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Jun 21, 2015

Compliance needs bigger role in business strategy, PwC survey shows

Plans to enter new industries subject to thorny compliance rules and opportunities for firms to differentiate themselves in market argue for expanded strategic role   

As business risks multiply and the pace of regulatory change accelerates, making more companies susceptible to compliance failures, it is becoming more critical that the compliance function expand to play a bigger role in corporate strategy.

That’s the primary conclusion of PwC’s fifth State of Compliance 2015 Survey, the results of were published this morning. The survey drew 1,100 respondents from companies in 23 different sectors and with annual revenue of $500 million to $25 billion.

There’s a disconnect between nearly four out of five (78 percent) of respondents to PwC’s Global CEO Survey earlier this year who say they’re concerned about government over-regulation impeding their business strategies and the fact that only 35 percent of respondents to the compliance survey say their company’s chief compliance officer plays a role in helping to develop and implement corporate strategy, the report says.

A key obstacle that the compliance function confronts is that it is often perceived as the bad guy and something to be afraid of, the report notes. The greater compliance officers’ awareness of their companies’ business priorities and the more they are able to ‘bake compliance requirements into business processes versus adding them on after the fact,’ as one respondent puts it, the higher the likelihood of compliance being seen as a valued partner instead of something to fear.

Compliance officers can offer valuable insights into the key business decisions that have an impact on a company’s growth targets and other strategic imperatives. Effective compliance management can provide CEOs and other senior managers with not only the ability but the confidence to take risks to implement growth strategies.

A major impediment to this can be compliance costs, which only 41 percent of respondents say they measure and which another 35 percent say they don’t even try to track. Only 33 percent of compliance departments have budgets greater than $1 million; in the last year, budgets have not increased as much as in previous years.

Sally Bernstein, principal at PwC and one of the authors of the survey report (along with managing director Andrea Falcione), acknowledges that chief compliance officers are overwhelmed as it is with what they need to do just to stay on top of their organization’s legal obligations, which raises questions about their capacity to make compliance more of a value-added function without having the budget to bring on additional staff.

‘There’s a drive to be more efficient by leveraging data analytics and leaving more time to be involved in the company’s strategic direction,’ Bernstein says. PwC sees opportunities to increase efficiencies in three key areas: risk identification and assessment; compliance monitoring and testing; and technology solutions.

Just a small portion of respondents say they don’t currently use data analytics, she notes. More and more of them are looking at analytical tools that would enable them to create a single dashboard providing a visual representation of factors such as employees’ job duties and geographic locations, so CCOs can easily see where there are issues to address. Bernstein believes CCOs have reached a tipping point in their ability to leverage those tools, which are becoming more reasonably priced and can be layered on as needed.

Compliance, when leveraged strategically, can play a key role in how the company differentiates itself in the marketplace, according to the report. Retailers that can show their investment in governance and compliance around cyber-security, for example, has resulted in diminished vulnerability to attacks and fewer incidents of data breaches can gain more trust from consumers and lure them away from competitors.   

The compliance function can also be especially helpful to companies that aim to grow by expanding beyond their core industries. More than half (56 percent) of respondents say their companies will probably compete in new industries within the next three years. To the extent that those industries are more heavily regulated than their core sectors -- such as healthcare and financial services --  a company’s ability to comply with often complex regulations will be a key factor for its success, the report says.  

PwC finds that at 48 percent of companies that don’t have a named CCO the general counsel is the de facto CCO. Named compliance chiefs report to the general counsel at nearly one third of the companies surveyed and report to the CEO at 26 percent of companies. Many of those who report to the CEO have a dual role as general counsel/CCO, a finding that aligns with the results of LRN’s ethics and compliance effectiveness survey, released last week.

Although compliance management may be made more efficient by having compliance specialists reside in the legal department at many firms, this can make it more difficult to expand the compliance function beyond its traditional legal focus to take on a bigger role in business strategy, PwC finds. Ensuring there’s a balance between the needs to protect the business and make compliance transparent, for example, presents challenges when the legal function may be inclined to suppress communication of compliance concerns because of qualms about increasing legal risks.