A CULTURE OF COMPLIANCE

How Compliance Can Affect Corporate Culture for the Better

2A CULTURE OF COMPLIANCE: HOW COMPLIANCE CAN AFFECT CORPORATE CULTURE FOR THE BETTER

TABLE OF CONTENTS

INTRODUCTION 3

THE COSTS OF NON-COMPLIANCE 4

CHANGING BEHAVIOR – BENEFITS OF A CULTURE OF COMPLIANCE 5

USING COMPLIANCE AS A COMPETITIVE ADVANTAGE 6

ESTABLISHING A COMPLIANT CULTURE – FROM A CULTURE OF COMPLIANCE TO A CULTURE OF INTEGRITY 7

CONCLUSION 9

REFERENCES 10

A CULTURE OF COMPLIANCE: HOW COMPLIANCE CAN AFFECT CORPORATE CULTURE FOR THE BETTER 3

Introduction

Since the 2008 financial crisis, regulators have been working overtime to change the popular perception and thus behavior of organizations around the world by implementing new and complex regulatory requirements. But high profile scandals in recent years such as Libor, Volkswagen’s emissions failures, manipulation of the FX markets, FIFA corruption, and many others, have continued to offset progress that has been made.

In order to restore trust and regain consumer confidence, organizations need to find new ways to ensure they remain compliant with the increasingly complex regulatory demands they face. Understanding regulators’ expectations and requirements and being able to apply them can be as big a challenge as keeping abreast of the many changes.

The best and most effective way for a company to be compliant is to embed core practices into its corporate culture. Nearly all institutions provide some level of training to employees, but a culture of compliance goes beyond once-a-year mandated training, it embeds compliance into everyday workflow and sets the

foundation and expectations for individual behavior across an organization. Ensuring employees are consistently educated and informed on company and regulatory policies will help enforce increased adherence to today’s constantly evolving compliance standards.

The benefits of implementing a culture of compliance can, and should, be leveraged as an opportunity for competitive advantage. An institution that embeds ethics into its core culture will see widespread benefits ranging from increasing its bottom line to bolstering confidence in clients, employees and other key stakeholders as they recognize a foundation of integrity and accountability.

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The Costs of Non-Compliance

Regulatory demands are only continuing to increase, placing added pressure on institutions across every sector – most notably in the financial space. From the complex Financial Conduct Authority’s (FCA) Advising & Selling rules, to Anti-Money Laundering (AML) and Conduct Risk, these are just a few of the key regulations that are growing in importance as regulators take a closer look at company procedures around these practices.

Scrutiny around compliance, or rather non-compliance, is also rapidly increasing as regulators look to ensure that companies are putting policies and procedures in place to effectively respond to and mitigate risk. The regulatory demands are high, and the costs associated with non-compliance are even higher.

The most obvious consequence of non-compliance is the huge monetary penalties and fines that can occur as a result of misconduct. These fines span industries and regions as regulators look to make examples of major compliance failures.

Across the financial services industry, exuberant fines also run rampant. Research shows that in 2014, banks in the US and Europe paid nearly $65 billion in penalties and fines, which is about 40 percent greater than 2013.1 In June 2015, a large global bank was fined $185 million for failing to comply with rules intended to protect client assets. Since then, the company has “undertaken an internal review to improve its policies.”2 While the

company is now taking steps to strengthen its compliance programs, it could have avoided a huge fine, as well as reputational damage, had it incorporated a more robust compliance framework from the start.

Besides the steep financial implications, research shows that there is an increased focus from regulators on personal liability. Compliance Officers are increasingly being held accountable for their actions, or inactions, if the services they provide are deemed negligent. In fact, a new study shows that 93 percent of compliance professionals expect their personal liability to increase over the next year.3 In 2014, Compliance Officers at a number of major financial institutions have been fined, banned or fired due to compliance failures.

Huge fines and increased personal liability are just two of the repercussions of non-compliance. While big companies usually have a better shot at bouncing back from charges or penalties they face thanks to deeper pockets, smaller companies may not have the capital or resources to do so, which can result in a company having to completely shut down. With the consequences of non-compliance only continuing to grow, it is becoming increasingly imperative that companies find ways to keep abreast of the ever-changing regulatory environment.

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Changing Behavior – Benefits of a Culture of Compliance

The behavior of companies and regulators is changing across every industry. We are in a time of what many are calling “super-regulation,” where regulators are going beyond just slapping companies on the wrist for misconduct. They are taking steps to circumvent misbehavior by implementing processes and standards to ensure compliance is top of mind and that organizations of all sizes have a framework in place to effectively mitigate risk.

