Navigating complexity: Understanding local culture is key to compliance
The gap between the way developed and emerging markets run their regulatory regimes has narrowed in recent times, but it remains the case that Asia still has some of the most challenging jurisdictions in the world when it comes to ensuring compliance.
While tools such as automation can help ease the burden, unique challenges remain. Exploring the strategies companies are adopting to stay ahead was the subject of a roundtable discussion in Singapore on November 14, 2018 hosted by CorporateTreasurer and TMF Group. Below is a taste of what was discussed.
Participants in the event included:
- Shagun Kumar, managing director, TMF India
- Keyur Master, director of finance and administration, Sabre Corporation
- Nitin Modi, associate director, TMF Singapore
- Sandeep Pandey, APAC financial controller, Forrester
- Evelyn Seah, finance director, Asia, Blackmores International
- Gopul Shah, director-corporate treasury and trade finance, Golden-Agri
- Rajendra Kumar Shreemal, chief financial officer, QuEST Global Engineering
- Hui Yin Yeo, head of accounting and tax, TMF Singapore
Moderator: Daniel Flatt, editorial director, CorporateTreasurer
COUNTING THE COST
Compliance comes at a cost. Whether a company is internally assessing its own regulatory needs, moving into a new market, considering an M&A or assessing regulatory compliance after an M&A, the process involves considerable time and financial resources.
Last year, estimated annual regulatory costs in the US averaged $1.9 trillion with companies spending close to $10,000 per employee on regulatory expenses.
The cost of non-compliance is high. Companies found not taking it seriously face losing their reputation and trust. Furthermore, corporates that delay meeting regulatory requirements also risk hefty fines, penalties and other settlement costs.
It is not easy to keep abreast of developments either. More than 200 regulatory updates are issued each day worldwide. And whether it’s Europe, the US or Asia, it looks like business believes this is set to only increase.
Around 28% of firms in Australasia and 25% of firms in Asia and Europe expect a significant uptick in the amount of regulatory information published by regulators and exchanges, according to Thomson Reuters Regulatory Intelligence (2017) data.
So, are there cases where regional corporates are not entering markets due to the cost of compliance?
To Gopul Shah, director-corporate treasury and trade finance, Golden-Agri, compliance is all about reputation risk, confidence and trust, and a company’s ability to manage compliance, and to drill into it. “Understanding those issues, understanding the risks, and mitigating them is very important if you really want to grow because compliance and business are two different sides of the same coin.”
Although Shah can’t recall a time when Golden-Agri said no to business because of compliance issues, he believes it is an important part of the assessment process when making an M&A. “We make an assessment of how much it will take to comply. If the business potential or benefit is greater, then we acquire and systematically clean up the company. It might take one year, it might take more.”
In one case, he said Golden-Agri had to do an assessment of whether to acquire an asset or the company. On close inspection, the corporation found the cost of buying the asset was lower than the cost of buying an unclean company with a lot of reputation risk.
“We’ve seen companies we have acquired which are great start-up companies but the last three years’ finances have not been audited or taxes have not been filed. So you carry all the penalties –you have indemnity clauses – and you take care of it. Systematically, you use tools so that people can do self-certification. You know whether everything’s getting done or not. You have a checklist and then you audit as well. Although an audit only happens once a year – at least you get to know what’s happening or not happening,” Shah said.
QuEST Global Engineering takes a different approach to M&A’s, regulatory and compliance risk. The company’s chief financial officer, Rajendra Kumar Shreemal said it currently has entities in six or seven big markets with rates of growth that are very attractive to his company.
He said: “What we are doing now is we are converting some of our full-fledged entities into distributorships. So we don’t take the risks and the headaches in lower priority markets, it’s just not worth it. We’re trying to shrink our compliance risk by going through distribution agreements. China is one market where we are doing a distributorship.”
Forrester’s APAC financial controller Sandeep Pandey believes attitudes to regulatory compliance need to be taken into account when working with emerging countries. “Let’s say I’m hiring a legal firm, then it’s very important to know whether my approach towards compliance is their approach or not. That’s something which I’ve found challenging. We have zero tolerance on non-compliance.”
For corporates that routinely make acquisitions, like QuEST Global Engineering, bringing the acquisition in line with the buyers’ reporting standards is a top priority.
“The moment you acquire a company, the first thing you do is the accounts. You make the company you are acquiring comply with your reporting standards. You lay out the new processes and explain to them this is how we work. You can parachute in someone in to explain it. You have to do one-on-one conference calls because the person has to understand you. Once they get it, I think you’ll find that within two months they are up to speed,” Shreemal said.
Culture and relationships are fundamental challenges within Asia. Get one or other wrong and the consequences could be costly.
The Harvard Business Review describes a M&A as one where two companies see value in capitalising on each other’s strengths. If they failed to fully investigate their cultural compatibility beforehand, the relationship is one likely to head to a costly divorce.
Failure to recognise critical cultural differences also creates delays and increases regulatory risks.
