An increase in the volume and complexity of regulations is the greatest risk to organizations over the next five years, according to a recent global KPMG survey which charts the views of 320 in-house General Counsel (GC).
The report titled Beyond the Law, interviewed General Counsel from 32 countries who provided their views on a range of issues, from relationships with the Board to the risk and regulatory challenges ahead and managing future disputes.
It found that 90 percent of respondents had flagged up regulatory risks as a key issue. Data security and protection was seen as a risk by 84 percent of respondents. Other principal areas of concern related to reputational risk (80 percent), increased complexity of third party contracts (79 percent), supply chain failure (76 percent) and anti-bribery and corruption (73 percent).
The report highlights that across Asia, including China, it is still common to see large companies owned and or controlled by single families who prefer to make their own commercial decisions. GCs roles still seem to be as legal advisors, brought in alongside other technical experts when their skills are needed, but not routinely consulted on matters of business strategy.
Grant Jamieson, Head of Forensic, KPMG in China and Asia Pacific, says: “At the moment, particularly in Asia, we see a lot of in-house legal people being considered as ‘back-office’, but we believe this will change as regulation and litigation increase. For example they will find themselves having to be more careful about contracts, as business grows and they are no longer dealing with people that they know, and as their corporate governance matures on the back of increasing regulations.”
This analysis is borne out by the Asia Pacific responses to the survey. Only 20 percent of respondents said that the legal department was represented on the main board (versus global at 38 percent). Nearly half said that they report to the board indirectly (versus global at 19 percent) while a third take part in board discussions but do not have a board member (versus global at 43 percent).
Jamieson explains: “In a lot of Asia Pacific economies the rules are not enforced in the same way that they are in more mature markets. There isn’t the culture of litigation with people preferring to deal with problems behind closed doors. Looked at in the other direction, this can be a real issue for an Asia Pacific GC trying to operate in a European or US market for the first time, where scrutiny is much tougher and rules are enforced much more rigorously.”
Asia Pacific GCs believe their involvement in business decisions can help companies to avoid risk; 73 percent agreed with this statement and 65 percent said that their ability to give commercial advice is as important to their companies as their ability to give legal advice. However, only 55 percent were able to say that they are more involved in strategic business decisions now than they were five years ago (versus global at two-thirds).
“We believe in Asia we will increasingly see a company’s GC playing a major role in helping the board to shape strategy and achieve its corporate objectives. They will need to be more closely aligned with sales, internal audit and proactively involved in the strategy of the company,” Jamieson adds.
In other findings, Asia Pacific in-house lawyers are relatively close to their operational colleagues. Approximately a third of respondents said they work regularly with their production departments and nearly 60 percent counted sales and marketing as close colleagues. Nevertheless, the area that respondents felt were most important to their work was internal audit. This department was chosen as an important area for collaboration by 65 percent, but by only 50 percent as an area that they actually work with day-to-day. Many clearly feel that there is more work to be done in developing a close productive relationship with internal audit.
Jamieson concludes: “It is not enough for businesses to use General Counsel purely for questions of law as and when they arise. The most successful organizations will have General Counsel who are integrated in the businesses, advising on the management of risks and the avoidance or resolution of disputes and offering commercial solutions that can be readily understood and implemented.”
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KPMG China has 13 offices (including KPMG Advisory (China) Limited) in Beijing, Shanghai, Shenyang, Nanjing, Hangzhou, Fuzhou, Xiamen, Qingdao, Guangzhou, Shenzhen, Chengdu, Hong Kong and Macau, with around 9,000 professionals.