A Culture of Compliance
Compliance may be seen as a vague area with negative connotations. It may evoke visions of archaic regulations and rules. It crops up in every area of operations, from when and how much employees get paid, to safety devices on manufacturing equipment, to financial filings to be made to federal and state tax authorities.
Most small and mid-size entities tend to be negligent or reactionary when it comes to matters of compliance. However, the old adage, “An ounce of prevention is worth a pound of cure,” could not be truer when it comes to the often mundane task of complying with government regulations.
It is important to recognize that most regulations stem from some underlying problem or purpose, whether it’s to make sure that employees are not working overtime without pay, or to ensure that manufacturers are not dumping their waste into our rivers and skies. Whether you agree with that problem or purpose is something that can be addressed through interactions with your elected representatives, rather than failing to comply.
What’s Your Culture of Compliance?
Companies deal with these requirements in a
variety of ways. Some smaller enterprises rely on their
owners and C level executives to be aware of and
implement the rules. Larger enterprises may appoint
a Chief Compliance Officer or even have division
specific managers with the responsibility. Regardless
of who is in charge of daily monitoring of compliance,
the importance comes from the top. Companies can
stress the value of staying compliant by including
statements to that effect in their mission statement,
employee handbook, website, and vendor policies. Or
they can de-emphasize it by seeing what they can get
away with. Still others may operate in a crisis mode.
It does not take long for an employee, customer, or potential
buyer to see which culture has been adopted.
What’s at Stake?
Government investigations, audits, fines, and
penalties are some of the direct consequences of
noncompliance. Less visible but more important for
long-term viability of a company is the loss of reputation,
customers, and employees that can result when
a company is under scrutiny. Also, company resources
are needed to manage inquiries; civil and sometimes
criminal penalties, or even a shutdown, may result.
In early 2019, Google was fined $57 million for violations
of the European Union’s data privacy laws.
Facebook is facing large penalties from the Federal
Trade Commissioner for violation of rules regarding
privacy. BP still faces major issues with its reputation
for its failure with compliance that led to the 2010
Deepwater Horizon oil spill. More than the money
damages are losses of reputation, losses that are
hard to quantify.
What Does It Take?
The most cited reason given by smaller companies
when faced with a compliance issue is lack of awareness.
There are many ways to overcome this knowledge
gap. Hiring experienced personnel is a good place to
start. Regularly sending employees to conferences
and maintaining subscriptions to relevant industry
publications is another way. No area is more important
in this regard than Human Resources. Changes in
labor laws can happen quickly and often, and spread
across states and cities once enacted. A prime example
of this is the regulation of employee background
checks. Until recently, background checks were an
expected step in the hiring process, but in just a few
short years, multiple jurisdictions have imposed
regulations on when a check can be conducted and
how its results can be applied. Not knowing where
employees are protected is risky and can open a
company up to liability. So although the cost of compliance
may be high, the lack of it will always be higher.
The Positives
Compliance decreases the risk of fines, lawsuits,
business shutdowns, and other regulatory problems.
Going beyond what’s required can lead to a positive
reputation amongst stakeholders, ultimately increasing
a company’s value in the marketplace. This
heightened level of compliance with regulations and
ethics is a way that a company can distinguish itself
from its competitors, especially if customers include
public companies that are highly risk averse. Finally, a
company that promotes compliance should see increased
employee retention and morale, creating a
healthier, happier, and more productive workplace.
Business Insights is hosted by the Law Firm of KPPB LAW (www.kppblaw.com).
Sonjui L. Kumar is a founding partner of KPPB LAW, practicing in the area of corporate law and governance.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
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