There is a lot of talk these days about compliance, corporate governance and transparency.
Go to any publicly traded company web site, click a link for “investor relations,” and you’ll probably see another link for “corporate governance” or the like. And there you’ll find the lofty prose and high-sounding platitudes about how the “leadership” of the Company is committed to the highest ethical standards and open to the most transparent scrutiny. You’ll probably even see an impressive array of policy and compliance guidelines.
Lofty stuff, indeed.
As with most noble intentions, though, the devil is in the details. The culprit is the complexity. The concept is sound but the execution can be shaky.
The Triple Whammy of Compliance
Go to any publicly traded company web site, click a link for “investor relations,” and you’ll probably see another link for “corporate governance” or the like. And there you’ll find the lofty prose and high-sounding platitudes about how the “leadership” of the Company is committed to the highest ethical standards and open to the most transparent scrutiny. You’ll probably even see an impressive array of policy and compliance guidelines.
Lofty stuff, indeed.
As with most noble intentions, though, the devil is in the details. The culprit is the complexity. The concept is sound but the execution can be shaky.
The Triple Whammy of Compliance
Now, we’re not compliance experts. We’ll leave that to the legal and business consultancies that suddenly realized they were experts, oh, say, within nanoseconds of the ink drying on the Sarbanes-Oxley bill. (Timing, as they say, is everything: had these folks realized they were such experts prior to the Wall Street scandals and SOX, well, we may not have had those scandals and any need for that law.)
We do know, however, what we have observed as investors, investors who happen to have a stakeholder interest in the ethical stewardship of our hard-earned investment dollars. Specifically, from an investor perspective the new emphasis on compliance has produced three (3) key dynamics:
1. Compliance is costly.
2. Compliance is complex.
3. Compliance creates bureaucracy.
Cost: Executives have rightfully complained of the excessive costs involved with regulatory compliance. There are legal and advisory costs. There is the cost of creating, maintaining and administering a whole new set of policies. There are people and systems costs, and on and on …
Complexity: Business is complex enough but the new emphasis on it has added a new level of complexity to business decisions, strategy and execution. Keeping up with the rules and regulations is not only costly but also time-consuming. The volume of information can be overwhelming.
This has spawned an unintended consequence: the more rules that are created, the more violations occur. This is because the rules become so complex and cumbersome to administer that even those companies who try to do it exactly “by the book” can make a misstep and innocently overlook something. Don’t believe it? Talk to an NCAA coach or athlete who has fallen innocent victim to the labyrinth of arcane regulations in the NCAA rulebooks.
Bureaucracy: SOX, etc, has prompted the need for a whole new set of policies, processes and programs. Effectively administering these things requires, more people. With more people, come more layers. And to oversee all these new things, we even have to have a new C-level executive: the Chief Compliance Officer. Presto … instant bureaucracy! Decision-making is slowed down due to more approval requirements and levels. Productivity is hampered. Strategy and decision-making are stymied as they wait for rigorous risk assessments to be made.
The fragmented rules and regulations from increased compliance have resulted in a cost, complexity and confusion that can hurt performance. It's a classic example of the Law of Unintended Consequences: As the level of effort required for greater stewardship and governance increases, competitiveness can decrease. And the more a company tries to do the right thing by protecting shareholders' investments, the more investment dollars it wastes from the red tape and administrivia associated with the current state of compliance.
We do know, however, what we have observed as investors, investors who happen to have a stakeholder interest in the ethical stewardship of our hard-earned investment dollars. Specifically, from an investor perspective the new emphasis on compliance has produced three (3) key dynamics:
1. Compliance is costly.
2. Compliance is complex.
3. Compliance creates bureaucracy.
Cost: Executives have rightfully complained of the excessive costs involved with regulatory compliance. There are legal and advisory costs. There is the cost of creating, maintaining and administering a whole new set of policies. There are people and systems costs, and on and on …
Complexity: Business is complex enough but the new emphasis on it has added a new level of complexity to business decisions, strategy and execution. Keeping up with the rules and regulations is not only costly but also time-consuming. The volume of information can be overwhelming.
This has spawned an unintended consequence: the more rules that are created, the more violations occur. This is because the rules become so complex and cumbersome to administer that even those companies who try to do it exactly “by the book” can make a misstep and innocently overlook something. Don’t believe it? Talk to an NCAA coach or athlete who has fallen innocent victim to the labyrinth of arcane regulations in the NCAA rulebooks.
Bureaucracy: SOX, etc, has prompted the need for a whole new set of policies, processes and programs. Effectively administering these things requires, more people. With more people, come more layers. And to oversee all these new things, we even have to have a new C-level executive: the Chief Compliance Officer. Presto … instant bureaucracy! Decision-making is slowed down due to more approval requirements and levels. Productivity is hampered. Strategy and decision-making are stymied as they wait for rigorous risk assessments to be made.
