Introduction
Welcome to Barclay Simpson’s 2009 Market Report. This is the 19th year we have produced a market report summarising and analysing recruitment trends in internal audit and the 5th year we have published specialist reports on risk management, compliance and information security.
We place great value on professional reaction to the Report and would appreciate your comments.
Top line conclusion
At the start of 2008, with the effects of the credit crunch already a number of months old, few people, certainly if market commentators and investor behaviour are to be trusted, anticipated that the banking sector and wider world economy would be facing their current difficulties.
In the space of a year, three out of the five leading US investment banks no longer exist as independent entities and two of those do not exist at all. A significant portion of the UK banking industry has been partially nationalised, as it has in other countries. The UK economy and the economically developed countries of the world are now in recession and the only questions are how deep and how long?
If it was not clear before, it certainly is now, that the UK economy did not undergo some politically inspired economic miracle. After a protracted period of low inflationary growth, risk was mispriced. The cost of money was too low, the willingness to take risks increased and leverage became unsustainably high. Bubbles inflated, most notably in equity, raw material, property and housing. A stressful period of de-leveraging is now underway.
Unfortunately, the problem was not contained to the financial services industry. The re-pricing of risk and withdrawal of credit is now taking its toll on the wider world economy, as both wealth and demand fall. What is the extent of the problem in the UK? Whilst the government wants bank lending to return to 2007 levels, which may well sound reasonable, it would still be twice the average of the previous ten years. It is likely that the de-leveraging process is set to continue and asset prices will decline further. Ultimately, the financial systems in North America, Europe and other parts of the world will need to be recapitalised as all losses are eventually recognised. A short sharp recession does not appear to be the most likely outcome.
However, the pertinent question for this report is how the economic environment will affect the employment prospects of those working in corporate governance. Employment is a lagging indicator. Usually, unemployment only starts to rise significantly once an economy is in recession and is often slow to respond positively once growth re-commences. In the final months of 2008, it became abundantly clear that the rate at which jobs were being lost in the UK economy was accelerating, with most days bringing announcements of redundancies.
Whilst employment in corporate governance will broadly follow trends in the wider economy, as a discipline it will do better than many others. Provided a company remains viable, its corporate governance resources are likely to remain intact. That does not mean that people who leave will be replaced or that redundancies will not occur. The problem for those who are made redundant (and if your employer no longer exists then you will be made redundant), will be to secure another position. For many, that is likely to become increasingly problematic.
Economic highlights
- The UK economy, together with the developed economic world, is already in recession. This is forecast to continue into 2009. The median estimate is for the UK economy to contract by a further 1.5% in 2009. A worse outcome is possible. World economic growth is likely to be less than 2%.
- At almost 6%, unemployment has already reached an 11 year high and is climbing rapidly. It will shortly exceed 2 million and, with plenty more bad news on employment to come, is forecast to be significantly higher by 2010. There are some predictions that it will approach 3 million. Total employment in the UK economy, which peaked during 2008 at 29.5 million, is now declining.
- Inflation, which only six months ago was perceived to be an economic threat, has fallen from a 16 year high and is likely to fall significantly further. Commodity prices have fallen steeply and with the economy shrinking, inflation is set to undershoot its 2% target during 2009. The prospect of deflation cannot be ruled out.
- The UK budget deficit is currently forecast to be £78 billion in 2009 and £128 billion or 8% of GDP in 2010. This will represent the highest level of government borrowing since modern records began and will take government borrowing to 60% of GDP. The potential for a significantly worse outcome is substantial and ultimately Government spending will be forced to decline.
Corporate governance - overview
The vast sums that have been spent on corporate governance in the financial services sector have seemingly done little to stop the credit debacle.
Whilst it is perhaps convenient to suggest that the fault lies entirely in sub-prime lending in the United States, it seems rather disingenuous when our own Northern Rock was offering 125% mortgages. Since 1997, and the bail out of Long-Term Capital Management, and in response to every economic threat since, low interest rates and a huge increase in the supply of money allowed the conditions to exist for credit to be expanded. Globally, governments created the monetary conditions that provided the banks with the opportunity to dramatically expand the credit they made available. They then seemingly compounded the error by allowing hedge funds, structured investment vehicles and other activities to go unregulated. Credit simply moved from regulated to unregulated areas. No doubt there were few votes to be gathered from a more restrictive monetary policy that would have saved the economy from asset price bubbles and its present predicament. In hindsight, a more restrictive monetary policy would have provided much better value in regulating the financial services industry.
Fortunately, and for the benefit of all of those of us who make a living either directly or indirectly out of corporate governance, more regulation is no doubt on its way. The proverbial cherry on the cake being the $50 billion alleged loss at Madoff. Unfortunately, the financial services industry in the UK is in the process of shrinking. Ultimately, a smaller more regulated financial services industry will emerge.
