Business Across Borders. Treading carefully: readiness to deal with regulation. A series of articles written by The Economist Intelligence Unit

Transcription

1 Business Across Borders Treading carefully: readiness to deal with regulation A series of articles written by The Economist Intelligence Unit

2 Business across borders Treading carefully: readiness to deal with regulation In the search for a solution to the magnitude and severity of the 2008 global financial crisis, policymakers, governments and commentators have often turned to regulation. Between higher capital requirements and ring-fencing retail banking from investment activities, the financial services sector has a tough few years ahead. But it is not alone in the challenges it faces. In the post-financial crisis period, companies from a number of sectors will have to deal with a greater degree of scrutiny, greater complexity in cross-border regulatory frameworks, and disparate regulatory requirements across markets. Still, the majority of companies have been able to overcome the pace of regulatory reform in recent years, according to a new global survey conducted by The Economist Intelligence Unit (EIU), on behalf of international law firm Reed Smith. Nearly two-thirds (64%) of executives surveyed say investment at their company (including human resources and management time) is effective in helping them keep abreast of regulatory changes. In the post-financial crisis period, companies from a number of sectors will have to deal with a greater degree of scrutiny. 64% of executives surveyed say investment at their company is effective in helping them keep abreast of regulatory changes.

3 When it comes to data protection rules, some of the biggest and arguably toughest changes look likely to come into place in Europe. 44% of respondents from the media and technology sector are not prepared to cope with regulatory reform to data-protection requirements. Living up to standards Companies are faring better in some areas of regulation than others. Overall, survey respondents identify themselves as best placed to adjust to changes to financial reporting regulation, with over four-fifths (82%) saying they are well prepared or adequately prepared. Considering the extent of reforms in financial reporting standards, including the introduction of global accounting requirements by the International Accounting Standards Board, it is understandable that companies are paying greater attention to their abilities in this area. The EIU survey finds that financial services executives feel better prepared than others to deal with changes to financial reporting standards. A proactive approach to regulation seems well-placed, as the industry faces an onslaught of global and national regulatory reforms. Regaining consumer and investor trust is also part of the strategy. Being quick to abide by stricter capital requirements, along with global accounting standards, could go some way in rebuilding the industry s reputation. A number of financial institutions, for example, have already boosted their capital levels before the directive requiring them to do so, Basel III, comes into force in When it comes to data-protection rules, some of the biggest and arguably toughest changes look likely to come into place in Europe. The General Data Protection Regulation (GDPR) will put in place a single law across the EU, detailing citizens rights regarding their personal data. Failing to comply with the restrictions on the use of consumer data could result in fines amounting to 2% of a company s global annual revenue. The EIU survey found that over two-fifths of executives from the media and technology sector and the financial services sector (44% and 41% respectively) are not prepared to cope with regulatory reform to data-protection requirements. Whether it is a customer s financial transaction history or browsing data, companies in both sectors handle large amounts of personal and highly valuable information. Being prepared for the GDPR will be paramount to their operations. Although any company holding consumer data will be affected, the changes about to take place in Europe will make operations more difficult for online advertising companies in particular, says Michael Fertik, CEO of Reputation.com, an online reputationmanagement company. They have a potentially high price to pay because they re in the business of taking your personal information without your knowledge or permission, and then selling it to people you can t identify, and for purposes you ll never know. According to Mr Fertik, internet companies are one step ahead already. If you re any of the huge number of start-ups in Silicon Valley that are not in that business [online advertising], then the new regulation won t pose a big problem because you re already treating people s data in a different way to the online advertising companies. For example, as Mr Fertik explains, Reputation.com is developing a model where the disclosure of personal data to third parties is done on the consumer s terms. The individual is empowered in the data ecosystem. Access is only granted with explicit permission from the individual and in exchange for a fair and desirable incentive. By centring their approach to privacy on the consumer, start-ups are redefining how businesses use personal data. Over one-third of respondents (36%) to the EIU survey are also not prepared enough, or at all, to deal with changes to anti-corruption and anti-bribery laws. Action against corruption and bribery around the world has proved ineffective so far.

4 Every year Transparency International, a non-governmental organisation, publishes its Corruption Perceptions Index, where each country is given a score of between 0 (highly corrupt) and 100 (very clean). In its latest edition, 70% of the 176 countries included in the study scored below 50, indicating that much work still needs to be done. Caught between harsh penalties for corrupt practices and slow progress in eradicating corruption, companies face a difficult choice between undermining their competitiveness by taking the high road and putting their reputation at risk. Chart 1: How prepared is your company to adjust to changes to the following types of regulation? Financial reporting standards 21% 61% 16% 2% Environmental regulation Health and safety requirements Corporate governance Standards for products and services 17% 54% 26% 3% 21% 55% 21% 3% 23% 54% 21% 2% 21% 56% 21% 2% Economic sanctions 14% 42% 36% 9% Data protection 18% 48% 29% 5% Antitrust/competition 18% 48% 29% 5% Anti-corruption/bribery 22% 42% 30% 6% 0% 20% 40% 60% 80% 100% 36% Thoroughly prepared Not prepared enough Adequately prepared Not at all prepared Source: The Economist Intelligence Unit of survey respondents are not prepared enough, or at all, to deal with changes to anti-corruption and anti-bribery laws. Coping with regulatory reform Perhaps as a result of the number of rules targeting the sector, three-quarters of financial services executives in the EIU survey say company investments to keep abreast of regulation have been effective a larger proportion than other industries represented in the survey. BBVA, a Spanish bank, offers a good example of the type of investment financial institutions are making. It has set up a regulation and public policy department, which coordinates all the regulatory efforts within the bank, and works to develop a consistent position on different regulatory initiatives. This unit also analyses regulatory and supervisory proposals across the globe, and works across the enterprise to gather input on the concrete impact of banking reforms. Meanwhile, BBVA holds a monthly regulatory committee meeting, at which senior managers discuss the bank s strategy on different regulatory initiatives.

