Introduction
Welcome to Barclay Simpson’s Interim Market Report – July 2009, which provides a comprehensive update on conditions in the corporate governance recruitment market in the first half of 2009.
We place great value on professional reaction to the Report and would appreciate your comments.
Top Line Conclusion
A year ago, we reported that the UK and global economies were facing growing head-winds. Six months ago, at the start of 2009, it was forecast that the UK economy would contract by 1.5% during the course of the year. The UK economy actually contracted by over 2% in the first quarter of 2009 and, like the rest of the world economy, faces an uncertain future.
The credit crunch has not only revealed the illusionary profits of substantial parts of the financial services industry, its effects have now permeated the entire economy. It is clear that central banks almost certainly targeted the wrong type of inflation. Interest rates were set too low. Banks were able to provide the credit that allowed bubbles to inflate across any number of asset classes. The resulting illusion of wealth was transformed into income which, in the case of the UK and other consumer orientated economies, allowed them to run deficits with export led economies. As exports have collapsed, these other economies have contracted even more than the UK.
However, before assuming the UK’s relative good fortune, the fiscal decline in the UK, as in other consumer orientated economies, has been proportionately greater and runs the very real risk of becoming unsustainable. A period of painful global rebalancing must ultimately take place as it has become clear that debt fuelled growth is no longer an option.
Whilst it is convenient to blame the banks, they did nothing without tacit political approval. Governments, the UK’s in particular, sought the acclaim of their richer electorates who must now bear the cost of ensuring that their financial systems are adequately capitalised. Fortunately this is a process in which corporate governance will ultimately have a critical role to play.
Economics Highlights
- It is difficult to predict what path the UK economy will now take. The consensus is a relatively slow and protracted recovery with the economy growing by only 1% in 2010. A worse outcome is clearly possible.
- At over 7%, unemployment will most likely reach 10% and result in 3 million unemployed. Rises will continue throughout 2009 and into 2010. Whilst the rate of growth in unemployment is slowing, for many, economic recovery will not come until unemployment begins to decline.
- On the government’s preferred measure, CPI, inflation, at 2.2% in May 2009, remains above its target. However, a deep recession should dampen inflation and is certainly consistent with the 1.1% fall in average earnings in the first quarter of 2009. However, by creating money through quantitative easing, the Bank of England has embarked on a radical course of action, that could significantly increase the rate of inflation.
- A year ago, we commented that the UK budget deficit was going to exceed 3% of GDP. Six months ago, that figure was revised sharply upwards to 8%. It is currently forecast to go to an eye-watering 12% in 2010, potentially posing a real threat to the UK’s credit-worthiness.
Corporate Governance - Overview
It is reasonable to assume that corporate governance functions, at least in critical areas of the banking system, failed. Banks were demonstrably unable or perhaps unwilling to responsibly manage the risks they were taking. However, given the circumstances, it is doubtful that corporate governance functions could realistically have averted the disaster that befell the industry.
Without implicit government support the excesses that caused the credit crunch could not have happened. In the UK, for example, Fred Goodwin, the now vilified crown prince of the excess, only became Sir Fred Goodwin in 2004. The government formally recognised and publically rewarded the wealth he and others seemingly created. The profits and taxes they mustered provided them with political influence as the financial services industry became a bigger part of the UK economy.
If the Treasury, Bank of England and FSA were compliant, any righteous corporate governance function that vocally protested would have simply been replaced by one that was prepared to sing more tunefully with the times. The management of Northern Rock, the first of a number of bank failures in the UK, was engaged in activities that were clearly in the public domain. Offering 125% mortgages on unsustainable multiples of unverified income, with money raised in the wholesale credit markets, clearly appeared to enough of those who mattered to be a sustainable business model.
Two years after the problems first emerged, bad commercial property and buy to let loans are still debilitating the once conservatively managed building society movement. It is abundantly clear that the mistakes were widespread, not only in the UK but globally, and management who might otherwise have been expected to protect the interests of their stakeholders, clearly did not. Given the magnitude of the cost, which has yet to be felt by the electorate, politicians will feel obliged to provide sufficient regulation and oversight to be able to demonstrate that such behaviour cannot be repeated, even if the market has already done it for them. At least until the next time.
In the brave new world of increased regulation, existing corporate governance structures will most likely remain intact. It is more likely that boardroom oversight will be reshaped and the necessary challenge to any potential cavalier approach to risk management put in place. In the UK, two reports, one by Sir David Walker on the way banks are run and the other by Sir Christopher Hogg, Chairman of the Financial Reporting Council, on the wider market are due in the autumn. Corporate governance, particularly in the financial services industry, is going to be made more effective and better co-ordinated globally.
Whatever may become mandatory, it is clear that in the current business conditions, managing risk and uncertainty is becoming an increasingly important part of corporate strategy. Companies are looking to reduce their risk profiles and surveys are indicating that companies both in and outside of financial services are planning to strengthen their corporate governance teams.
Whilst many corporate governance departments are reporting that their workloads have increased and that they are short staffed, this is not translating into increased demand. This is not surprising. Unemployment is currently increasing at close to 100,000 per month and, whilst the rate may decline, unemployment will continue to increase. Corporate management remains focused on reducing costs and maximising efficiencies. External recruitment for many companies is currently the exception rather than the rule. Demand for corporate governance staff is depressed and vacancy rates are currently the lowest they have been for over fifteen years.
