Corporate Governance in Finance
Trend: 5 Years and Growing h2ly
The financial services industry has been witnessing rapid changes in the last few years, especially on the legislative and regulatory compliance front. Numerous local, national and international compliance requirements spring up on an almost regular basis, affecting companies in a big way.
Financial institutions in particular, face a diverse set of compliance regulations focused on a range of factors, including: responsible corporate governance and transparency, the protection of customer information and privacy, and the prevention and detection of illegal activities.
However, at the end of the day, it is important to keep in mind that all legislation is meant to secure citizen safety and economic stability on a local, national and international basis.
What this means for Financial Institutions
From a business perspective, accountability, risk management and agility form the keystones of industry best practice and compliance. In addition, most financial services compliance mandates emphasize on the following requirements:
- Process consistency and visibility
- Content management
- Internal controls and standard operating procedures
- Transparent and auditable reporting of all financial transactions
- Records management and archiving
- The ability to react quickly to business change or "material" events
- Efficient management of collateral/product information
- Effective and timely approvals
- Sound management of complaints, disputes and service level agreements
- Prevention of fraud and money laundering
No Longer Limited to Financial Institutions
However, compliance and corporate governance is no longer solely a concern of the Financial Services industry. In recent years, we have seen a spate of compliance efforts from various businesses across many industries.
As a result, corporations are focused on implementing solutions that meet compliance requirements as well as establishing best practices in managing enormous volumes of valued information within the enterprise. Market studies also indicate a robust rise in such activities across industries.
For instance, a recent Mercer Investment Consulting survey reflects the corporate governance views of 157 investment management firms from around the world who manage aggregate assets in excess of US$20 trillion. 62% of asset managers globally think that corporate governance is directly proportional to mainstream asset performance.
Another study, from Gartner, Inc., confirms an increase in spending for financial compliance management and corporate governance software technology in 2005 and forecasts continued growth in those fields through 2007.
Toll on CFOs?
All this is taking a high toll on individuals with designations of Chief Financial Officers. Consultancy Mercer and executive search firm Russell Reynolds Associates conducted a survey of 60 CFOs belonging to some of the largest listed companies in Europe and North America. The findings indicate a rather gloomy scenario. The survey found that the pressures of the job combined with mounting external scrutiny from stakeholders, boards, regulators and investors have started taking their toll.
In particular, corporate governance demands the introduction of International Financial Reporting Standards (IFRS). It also necessitates finance chiefs to be more business-focused in their approach. As a result, the CFO\'s role as the custodian of a company's financial stability has become at best more complex, and at worst an overwhelming juggling act.
So What Produces Good Corporate Governance?
Experts and analysts opine that good corporate governance does not come from enforcing rules. It comes from understanding and managing the substance of what the corporation should be doing. Basically, the corporation needs to have a viable strategy to create substantiated future value and that capital needs to be developed and utilized over time to create actual value.
A Cost-Effective Way to Enhance Governance
In the wake of rigorous developments on the governance and regulatory front, it is imperative for top level management and the board of directors to concentrate more on developing new strategies to bring about effective corporate governance.
One such strategy is to take full advantage of the offshoring boom. An Accenture global survey of more than 200 senior executives at midsize and large companies indicates that outsourcing finance may enhance governance.
Among participants whose organization had outsourced a finance process, 44 % said that the move had caused no adverse impact on governance and compliance. And a surprisingly high proportion 43 % said that outsourcing had improved governance and compliance.
Developing Economies Take a Lead in Implementing Governance
The principles, initially non-binding will be promoted by the National Foundation for Corporate Governance (NFCG). The company affairs ministry wants NFCG to evolve as an umbrella organization having the status of a sought after accreditation body.
India's corporate governance framework is much above average compared to other emerging market economies concludes a new report by the Institute of International Finance (IIF). As a result, India is well poised to jump into the fray.
It is no longer a secret that how a company is managed and the measure of its compliance efforts has a direct impact on shareholder value. Poor management and non-compliance can lead to lost business, financial penalties, indefinite suspension of operations and even criminal charges.
As corporate governance and regulatory measures increase by the day, the phenomenon is not limited to financial institutions alone. The leading economies of the world are also waking up to corporate governance best practices in order to thrive in a global marketplace. Therefore, if implemented carefully, offshoring finance processes can be a good and profitable move to enhance governance.