The fragmented rules and regulations from increased compliance have resulted in a cost, complexity and confusion that can hurt performance. It's a classic example of the Law of Unintended Consequences: As the level of effort required for greater stewardship and governance increases, competitiveness can decrease. And the more a company tries to do the right thing by protecting shareholders' investments, the more investment dollars it wastes from the red tape and administrivia associated with the current state of compliance.
A Compliance Trifecta
Compliance is largely a function of managing and communicating information. Better organization of compliance information and more effective communication of it can result in a hitting the trifecta: being a compliant company ... but staying competitive while doing it cost-effectively.
Since we are talking about managing and communicating information, this means that information technology can play a leading role. In turn, this requires the compliance stakeholders and IT teams to work together.
Currently, this either is not being done at all or not being done on an effective basis. One reason is that compliance, as we know it today, is still relatively new. Companies are still learning how to best achieve it on the fly. So the idea of leveraging IT to improve compliance productivity and effectiveness is still very much in its infancy. Most of the IT applications to date are of the “band aid, quick fix” variety.
It’s also a tough proposition to use IT in compliance management because the information required is very cross-functional in nature; i.e. it cuts across so many, if not all, of a company’s business functions and processes.
Much of the information also tends to be qualitative rather than quantitative. It is not simple data and numbers but a fair amount of unstructured information that makes it hard to digitize and automate. So many of the regulations and rules involved are the kind of prose and legalese that don’t lend themselves to the kind of neat little spreadsheet pigeon-holing we love so much.
Since we are talking about managing and communicating information, this means that information technology can play a leading role. In turn, this requires the compliance stakeholders and IT teams to work together.
Currently, this either is not being done at all or not being done on an effective basis. One reason is that compliance, as we know it today, is still relatively new. Companies are still learning how to best achieve it on the fly. So the idea of leveraging IT to improve compliance productivity and effectiveness is still very much in its infancy. Most of the IT applications to date are of the “band aid, quick fix” variety.
It’s also a tough proposition to use IT in compliance management because the information required is very cross-functional in nature; i.e. it cuts across so many, if not all, of a company’s business functions and processes.
Much of the information also tends to be qualitative rather than quantitative. It is not simple data and numbers but a fair amount of unstructured information that makes it hard to digitize and automate. So many of the regulations and rules involved are the kind of prose and legalese that don’t lend themselves to the kind of neat little spreadsheet pigeon-holing we love so much.
A Compliance Solution
Despite these challenges to using IT for achieving productive compliance, there is a solution -- a modest one in the grand scheme of things, but a solution nonetheless.
Using our Ratchet-X integration software, the chief compliance officer and compliance stakeholders can use an IT-based solution to improve the management, maintenance, monitoring and communication of key compliance information throughout the company.
The solution is not limited in scope to SOX compliance. It is portable to other Regulatory areas, such as FDA or SEC compliance. The software can also facilitate U.S. Customs and C-TPAT compliance for import and export supply chains, as well as product safety and factory certifications for offshore sourcing.
The solution focus also is not limited to external regulatory compliance: it also can be used for internal Corporate programs, such as internal audit, accounting, product testing and policy compliance, as well as supplier/vendor and customer compliance management.
Whether for internal or external purposes, compliance cuts cuts across a wide spectrum of functional boundaries and systems these days. And whether your business involves toys or turbines, the common link in all these scenarios is information. Specifically, the ability to connect, consolidate and communicate the qualitative and quantitative information required for effective compliance.
Integrating this information is where we can help. Since seeing is believing, please check out the link below for a video about how Ratchet-X integration can make your compliance efforts more effective and productive … and a lot less costly.
http://www.ratchetsoft.com/videoseries/compliance/compliance.html
The solution is not limited in scope to SOX compliance. It is portable to other Regulatory areas, such as FDA or SEC compliance. The software can also facilitate U.S. Customs and C-TPAT compliance for import and export supply chains, as well as product safety and factory certifications for offshore sourcing.
The solution focus also is not limited to external regulatory compliance: it also can be used for internal Corporate programs, such as internal audit, accounting, product testing and policy compliance, as well as supplier/vendor and customer compliance management.
Whether for internal or external purposes, compliance cuts cuts across a wide spectrum of functional boundaries and systems these days. And whether your business involves toys or turbines, the common link in all these scenarios is information. Specifically, the ability to connect, consolidate and communicate the qualitative and quantitative information required for effective compliance.
Integrating this information is where we can help. Since seeing is believing, please check out the link below for a video about how Ratchet-X integration can make your compliance efforts more effective and productive … and a lot less costly.
http://www.ratchetsoft.com/videoseries/compliance/compliance.html
