Why are we Managing Compliance?

At the end of the day, it’s all about money.
– Garry Kasparov

One of our senior executives recently asked me over a cup of coffee: “Michael, why are we actually doing Compliance? Why are companies doing this?” I started answering something about being Ethical, Doing the Right Thing, Stakeholder expectations… But he interrupted me, looked me straight in the eye and asked again: “No, Michael, why are companies really doing this?”

My answer was: “At the end of the day: For the money, to protect shareholder value.” And it’s true, we are finally doing it to protect the company from having to pay fines and penalties due to noncompliance with laws and regulations, from losing money through fraud, and to protect the reputation of the company. Reputation is an asset: we use it not to lose money and to ensure we make money.

“So then why Ethics and Integrity?”, the executive asked. We need them to manage compliance. They are not necessary for compliance. You can be compliant without having integrity, but because you are forced to be; or you can grudgingly comply, even though you don’t believe in the organiation’s ethics & values. But Ethics & Integrity are not the purpose of the enterprise. That is, at the end of the day, to maximize shareholder value by making money in a sustainable way; and for this we need to be compliant.

Ethics and Integrity are preventive measures in a Compliance Management System and hence more economical than detective and corrective (after-the-damage) measures and sanctions (where the way we communicate sanctions again is a deterrent preventive control). We aim to decrease the risk of loss of reputation and financial damage from noncompliance, by being ethical and acting with integrity in the first place, because is is less costly than enforcing compliance by lots of tight and expensive controls and hard deterring sanctions. In a culture of integrity, and with an ethical set of values as supreme guidance, associates are expected to be self-motivated and hence more likely to do the right thing in the right way – and be compliant: a virtuous circle and in the end the more economical control alternative from a cost-benefit perspective: greater preventive risk reduction and more sustainability achieved with less cost of control (hopefully), but requiring completely different measures (soft factor controls). It’s all about the money.

The discussion went on: “And where are the interests of the other stakeholders?” Their expectations are contained in the shareholder expectation. Our shareholders require us to do our best to meet stakeholder expectations, because then we can deliver sustained and superior shareholder value in comparison to other possible investments.

In the end of the discussion, the executive and I agreed that, explained this way, top management would most easily buy into the necessity of effective integrity & compliance management.

Does this make sense to others? I am looking forward to your opinions and comments.

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