The Carrot or the Stick?

New Ways to Explain Why Compliance Builds a Stronger Bottom Line  

There is a well-known truth that most business leaders get: bad ethics are bad for business.

The reasons are as obvious as last week’s headlines: fines, investigations, remediations, and the like can take a huge toll on internal resources and external investors.

The Stick: Where Non-Compliance Hurts

  • Fines, penalties and settlements: Increasing global enforcement and cross-border cooperation means fines and penalties have grown as well. BNP paid a record $9 billion penalty in 2015 to the DOJ for violating trade sanctions.
  • Investigation fees: Once the regulators come knocking, investigators, auditors, forensic specialists and the like take their tool. Wal-Mart spent $612 million in pre-enforcement professional fees and expenses in the 2013-2015 fiscal years, before it had even been charged.
  • Remediation costs: In addition to any remediation requirements imposed by settlements, proactive remediation takes a bite. Siemens racked up $1 billion in investigation and global remediation costs—in addition to $1.6 billion in fines and disgorgements—to clean up the fallout from its global bribery scandal.

But it’s more than just regulatory agencies who wield the stick. There’s another way that a lack of compliance can impact a company’s bottom line: loss of market valuation as investors and customers perceive it as less trustworthy.

  • Market valuation losses: A company’s brand and competitive disposition tak101e a hit when scandals emerge. Within a month of their recall, Volkswagen saw its market value plummet 43%, to the tune of $33 billion.
  • Stock price losses: Companies that announce investigations or settlements may see their stocks slide as investors react unfavorably to the news. After disclosing that the DOJ and the SEC were investigating possible corruption related to a contract award in South Africa, Net 1’s stock price dropped nearly 59%. When South African courts invalidated the contract because of the concerns, shares dropped another 28%.
  • Shareholder lawsuits: Compliance fallout may also extend to a company’s shareholders, either in the form of class action lawsuits or derivative suits brought against the company’s directors. Alcoa agreed to pay $3.75 million in attorneys’ fees and make significant compliance program and governance improvements to settle an FCPA-based shareholder derivative lawsuit—this in addition to their $384 settlement with the DOJ and SEC.

The Carrot: Where Compliance Helps

The opposite point, that good compliance is good for business, can be harder to drive home, but is demonstrably true.

In 2012 (Q2 is in dark blue in the graphic), Apple was faced with whatapple-earnings could have been a huge blow: the Foxconn scandal. Apple did something unusual for a big company: it admitted it was in the wrong almost immediately, and got to work.

Apple announced a deal with Foxconn to hire tens of thousands of new workers, tighten safety and overtime rules, and build better employee dormitories. Instead of headlines raking the company over the coals for it’s lack of ethics, Apple was extolled for their determination to bring positive change to business suppliers.

So why was it so easy for Apple? A consistently compliant corporate culture reduces negative pressures on employees to succeed at any cost, and leads to greater employee satisfaction, higher productivity, and greater loyalty. Satisfied employees have been shown to outperform their less satisfied peers. And in the case of a company like Apple, employees expected their company to do the right thing.

The Wharton School at the University of Pennsylvania found that firms considered good places to work have 2x the growth of the market average.

There’s also the defense a company is able to raise when they make a good faith effort to comply. In 2012 a Morgan Stanley employee was sentenced to nine months in prison for FCPA violations in China. Yet the U.S. Department of Justice declined to prosecute Morgan Stanley itself because the company was able to show that they had trained the employee on FCPA 7 times and reminded him to comply at least 35 times. 

COMPLIANCE AND A STRONG WORKFORCE

Compliance is about many things, of course. Yet compliance can have a big hand in helping shape the company culture, and the company culture is what gives employees a reason to love their work beyond just their paycheck. Loyalty, hard work, and the greater attraction and retention of talent are all side effects of robust compliance programs that focus on more than just the law.

“The business environment is rapidly changing,” says Mark Royal, senior principal at Hay Group. “Firms rated highest for engaging and enabling their staff achieve 4.5x the revenue growth of their lowest scoring counterparts and see up to 54% improvement on staff retention.”

Compliance and human resource departments have—or should have—their fingers on the pulse of their organization, through feedback from hotline reports, culture surveys, focus groups, and the like. The fact Apple has ranked #1 in Fortune’s Most Admired Company eight years running says something about more than just its bottom line.

More Carrots, Less Sticks

Many companies, including some billion-dollar ones, still have compliance programs that are almost exclusively configured to deal with the sticks — the fines, lawsuits, and other messes.

Their boards and their executive teams allow compliance to be relegated to crisis management. And these companies pay the price in all the ways described above.

There’s a better way for compliance professionals to raise the awareness of what compliance can truly bring. (For those that would like to take a deeper dive, our recent eBook Reporting to the Board explores this in much greater detail.)

 

Because tomorrow’s compliance is about creating a stronger bottom line, from the inside-out.

Convercent offers comprehensive and integrated compliance management, reporting, and defense for compliance departments who want to become best-in-breed. Our bi-weekly blog offers cutting edge information for compliance professionals.