Global benefits governance

Good governance helps firms facilitate talent mobility, leverage global size

By Imran Qureshi

When Sarbanes-Oxley Act passed in 2002, the global benefits management landscape in the United States altered dramatically. So much so that the vernacular changed. Before Sarbanes-Oxley, or SOX, multinational corporations (MNCs) talked about global benefits management. Since then, MNCs have been concerned with global benefits governance.

Some might consider governance to be roughly equivalent to management, but the difference is important. Management is an act involving supervising, watching and directing. Governance, on the other hand, is a process involving strategy, organizational structure and the distribution of power. It takes into consideration institutions, laws and culture.

Quite simply, governance is much more complex and difficult than management. And as markets tumbled during the recent economic crisis and significant inherent risks in benefit plans were once again exposed, many companies saw a need to reexamine their global governance structures.

What is good governance?

There are many reasons to tout global benefits governance. Among them are regulatory compliance, risk mitigation, organizational consistency, economies of scale, enhanced communication and sharing best practices. But many companies are now asking not why, but what. What is good governance?

First and foremost, good governance is dynamic. It evolves and reacts to its environment. Governance structures must constantly adapt to meet fluctuating demands.

Structurally, good governance has two arms: One is foundational, and the other is strategic. The foundational arm is about risk mitigation and managing hazards inherent in plans and programs around the world. Those risks are threefold: people, financial and legal.

From a people perspective, companies need to grapple with their ability to attract, retain and motivate a global workforce. Financial risks involve the expense of having plans in multiple regions and the liabilities associated with those plans. Legal risks are about compliance with local laws and regulations.

Strategy, the second arm of good governance, allows organizations to gain a number of key advantages. When companies are better able to deploy a global strategy, they can more easily facilitate the movement of talent globally and can better leverage their global size to reduce costs through economies of scale.

When companies have risk-proofed their foundation and have developed and deployed a global strategy, they can have transparency in decision making, open communication and a level of local trust that may not have been there before.

Three considerations for implementing global governance

Once companies define exactly what governance is, they must then grapple with just how to implement the optimal structure. As with any major organizational change, there are issues to consider as you move forward. Leading MNCs are implementing ― or reengineering, in many cases ― global governance in three distinct ways: people, process and technology.

People

When considering people, it’s important to look at the roles and responsibilities of individuals and the committees charged with monitoring, approving and influencing plans around the world. Companies need to address two common people issues that many other organizations have faced: change management and organizational structure changes.

• Change management. Implementing a new global governance structure is essentially a process of change management. Consider how you’ll engage your change leaders; educate, train and support your people through the changes; and implement methods to sustain the changes once they’ve been made.

• Organizational structure changes. When you consider implementing a global governance structure, reflect on your organizational structure. There should be alignment between the decision-making process and the organizational structure. The two cannot be incongruent. Consider the role of business units versus the functional side. How will the two complement each other?

Process

Process takes into account how and when a decision becomes important enough to be elevated to a higher level. The following process issues can be significant when implementing a global governance plan.

• Local attestation. One frequent concern surrounds local attestation. Senior leaders at the corporate office might trust their local counterparts and believe they’re doing the right things. But they also need to know definitively that all actions being carried out locally are consistent with local laws and regulations.

• Corporate and local balance. Another process concern is determining how to balance corporate and local decision-making authority and autonomy. Multinational corporations need to adjust their decision-making process to identify those decisions that really need to come to the corporate office and those that should be pushed down to the regional or local level. For example, one area that almost all agree requires corporate oversight is defined benefit retirement plans. Such plans are often associated with significant liabilities and expenses, and are subject to complex laws and regulations, necessitating a greater degree of governance.

• Dollar thresholds. Flowing from the balancing act between corporate and local decision making is the debate over dollar thresholds. Some MNCs have pushed as much decision-making power as possible down to their local entities, but they also set dollar limits or thresholds on the bigger decisions. Many have found setting thresholds to be challenging because they don’t know where to draw the line. If this is the path you’ve decided to take, put a stake in the ground and recognize that setting thresholds is a process that will evolve.

• Settlor versus fiduciary decisions. Increasingly, companies are considering the implications of granting oversight and approval authority to certain company officers. To limit potential liability and conflict issues (arising from Section 16b of the Securities Exchange Act of 1934), companies are demarcating between settlor/policy decisions and those of a fiduciary or investment nature. By doing so, they’re able to limit an officer’s overall liability and conflict of interest.

Technology

Technology is the third part of implementing good global governance. It’s important for MNCs to have an online tool ― such as Towers Watson’s BenTrack ― to help them manage the costs and risks associated with their global benefit plans.

While there are issues and concerns to consider when implementing or reengineering a global benefits governance structure, the pros of such plans far outweigh the cons. When done well, good governance assures MNCs of regulatory compliance, risk mitigation, economies of scale and more.

What more is there around the corner for MNCs to consider? Research is finding that emerging-market MNCs in countries such as India and China operate very differently from U.S. and European multinationals. They’re more nimble, flexible and decentralized, and they’re recovering from the economic crisis more quickly than are traditional MNCs. Is that going to shape the way others operate? We’ll need to wait and see. The possibilities are fascinating and might well influence how many mature MNCs view their own governance structures.

Imran Qureshi is a director at Towers Watson. For any Inquires, please contact Edward Eun at edward.eun@towerswatson.com, and James Jang at james.jang@towerswatson.com.