Understanding culture is part of the TMF Group’s strategy, explained Shagun Kumar, managing director, TMF India. “In reality, it doesn’t work if cultures are different. For example, we acquired something in India, in Pune, and it was all about “does the promoter’s thinking match the founder’s thinking?” You don’t want someone who’s been bribing their way through. You need to spend time on educating, there is no grey, it’s only black or white. This is what you do, this is what you don’t do.”
Alternatively, bringing a new partner up to speed might just require a transfer of knowledge.
“Parachuting someone in may solve that problem but I think that parachuting someone in will always have problems with scale. I need an office in Pune, I need one in Bangalore. I need those offices to be independent. So when I pull my people back, will the culture just lapse and go backwards to where it was before?” Kumar said.
With a growing surfeit of regulatory requirements, corporates are increasingly looking to automation as a practical and time-saving solution.
As reported in the Association of Intelligent Information Management’s 2018 Automating Compliance and Governance survey, 51% of organisations plan to increase spending on information governance in the next 18-24 months with a particular emphasis on automation, analytics and machine learning.
Automation can certainly remove human error, reduce costs and drive efficiency and effectiveness in the regulatory process, but much depends on the quality of information.
“There are some tools available in the market today which actually automate your entire compliance end-to-end. Of course, the quality of information has to be good when you uploading the documentation. Some of these solutions are readily available and the return on investment is very high. It’s not expensive, about $50,000-$60,000,” said Keyur Master, director of finance and administration, Sabre Corporation.
While tools may not solve the world’s problems, they are important enablers, according to Blackmores International’s finance director, Asia, Evelyn Seah, who maintains tools help confirm all her country entities are filing on time. “The challenge is to ensure that we actually capture everything – which can be challenging – when it comes to cross-border transactions. For example, reminders are very good for finance people to keep track of when licences are going to expire,” she said.
If you’re an international company, Master sees regulatory tools as useful in helping corporates understand where they are positioned. “Because it automates, I don’t have to rely on someone. I can go to my dashboard and check.” He says tools also help to track a company’s status giving the user the ability to instantly see how compliant the company is on any given day from anywhere in the world.
“The tool is an enabler. Of course, you need to do a review maybe every month, quarterly or six- monthly to make sure that if there is any change, you can address it immediately. You also need people adding or deleting data as the case may be, to make sure you are currently up to date – that is the human part you have to do,” Master said.
IN-HOUSE VS OUTSOURCING
As the burden of meeting regulatory compliance requirements grows, firms are increasingly looking at outsourcing as a solution to compliance issues.
The use of outsourcing varies worldwide. In Asia for instance, around 20% of firms outsource some or all of their compliance functions, a figure similar to the UK, EU and Canada (21%). This compares to US firms where 42% outsource this function.
A recent Thomson Reuters survey statistic for 2016, found 25% of financial firms outsourced to a third-parties. One year later, that increased to 28% as institutions increasingly recognised the cost-effectiveness of hiring external expertise to streamline the process, reduce costs or supplemented a lack of in-house compliance skills.
Healthcare provider Blackmores International takes a mixed approach.
Out of the eight Asian countries Blackmores International operates in, it outsources in two of those countries. “As the business grows, it would move up to have its own internal finance teams. We typically go for people within the industry. We’ll source people who have worked for competitors, sometimes from the big four (finance or audit). This makes sense because recruitment takes about two or three months. However, I have on my team, finance managers who are trained to go country to country. They do recruitment projects, implementation and IT projects, for example,” Seah said.
Although corporates are inundated by hundreds of regulatory and compliance matters each week, the region’s regulators actively interact with those they regulate.
For Shah, who runs treasury and structured trade finance functions – the front-end business side – capital markets and money markets, this means talking directly to regulators. “We do get calls from regulators. In my previous corporation, I used to meet with Indian regulators as well and the ministry of finance. My experience is that they’re open to opinions. If you go direct and approach them, and basically spell your case out, they’re willing to listen, and they’re willing to basically guide you through. I’ve never had problems,” Shah said.
The roundtable discussion also touched on another aspect of risk management – environmental, social and governance (ESG) being central to investment and risk management.
Refinitiv data shows ESG is being driven by European investors, companies and regulators. However, interest in ESG investment is on the rise in Asia, although coming off a very low base. But with 35% of the region’s wealth likely to change hands in less than a decade, this may well change as a new generation of “do good” socially-conscious investors enter the markets.
Both Hong Kong and Singapore stock exchanges have mandatory ESG reporting, with listed companies having the option to either comply or explain. Around the region, Japan, South Korea, Taiwan, Hong Kong, Thailand, Malaysia and Singapore have all signed voluntary stewardship codes but reliable informed ESG data is still lacking.
Shah believes change is on its way. “I don’t think we should be surprised if in the next five years that the environment becomes a priority. We’re getting things right – whether it’s compliance or whether it’s environmental issues. I work very closely with the sustainability team, and I’m very happy about it – it’s important because it’s about the future for all of us and our kids,” Shah said.
For more intelligence on the pain points faced by the region’s top CFOs, we invite you to download our new report: Researching Asia’s Compliance and Regulatory Readiness conducted by CorporateTreasurer in partnership with TMF Group.