rfg scce emerging markets v2 [read-only]€¦ · from the emerging markets to make a difference...

8/26/2011

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Advisory | Due Diligence | Technology

Compliance in Emerging Markets

Challenges & Opportunities

Corporate Governance & Compliance | Competitive Advantage


My Background

� Personal Background

� Legal Background, Regional General Counsel / Regional Compliance roles

� Professional

� Worked and lived in Australia, USA, UK, and Hong Kong

� Most of the time spent in helping to develop emerging market legal and compliance departments in countries such as China, India, and the Middle East.

� Emerging market focus and experience

� US company background operating in emerging markets

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Today’s typical situation


The Typical Scenario

� Large USA based Company� International business (30-50%) of turnover

� Shifting manufacturing base from USA to International sites

� Developing local centres and local ‘hubs’ internationally

� International Growth� International offices are growing at higher margins and at faster revenue rates

� Sales and business teams were initially expats but now moving to a more localized model

� Legal/Compliance� International legal exists and are dotted throughout the regions

� Compliance is more US based with the Legal team helping in some regions and the development of Compliance outside the USA is just starting

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The Typical Scenario

� Compliance Programme

� The Company has a global code of conduct available in multiple languages

� The Company has a hotline service which is global and driven from the USA

� The Company has a global training offering from a large US based compliance e-learning company with a suite of off the shelf courses (some in multi-languages) offered globally

� The Company has a global audit function (internal audit) that focuses on financial audits and has minimal compliance involvement


Compliance in emerging markets

� Typical approaches for those ‘tough’ countries include:

� Flying out a team to do some face to face training

� Putting in place tough controls and tightening compliance procedures

� Making the local management team understand how corporate treats compliance and expecting local management amend their ways

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Applying a Compliance Framework to

Emerging markets


Example: Compliance Framework

• Responsibility articulated and assigned

• Competence and Training• Behavioural Encouragement• Controls in Place

• Performance is monitored, measured and reported

• Documented Practices

• Commitment from the Board and Top Management

• Aligned to Corporate Strategy

• Resources Allocated• Objectives & Strategy endorsed by Mgmt

• Obligations identified & assessed

• Regular Review• Improvement

Continual Improvement Commitment

ImplementationMonitoring and Measurement

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Commitment

Board/Top Management

CEO & Board Commitment

Commitment communicated

widely

Compliance mapped to Values

Appropriate Resources assigned

Business Alignment

Mapped to Company Objectives &

Goals

Linked to Structure & Governance framework

Mapped to Risk Appetite of Company

Linked to Highest Risk

Resources

Compliance Resources Assigned

Finance, Legal, HR resources available

External Resources

Endorsement

Compliance Strategy

endorsed by Board

Targets set to achieve

compliance objectives

Review and Update

Mechanisms implemented

Objectives

Identify Compliance Obligations

Prioritise and risk assess

Align to business strategy

Adapted from the Australian &

New Zealand Compliance Standard AS3806


Aligning Compliance to the Business

� The corporate goals often differ to the local country goals

� The ‘US’ governance structure is little known outside the USA with the ‘audit committee’ being too far away from the emerging markets to make a difference

� Risk locally vs. at corporate in the local emerging markets is seen from totally opposite ends of the spectrum

� The risk locally is that we will lose the value of our investment if we don’t capitalise on the market position and react quickly to market demands

Business Alignment

Mapped to Company Objectives &

Goals

Linked to Structure & Governance framework

Mapped to Risk Appetite of Company

Linked to Highest Risk

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Finding compliance resources locally

� Resources are often US based with minims resources in the countries

� Those resources in the countries are often less senior roles and have the challenge of ‘going native’ in small remote offices

� Local compliance talent that speak the local language and have foreign company experience are sought after, hard to find and expensive

� Difficult for local compliance resources to effectively do monitoring, measurement and investigations when working closely with a small group of business partners

� External resources are often lacking in these regions and when they do exist are limited in expertise. Mostly they need to engage both locally and in the USA corporate offices

Resources

Compliance Resources Assigned

Finance, Legal, HR resources available

External Resources


Endorsement for compliance is shallow

� At a local level, the country management team sees compliance as ‘don’t tell them too much, but keep them on side’

� Most country management ‘endorse’ compliance so long as it doesn’t interrupt their growth targets, sales practices and compensation plans

� Getting endorsement at a LOCAL level is very difficult as targets are often high and the level of investment in the region means a great deal is at stake

Endorsement

Compliance Strategy

endorsed by Board

Targets set to achieve

compliance objectives

Review and Update

Mechanisms implemented

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Tone at the Middle

� In the emerging markets, no one really thinks about ‘the Board’, the Chief Compliance Officer or the Audit committee’� These are foreign concepts and often ‘out of sight out of

mind’

� They rarely visit and interaction with most staff is very small and at best annual

