Hard times are making the case for compliance
3 November 2008
Corporate crises present opportunities to put compliance programmes at the heart of board strategy, leading in-house lawyers told delegates at The Lawyer’s global compliance conference last week (29 and 30 October).
BAE Systems general counsel Phillip Bramwell told the conference that risk management came to the fore in times of disaster, adding that crises presented an opportunity to address non-financial risks.
“The board shouldn’t look to the risk committee as its only way of understanding the risks before it,” Bramwell said. “There must be a central understanding of the risks.”
There should be an awareness of reputational risk, he added, which is often left to public relations functions to manage when in fact reputation was “an identifiable driver of the value of the enterprise” and “can have a significant financial impact if a company gets it wrong”.
Delegates raised concerns over how to persuade board members to embrace non-financial risk when company finances are a strong driver of remuneration packages and share prices.
“At this point my board knows it should be concerned about the non-financials,” said one delegate. “But there are really more pressing matters – like a crashing share price.”
Peter Wiley, Walt Disney general counsel for Europe, the Middle East and Africa, agreed. “Creating the right compliance culture can be very difficult – it’s more than just writing a compliance code,” he said.
Wiley advised that, if boards were uncooperative, in-house lawyers should “explain the issues in the right way, walk them through the consequences, show them the implications and give examples”.
Charles Lawton, consultant and former general counsel of Rio Tinto, added: “Pointing out directors’ liability will get their attention. Multinational companies with US businesses will see class actions as a real nightmare and also there is peer pressure.”
Lawton continued: “It’s important for Rio Tinto to show it’s doing the best it can for the [mining] sector, not just as an employer but also looking at external factors such as supply chains. Non-governmental organisations are never far away from Rio Tinto.”
If board directors are still unwilling to pay attention, it is up to lawyers to point out the increase in global regulation, harsher penalties, a significant rise in court powers and the possibility of imprisonment.
But Lawton warned: “The credit crunch is going to put huge stress on these sorts of programmes. They’re seen as expensive and time-consuming. All businesses will be cutting back on anything considered peripheral.”
Nevertheless, Bramwell argued there was an opportunity for private practitioners to create audit committees to monitor non-financial risks.
“At present the availability for non-financial audit is immature at best,” said Bramwell. “The big-four accountancy companies are financial at their heart and non-financials don’t fit very comfortably with that. There’s more work to do. Private practitioners could create compliance committees for non-financial roles.”
Bramwell called for global companies to be legally obliged to have a global compliance code of conduct.
“Until we get a global law, those companies that operate globally will have to take varying approaches towards compliance,” he said.
The creation of a global code would enable multi-nationals to benchmark themselves against their peers.
“Difficult times are driving up the quality of the compliance risk management,” Bramwell said. “It’s a shame to have to say it, but in the next five years quality will improve greatly.”