Interim Market Report 2008 - Executive summary

Introduction

Welcome to Barclay Simpson’s Interim Market Report - July 2008, which provides a comprehensive update on conditions in the corporate governance recruitment market in the first half of 2008.

Top line conclusion

The UK economy and much of the wider global economy is now facing growing head-winds. These manifest themselves in rising commodity and oil prices, financial turmoil and an end to the housing boom. The economic news in the UK is becoming gloomier. The service sector, the main engine of the UK economy, is shrinking. There is now little doubt that the best the UK economy can expect is a period of sub trend growth as the economy is rebalanced away from consumption and towards investment and exports. This is being facilitated by the fall in the value of sterling. For many, as their real disposable incomes fall, this is likely to be an uncomfortable experience.

Whilst overall the UK corporate governance recruitment market currently remains strong, there are pockets of weakness. The reason for the overall strength is clear. Total employment in the UK economy in the first quarter of 2008 grew by over 100,000. Given the enhanced role that corporate governance has taken in the economy, it would be surprising if employment in governance did not mirror the growth in total employment. It has. However, it is also likely that the UK economy is at, or is close to, a tipping point where total employment will start to turn down, resulting in higher unemployment. The more pertinent question is whether employment in corporate governance will follow the overall employment trend?

Economic highlights

• At 4.1%, world growth is forecast to trend lower. Whilst growth in the developing world remains strong, the United States is currently close to recession and there are mixed reports from the EU and Japan. High commodity prices, particularly the cost of energy and food are potentially destabilising.

• Employment in the UK is weakening but still remains comparatively strong. However, both unemployment at 5.2% and claimant count are now moving higher from low bases. Total employment at 29.5 million has increased by an additional 450,000 jobs in the course of the last year as a growing population has increased the work-force. There is anecdotal evidence that the wider recruitment market is softening.

• Inflation has emerged as a problem. At 3.8%, the Consumer Prices Index (CPI) is over a full percentage point above target and is threatening to go higher. Even though the headline growth in earnings remains subdued at 3.8%, there is currently little scope to reduce interest rates.

• The UK economy is currently running two substantial deficits. Government borrowing is currently in excess of 3% of GDP and the current account deficit is 4%. With both the UK government and consumers fully leveraged and inflation emerging as a problem, the fiscal and monetary tools available to stimulate the economy are limited. The UK economy has entered a period of sub trend growth and further deterioration is likely. 

Corporate governance - overview

We have previously made the point that the UK has a heavier reliance on financial services than any other major developed economy. This has without doubt benefited the UK and the many thousands of people working in corporate governance. However, the banking industry has recently made catastrophic losses which, in terms of the availability of credit, now threatens the wider economy. Without doubt, loose monetary policy, low interest rates and a huge increase in the supply of money allowed the conditions to exist for these losses to be made.

Some would believe that these losses were the result of a failure in corporate governance. Perhaps that has some resonance; however, it is unlikely that individual internal audit, risk management or other in house governance functions are culpable.

For example, in the case of Northern Rock, it is understood in the wider investment community that they had adopted a higher risk growth strategy. The management were growing profits more strongly than their competitors because they were taking greater risks. The Northern Rock business model was substantially dependent on the availability of lower cost wholesale funding. If management, depositors and investors understood it as a risk and enjoyed the enhanced benefits, then it is hardly a failure of corporate governance when the risk crystallised and broke the business. Whilst it is clear that many would argue that they were not aware of the risks; this was not the fault of the governance function within Northern Rock.

The failure of governance is more properly laid at executive management who failed to take account of the risks they were taking. In terms of corporate governance, it is not always the case of having too much or too little. It is likely that incentivised remuneration packages, based on short rather than long term performance, and abject executive management are the cause of the present problems. Confidence in the executive management of the banking industry has quite rightly been damaged. More pertinent is the effect of this damage on the demand for corporate governance staff.

