Internal Control: Governance Framework and Business Risk Assessment at Reed Elsevier

Abstract

In this paper I am going to discuss the framework used at Reed Elsevier for designing internal controls and assessing business risks. To provide some background, I will start by describing Reed Elsevier and the changing publishing and information business, and also give an overview of the corporate governance environment. REED ELSEVIER Reed Elsevier plc was formed by the merger of the operating businesses of Reed International PLC and Elsevier NV in 1993. The two parent companies each own 50 percent of Reed Elsevier. Reed International has its primary listing on the London Stock Exchange and a secondary listing in Amsterdam, whereas Elsevier has its primary listing on the Amsterdam Stock Exchange and a secondary listing in London. To make it more interesting, both are listed on the New York Stock Exchange. The combined market value of Reed International and Elsevier is presently approximately 18 billion euros. Reed Elsevier has sales of approximately 5 billion euros spread across three divisions, operating across the world. Through the Elsevier Science business, we publish close to 1,200 scientific journals in print and increasingly on the Internet. Our Legal business is global, the most significant brand of which is Lexis Nexis, which has sales of 2 billion euros ([European Dollar]). In the Business sector, we have business magazines, exhibitions, and other business information services, also increasingly delivered on the Internet. The Publishing and Information Business Being a publisher used to be quite predictable. We had clearly defined and stable markets. If you had a good, reliable journal, then subscribers would renew every year. Very strong publishing brands more or less sell themselves. The industry was fragmented with a few big players. We were able to achieve steady growth in relatively mature markets. Life has changed considerably and is becoming more exciting. First, there has been considerable industry consolidation. To use the U.S. as an example, in the last five years approximately U.S.$9 billion has been spent by Reed Elsevier, Wolters Kluwer, and The Thomson Corporation in the U.S. legal publishing industry alone. Similar trends of consolidation are visible in the other markets in which Reed Elsevier is active. This is introducing a level of competition, both for acquisitions and for customers, that has not been seen in the past. In terms of technology, the Internet is clearly revolutionizing the way that information is delivered and also what you can deliver to customers. Using web functionalities, new services that are just unimaginable in a print environment can be provided to customers. The barriers to entry have also changed. There are many new entrants, some with different emerging business models. Customer expectations are also changing, with higher expectations from information services at affordable prices. So what are we doing to address the challenges and capture the opportunities of this changing environment? We have grouped our publishing activities into three global divisions--Science, Legal, and Business-to-Business--each with a global head, to manage these businesses closer to their markets. We are redefining the head office to give it a more strategic and catalytic role and we are reducing its size. We are separating our Internet activities from the print businesses in order that each can thrive in a different culture and growth path. We are investing significantly to upgrade our products and sales and marketing. In fact, this year we are investing an additional 300 million [European Dollar] in new product development, sales, and marketing. This is, in part, funded by 200 million [European Dollar] of savings in costs across the business, about 7 percent of the cost base. This represents a huge reallocation of resources within our business from the back office and infrastructure into revenue-generating areas. …