In the spirit of clearly identifying the problem, we have found that many organizations face four fundamental challenges in their pursuit of good governance practices and a pristine corporate record.
1. Lack of trust in data.
Current State: Legal teams lack confidence in the accuracy and completeness of the information in their corporate record due to poor data maintenance processes.
- According to Opus, entity data is estimated to decay at a monstrous rate of 25% a year.
- KPMG says that less than three-quarters (69%) of organizations are leveraging technology to support their compliance initiatives.
- The Forrester Opportunity Snapshot study reveals, despite easy manipulation and a lack of controls, nearly 50% of companies still rely on spreadsheets alone to do their auditing and controls. However, Deloitte notes that 23% of all spreadsheets contain errors, too. So a spreadsheet-based process can lead to errors, data leaks, and inefficient processes.
Negative Consequences: Bad entity and compliance management practices result in bad data, and bad data causes operational inefficiencies. This leads to increased data maintenance costs, heightened corporate risk and loss of internal credibility.
Future State: Organizations can proactively help maintain the completeness and accuracy of their data by:
- Defining guardrails for how information is entered into the system to prevent garbage in and garbage out.
- Increasing the completeness of information with entry of certain data fields being required via mandatory fields.
- Improving data validation and information oversight with data entry and data review workflows for four eye reviews and notifications when information in the system is changed.
- Adding external data validation points via APIs or feeds to confirm information accuracy and leveraging up to date information from connected third party systems.
- Collaborating across teams by unifying different sets of data from multiple business units into one single source of truth (for example: Signing Authority for Finance, Bank Details for Treasury, Business Licenses for Legal, etc.)
Positive Business Outcome: When data is unified and accurate, processes are standardized, and collaboration across functions is easily adopted, organizations can overcome the complexity of managing voluminous amounts of legal entity information. A key measure of effective entity governance lies in an organization’s ability to locate accurate corporate data quickly in response to requests for information from key stakeholders across the business.
2. Uncertainty over compliance status.
Current State: Tracking regulatory change and complying with regulatory requirements, internal policies and external obligations are difficult as the pace of change accelerates.
- According to Thomson Reuters, compliance officers rank “continuing regulatory change” as their biggest challenge.
- As reported by Globalscape, $59 billion: The amount corporations paid out in penalties for U.S. regulatory infractions in 2015. This number grew by more than five times between 2010 and 2015.
- According to KPMG, only 27% of chief compliance officers strongly agree that their organization’s compliance function has a change management process in place to both identify and incorporate regulatory and legal changes and to integrate those changes into their policies and procedures.
Negative Consequences: Financial penalties and reputational damage that destroy shareholder value.
Future State: Position your organization with the ability to achieve improved governance, risk and compliance standards by:
- Increasing visibility of important dates and accountability for the actions that need to be taken by individuals/teams in order to maintain good standing.
- Building confidence in compliance with regulatory requirements, internal policies, and external obligations by implementing controls to demonstrate compliance and always being audit ready.
- Better controlling regulatory filings via direct statutory form creation and electronic filing. This also increases operational efficiency and reduces money spent on external providers.
- Collaborating across teams to quickly and easily handle business requests that rely on access to entity information.
Positive Business Outcome: To oversee governance and compliance performance, organizations and their directors must put in place a system of processes to communicate, control and oversee the business. It is also critical to bring the right people together to discuss the most important items. Investment in the compliance function – and in software that helps support its operational efficiency and maturity – is associated with increased top and bottom lines in addition to a reduced danger of organizational and reputational risk.
3. Reporting deficiencies.
Current State: Without adequate governance, risk and compliance information, multiple stakeholders are at risk of making consequential bad decisions that will adversely affect their organization.
- According to KPMG, only 47% of chief compliance officers say that their organization has an enterprise-wide reporting system across functions and business units that integrates with compliance monitoring.
- According to Ventana Research, companies spend an average of 18 hours each month modifying, consolidating, correcting and updating information in their company-created spreadsheets.