5 It s about having the right partner on the ground who can be nearest to the decision makers, and who knows how to interpret the rules. Vishnu Amble, an investment principal with Global Cleantech Capital In contrast to financial services executives, 47% of those from the media and technology sector say their company s investment in keeping abreast of new regulation is ineffective, with 45% reporting otherwise. The financial services sector is much more heavily regulated, and has been for a longer period of time. Having effective systems and processes to deal with regulation is therefore critical. In comparison, the regulatory environment for the media and technology sector is simply not as complicated. The relative ineffectiveness of the investment made by media and technology companies to keep abreast of new regulation is not so much a weakness, but a symptom of the fewer regulatory requirements they face. It could nonetheless cause problems further down the line. So far regulators and policymakers have had to play catch-up with the rapid advancement and take-up of new media and technologies. If and when they get ahead of the game, improving the systems and processes to cope with regulation will become a necessity for media and technology companies too. Besides internal systems and processes, another potential solution to overseas regulatory environments is to form a strategic business partnership. This is a strategy pursued by Global Cleantech Capital, a Europe-based private equity firm investing growth capital in clean energy. In Asia, we often look to invest with a local party with a track record domestically, with the right relationships and with a bird s eye view of the local regulatory regime, says Vishnu Amble, an investment principal with the firm. It s about having the right partner on the ground who can be nearest to the decision makers, and who knows how to interpret the rules. However, not everyone has enough resources available to find solutions for regulatory challenges. Executives from small companies are less confident of their capabilities than those from the largest companies. In the EIU survey, 59% of the former group say they are effective or very effective at keeping up with new regulations, compared with 71% of large companies. Smaller companies are usually the ones that make decisions to avoid investments entirely [owing to governance challenges], because they don t have the resources to deal with them. Big companies do, says Fredrik Erixon, director of the European Centre for International Political Economy, a world-economy think tank. Chart 2: How would you describe the effectiveness of your company s investment (e.g. human resources, management time, etc) in keeping abreast of new regulation in key markets? Healthcare and Life Sciences Shipping and Transport Media and Technology Energy and Natural Resources Financial Services 24% 22% Very effective/somewhat effective 29% 37% 45% Not effective enough/completely ineffective 47% 60% 72% 71% 75% Source: The Economist Intelligence Unit Conclusion Coping with the rise in cross-border regulation will require time, strategic thinking, and often, money. However, other market attributes, such as the size of the domestic market and the quality of the workforce, will continue to play a big role in the decision to do business across borders. Simply put, if the market is attractive enough in size and prospects, the risk is worth taking, as Mr Erixon explains. What we ve seen especially in high-growth markets is that despite the risks, many companies have decided to invest, because the growth is so high they can t resist going there.

6 More than 1,800 lawyers Ranked among the top firms for nine years for client service by the BTI Consulting Group About the research In January 2013 The Economist Intelligence Unit conducted a global survey of 451 executives on behalf of Reed Smith. All respondents represented companies that conduct business internationally. Over one-half of respondents (56%) are C-level executives and 53% are from companies with annual revenues in excess of US$500m. Just under one-third of respondents are from Asia-Pacific (30%) and from North America (30%), and nearly one-third (32%) are from Europe. The remainder of respondents are from the rest of the world, including the Middle East, Africa and Latin America. Respondents represent a range of industries, including: 15% from financial services, 14% from energy and natural resources, 14% from media and technology, 13% from shipping and transport, and 13% from healthcare and life sciences. In parallel to the survey, The Economist Intelligence Unit also carried out several interviews with senior business leaders and experts. We would like to thank all survey respondents and interviewees for their time and insight. A series of articles written by The Economist Intelligence Unit The business of relationships. SM reedsmith.com Reed Smith LLP 2013 NEW YORK LONDON HONG KONG CHICAGO WASHINGTON, D.C. BEIJING PARIS LOS ANGELES SAN FRANCISCO PHILADELPHIA SHANGHAI PITTSBURGH HOUSTON SINGAPORE MUNICH ABU DHABI PRINCETON N. VIRGINIA WILMINGTON SILICON VALLEY DUBAI CENTURY CITY RICHMOND GREECE KAZAKHSTAN