In May 2015, for the first time ever, the Antitrust Division of the U.S. Department of Justice (DOJ) awarded a company sentencing credit for implement-ing an effective compliance program after the start of an investigation. A London-based banking and financial services company was being investigated due to its involvement in the alleged manipulation of the foreign exchange markets. This institution ultimately received credit due to its initiative to bolster its compliance program in order to prevent similar misconduct in the future.4

This ruling showcased that the DOJ is serious about influencing operational changes and is willing to reward companies that are taking steps to do so. Regulators are continuing to heighten enforcement through massive fines and stricter processes, but they are also taking steps to encourage those companies that are implementing stronger compliance policies.

The tangible and intangible benefits of implementing a culture of compliance are widespread. The palatable rewards can be seen in the case of the previously mentioned bank ruling – the company was directly rewarded with a decreased sentence due to its effort to make behavioral changes. Reduced fines are just one of the direct benefits of compliant behavior. The intangible benefits of creating an ethical culture go beyond monetary implications. Creating an organization that follows the rules and encourages the highest level of ethical standards helps increase trust with employees, clients and potential clients; it helps draw in and retain top talent; and most importantly, it ultimately builds positive brand awareness with influential stakeholders around the globe.

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Using Compliance as a Competitive Advantage

Many companies operate reactively to regulatory requirements as they scramble to develop internal policies after new regulatory rulings are put into place. By creating a proactive culture of compliance, companies are able to respond to new rulings more quickly, allowing them to better pursue their business goals.

Adhering to regulatory requirements is mandatory, time consuming and complex, but companies can, and should, maximize the large amount of time and money spent on developing a strong compliance program and turn it into an opportunity for competitive advantage.

INCREASING THE BOTTOM LINE

Companies that set the groundwork for a culture of compliance are ultimately more agile when responding to new regulatory changes. They can remain one step ahead of their competitors that have more disparate, reactive processes in place.

Research has shown that an accounting scandal alone typically takes a reputation-related toll equal to about 27 percent of a company’s pre-scandal share price.5 This alone shows that staying atop of regulatory changes can help a company maximize growth and preserve value for stakeholders.

STRONG BRAND REPUTATION AND AWARENESS

In a time where trust in financial institutions is lacking, an organization can come out on top by promoting its own strong ethical behaviors and internal compliance policies, especially as compared to competitors. Recognizing the public disconnect between integrity and the banking sector and capitalizing on the perception of mistrust, an organization can build awareness around its own culture of compliance to help bolster its own reputation.

REDUCED FINES

The recent ruling by the DOJ to reward the previously mentioned bank with sentencing credit is a prime example where a company leveraged compliance in order to benefit the company and its stakeholders.

In another example, a Japanese automotive parts company was charged for price fixing, bid rigging and market allocations. The DOJ later reduced their sentence in part due to the institution of an effective compliance program. This is another case that ruled in favor of a company that showed initiative to incorporate change through stronger compliance standards.6

In both cases, each company’s dedication to improving its policies helped put them one step ahead of their competitors. These rulings further indicate that the DOJ is taking a hard stance to implement change. As the DOJ and regulators continue to provide more clarity around exactly what an “effective compliance program” entails, a company can only benefit from staying up to speed on new rulings and adapting its corporate culture to ensure the desired policies are in place.

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Establishing a Compliant Culture – From a Culture of Compliance to a Culture of Integrity

Establishing a culture of compliance is a huge undertaking but an extremely worthwhile commitment. It takes continuous vigilance, resources and time to influence widespread change. As regulatory demands continue to grow, companies need to have the resources and technological framework in place to build compliance practices into their everyday workflow.

HOW TO ACHIEVE A CULTURE OF COMPLIANCE: THE BASICS

• Awareness: Simply put, a company can’t be compliant if it doesn’t fully understand regulators’ expectations. In today’s constantly evolving regulatory environment, companies need to find new ways to keep their finger on the pulse of changing regulations. It is extremely important that an organization has the resources in place to keep managers abreast of new developments, meet deadlines, and understand complex rules in a timely manner allowing them to make well-informed decisions to better mitigate regulatory risk.

• Communication: Compliant behavior goes hand in hand with instilling an ethical culture across an organization. To achieve this, the tone needs to be set from the very top. The C-Suite needs to effectively and continuously communicate the expectations, policies and procedures that employees are expected to understand and practice daily. Furthermore, senior managers need to be transparent about their own behavior by setting a high standard of ethical conduct that can be filtered down throughout an organization.

