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03/01/2011

"Liability protection is the most important topic for investors"

Compliance is the conformity in fulfilling all statutorily prescribed as well as voluntarily imposed regulations in an enterprise. In a talk with Mathias Renz from VentureCapital magazine, Sabrina Keese, partner at Kerkhoff Consulting, explains not only how the introduction of compliance guidelines can help realize cost benefits but also the advantages resulting for private equity companies upon the introduction of a specific compliance management.

 
 
VC Magazin: What are the compliance failures you currently observe most frequently in daily buying processes?

Keese: There's a wide range extending from process errors to corruption. Many companies don't have signature guidelines, for example. Others have either disastrously bad supplier contracts or even none at all. Another frequent observation is the so-called "purchase bypassing the purchasing department"; for example, when the personnel manager just buys a laptop or office supplies at a Mediamarkt or at other specialized discount stores. We can generally say that sales contracts are almost always better than purchasing contracts.

VC Magazin: Your consultancy has been specializing for years in the area of purchasing and procurement consulting. What are the savings potentials of a functioning compliance management?

Keese: When we talk about optimization of purchasing and savings, we'll usually have in mind large amounts in multi-digit millions of euros. When we talk about compliance management, we talk about the transparent handling of processes. The security concept ranks first with this service and is definitely above the savings potential.

VC Magazin: What may be the concrete consequences of compliance failures?

Keese: Until 1996, expenses for corruption abroad were still tax-deductible as useful expenditures. Today, of course, corruption is a punishable offence. For example, the supervisory board is also obligated – due to its duty of care in terms of owner's interests –to proceed against the management board in case of gross offences such as corruption or any violation of antitrust laws. Antitrust law offences may result in fines of up to 10% of the corporate group sales, and such fines may even jeopardize the existence of the company. Also, the enterprise first calling upon the antitrust authorities in Brussels and submitting sufficient evidence will get away without any fines at all.

VC Magazin: What may be the importance of the compliance issue in purchasing for associated companies?

Keese: Liability protection is the most important topic for investors. Just imagine an investor having invested in a company affected by the dioxin scandal. Such risks are supposed to be identified and eliminated already in the due diligence process. Our primary duty is to review and optimize processes and contracts. A well-functioning compliance management can remove a lot of risks from a private equity company and from the persons acting in their portfolio companies; additionally, it can render processes more efficiently which will go hand in hand with cost savings. Today already, many large companies will shun suppliers which do not impose any compliance guidelines, or they will strike them from their list of suppliers. That may threaten the existence of small and medium-sized companies.

VC Magazin: To what extent are private equity companies at all able to enforce compliance specifications in portfolio companies?

Keese: That's a question of share ratios and influence. With majority conditions, this shouldn't be difficult. In case of minority interests, it will be important to show the advantages of sound compliance management. A certified company enjoys a higher reputation and will thus realize advantages in marketing and public relations work. In the final analysis, I can only see benefits.

VCMagazin: What's the strength of demand by venture capital and/or private equity investors for your services?

Keese: It's currently very strong. Any scandal – like the already mentioned dioxin scandal – will increase the sensitivity for compliance management. Moreover, the legislator is currently especially active in this respect. The topic's importance has also been emphasized by the Institut der deutschen Wirtschaftsprüfer (German Institute of Certified Public Accountants) which submitted a draft for reviewing compliance standards in enterprises.

VCMagazin: How much time do you estimate until compliance specifications will actually be really lived by? What are the costs incurred for a company?

Keese: The question is: What's the condition we'll find the company in? If there are certain predominant structures, I would estimate half a year. A lot also depends on the corporate culture we'll find in a company, and also for how long such "wrong" conduct is already entrenched. It's thus not possible to arrive at any sweeping cost estimate. We are principally paid according to daily rates, and we'll estimate expenditures beforehand. Our commitment is to reach our targets and objectives; if not, we'll be reworking.

VC Magazin: Thank you very much for this interview.