Companies strangling in regulation and red tape
The results of a recent survey by Deloitte, Directors’ Cut, showed that the most significant issue affecting board effectiveness in the past year was the perceived burden of complying with government policy and regulation. The 50 chairs and CEOs from leading Australian companies were of the view that the impact of government regulations and corporate red tape is preventing decision-making and the capability to be agile, and as a consequence holding back levels of productivity.
Given that Deloitte released a survey last year showing that internal red tape and self-imposed rules are costing businesses twice as much as government regulations, it appears that boards and their management need to interrogate how they can change internal practices, to alleviate the compliance burden. In its 2014 report, Deloitte put the total cost of compliance for Australia's economy at $250 billion a year, and estimated that companies spend about $95 billion a year to keep in line with government regulation. However, the cost of following their own rules is much higher — almost $160 billion.
The 2015 survey of chairs and CEOs found that respondents saw increases in external pressures as contributing towards increases in internal pressures that came from added layers of bureaucracy and internal regulation. Some respondents saw internal pressures as compromising a company’s ability to undertake effective risk oversight, whereas other respondents saw risk as the drivers of the increase in internal regulation, as risk committee members ask for more information when they become more aware of their liabilities as directors. Other factors such as the tension between the requirement for more transparent self-regulation and the perceived lack of return on this self-regulation were also seen as issues.
However, in line with the findings of the 2014 survey, two-thirds of respondents to the 2015 survey said that companies are 'wrapped up' in internal red tape, with some commenting that it was up to companies to rationalise internal policies and controls. One respondent noted that individual companies are able to make choices as to the degree of adoption of internal policies and they need not be onerous.
When this is considered alongside the view of more than two-thirds of respondents to the 2015 survey that cultural issues and politics, rather than compliance, are key factors holding back innovation, it is clear that not only can internal red tape be reduced, but boards and management can focus on other aspects of the business to enable performance.