In a very challenging business world, general counsels (GCs) are being called upon to play a greater role in the running of companies, particularly in the management of risk. For now, GCs are accepted as people who need to sign off on significant decisions or get involved when there is a problem. But people are looking to the GC to prevent problems, rather than just deal with problems as they occur.
KPMG believes that GCs can get ahead of the curve on risk in the company, bringing another facet of business savvy by assuming the role of business risk forecaster. Put simply, GCs can be a barometer for management and for the board. For instance, when they are brought in during strategic discussions, GCs can help management foresee risks from changes in the business. In acquisitions, having the GC at the table during early discussions about entering a new line of business can give them the opportunity to help management look around the corner on what legal and regulatory risks the organization may face if changes to the business occur.
However, there is a gap between the beneficial impact GCs can have and their current involvement in strategic decision making, according to a survey of 320 corporate counsels around the world, conducted on behalf of KPMG between April and May 2012. By using their unique skills and approach to business, the influence of the GC in the C-suite is growing, but the journey is far from over. GCs also have a significant exposure to the board, and that’s where they can make a great impact, since the board helps guide decisions. The GC has an opportunity to be seen by the board as not just a problem solver but also as a risk barometer. Governance, Risk and Compliance is now an explicit part of the boards’ responsibility, and the GC can help the board meet that responsibility.
The goal of KPMG’s first global survey of GCs was to find out how much progress GCs are making as business decision makers and the challenges they face in this growing role. Interviews were conducted in 32 countries across regions and industries, in both mature and high growth economies.
The North American region appears to be showing the way to many other regions in terms of strategic input and adding greater value through a broader, future-looking role. Nearly half of the North American respondents to our survey (46 percent) had seats on the main board of their companies. Virtually all of them (96 percent) thought that GCs could help to reduce the risks faced by their companies if they are involved in business decisions, and 41 percent, the highest proportion in this survey, were taking proactive steps to find ways of managing and avoiding risk.
This is, perhaps, what we might expect of companies based in the U.S. and Canada, many of which have the very highly regulated, very litigious environment of the United States as their main market. Compliance with regulations is clearly a main priority for these companies. Indeed, for 63 percent of the legal departments polled, improved training in the implications of legislation was their primary response to increased risk, while specifically better processes for compliance were the priority for 37 percent.
In saying this, these legal departments actually seemed much more likely than their counterparts elsewhere in the world to challenge regulation, up to and including regulatory litigation. Nearly 80 percent said that they were expecting an increase in the number of general regulatory disputes they are called upon to deal with in the next five years, and 60 percent anticipated a rise in disputes over competition and antitrust matters, a major area of activity for the U.S. authorities.
One-half of those polled anticipated an increase in litigation in the near future, but the view taken by the specialists (see quotes in full report) on managing disputes is that this increase will not be universal; rather, it will be confined to particular sectors in particular areas within the region.
Litigation is understandably seen as increasingly expensive and uncertain in its outcome, and companies are avoiding it if they can. This could explain the high proportion of GCs with places on the main board, and the strength of the efforts being made to find proactive ways of reducing risk. North American companies seem to be taking the need to manage risk very seriously, and are giving their legal departments the tools and influence to do this.
Nearly 60 percent of the legal departments surveyed are organized along functional lines, rather than moving closer to lines of business. They remain highly centralized, which may slow down the efforts being made by some GCs to embed lawyers in their client businesses. Some departments have embedded attorneys in their operating units. Working with other parts of the business is extremely important. Some of the survey findings showed that GCs can become more involved in the business by developing relationships across the enterprise. For instance, the chief audit executive often has a strong risk-focused work program. GCs have an opportunity to spot emerging risks and to monitor identified risks by working more with the internal audit function.
Looking to the future, the principal concern expressed by these GCs is over data security, selected as a strong risk by 53 percent. Their worry is not necessarily about future legislation in this area – they are more uneasy about emerging laws related to anti-bribery and corruption – rather, it is about the implications of the existing data-protection rules and the way that these are being applied and interpreted by the regulators.