To date, in corporate governance recruitment terms, there has been no ‘knee-jerk’ reaction. Although there are pockets of weakness, recruitment patterns remain broadly consistent with the period prior to the credit crunch. In the medium term, it is actually likely to strengthen corporate governance in the financial services industry. Some banks have demonstrably failed to adequately manage their risks. Better risk identification, evaluation and reporting will be demanded. Shareholders will surely want the consequences of the risk taken on their behalf to be better communicated and quantified. 

Here is a brief summary of the individual corporate governance markets:

Internal Audit

Of the three largest employers of internal auditors - that is, the public sector, public practice and the financial services industry - only the financial services industry recruited along normal patterns during the first six months of 2008. In spite of this, the tone of the recruitment market has remained good. This was helped by the wider commercial sector, where, with the exception of companies relying on consumer discretionary spending, demand held up. There has been no indication of recruitment or headcount freezes and redundancies have been limited only to retail, leisure and small specialist areas of the financial services industry, where companies have either pulled out of market segments or ceased to trade.    

Whilst most internal audit departments would report that it has become marginally easier to recruit, candidate shortages in many regions of the UK and sectors of the economy remain in place.

Risk Management

During the last six months, demand in risk management has come under more pressure than other areas of corporate governance. This is as a result of the large number of risk managers employed in investment banking and the extent of the losses and rationalisation in the sector. Risk managers in investment banks who work in departments independent of business streams have been more secure and faced better prospects than those embedded within the business. The latter have tended to be cut as business areas have been slimmed down or closed.

Fortunately, other areas have fared better, with demand and supply patterns not dissimilar to 2007. In many areas, shortages of risk managers still remain. Demand has to some extent been underpinned by the requirement to comply with the Solvency II directive.

We expect demand to remain weak across investment banking. On current trends this may be compensated for by demand from other areas. 

Compliance

During the first six months of 2008, there was healthy demand for compliance staff in insurance, wealth and fund management; and some areas of investment banking.  By contrast, the number of vacancies in retail financial services fell significantly, together with those areas of investment banking adversely affected by the credit markets. Fortunately, demand continues to be underpinned by regulatory oversight and therefore compliance recruitment is viewed as essential to the conduct of business.

There was a noticeable increase in the number of candidates registering for defensive reasons, although the actual number as a result of redundancy was comparatively low.

Whilst the market has become more liquid, for many vacancies there is still a shortage of candidates meeting the specific qualifications and experience required.  As a consequence, suitably qualified candidates remain at a premium.

In the immediate future, demand will be played out between the need to meet regulatory requirements and the focus on cost savings where levels of business are falling. 

Information Security

Whilst demand in information security was marginally lower in the first six months of 2008, it remained broadly based. The exception was the consultancy sector.

The market has been subject to two broadly conflicting pressures. Whilst there is caution that IT spending is starting to be squeezed, the increased recognition of information security as a critical business function remains a powerful driver, ensuring that departments are appropriately resourced. More recently, there has been a trend to fill vacancies internally, which is a signal that companies are becoming more cautious.

The number of candidates registering for defensive reasons increased during the first six months. This reflected both caution on behalf of many and necessity for a small number who were made redundant. Fortunately, those who were made redundant have generally been able to find contract or permanent employment relatively quickly.

Information security recruitment is at least partially dependent on IT investment. IT investment has historically been sensitive to the level of economic and business activity in the wider economy. The next six months are likely to be more challenging.

Outlook

This time last year, we reported that it would most likely be an unforeseen political or economic event that would stall the corporate governance recruitment market. For most of us the credit crunch was not foreseen. Whilst its origins almost certainly lie in an extended period of loose monetary policy and the craven attitude of governments to printing money, the credit crunch is now impacting on the wider economy. The 4% trade deficit, which effectively represents the proportion of UK consumption that is funded from overseas, is in the process of being withdrawn and total employment in the UK has or is certainly in the process of peaking.

Whilst there is unlikely to be a collapse in the demand for corporate governance staff, it is unrealistic to expect that if the total number of people employed in the UK economy is falling, there will not be an adverse impact on corporate governance recruitment.