Why should you have a compliance program? The Business Case

How do we convince organizations to adopt a Compliance and Ethics (C&E) program?  How do we convince them to make it truly effective?  How do we convince the board members, executives, managers and employees?  In a sense we are selling all the time.

I have seen quite a bit in posts and the literature about “making the business case,” convincing companies that it will be worthwhile from a business point of view.  Sometimes commentators even suggest this as a replacement for the legal case.

From the legal perspective, lawyers may rely on scare tactics, explaining the law and what bad things will happen unless a compliance program prevents violations.  Sometimes a compliance program (or parts of a program) is legally required, and lawyers will tell us we have no choice.

Others may just think it is the right thing to do, to protect the public.

Who is right?  In this series we consider three “cases” for doing C&E right:  the business case, the legal case, and the moral case. In this article we discuss the business case.  In the next issues we will discuss the legal case, and then the moral case and general conclusion.     

1. The Business case

You can be adding value to the business.

The business case rebels against reliance on scare tactics and legal mandates, and reminds us that as C&E professionals we do add value.  Advocates of this view push back against being negative or antagonistic, and recommend we be pragmatic and look to improve the business as our prime role. 

There is, indeed, much to be said for the business case. Here is a point I like to start with that is simple and based on business analytics.  The Association of Certified Fraud Examiners’ annual reports always show that businesses lose 5% of their top line to fraud. This can be a financial figure that gets anyone’s attention.  The key here is the fact that a good C&E program will uncover waste, fraud and abuse in any business. Doing compliance audits, studying business data, talking with people in the field, receiving helpline calls – all of this leads to unearthing a broad range of misconduct, including things that harm the company.  The opportunity to protect 5% of gross revenue is an appealing argument.

There is also a point that the businesspeople and the lawyers will appreciate. The same C&E program can detect instances where your business is the victim of others’ misconduct. Suppliers and/or customers may be cheating you.  The same techniques that uncover employee misconduct also unearth instances when others are hurting your company. This may present an opportunity to bring in money from suing others for damages. 

Effective C&E programs dig into what is happening in the business.  Good C&E professionals talk with people in all parts of the business.  They do data analysis and understand the business. Because of this they are uniquely qualified to identify inefficiencies in the business and to recommend improvements to business processes and areas where the business could perform better.  This may come not just from the ideas of the C&E professionals, but from the fact that they talk with and listen to people in all areas of the business at all levels.

An effective program can also help build employee morale and commitment to the business.  It can even improve employee effectiveness – sales people, for example, may be more effective if they can feel confident that they know what the rules are. 

Having a commitment to doing the right thing and a stellar reputation is clearly a business asset.  It aids in recruiting talented employees and retaining them.  It helps with customers and the company’s market appeal.  It can even be a factor for business owners and investors who plan someday to sell the company to a larger, blue-chip company.  Such potential purchasers will want to know that the company they are buying is safe, and not hold a hidden scandal waiting to explode.  Similarly, bigger companies may look for quality and reliability in their supply and distribution chains.  A commitment to C&E can show that you are a reliable business partner.  And if you are looking to be a supplier to the government, depending on size, having a program can be a requirement under the Federal Acquisition Regulation.[1] 

The business case:  an overlooked weakness.

Certainly C&E professionals should not be seen as always opposing any new ideas or initiatives and creating unnecessary bureaucratic hurdles.  They should be able to work cooperatively with others in the business.  But there are serious downsides to relying solely on the business case.

When the business case is discussed there is solely focus on the value created or return on investment for the money expended on C&E. Typically, however,  there is also no consideration of the concept of opportunity costs.  If, for example, you are arguing for a $1,000,000 budget only because of the business value you can bring, consider what happens when you are competing for the same dollars with the sales and marketing team.  If there are no other considerations – only the bottom-line numbers – what happens to your arguments if the businesspeople can beat you at your own game.  For example, suppose you can show that the one million dollars invested in the C&E program has a return of 10%.  Impressive, yes?  But the opposing marketing team can deliver a 15% return.  So going with the C&E investment would mean giving up 1/3 of the new, potential revenue marketing can deliver.  In other words, the value of any investment is relative to the value of other opportunities.  If marketing can deliver 15% and you can only deliver 10%, then I go with the team that gets me the higher return.  A dollar that goes for a mere 10% return is a dollar not earning a 15% return.

If your mission is only about the numbers you also set yourself up to be in the regular line for budget cuts, just like any other part of the business.  If you depend solely on the business case, then when it comes time for cuts you are just as inline as any other part of the business.  Solely relying on the numbers makes you just as expendable as any other business activity. 

A problem here is that C&E is not just another P&L item. The business case has an important role, but is only part of the story.  

In a later issue we will cover the Legal Case and subsequently the Moral Case and Conclusions. 

[1] There are also arguments that companies that are ethical, have C&E programs, or similar elements have greater success in the marketplace and outperform their peers. Others may challenge these based on whether performance results are really cause and effect or correlation  (i.e., that better performing companies can afford better C&E programs, rather than the programs producing the better business results).