Corporate governance is a hot topic for multinational companies...

Corporate governance is a hot topic for multinational companies, wherever they are headquartered. The Sarbanes-Oxley Act has led to significant new requirements being introduced for US companies, while the Higgs proposals could have a similar effect in the UK. Other European countries are following suit, and implementing regulations to improve corporate governance standards. Worldwide, more multinational corporations now see the need to implement - and be seen to implement - transparent and structured approaches to many aspects of business conduct. This is driven not just by regulatory developments, but also by media scrutiny and peer pressure. Companies also recognise the competitive advantage that can be gained from adopting best practice governance standards, for example, through improved management and control of important financial and reputational risks.Corporate governance in relation to employee pay and benefitsExecutive pay practices have been under the governance spotlight for many years, both in the UK and US. Increasingly, however, companies and shareholders are being alerted to the risks associated with more broad-based employee pay and benefit programmes. For example, the costs and risks relating to company pension plans have been highlighted by the new transparent accounting standards FRS 17 and IAS 19. Corporate governance, in relation to employee pay and benefit plans, can be defined as: 'a framework of principles, guidelines and processes for ensuring that there is clear accountability, control and monitoring of key aspects of employee compensation and benefit provision.' Having such a framework in place helps companies to understand their benefit plans, and to take more control of them.

The five-pillar approach

Corporate governance in pay and benefit arrangements can be made easier by looking at it as consisting of five 'pillars':
  • effective remuneration and benefit committees
  • written plan policies
  • clear and appropriate accountability
  • rigorous oversight and monitoring
  • effective information flow.

    Effective remuneration and benefit committees Effective remuneration and benefit committees are critical to the success of pay and benefit plans. They should set or recommend policy, delegate functions and hire service providers. Their responsibility is to ensure the plans remain an effective element of the total remuneration package, and to mitigate the risks of sponsoring the plans.

    Written plan policies Formally documented policies covering governance and oversight of investments, conflicts of interest/ethics and benefit plan funding and accounting can be important risk management tools. Processes should also be in place to ensure that the policies are followed, regularly updated and documented.

    Appropriate accountability Appropriate accountability requires that those involved in operating benefit plans have clear roles and responsibilities, and that the right people at the right levels make and implement decisions.

    Rigorous oversight and monitoring Regular and rigorous monitoring of pay and benefit plan design, investments, administration, compliance, and service provider costs is essential for effective governance. Ensuring compliance with all relevant local laws and business procedures is a big responsibility and is often charged to remuneration and benefit committees.

    Effective information flow Effective communication is key to the success of pay and benefit plans. All parties involved in the governance structure must have appropriate access to relevant, accurate and timely information. There should be clear lines of communication between the board of directors, remuneration and benefit committee members, other key decision-makers, staff members responsible for implementing decisions, and outside vendors.

    By breaking corporate governance down into the steps outlined above in this five-pillar approach, companies can work in stages to implement governance procedures. The five-pillar approach helps them to set objectives and processes that are transparent and easy to follow, and to identify what governance structure is likely to be the right one for their organisation.

    What are companies doing in practice?

    Every company will implement governance procedures in a different way. The five-pillar approach may be useful for a comprehensive review, but may not suit every organisation or situation.

    Preparing an inventory of benefit plans allows companies to check for regulatory compliance and to analyse risk. Mapping risk and measuring it using a risk register can help them to visualise key needs and prepare a business case for implementing change through quantifiable goals.

    Risk reviews are a good first step to identifying and understanding the risks that exist within pay and benefit plans. The level of review can vary from just looking at the business plan and whether objectives are being achieved, to an in-depth audit and compliance exercise.

    Tools for reducing risk

    A concise and coherently structured risk assessment can be invaluable. Figure 1 shows a risk mapping chart for the employer-related risks of a final salary pension plan. This provides examples of the various external and internal risks that affect such a retirement plan from a financial, strategic, operational and hazard perspective.

    Identifying potential threats and deciding upon mitigating actions is essential for moving forward in the right direction.

    As previously mentioned, identifying who is accountable for various aspects of pay and benefit plans is key to successful governance. Setting out who is responsible for which task helps all relevant parties to understand where the line of sight falls within both the local and corporate management teams.

    Figure 2 shows a typical accountability and reporting chart, designed to help ensure that the correct procedures are in place and to minimise any chance of confusion. Again, pension plans are used as an example.

    Corporate governance is key to creating a solid infrastructure for successful and efficient pay and benefit plans. But it does not end there. Procedures must be in place to ensure that the governance framework and processes are adhered to. Ongoing monitoring is the key to success.

    Rosanne Cumberland is a senior consultant, Mercer Human Resource Consulting, Tel: 020 7222 9121, E-mail: Pull-out quotes:
    Effective remuneration and benefit committees are criticalAn inventory of benefit plans allows companies to check for regulatory compliance and analyse riskCase study
    A major European multinational company was concerned about rapidly increasing pension costs as reported under new accounting standards. Initial investigation indicated that some key decisions relating to pensions and other aspects of the employee reward package were being taken without senior management involvement. There was also concern about local compliance with national and international regulations.

    To address these concerns, the company implemented a governance framework for managing employee benefit arrangements worldwide. An initial data-gathering exercise was conducted to collect information on all pay and benefit plans. A facilitated workshop session involving principal stakeholders was then held to review the data and identify key governance issues and potential risk exposures. The workshop was used to brainstorm and develop the first draft of a global governance framework for senior management consideration. The main action points were to develop:

  • a documented global governance framework
  • an outline action plan for implementing the framework in key countries
  • a clear statement of roles and responsibilities for managing critical aspects of global benefit plans.

    The principal outcomes from developing and implementing the governance framework were:

  • a clear benefits policy to facilitate future change management arising from merger and acquisition activity, corporate restructuring and other significant business initiatives
  • processes to ensure consistency in risk-taking across the enterprise
  • a consistent global approach to all aspects of benefit cost (particularly in the areas of cost identification, reporting and ongoing monitoring)
  • roles and responsibilities of all relevant management groups were clearly identified and communicated throughout the organisation

    Involving key stakeholders in the development process helped achieve buy-in at the implementation phase.