As part of this process, the role of corporate governance will be re-evaluated. Whilst governments certainly created the monetary conditions that allowed the banks to expand credit, it was the executive management of many financial institutions, even including some of the apparently more conservative building societies, who failed to take account of the risks they were taking. The premise that management would be prudent in their action because of their responsibility to protect shareholders, has proven misplaced. A rather more convincing explanation is that incentivised remuneration packages based on short rather than long term performance caused the interests of shareholders to be relegated and otherwise unacceptable risks to be taken. In this context, corporate governance has appeared to have a pro management bias that has not adequately protected shareholders or the wider economy. The deeper the recession, the greater the political response will be. At the very least better risk identification, evaluation and reporting will be demanded. Governance will become more transparent and form a much greater part of the reporting process. Corporate governance is set to become high profile.
This lies in the future. Now it remains a question of managing the banking and consequent economic crisis.
So how is it looking in the corporate governance recruitment market?
For those expecting a knee jerk reaction and a drive to immediately strengthen governance functions, it is yet to happen and is most likely many months away. However, for those expecting widespread redundancies, there is as yet little evidence. What does appear to be underway and started over a year ago, is a protracted slow down in corporate governance recruitment, a slow down unlike any that we have witnessed in twenty years…
In recent years, many ‘crises’ have blown up, often seemingly from nowhere, which have gripped the corporate governance recruitment market almost overnight and brought about head count and recruitment freezes. Governments have invariably responded with lower interest rates and in a matter of months the market has regained its composure and moved on.
The difference now is that whilst the current economic crisis dwarfs all others, it has built up slowly. Sub-prime and credit crunch entered the vernacular two years ago. Market participants seemingly became immune to bad news. Whilst the market has slowed and the pockets of weakness that we described in our interim report are spreading, it is clear from our various surveys that the corporate governance recruitment market has not ground to a halt. However, the economy is continuing to contract, the rate at which the economy is losing jobs is accelerating and further declines in corporate governance recruitment activity will occur.
Here is a brief summary of the individual corporate governance markets:
Internal & Computer Audit
Demand for internal auditors only started to decline steeply during the last quarter of 2008. However, as we reported last year, a slowdown in recruitment seemingly started in 2007.
To date, there have been few redundancies in internal auditing and a lower number than in other areas of governance. The redundancies that have occurred have primarily been in sectors such as house building, retail and financial services where corporate failure has resulted in the closure of resident internal audit departments. There is little doubt that more failures and closures will occur.
The vast majority of internal auditors are employed in three sectors - the public sector, the Big 4 and the financial services industry:
- Recruitment in the public sector has slowed and those employed in it will probably stay put. Significant redundancies are unlikely in the short term.
- The Big 4, who in past slowdowns have invariably shed staff, have so far shown no indication of doing so. They have perhaps learnt from past mistakes. During the past two years, outside of their annual graduate intake, they have recruited very few internal auditors. However, given the numbers they employ, should they undertake any significant redundancies, the number of internal auditors in the recruitment market could significantly increase.
- The financial services industry is now contracting. To date there have been limited redundancies and given the travails of the sector, almost a surprising propensity to recruit. What is clear, however, is that vacancy creation has slowed significantly and there is little immediate prospect of it picking up.
For those departments who are recruiting, it remains a frustrating process. The number of suitably experienced candidates can often be limited. Not surprisingly, given the economic backdrop, many internal auditors, unless they are obliged to do so, are not entering the recruitment market. Unfortunately for those who are, the shrinking number of vacancies is clearly apparent.
There is little doubt that demand for internal auditors will be subdued in the short to medium term and that the number of redundant internal auditors will rise. To what extent, is dependent on developments in the wider economy.
Risk Management
Risk management continues to come under more pressure than other areas of corporate governance. This is as a result of the large numbers of risk managers employed in investment banking and the extent of the losses and rationalisation in the sector. Well known names such as Lehman Brothers and Bear Stearns no longer exist, whilst others have lost their independence.
Not surprisingly, the shortage of candidates that has characterised the market in recent years has dissipated. For many vacancies, and it seemed improbable only a few months ago, there are now significant numbers of well qualified candidates readily available. The number of redundant risk managers is growing.
Whilst risk management remains a critical function and one that is likely to be recast in the light of developments, the mandate to recruit externally is now more frequently missing. In these instances the responsibilities of the role are being absorbed and distributed internally.
However, there are pockets of relatively strong demand. Solvency II, the insurance sector’s capital management programme, is driving recruitment in the wholesale and retail insurance markets. In response to the increase in the number of risk transformation projects there is steady demand from the risk advisory divisions of the consultancy sector. There is also notable demand for risk managers with restructuring, turnaround and workout experience as banks are looking to respond to their deteriorating credit portfolios. A further noticeable development is that credit and market risk are becoming more closely aligned. This is resulting in what is becoming known as ‘convergence risk’.
One may debate whether risk management is the cause or the symptom of the current crisis. There is no doubt, however, that risk management will remain centre stage. Once the current economic crisis abates, more commonly understood and transparent risk management processes are likely to emerge. In the meantime, overall demand is likely to be subdued as the financial services industry is recapitalised and reorganised.
