ILA Directors’ Day 2019 - Event report

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Corporate culture moves to centre-stage as governance focus

Businesses in general and financial institutions specifically have faced a surge in rule-making over the past decade after the global financial crisis and the economic slump that followed exposed ethical weakness in corporate behaviour, shortfalls in governance and vulnerabilities in regulatory frameworks. New constraints on companies ranging from financial adequacy to transparency and reporting have imposed new compliance burdens, and in many cases raised the cost of doing business.

Ensuring that companies adhere to the new requirements is a key responsibility of independent directors – whose importance to the functioning of corporate governance has been reinforced in the rule-making process. That said, speakers at the 2019 Directors’ Day organised by ILA at the European Convention Center on November 20 also argued that the involvement of directors in setting and shaping corporate culture is equally critical.

Tobias Sattler, culture lead at Deloitte in Switzerland, notes that values, goals and mission define a company’s culture – and that weaknesses lead to the kind of adverse regulatory, legal, financial and reputational consequences seen in recent years at groups as diverse as Volkswagen, Boeing and banks throughout Europe and North America.

“Culture is now top of mind for boards and investors – it is no longer part of the game, but the whole game,” he says. “It’s about right and wrong – what people do when no-one is watching.

Risk-compliance balance

Mr Sattler says that while anchored in a company’s purpose and reflected in its daily behaviour, culture is shaped by its leadership and instilled through communication. A culture effectively conveyed makes a significant difference in engagement and commitment of employees to the company and its purpose. Nowhere is this more important than in the delicate balance between risk and compliance. He identifies a shift toward value-base compliance – essentially “doing the right thing” rather than focusing on the letter of the regulations.

A positive corporate culture depends on leaders who set the tone for the company, are fully accountable for that culture and act as role models for the entire organisation. That culture, however it is shaped, must be conveyed as a consistent “story” throughout the business and reflected in employees’ mindset and behaviour. Above all, the organisation must achieve its results in a way consistent with that culture.

Board members have an important role in this process, Mr Sattler argues, but he cautions that it’s not a foregone conclusion, especially for large groups trying to achieve cultural change. “Some of them will fail,” he warns.

That is one of the challenges repeatedly faced by Norbert Becker, whose storied career has taken him over the years from Luxembourg’s fledgling finance supervisor to international leadership roles at Arthur Andersen and then Ernst & Young, entrepreneurship in the grand duchy and a range of board positions with multinational corporations.

Emotional intelligence

“Corporate culture is extremely important,” he says. “Organisations have an implicit or explicit fabric that boards must understand, even though management may change.” Directors, he insists, must be fully focused on the company’s inherent values.

That applies particularly, he says, to a critical element of the board’s role: recruitment of executives. “When recruiting a new CEO, there’s never a single right answer,” Mr Becker says. “Interviewers need to assess candidates’ emotional intelligence and how they will respond to pressure, such as a critical audit or an adverse remuneration committee decision.”

In addition, he advises directors to extend their contacts throughout a company rather than simply at the executive level. “It’s important to take the pulse of the company,” he says. “And those relationships may be important in turbulent times if you need buy-in from employees or staff representatives on tough issues such as closures and redundancies.”

An important element of the non-executive’s role, Mr Becker argues, is to help ensure that companies’ ambitions and strategies remain realistic and achievable – for example by reining in shareholders over-ambitious business goals, including profit expectations. On the other hand, they also need to defend the company’s long-term interests against the executives when necessary, including resisting short-term cost-cutting in fundamentally important areas such as internal audit, claims management or marketing.

Diversity agenda

Mr Becker also notes that the issue of gender equality and diversity is becoming a higher priority for companies both at boardroom level and throughout the organisation: “On some boards where I have been a member there is gender parity, and one had a female majority, although at others equality is still a work in progress.”

According to KPMG partner Jean-Pascal Nepper and senior manager Sabrina Bonnet, the firm’s latest financial sector remuneration survey indicates that financial institutions are taking diversity increasingly seriously. Of the groups surveyed, 97% have a gender equality policy, and many also monitor inclusion of people with disabilities (55%), individuals over the age of 50 (48%) and religious and personal beliefs (also 48%).

Companies cite the importance of respectful behaviour and improving conditions for their employees, but diversity and gender equality also contribute to their image and reputation; 59% of respondents see a benefit to business.

Yet the remuneration data indicate there’s still a way to go, even in Luxembourg, one of Europe’s best performers on gender equality. Although the number of men and women among survey respondents is broadly equal, men make up 75% of managers, and the gender pay gap rises from 8% among ordinary staff to 15% for middle managers and 24% among senior managers.

AML challenge for financial firms

Corporate culture can be stronger among small and medium-sized businesses than their larger peers, according to Michèle Detaille, chairwoman of industry group FEDIL, and it may be integral to their public face as well. She says it may be inappropriate to apply corporate governance standards designed for bigger organisations to SMEs, where they may interfere with established informal systems and dynamics; former ILA chairman Raymond Schadeck notes that in any event, governance considerations are different anyway in cases where executives are managing their own assets.

The challenge of tackling money laundering, on top of growing transparency requirements, is requiring financial firms to adopt more rigorous compliance procedures than in the past – especially with Luxembourg’s AML review by the Financial Action Task Force looming next year. Guilhem Ros, a member of the CSSF’s on-site inspection team for the fund industry, says a key responsibility for an organisation’s board is to determine its risk appetite. Without this, the basis for an effective, risk-based AML assessment is missing.

CSSF CEO Claude Marx warns that some financial institutions in Luxembourg are destined to disappear in the coming years, noting that 21 banks were loss-making in 2018, while many of the country’s 400-plus management companies are small operations that use third-party services. He says: “Currently 50,000 people work directly in the financial sector, plus 8,000 in insurance, and overall the sector supports around 100,000 jobs. But we expect the number to decline as small players leave the market, as well as from the impact of digitalisation.”

Mr Marx is insistent that the days of Luxembourg exploiting regulatory niches are history, especially as EU legislation shifts from directives that offer scope for national interpretation  to directly applicable regulations designed to harmonise rules and their implementation throughout the union. The country has benefited from Brexit, he says, because it is perceived to be seriously regulated – a prerequisite for large institutions.

Today the regulator is conducting more on-site inspections rather than relying on external audit reports, which Mr Marx notes are “good for numbers, but less so for ‘soft’ areas”. While there is no requirement on Luxembourg funds to have independent directors, the CSSF recommends it as best practice, along with training for non-specialists. “We are seeing more independent directors today,” he says. “The situation is not perfect, but it is improving.”