A culture of compliance is founded on the individual behavior of each employee across an organization. An effective compliance program needs to have clearly defined rules and standards of behavior that can act as a road map for every employee. Clearly defining the standards of respect and communicating the behavioral expectations for each and every employee will encourage teamwork and productivity as everyone strives to adhere to the same cohesive compliance policy.

Education: Perhaps one of the most important pieces of the compliance puzzle is ensuring that employees are educated on an organization’s internal policies and external regulations in a regular and influential way.

Companies have historically approached compliance training as a once-a-year process, but with regulations, procedures and internal corporate procedures constantly evolving, employees need more repetitive education in order to stay abreast of ongoing require- ments. New approaches, such as MicroLearning, focus on delivering training in small, specific modules in order to maximize retention of information.

• Effective Technology: There is no one-size-fits-all approach to compliance education, so companies need to create a customizable framework that appeals to the needs and learning styles of different employees. E-Learning programs that leverage interactive use cases, videos, games and quiz questions that cater to a specific user’s job function, have proven to be an extremely effective way to reach the digital-savvy employee.

Incorporating mobile-friendly elements allows individuals to more easily remain on top of requirements through their mobile phone or tablet – and videos can be integrated in order for visual learners to learn more effectively. All of these components are key elements that make up an effective compliance program.

A robust course completion tracking and reporting system is essential to simplify the administration process, monitor employee participation and drive high completion rates. This adds additional benefit for a company should an issue arise and can be provided as evidence if regulators question company behavior or intentions.

• Incentives: There is no denying that corporate culture reflects what managers reward. By developing suitable compliance incentives, management can demonstrate their commitment to compliant and moral conduct. Just like any aspect of business, an employee will be more motivated if there is potential for personal and professional gain.

This is a long-standing position that the Securities and Exchange Commission (SEC) has supported for years. In 2004, then SEC Director of Enforcement Stephen M. Cutler said, “Make integrity, ethics and compliance part of the promotion, compensation and evaluation processes as well. For at the end of the day, the most effective way to communicate that ‘doing the right thing’ is a priority, is to reward it.”

• Incident Reporting and Case Management: Incident reporting and case management are important aspects of a compliance program in order to ensure a company is able to track and address any misconduct. Being aware of non-compliance is half the battle when it comes to mitigating risk.

Some employees wish to remain anonymous when reporting misconduct, while others want a personal response or some type of acknowledgement. An effective system offers a variety of options for employees to report an incident. Reporting options can be offered via an online Web portal, automated phone system, live operator, or a combination of the three for a thorough incident reporting system.

Many businesses have inconsistent methods of incident reporting case management that begins with multiple concern reporting lines and continues with the high volume of affiliated spreadsheets and notes stored in various, disconnected locations. This exposes a company to additional risk that could be otherwise avoided. A more streamlined incident reporting and case management platform equips an organization with one cohesive enterprise control system used to collect, manage and resolve incidents across the entire company. Collecting all incident information in a consistent manner helps organizations quickly determine appropriate actions based on the level of risk presented to them.

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Conclusion

Research shows that “building a culture of compliance” was one of the top trends across the compliance industry in 2015, meaning higher ethical standards and behaviors are only going to continue to grow in importance. Regulatory pressure is not going to let up anytime soon and scrutiny will only continue to increase around what organizations are doing to ensure the highest level of compliance.

As we have seen from recent rulings in related lawsuits, there is a heavy price tag placed on the value of a truly effective compliance program. Organizations need to go beyond simply adhering to rules, they need to find ways to make compliance an unalterable part of corporate culture in order to ensure maximum protection.

Ensuring that a company has its finger on the pulse of changing laws and regulations can help proactively steer that organization onto a successful and fruitful path. Effective technology, widespread organizational standards, and continuous education will help set a positive and rewarding culture of compliance across a company and promote a competitive advantage over industry peers.

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1 http://www.wsj.com/articles/no-more-regulatory-nice-guy-for-banks-1419957394

2 http://www.nytimes.com/2015/04/16/business/dealbook/britain-fines-bank-of-new-york-mellon-185-million-for-compliance-failures.html

3 https://risk.thomsonreuters.com/sites/default/files/GRC03463.pdf

4 https://www.wsgr.com/publications/PDFSearch/law360-0515.pdf

5 https://www.gsb.stanford.edu/insights/ed-dehaan-how-rebuild-trust-after-scandal

6 https://www.dlapiper.com/en/us/insights/publications/2015/11/how-does-an-antitrust-compliance-program-meet/

REFERENCES