� The ‘CEO’ is really the country or regional manager. This is the person that people look to for leadership. They do not look to the CEO in the USA, they look locally� The local country manager is key in making compliance work

effectively

� If the local country manager does not walk the talk, compliance will typically struggle

� While mapping to values is done in a Code of Conduct, this rarely means anything at a local level where values are considered differently and relate to wealth creation, knowledge, speed and personal advancement

� Local resources are often insufficient and not assigned appropriately� Risks are in the emerging markets, yet there are more people

at corporate than there are in the field

Board/Top Management

CEO & Board Commitment

Commitment communicated

widely

Compliance mapped to Values

Appropriate Resources assigned


Compliance Obligations locally are often disregarded

� Many companies focus on US regulations and forget that the emerging markets have some powerful local legislation that opens up local staff to potential exposure� Often exposure is on the people rather than the company

� Often quite draconian laws� Sometimes political issues interact with enforcement and enforcement can be motivated by retribution

� Compliance is not often aligned to the local business strategy which is often focused on revenue growth and directed towards capturing local market share� Anything that slows this down is looked upon unfavourably

Objectives

Identify Compliance Obligations

Prioritise and risk assess

Align to business strategy

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Implementation

Responsibility Assigned and Communicated

Management

Compliance Management

Line Management

Employees

Competence and Training

Competencies Identified

Communication and Training

Measurement & Effectiveness

Behavioural Change

Tone at the Top Leading by Example

Drivers and Motivators

Mentoring & Coaching

Reward Mechanisms

Disciplinary Procedures

Controls

Policies

& Procedures

Approvals and Workflows

Systems/Tools

Segregation of Duties


Compliance is often skipping levels

� In the merging markets, compliance is rarely seen at all levels and is rarely articulated at each level of management

� Typically compliance management is looked upon to ‘own’ compliance whereas management seeks to delegate locally to compliance management

� Employees feel the brunt of most of the compliance issues with less and less of a role played by line management – who simply deflect things back to compliance management

Responsibility Assigned and Communicated

Management

Compliance Management

Line Management

Employees

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Training is often poor (at best)

� Typical training given in the emerging markets is poor� Too American or HQ centric

� Too little face to face practical workshops

� Too little time is spent on localisation and building local training

� While training may exist, communication is non existent� Minimal reminders and messaging from anyone other than pushed form corporate

� No time is spent in looking at competencies in training and measuring its effectiveness� An attendance sheet is the usual approach with some broad questions

� Training is too corporatized and just not thought through at a local level

� Too little time spent on behavioural changes and too much on training ‘the law’

Competence and Training

Competencies Identified

Communication and Training

Measurement & Effectiveness


Changing Behaviour is key

� This is the most important piece to developing compliance in the emerging markets

� Identify the key drivers and motivators for the non-compliant behaviour and focus on managing those rather than simply telling people to do the right thing

� ‘carrot and stick’ should both be utilised for excellent results

� Behavioural change will only happen with patience and perseverance

Behavioural Change

Tone at the Top Leading by Example

Drivers and Motivators

Mentoring & Coaching

Reward Mechanisms

Disciplinary Procedures

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Too much focus on policies

� Policies are often ‘global’ and not well thought through at a local level

� Engagement and a sense of ‘inclusion’ is necessary from local staff to get buy-in

� Focus on making things easier and remove any obfuscation out of the process

� Time zone and location challenges mean that web based workflows work well and remove the need for poor ‘paper trails’, ‘poor filing and record systems’ and continual changes in people managing the process

Controls

Policies

& Procedures

Approvals and Workflows

Systems/Tools

Segregation of Duties


Monitoring & Measurement

Monitoring

Monitor the Compliance Program

•Training effectiveness•Adequacy of controls

•Near Misses

Monitor overall Compliance Performance

•Objective Misalignment•Compliance Culture

Measurement

Build measurable indicators

Audits

Establish frequency and objective of measurement

Reporting

Establish criteria and reporting obligations

Issues Management & Escalation

Dissemination

Exception Reporting

Documentation

Establish Record Keeping

mechanisms

Performance & Audit reports

Remediation

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Local monitoring is often poor

� Typically there are inadequate systems to monitor compliance locally

� Too much focus on corporate hotline monitoring and not enough on

� Local issues

� Discussion groups and ‘ground up’ issues, trends and ‘noise’

� Inability to capture the local trends as there is no ‘corporate’ mechanism to do so

Monitoring

Monitor the Compliance Program

•Training effectiveness•Adequacy of controls•Near Misses

Monitor overall Compliance Performance

•Objective Misalignment•Compliance Culture


Audits are everywhere

� Local markets are buried in internal and external audits

� In most large companies there is a host of ‘corporate’ people doing audits and (unfortunately) there is often a fair degree of frustration and negativity around them at a local level� Often too many arranged around busy periods