Compliance
Not surprisingly, recruitment activity declined significantly during the second half of 2008. Redundancies were up and recruitment freezes became common place. The sectors bearing the brunt were investment banking, where many banks either collapsed or merged, and mortgage lenders, intermediaries and packagers. Sectors that fared relatively better include asset and wealth management and the insurance sector.
As predicted, the FSA continued its risk and principles based approach to regulation during 2008 and its 2008/9 Business Plan reaffirmed that principles become more significant in times of market turbulence. The FSA does not plan to deviate from its work on MiFID or CRD nor let up in the focus to mitigate the risks presented by market abuse or financial crime. It is continuing to take action and enforce severe penalties on companies and approved persons who breach regulations. The Treating Customers’ Fairly deadline for 2008 impacted recruitment, particularly in the retail financial services markets where many of the vacancies required taking some responsibility for implementing TCF.
Internationally, the SEC will be investigating the effectiveness of its regulatory regime as a result of the Madoff debacle. Tighter controls on private investment pools and hedge funds will be on the agenda for 2009 and this is likely to impact on the UK’s view of regulation in the sector.
Despite regulatory pressures to maintain high levels of risk management and robust compliance controls, it clearly emerged towards the end of the year that only business critical recruitment was being undertaken. Only candidates requiring little or no training and who could immediately add value were being considered. Further, junior compliance positions and Senior/Head of Compliance type roles were becoming rare.
Whilst the number of redundant compliance staff is now growing, some vacancies remain difficult to fill. Not surprisingly, if companies are going to recruit externally they will have high expectations of finding a very close fit to their requirements. On a positive note, redundant investment banking compliance candidates are generally highly regarded in other sectors such as asset management and asset servicing
Demand for compliance staff is likely to remain subdued in the medium term and limited to business critical recruitment. Fortunately, many positions in compliance are essentially guaranteed as a requirement to conduct business. Unfortunately, there is less certainty that businesses will continue to exist as an industry wide process of retrenchment and rationalisation continues.
Information Security
Demand for information security staff noticeably declined in the second half of 2008. Recruitment freezes and elongated recruitment sign off procedures are becoming more common and unemployment amongst security practitioners is increasing. However, information security extends into all areas of the economy, both in the private and public sectors, and is not substantially dependent on financial services. Demand is therefore potentially broadly based.
Recruitment in banking and financial services is now particularly subdued and it is clear that after a strong period of demand, the Big 4 are no longer recruiting. Investment in IT is declining and directly affecting IT security vendors, consultancies and those working in-house in risk assessment or project roles. However, whilst redundancies are back, information security is clearly better integrated into businesses than in previous downturns. Areas of relative strength are FTSE 250 companies who are still pressing ahead with the appointment of their first information security specialist. Further, the Hannigan Report, which followed government data leakages, is resulting in improvements in the security of government projects and demand for security practitioners with government and military experience.
However, for the first time in some years, there is now a pool of redundant security practitioners. Not surprisingly, for those companies looking to recruit there is a much wider range of candidates available who are far more likely to be flexible in terms of the geographic locations, sectors and salaries they will actively consider.
Looking ahead, there is unlikely to be any upturn in the market in the near term and redundancies and unemployment are likely to track developments in the wider economy. In consolation, the redundancies and widespread unemployment that characterised the recruitment market for security practitioners in 2001 and 2002 are unlikely to return. Security departments are now more independent of IT, more regulator led and have a better defined role than previously. Information security is not the target for cost savings that it once was.
Outlook
Last year we anticipated a painful period of deleveraging. It is clear that we assumed that the accompanying falls in asset prices would be contained and that any damage would be substantially limited to the financial services sector. However, the ferocity of the process and the damage to the wider economy has been far greater than perhaps even the most pessimistic commentators’ forecast. Unemployment is already starting to climb menacingly. Whilst you can take your pick as to where unemployment will be in one month, six months or a year from now, perhaps the only thing you can say with certainty is that it will be significantly higher than it is now.
Whatever the rise, we believe it will be proportionately lower in corporate governance. Corporate governance is integral to business and most departments are leanly staffed. Redundancies are expensive, destroy the morale of those who remain and then leave open the problem of sometime in the future having to find replacements.
Unfortunately, the problem is not simply the dispensability of corporate governance, but the ability of the host business to survive either independently or otherwise. It is clear, as is already the case, that as businesses retreat from markets, fail or undertake defensive mergers, redundancies will follow. However, for most people, if you are working in a relatively secure business, or even the public sector, you are unlikely to lose your job. The problem with recessions is that for those people who do lose their jobs, the pain is disproportionately distributed. As vacancy creation collapses, the pool of redundant people grows and securing employment becomes increasingly problematic. Unfortunately, during 2009, the number of unemployed corporate governance practitioners will rise. |
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