The benefit, although it might not seem obvious to those working in corporate governance, is that redundancies are lower than in the wider economy. Where companies have failed, merged or pulled out of businesses, the associated governance staff are losing their jobs. However, outside of that, the common corporate refrain that “10% of jobs are going”, is generally not being applied to corporate governance departments. Whilst more corporate governance staff are destined to lose their jobs as businesses rationalise and adjust to a smaller economy, we expect the rate to continue to be lower than in the wider economy.
Here is a brief summary of the individual corporate governance markets:
Internal Audit
The internal audit recruitment market can be characterised by a broadly based collapse in demand. This collapse commenced in the fourth quarter of 2008 and gathered pace during the first half of 2009.
It is likely that demand is now stabilising around historically low levels. Redundancies in internal auditing have been lower than in other areas of corporate governance and have been substantially associated with corporate failure. The pool of redundant internal auditors is growing far more slowly than unemployment in the wider economy. It is clear companies are using the versatility of their internal audit departments to undertake work in risk, efficiency and value for money reviews.
For those internal auditors that have been made redundant, securing another job remains a frustrating process. Equally disappointed are those companies who are recruiting and anticipate a surge of appropriately qualified candidates. Candidate shortages in some sectors of the economy remain and many internal auditors who might otherwise have been in the recruitment market prefer the security of their existing employment.
Risk Management
Risk Management recruitment was badly hit in the latter half of 2008, with widespread redundancies. This continued into 2009 and although the rate of redundancies has slowed down, this will remain a feature of risk management recruitment for the foreseeable future.
Vacancy creation from a historically low level has marginally improved. Basel II is still creating vacancies and there has also been an increase as a result of Solvency II, particularly as Pillar II takes shape. Within credit risk, there is currently positive demand for workout and corporate recovery specialists and, within the Lloyds and London insurance markets, operational risk specialists are in demand.
Whilst some specialist roles remain difficult to fill due to a decrease in the number of specialist candidates available, candidate availability overall remains high.
Compliance
The decline in the compliance recruitment market in the second half of 2008 accelerated in the first quarter of 2009.
The number of redundancies increased, with investment banks and mortgage lenders, intermediaries and packagers particularly badly hit. The number of vacancies fell to new lows.
During the second quarter, the rate of redundancies declined and there is some evidence, against historically low levels of demand, the number of vacancies is starting to increase. However, after a year of depressed demand and consistent redundancies, the market is candidate rich. Competition for new positions is at an all time high.
Factors driving existing demand include TCF (Treating Customers Fairly) and complaint handling, as companies realign their in-house policies, and the incorporation of the Conduct of Business (COB) legislation into the FSA’s remit. It is also clear that the Madoff debacle will ensure changes to the regulation of hedge funds. In the insurance sector, Solvency II is becoming a major focus for compliance and risk strategies.
The compliance recruitment market is currently stabilising around low levels of demand.
Information Security
Demand for information security staff has continued to fall during the first half of 2009, as the recruitment market has become increasingly subdued. Business investment, particularly in IT, is falling and with it the development work that helps underpin demand in information security. Much proposed recruitment is failing to receive the necessary authorisation.
Redundancy and the fear of redundancy remains a feature of the market, particularly for more senior staff in the end user and consultancy markets. There are fewer good quality junior and mid level staff entering the recruitment market, with many people preferring the security of their existing employment relationship.
One area where demand has remained relatively strong is for government skills. There is currently a rush of information security practitioners seeking to gain CLAS and make themselves marketable for government sector work.
There is now a large pool of redundant information security practitioners. Perhaps the best that we can anticipate is that this pool does not grow any larger during the latter part of 2009. A decisive upturn in business investment will be required to shrink it.
Outlook
There is little doubt that the last six months, particularly for those who have lost their jobs, has been traumatic. For us, right now, there are grounds to be both optimistic and pessimistic.
The case for optimism turns on the influential role that corporate governance enjoys. Whilst there is little doubt that more governance staff will lose their jobs, as companies and ultimately the government responds to reduced economic circumstances, it is clear that there is substantial pent up demand. Recruitment is cyclical and, although driven by the economy, it is also driven by the need for companies to recruit critical staff and for individuals, for both personal and professional reasons, to seek new employment. Recruitment cannot be frozen indefinitely. Effective corporate governance is vital for the financial services industry and the rest of the economy. That argument for us, after twenty years, is clearly won. As this year progresses there will be an increasing propensity to recruit corporate governance staff. How quickly that translates into real vacancies and offers of employment is dependent on wider economic conditions.
Unfortunately, it is wider economic conditions that provide the case for pessimism. In the UK we have now moved from spending money that we do not have to spending money that does not even exist. Where is all the money created by quantitative easing going to? Green shoots or more bubbles from which no credible exit strategy exists?
It is clear that a loose monetary policy and the availability of credit allowed the UK and many other countries to consume beyond their means to produce. With public debt in the UK in the process of doubling, it is not difficult to view corporate governance as a valuable product in an economy that has painful adjustments to make.
Other sections
To view further sections of this report, please visit:
- Internal Audit – market analysis
- Internal Audit – salaries
- Risk Management – market analysis
- Risk Management – salaries
- Compliance – market analysis
- Compliance – salaries
- Information Security – market analysis
- Information Security – salaries
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