, is involved in response letters to standard setters and delivers accounting training.

Armon NakhaiArmon is a London based Senior Manager in our ACS Group, based in London. He specialises in business combinations and impairment. Armon currently has a liaison role with our London mid-tier assurance practice as well as a number of FTSE 100 clients.

Should you have any enquiries or wish to make a booking, please contact our Helpline on 020 7804 3091 or send an email to [email protected]




Imre GubaImre is a London based Senior Manager in our ACS Group. His specialism includes business combination and equity accounting as well as matters concerning joint arrangements. Imre currently has a liaison role with our London mid-tier assurance practice as well as a number of FTSE 100 clients. In a more broader role, he develops guidance for PwC’s manual of accounting, is involved in response letters to standard setters and delivers various accounting training.

Avni MashruAvni is a London based Director in our ACS Group, which provides IFRS and UK GAAP accounting advice to both staff within the firm and our clients. Avni has specialised in providing accounting advice in a number of areas during her time in ACS including accounting for business combinations, revenue recognition, employee benefits, share-based payment and first-time adoption of IFRS. More broadly, she provides advice to some of the firm’s largest FTSE 100 clients, develops guidance for PwC’s Manual of Accounting, is involved in response letters to standard setters and delivers accounting training.

Armon NakhaiArmon is a London based Senior Manager in our ACS Group, based in London. He specialises in business combinations and impairment. Armon currently has a liaison role with our London mid-tier assurance practice as well as a number of FTSE 100 clients.

Should you have any enquiries or wish to make a booking, please contact our Helpline on 020 7804 3091 or send an email to [email protected]



Risk in the regions: a view from the North

‘The danger is that, in focusing on the red tape, companies will lose sight of what really matters – which is doing good business.’

Barely a day passes by without the latest business or organisational failings being splashed all over the web or the front pages of the papers. It is due to these failings that regulation is, perhaps not surprisingly, becoming ever more onerous.

We are seeing the ramifications of this play out in front of our very eyes in the Financial Services sector where the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are beginning to roll out their new requirements and expectations.

As such, one can sensibly predict that regulation in other industries and markets will begin to get tougher as other scandals unfold, or industry bodies look to avoid making tomorrow’s news. This is a point highlighted in our 16th annual global CEO survey, where over regulation featured in the top four potential threats to business growth. 69% of CEOs surveyed felt anxious about the risk of over regulation, which is now seen as a bigger threat than at any time since 2006.

Keeping up with today’s relentless levels of regulatory change is no small task. Bill questions whether the pendulum is swinging too far in favour of regulation. He says: “Companies are in danger of being too focused on meeting deadlines and ‘passing the test of the regulator’. The demand on resources can be significant. The danger is that, in focusing on the red tape, companies will lose sight of what really matters – which is doing good business.”

PwC’s paper Trust: The behavioural challenge illustrates that there is a

Does regulation or culture point the way out for companies lost in the corporate governance maze?

disconnect between meeting regulation standards and a move to genuine, positive actions to enhance trust and market reputation. Furthermore, regulation can only take you so far: building and embedding the correct culture, allowing staff to make the correct decisions in the “moments that matter” can prove just as powerful.

corporate purpose is, it increasingly centres on their Ofsted marks, and not the people it has set out to serve. Current and prospective parents and pupils take a different stance, focusing on interaction, sense of community and pupil development. There are some real opportunities for all organisations, corporate

Bill Henry, Risk Assurance Head of Regions (North), talks about how organisations that display and embed the correct culture and behaviour can gain a march in corporate governance as well.

Take the simple, but important example of education: teachers and staff can become obsessed with Ofsted and its grading system. If you ask any school what their

or otherwise, to look beyond their regulated results and get to the heart of why they exist.

The acid test for any organisation is to evaluate whether it is driven by policies, procedures and compliance activities, which serve merely to “tick a box”, or an over-arching mission and strategic plan. Business leaders should then ensure that their mission and strategy are underpinned by fitting values and culture that enable the organisation to stand up under scrutiny now and in the future.

People, behaviours and values are what matter to Bill. He says: “Businesses should continue to work on their culture and outlook as much as their systems and controls. You need to screen appropriately for senior appointments, define the values by which you intend to operate and develop and reward the behaviour that reflects those values. The tone from the


Bill Henry, Risk Assurance Head of Regions (North)

p74-75 Bill Henry.indd 74 08/04/2013 15:48



top is critical in creating and embedding this culture...”

While nobody would question the importance of a rigorous regulatory framework, an effective system of internal controls and a responsible workforce, a strongly embedded culture can be a better defence than any “box ticking” could ever be.

Bill Henry, Risk Assurance partner, is a part of Risk Assurance leadership within the firm and currently leads the practice for the North of England, covering 6 offices.

Bill joined PwC in 2006 from another professional services firm where he led the Risk Assurance practice nationally. Bill served some 15 years in industry before moving to professional services in the mid 90’s.

Bill has worked across a range of industries and sectors and has a wealth of experience of helping companies see the opportunity side of risk, build pragmatic controls and effective governance mechanisms.

Outside of PwC, Bill enjoys spending time with his wife and two teenage girls.

‘You need to screen appropriately for senior appointments, define the values by which you intend to operate and develop and reward the behaviour that reflects those values’

Bill concludes: “People rarely set out to be dishonest or incompetent. But, expecting your workforce to robotically follow overprescribed procedures is not the answer to efficient and effective control. In fact, that’s precisely how formal risk controls become devalued over time. No matter how good a system or process is, it is only as good as the people using it. An over-arching culture that encourages employees to do the right thing and be comfortable whistle-blowing is the most effective corporate governance measure of all.”

p74-75 Bill Henry.indd 75 05/04/2013 16:32


John Patterson, ConsultantJohn works in a Consultant role on corporate governance matters within the Assurance Practice of PwC, providing advice and updates on corporate governance developments to client management and boards as well as to PwC teams. He has 15 years’ experience with UK public companies, including AIM, small cap and mid-tier organisations.

