Head of Risk Management at Capita, member of AIRMIC
Less than a week after the historic Brexit vote, on Tuesday June 28th, ECIIA and FERMA held a joint working breakfast in the European Parliament entitled County-By-Country Reporting: From Risk to Opportunities. With Europe at the early stage of their reaction to the vote, and the atmosphere at the Parliament highly charged, I was the only British representative on the panel. Oh, and England had lost to Iceland the previous night.
When we got down to the topic at hand, the overriding message from the morning was that risk managers have a vital role to play in ensuring that future financial transparency standards are understood and implemented. There was a similarly strong belief that with an informed risk based approach to embedding the requirements into the strategy of large corporates it could in fact become a competitive advantage.
Just one of a long list of examples of the expanding role of risk management, the country by country proposals emphasise the need for the risk manager to evolve at a somewhat rapid pace. The potential effects of country by county reporting will expose businesses to new and less clear cut areas of risk. For example concerns directly associated with the accuracy of reporting will be coupled with the need for significant governance and scrutiny of the processes being followed; new types of reputational exposure are sure to emerge; there could be unknown business model and market sector impact; and new risks around corporate conduct will surface. The accuracy of financial disclosure could also be a vulnerability for the company if an understanding of the context and details of the full spectrum of the organisations value chain is overlooked, misunderstood or misrepresented. It is clear that these grey areas will need a risk minded approach in order to conform, but does an organisation work to simply comply with the new rules? Or can organisations astutely use their new responsibilities to their advantage and use the reporting to increase positive public perception and confidence? Either way it is likely that to support the business, risk will increasingly need to reach outside its comfort zone.
The corporate soul searching necessary to determine the right attitude towards disclosure and compliance will require healthy confrontation in order to find the appropriate level of transparency that assures stakeholder that the company is following the rules as written and as intended: the letter and the spirit of the law. Loopholes that will undoubtedly materialise and be exploited will require internal governance from the legal risk vs. social citizenship perspective. The relationship between businesses and the public, often conducted via the media, will require careful risk management to ensure the information disclosed is not misinterpreted.
Whilst the transparency principles of country by country reporting are not completely new, the uncertainty this level of expectation brings is. And, as we’ve seen recently, the one thing markets fear is uncertainty. It is still not clear how information will be formally scrutinised and therefore little insight for companies working to meet the requirements; there is no information over how the principle of “fair” tax payments will be defined by each authority; there is also a fear that these new disclosures will turn all city analysts, investors, commentators, journalists and the every-day public into tax experts. These and other areas will certainly form a lot of the ongoing consultation with the Commission on the country by country proposals, but what we do already know is that this will result in a new collective responsibility across an organisation for ensuring compliance with these obligations.
Going forward I will be part of the working party providing further analysis, discussion and consultation with the European Parliament. What is clear to me so far is that it is paramount risk managers step up and adapt, acquiring knowledge and staying alert to categories of risk that have traditionally been outside our domain: we must move from ‘facilitator’ to ‘principal advisor’.