� Asking the same questions of the same limited resources

� Most audits are done by unqualified financial based auditors that miss the ‘real’ compliance issues� Almost always identify nothing, yet the markets are

highly risky

� Consider conducting ‘healthchecks’ or ‘integrity circles’ that are less invasive and support a ‘growing compliance’ rather than a ‘lets find out what you have done wrong’ approach to compliance� The local markets want to learn not be scolded

Measurement

Build measurable indicators

Audits

Establish frequency and objective of measurement

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Issues are everywhere and poorly escalated

� ‘Everybody MUST know’ problem

� Lack of clarity on ‘need to know’ issues

� Local team end up answering questions from multiple sources and are reporting out to many locations� Leads to inconsistency, inaccuracy and a waste of time

� Reporting obligations are often unclear and in some cases this leads to the burying of issues at a local level for fear of retribution at a corporate level

Reporting

Establish criteria and reporting obligations

Issues Management & Escalation

Dissemination

Exception Reporting


Documentation is poor

� Physical local offices in many countries are also ‘emerging’

� They simply lack the ability to control paper documentation very well and securely

� Office expansions, office moves, changes in location are commonplace

� Remediation and follow-up is often poor due to the sheer pace of the business development in those markets

� ‘they have moved on already to the next thing’

� Staff are often changing and retention of staff is often an issue in many of the emerging markets

Documentation

Establish Record Keeping

mechanisms

Performance & Audit reports

Remediation

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Continuous Improvement

Compliance Program Review

Achievement of objectives & targets

Status of corrective &

preventive actions

Changes in external

environment

Review of Business Needs

Improvement

Timeline

Priorities


Reviews are rarely done locally

� Changes in the external environment are not often captured locally

� The business needs are generally seen at a global or corporate level even though the needs locally might be different to a corporate level� E.g growth vs. investment story

� Manufacturing vs. sales

� Government sales vs. commercial

� Rarely is compliance able to be adapted to meet the local business needs

Compliance Program Review

Achievement of objectives & targets

Status of corrective & preventive actions

Changes in external

environment

Review of Business Needs

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Priorities are misaligned

� Often the priorities at a local level are different to the corporate compliance priorities

� Some of this is down to lack of engagement and sometimes down to confusion and lack of communication

� Timelines are often reflective of ‘getting a policy implemented’ or ‘achieve 100% training’ and not expanded to thinking about longer term behavioural changes

Improvement

Timeline

Priorities


Specific Country Examples from Asia

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Mongolia

� Demographics

� Small country of <3m people

� Massive investment in the region, particularly in the extractives/mining sectors

� Highly integrated workforce where ‘everyone knows someone’

� Very active political system and media

� Language not spoken outside Mongolia and few outside Mongolia speak the language

� Significant number of population are nomadic

� Laws are very sparse and basic and cant handle modern issues


Mongolia

� Problem

� There was a risk that companies were engaging third parties to procure permits and that such permits may have been secured by making illegal payments

� The Solution

� Taking the standard approach of trying to convince the local staff to change their practices – didn’t really address the problem

� The real problem was that the laws are not complete, spotty and many are poorly drafted, which means that government decision makers couldn’t make decisions on permits etc., which lead to delays and potential bribery to speed up approvals etc.

� The solution was to work with other companies to help the Government out in place new laws and better approval practices

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India

� Specific Challenges

� Extremely slow process for approvals

� Systemic corruption issues

� Huge growth market and highly competitive with local players not following international norms

� Political environment is tense

� Few international/HQ people wish to visit India to help

� External talent is difficult to obtain in India

� Language is helpful –a s broadly English spoken


India

� The Problem

� Medical device company wanted to do the right thing and stop supporting medical practitioners in public hospitals by supporting them to attend third party congresses

� The Solution

� Taking a strong stand on their position and working with competitors they worked to support the development of Government issued guidelines from the Medical Council which adopted consistent policies

� Now, many requests for support to attend congresses simply do not arise

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China

� Specific challenges

� Local Laws are becoming active and enforced

� Breach of local laws can lead to personal significant exposure

� Director liability

� Tax liability

� Jail time and potential capital punishment

� Heavy government involvement in most transactions

� Regulations are often challenging and poorly drafted

� Speed and pace of business

� Focus on money and wealth

� Positions and people are changing roles very often


China

� The Problem� A cargo airline that has flights arise at 1am in the morning provided tea and coffee to the customs agents in order to (literally) ‘wake them up’ and have them ready to unpack the planes

� The airline had recorded such costs as ‘facilitation payments’.

� A policy change (which banned facilitation payments) meant that they could no longer provide such benefits to these Government Officials

� The Solution� Working with the Government, the airlines changed the shift hours for the workers which meant they arrived at 1230 am and were ‘fresh’ and no longer needed the benefits to get them moving.

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Thank you

rfg scce emerging markets v2 [read-only]€¦ · from the emerging markets to make a difference...

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