- A Forrester Consulting study showed that nearly 1 in 5 governance, risk and compliance professionals depend on spreadsheet accuracy to inform their critical business decisions.
Negative Consequences: Reputational damage as a result of compliance or governance failures, which ultimately result in destruction of shareholder value.
Future State: Organizations achieve new levels of performance by putting the right information, analytics, and insights at their fingertips by:
- Improving operational efficiency and decision making by surfacing the necessary information in the right format to the right people via secure rooms and user provisioning to maintain high levels of data security.
- Increasing profitability by allowing organizations to think proactively about how best to align their legal entity structure with their business strategy and eliminate components that are irrelevant as the business strategy evolves.
- Demonstrating compliance against a range of business, regulatory, legislative and/or contractual requirements using best practice frameworks and standards to understand your organization’s compliance, capability and maturity.
Positive Business Outcome: Organizations can manage Governance, Risk and Compliance (GRC) activities with efficiency and speed in order to perform at the highest level and deliver long-term success and sustainability.
4. Inefficient processes.
Current State: Legal teams are being asked to do more with less, and they need to find a way to increase output without increasing headcount.
- According to Gartner, Legal departments that standardize legal work have a much lower legal spend than their peers. Lower cost legal departments take steps for sustainable savings; their investments, not their cuts, differentiate them. Companies that invest in legal operations have 30% lower legal spend than companies that don’t, illustrating the functional benefits of the legal operations profession.
- According to Deloitte, getting entity management right provides a real return on investment. Cost savings come from the reduction of effort necessary to gather, file and publish the correct compliance data, from reducing the need to identify and correct filing mistakes and from the elimination of fines and other penalties arising from missed deadlines and incorrect filings.
- According to the Competitive Enterprise Institute, $10,000 is the average regulatory cost per employee for organizations, regardless of size.
Negative Consequences: Bad entity and compliance management practices result in bad data, and bad data causes operational inefficiencies resulting in increased data maintenance costs, heightened corporate risk and loss of internal credibility.
Future State: Increase department productivity and help organizations modernize their legal operations with better processes by:
- Streamlining the entity onboarding, dissolution, and significant change process with workflows for better execution and enhanced visibility across departments.
- Ensuring that regulatory requirements are met in an accurate and timely manner.
- Increasing operational efficiency and reducing money spent on external providers via statutory form creation and electronic filing.
- Improving data validation and information oversight with data entry and data review workflows for four eye reviews and notifications for when information in the system is changed.
- Adding external data validation points via APIs and/or feeds to confirm information accuracy and leveraging up to date information from third party systems.
- Collaborating across teams by unifying different sets of data from multiple business units in one single source of truth (for example: Signing Authority for Finance, Bank Details for Treasury, Business Licenses for Legal, etc.).
Positive Business Outcome: Getting entity and compliance management right provides real ROI. According to Deloitte, cost savings come from the reduction of effort necessary to gather, file and publish the correct compliance data, from reducing the need to identify and correct filing mistakes, and from the elimination of fines and other penalties arising from missed deadlines and incorrect filings. Greater efficiency allows highly paid resources to focus on creating business value rather than fixing mistakes.
How good entity governance enables sustainable growth, stronger profitability and a better brand reputation.
In conclusion, good governance looks different for companies depending on their size and industry; however, the role that good governance plays in compliance, risk management, business performance and sustainable growth is critical to all. Good governance cannot happen without an accurate corporate record where all essential governance and compliance teams can reliably and securely access the latest entity and subsidiary information.
Investment in the governance and compliance function and software that helps accelerate its maturity and operational efficiency will enhance an organization’s ability to achieve the three most important goals of any business: growth, profitability and brand reputation.
1. Support sustainable growth
Good governance practices can increase your company’s long-term viability, enhance the business’ value, and pave the way for growth.
2. Ensure profitability through better practices
Good corporate governance is a key driver of sustainable corporate growth and long-term competitive advantage.
3. Protect brand reputation with enhanced processes
Manage the risk of legal or regulatory sanctions that result in material financial or reputational losses.
Read Part 1: Diligent’s Philosophy of Modern Governance