Much of John’s work focuses on the reporting of corporate governance, and he has contributed to a number of PwC’s publications on corporate reporting. He has also developed the firm’s responses to consultations from the Financial Reporting Council, the UK government and the European Commission, including revisions to the FRC’s UK Corporate Governance Code.

Richard Sexton, Partner Richard is a member of the UK Firm’s Executive Board where he is responsible for reputation and policy and Deputy Global Assurance Leader. He has for many years successfully combined leading our largest international clients and practice management.

He has extensive experience of corporate reporting and governance having helped drive the firm’s responses to evolving issues such as Sarbanes Oxley, the review of the Combined Code and IFRS developments. He has also been involved in research into the functioning and operation of governance regimes including Audit Committees in both the UK and Hong Kong.

About PwC

As the UK’s leading provider of integrated governance, risk and regulatory compliance services, PwC specialises in helping businesses and their boards create value in a turbulent world. Drawing from a global and local network of specialists in risk, regulation, people, operations and technology, PwC helps its clients to capitalise on opportunities, navigate risks and deliver lasting change through the creation of a risk-resilient business culture.

Author biographies

Richard Sykes, PartnerRichard is a Global Relationship Partner for a FTSE 100 client and previously spent the majority of his career as an Audit Partner on FTSE 100 clients.

Richard currently leads the firm’s global initiatives in the Governance, Risk and Compliance area. He has developed and led our thinking in how to apply the conceptual aspects of GRC in practice. His current focus is on driving the Risk Resilience agenda, with a focus on good corporate governance and risk behaviours and culture.

Author biographies

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Author biographies

p76-77 Biogs.indd 77 27/03/2013 12:27


Author biographies

p76-77 Biogs.indd 77 27/03/2013 12:27


Regional contacts

If you would like to speak to someone from PwC in relation to any of the business issues or opportunities covered in our magazine, please contact your appropriate regional PwC representative listed opposite. They’ll be happy to help you.

Regional contacts

2

4

5

6

7

3

1

p78-79 Contacts.indd 78 04/04/2013 10:30


Regional contacts

1. Scotland Stephanie Bruce, PartnerTel: +44 (0) 131 524 [email protected]

2. North East and North West (Newcastle, Sheffield, Leeds, Hull, Liverpool, Manchester) Bill Henry, PartnerTel: +44 (0) 113 289 4510 [email protected]

3. Northern Ireland (Belfast, Linen Green) Martin Pitt, PartnerTel: +44 (0) 28 9041 [email protected]

4. Midlands (Birmingham, East Midlands, Milton Keynes) Helen Nixseaman, PartnerTel: +44 (0) 20 780 [email protected]

5. Greater London (London) Richard Porter, PartnerTel: +44 (0) 20 721 [email protected]

6. South East (Cambridge, St. Albans, Gatwick, Norwich, Southampton, Thames Valley) Mark Stock, PartnerTel: +44 (0) 1727 89 2210 [email protected]

7. West (Bournemouth, Bristol, Plymouth) and Wales (Cardiff, Swansea) Richard Cleary, DirectorTel: +44 (0) 117 923 4108 [email protected]

p78-79 Contacts.indd 79 04/04/2013 10:31


Advertisers’ index

Acer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IBC & 18

Belmont International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

British Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7

Broadbean Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Brompton Lakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Bupa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Experian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Griffiths & Armour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Il Sogno . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Integrc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IFC & 1

J .C . Rathbone Associates Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Jack’s Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52-53 & 66

Liberty Mutual Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42-44

Pagefield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Reed & Mackay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Reynolds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Scottish Widows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Symfact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37


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Acer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IBC & 18

Belmont International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

British Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7

Broadbean Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Brompton Lakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Bupa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Experian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Griffiths & Armour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Il Sogno . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Integrc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IFC & 1

J .C . Rathbone Associates Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Jack’s Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52-53 & 66

Liberty Mutual Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42-44

Pagefield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Reed & Mackay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Reynolds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Scottish Widows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Symfact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37


p80 Ad index.indd 80 04/04/2013 11:02

Acer recommends Windows 8.

www.acer.co.uk www.acer.comAcer and the Acer logo are registered trademarks of Acer Incorporated. Copyright 2012 Acer Inc. All rights reserved. Specifications subject to change without notice. Pictures are intended simply to illustrate the product. Features depending on the model.

• Touch-type-view: Three ways to work with one smart device

• Acer Always On: Press it and it's on and updated, like a smartphone

• Free yourself with AcerCloud: Access your data on any of your devices, always

• Superior battery life: Up to 18 hours1 of productive power

1. Up to 18 hours of battery life when docked to the keyboard.

ICONIA W510A new twist on everywhere-you-go productivity

Acer and the Acer logo are registered trademarks of Acer Incorporated. Copyright 2012 Acer Inc. All rights reserved. Specifications subject to change without notice. Pictures are intended simply to illustrate the product. Features depending on the model.

• Touch-type-view: Three ways to work with one smart device

• Acer Always On: Press it and it's on and updated, like a smartphone

• Free yourself with AcerCloud: Access your data on any of your devices, always

• Superior battery life: Up to 18 hours1 of productive power

1. Up to 18 hours of battery life when docked to the keyboard.

ICONIA W510A new twist on everywhere-you-go productivity

www.pwc.co.ukPwC UK helps organisations and individuals create the value they’re looking for. We’re a member of the PwC network of firms in 158 countries with more than 180,000 people committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/uk.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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Winning with Governance Risk and Compliance - PwC UK blogs

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