18 Oct 2012
As we continue to work through a period of unprecedented uncertainty, complexity and change, external expectations and pressures on businesses and the demands on their leaders have never been greater. In the wake of the financial crisis and continuing economic difficulties in many markets, the pressures and expectations from the regulators and the political community have increased exponentially. Even with supportive statements from politicians about creating the right environment for growth, we are undoubtedly facing an interventionist phase in the regulatory cycle.
This phase is not just about financial sector regulations, although the wave is strongest there. There are a wide range of sectors being impacted by significant regulation and policy changes. These range from retail – with reviews of supplier relationships and commercial behaviour or unfair B2B practices underway at EU level, through to energy, with the security and diversity of supply agenda outstripping the environmental in the face of economic difficulty.
Technology is also a sector where the current battle between EU and US policies over a true modern currency ‘data’ will impact online and traditional business models in ways that have yet to be fully understood. The regulatory wave is being magnified by a number of factors. Firstly, the cross-sectorial intervention in company governance, political debate and potential legislation around issues including diversity and gender quotas on boards. Looking at Commissioner Reding’s recent announcement of intent to move to firm legislative quotas of 40 percent of women on boards across Europe, the debate ensues.
Previous regional hierarchies and markets are being shaken up with the growth of the BRICs plus. More complex company footprints mean trade, competition, IP and other international regulation become less straightforward. How can a campaign to investigate imports into a market work to protect the companies that may also have manufacturing capacity in the exporting market? A sector divided and the collapse of the ability of trade associations to represent a consolidated and consensual industry position; decreasing cross industry effectiveness, increasing single issue coalitions of the committed and much higher levels of direct individual company representation required.
According to investors, much will rest on the shoulders of managements’ ability to engage first-hand with regulators and the policy-making community
Thirdly, macro international policy and geopolitics are no longer irrelevant, and have become both more and less compelling, depending on the latest governmental decoration. However it is having a specific impact on day-to-day operations, which require sharp analysis, in order to minimise and mitigate risk. Companies, for example, who previously sent staff to low-key postings in Brussels, or were appointed inexperienced juniors to monitor, are now holding regular calls between management and function heads to assess the situation. Business divisions are second guessing communication functions, and duplicating spend to gain as much intelligence as possible to chart the path for upcoming operating decisions.
Looking for answers
Many companies are looking to the government to find adequate support and as a result, State power is increasing. Increased and personal attention is now paid to the regulatory and policy environment beyond the normal bounds of on-going work place relationships. There is also greater attention paid by the capital markets and investor community to regulatory bodies. The changing dynamic between private and public sector is increasingly understood by analysts and investors alike, and there is greater recognition of the potential impact on share price, reputation and enterprise value of this public and private interface.
Whether in the very specific area of transactions and competition investigations, or the wider policy context needed to create the right operating environment, the concern is manifesting itself in requests from investors for a greater level of management engagement and oversight in regulation and policy. The debate over whether this is a short-term effect, a passing trend which will fade as the economy improves or interest moves on is questionable, as is the length this phase in the regulatory cycle will be, and how heavy its impact. According to investors, much will rest on the shoulders of managements’ ability to engage first-hand with regulators and the policy-making community.
Understanding the results
In a survey conducted by the global business advisory company FTI Consulting earlier this year of more than 170 global institutional investors based in Europe, North America, Asia and Latin America, 89 percent said they believe that companies need to be more vocal about the potential impact of policy changes on their business. Only eight percent believe that companies currently do this very well, which is concerning. Some 91 percent of these same investors are expecting some form of engagement from management on the public policy debate. Nearly 28 percent expect significant contribution, and 63 percent expect a moderate contribution to relevant policy discussions. What’s more, the investors largely believe that management engagement can have a positive impact on the outcome, the wider environment for business and enterprise value.
What is certain is that in the absence of reliable information, investors are then inclined to think the worst of the current situation in the eurozone
Perhaps the most telling views among investors are perceptions around upcoming investment opportunities over the next 12 months. Nearly two-thirds of investors in the EU expect that EU policy decisions will negatively affect their decisions to invest in Europe. Investors in the EU and North America were more negative about the consequences of political decisions that will be taken in the coming five years, than their Asian and Latin American counterparts. For now there will be a continuing raft of financial services legislation; corporate governance work – for example looking at whether auditor rotation potentially leads to higher costs – and credit rating agency problems impacting all companies issuing specific debt.
So whether or not regulatory interventionism is flowing with economic pressures, or whether it becomes a tidal wave – it is clear current regulations run high, and investors want management to engage in the wider EU policy debate. This engagement will no doubt be time-consuming, and has to be conducted in conditions of economic uncertainty and popular mistrust of both corporations and government agencies. No simple feat for those requiring specific personal involvement, transparency, clarity of purpose, leadership and an ability to genuinely engage in the debate, forming a solution for all stakeholders. What is certain is that in the absence of reliable information, investors are then inclined to think the worst of the current situation in the eurozone. This makes keeping abreast of company regulation all the more crucial and important, where the European business community actively participates in shaping European policy at the most senior level.