Business executives often grumble when new government regulations, like China’s Basic Standard for Enterprise Internal Control (C-SOX), are released. They are worried about the extra time and cost of implementing the regulation and the burdens that this will put on the company. While government regulation can be a costly exercise, what about the benefits? In China, where governance, risk and compliance practices are generally behind those in more advanced economies, companies should expect substantial benefits from implementing this new regulation.
What benefits can Chinese companies expect from C-SOX compliance?
1) Lower risk. When employees are more aware of how to manage and prevent risks, the overall risk profile of the company goes down - this includes financial and operational risk categories.
2) More predictable business. Companies that have steady, predictable business are valued more highly by investors, customers and suppliers. C-SOX compliance makes you more predictable by imposing disciplines and giving you the tools to make the business steadier.
3) Increased trust. Investing in the process of C-SOX compliance means that the market will perceive your company as more trustworthy because you are willing to make your operations more transparent.
4) Higher stock price. The stock market values companies that are well-disciplined and transparent higher than companies that are difficult to understand. Companies that are C-SOX compliant will have higher valuations than those which are not. This data has been validated in the US and Japan, which have similar compliance rules.
5) Motivated employees. Employees care that the companies they work for are ethical, well-run and stable. Therefore, investing in China SOX compliance means that your workforce will be more motivated to help achieve your goals.
6) Lower employee turnover. The average cost of replacing an employee is 150 percent of the employees annual salary. Therefore, there is a big incentive to reduce turnover and lower your costs. Companies that are C-SOX compliant have better processes and more engaged employees, which will reduce the voluntary departure rate.
7) Improved supplier relationships. Suppliers are a critical part of your supply chain, and they will appreciate your investments in processes and systems that give them a clearer view and more access into your business. This means more just-in-time delivery, lower inventory costs, and more bargaining power with your vendors.
8) Quicker decision-making. C-SOX mandates the definition and documentation of internal controls and company policies. This means that information will be easier to find and use, and that the company will be able to make decisions more quickly.
9) More customers. C-SOX compliance is a competitive advantage and customers will want to do business with an open, ethical and well-run company. Expect to see higher win rates and more profitable customer relationships once your China SOX implementation is underway.
10) Better corporate governance. This is the sum of the benefits of compliance. Better corporate governance lowers risks for all stakeholders, improves the image of the company, allows for better decision-making and more efficiency in the company. This will be reflected not just in the board of directors, but in all employees.
Evidence from companies that implemented Sarbanes-Oxley (SOX) in the US suggests that there are many more operational, financial and strategic benefits to be had from investment in compliance processes. Since the Basic Standard for Enterprise Internal Control is new in China, the rate of improvement will be dramatic.
