Compliance and corporate governance are making its way to almost every business function. How about its impact on the marketing department? Marketingovernance.com is often asked to clarify abbreviations such as: SOX, IFRS and Basel II. So we which regulations apply to what kind of activities and companies?

Why corporate governance?

The ideas behind corporate governance haven’t changed fundamentally for decades. The core objective is still to protect shareholder value in the widest sense possible, avoid any risks that might damage the value of the companies’ shares, which also implies avoiding damage to the value of the brand.

During the Nineties it became painfully evident that this wasn’t enough. New laws were enacted in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, and WorldCom (now MCI). Consequently a declination of public trust in accounting and reporting practices arose. The world was ready for a new set of rules. The most important and relevant regulations to marketing departments are:

SOX

Although it is an American law, it applies to all foreign companies operating in the USA as well. Because of SOX, marketing departments become financially accountable. The Sarbanes–Oxley Act, often referred to as SOX, passed law in 2002 and has been named after sponsors Senator Paul Sarbanes and Representative Michael G. Oxley.

IFRS

The IFRS regulation is relevant to marketers as it has a considerable impact on brand value and brand investments. The IFRS, international financial reporting standards, is the new standard as of April 2001 by the IASB, International Accounting Standards Board.

Basel II

Basel II is relevant for marketers, since companies in the banking industry have to manage their operational risks more carefully than before. ‘Basel I’ dates back to 1988, the ’Basel II’ regulations apply as of 2006. The New Basel Accord now includes operational risk as well as credit risk and market risk.

SOX

The impact of SOX on marketing departments focuses mainly on financial accountability and legal compliance in communication.

“How do you ensure the marketing budget is spent most effectively and efficiently?”, we asked a CFO some years ago. Hence, marketing expenditures represent a significant percentage of the overall expenses of companies. His reply was: “Well, that is easy. At the end of the year we see if the marketing budget was spent carefully, not one dollar more or less.”

This latter statement is exemplary of a marketer who is having a hard time explaining which budget is used to which result. Marketing is ‘famous’ for it’s ad-hoc, unplanned operating expenses because of evolving market conditions and competitive landscapes. “Unfortunately, these unexpected operational expenses are almost never accrued accurately. As a result, it is likely that most corporate P&L statements have an error margin of 6-10% that can be directly attributed to inadequate financial reporting by marketing staff”, says Chetan Saiya, founder of Assetlink. For this reason marketing is one of the first business functions to get hit when budgets are cut.

With SOX, marketing departments become financially accountable. Although acting according to SOX regulations will be a challenge, on the long run transparency also means more credits from the management. In a way SOX is an opportunity. An external push to finally change that internal organization.

Moreover, marketing needs to increase control over communications in order to be compliant with local laws. For instance a company that uses portrait photography in the U.S.A. should comply with the law. In the U.S. you risk being sued unless you portray a variety of people: different abilities, sexes, ages and ethnical backgrounds. The result is group shots, especially for posters and print ads, where there is no opportunity to balance representation in any other way.

IFRS

The IFRS regulations are relevant to marketers because its impact on brand value and brand investments. IFRS forces stock exchange listed companies to add goodwill to their balance sheet. And of course, the value of the brand is part of that. Actually, for most companies brand value takes the largest piece of the financial pie when calculating the intangible assets. Over time the value of brands can vary and therefore should be audited on a regular basis. Valuation is likely to increase the value of your brand, but also might decrease it like in the case of SlimFast and Nutricia (one billion euro’s).

There is another complicating factor. IFRS only requires CFO’s to add acquired brands to the balance sheet. For the marketer this complicates managing the brand portfolio of a company when fighting for budget for brand investments. How are you going to raise the budget for a brand that is not valued because it has been developed in-house?

Basel II

Basel II is relevant to marketers, because companies in the banking industry have to manage operational risks more carefully than ever before.

In one of our projects we discovered that the media production process of a client was built around a spider in the web, one single person that had all operational responsibility and was signing of all operational tasks. Consequently, important knowledge about the process had not been shared or documented. If this person would have left the company, it would have cost an estimated 3.5 million dollars because of delays in the process which as a result would have been stopped for weeks.

For some marketers the governance of marketing processes is interfering with daily projects and counterproductive to creative ideas. To others it is a blessing in disguise, delivering that final argument that is needed to change marketing thinking. The challenge we face today is how to combine legal, financial and logistical marketing logic with creativity, without turning the marketing department into an administrative function. We invite you to read more about this challenge on marketinggovernance.com

By Frans Riemersma

Email: fransriemersma@mrmlogiq.com
Web 1: http://www.marketinggovernance.com
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