Both the mandatory reporting of data security breaches and the large fines for misuse of data are focusing the minds of North American GCs on the complex question of how they can be confident that their company’s data management is adequate. It is an area where it is easy to get things wrong, and often a very public matter when mistakes are made.
According to the survey, GCs firmly believe that their involvement in the commercial decision-making process helps to reduce the number of disputes and regulatory issues companies face. Seventy-nine percent agreed with this view. But when GCs were asked if they are now more involved with the formulation of business strategy than five years ago, only 67 percent said they are. The gap suggests that GCs are making significant progress in playing a bigger role in their companies, but they still have some way to go to realize their full potential as business leaders.
One way of influencing business decisions is to have a seat at the table with leadership, but only 38 percent of the global respondents said the GC sits on the board. However, 43 percent said the GC reported directly to the board, and 19 percent reported via a board member. Where GCs have already won this influence, they have learned to present their legal and regulatory knowledge in powerful, practical commercial language that boards recognize and appreciate. Moreover, GCs bring a valued legal perspective, which complements the skills of others who advise senior decision makers.
A crucial area where corporate counsel adds value to the organization is in assessing risk. In the view of survey respondents, the strongest risk to organizations in the next five years is an expected increase in the volume and complexity of regulation. It is here where the influence of the GC is unrivaled. Respondents say that the legal function has primary responsibility for handling regulatory compliance and regulatory investigation. The compliance function is cited about half as frequently, with finance and risk functions far behind. Nevertheless, the risks companies face need to be placed in the context of the business, and this is a challenge for corporate counsel. Being able to translate complicated legal issues into the more commercial, solutions-focused language that business leaders can relate to is a skill that will do much to enhance GC senior-level influence.
GCs would improve their standing within the company if they can anticipate what the regulatory landscape might look like tomorrow. But only 29 percent of respondents globally had proactively identifying risks at an early stage as one of their top three tasks. By contrast, North American respondents gave it a higher priority, with 41 percent saying it was a key step in risk management. Worldwide, 69 percent of respondents said their most important tactic in proactively identifying risk is to train the in-house legal team on developments in legislation.
Looking forwards rather than backwards is vital: but, to make their voices heard, GCs must also collaborate effectively with other parts of the business. In the survey, GCs indicated that to address the risks they face, it is necessary to develop close working relationships with other parts of the organization. The top three functions cited were finance (61 percent of respondents), internal audit (59 percent), and sales and marketing (55 percent). Asked which parts of the organization they worked most closely with at present, respondents highlighted the same three functions. These findings suggest GCs are focused on governance and compliance as well as revenue risks, more than supply side issues and cost control.
When asked to predict what types of laws were a serious concern to the business over the next five years, most respondents cited legislation covering competition and anti-trust matters (39 percent), followed by laws protecting consumers (34 percent) and anti-bribery and corruption laws (32 percent). Twice as many Western European, compared to North American, respondents cited competition rules as serious concern. Among the issues handled by the in-house team, the number of regulatory and competition/anti-trust disputes is expected to increase the most worldwide, over the next five years. Securities-related disputes and professional negligence cases are expected to increase the least.
Legal disputes will not only become more numerous, but also more difficult to resolve, over the next five years. The complexity of subject matter and the volume of information disclosed as part of the dispute will also significantly increase, as well as the number of cases resolved through arbitration, litigation, and mediation.
The growing regulatory demands on businesses around the world will lead the board and senior executives to rely increasingly on their in-house legal team for proactive advice. In short, GCs can add value by preventing problems, not only solving them. The most effective GCs will be those who can predict potential problems, explain the risks and weigh them against the opportunities, blending legal and business knowledge. Global businesses face the same global challenges, so the firms that fare best will be those able to turn adversity to their advantage. GCs are well-positioned to help navigate the wisest course.
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