Compliance encompasses a broad range of ongoing activities across all departments or divisions within a company to meet legislative and regulatory requirements. Enlightened organizations regard compliance as a useful, ethically-driven business practice and an honorable profession that exists for the mutual benefit of the company and its customers, while unenlightened companies take a different view.
Those businesses, to their detriment, view compliance as a function that requires attention only when it needs to be “fixed.” Instead of investing in compliance, they invest in fixing non-compliance.
Given the increasingly high cost of litigation and the increasing premium that employees and customers place on integrity, companies that value compliance are often highly desirable places to work and are more competitive in the marketplace.
Asset or Cost?
Whether a company regards compliance activities as an asset or a cost depends on its corporate culture. In weighing the value of compliance versus non-compliance, it may cost a mid-sized insurance carrier hundreds of thousands of dollars to prepare for market conduct examinations and pay for examiners’ per diem expenses. Those outlays pale in comparison, however, to the millions of dollars in fines the company could face for non-compliance related to claims, forms, underwriting or licensing.
Taking proactive steps to be in compliance, including investments in skilled compliance professionals, has been shown repeatedly to be a more effective strategy than fixing non-compliance by taking remedial actions.
For an organization to be successful in managing its compliance activities, the culture must reflect a continued willingness to go “above and beyond” the letter of any given law or regulation. Such treatment includes:
- Regarding compliance professionals as valued members of the team rather than as hindrances to accomplishing business goals
- Abandoning the traditional mindset of relegating compliance professionals to “dark corners” of the office
- Acknowledging that compliance activities consist of much more than “reactions to complaints” and “doing the minimum to cover ourselves in an audit”
- Using intranet and social media to help change employees’ attitudes toward compliance
Companies that value compliance tend to be organizations that foster deep loyalties with customers and employees.
Effective Strategies and Tactics
There are many ways for top and senior management to demonstrate the value they place on compliance. Those actions consist of:
- Including the Chief Compliance Officer (CCO) in top-level decision-making
- Praising the work of compliance professionals by sending e-mail blasts companywide
- Writing letters to personnel files
- Acknowledging successful market conduct examinations much like “sales wins” are celebrated
- Rewarding compliance professionals with golf outings, travel and other perks for outstanding contributions to the organization
- Allowing CCOs and their subordinates to participate in Board meetings or senior management meetings
- Holding luncheons or assemblies to recognize the contributions that compliance professionals make to the organization
- Channeling employees’ competitive desires into contests related to compliance matters (gamification)
After management has established the importance of the CCO, companies can benefit from dividing compliance responsibilities among business units rather than making the compliance department solely responsible for compliance activities.
Assigning compliance responsibilities to “leaders” or “rising stars” in various business units who work closely with their compliance department colleagues, rather than delegating responsibilities to less capable individuals who “have extra time,” can help to ensure that compliance is valued organization-wide.
The benefits of compliance activities are shown clearly in a survey conducted by the American Bar Association’s (ABA’s) Open Compliance & Ethics Group. The findings revealed that, for every $1 billion in revenue, the cost of compliance is $6 million, or 0.006%. Therefore, to be in compliance, companies do not need to spend large amounts of money relative to the incomes they generate. Nevertheless, many organizations need to step up their compliance spending to avoid the larger expenses of fines and penalties they face for non-compliance.
Companies that fail to invest in compliance programs often pay heavy fines.
In 2010, a prominent insurance carrier was fined $100 million for under-reporting the value of the premiums it sold to customers. Eight years earlier, another leading carrier was fined $4 billion for unlawful sales practices. Most typical, though, are smaller fines ranging from $1,500 to $1.5 million.
Regardless of dollar amounts, non-compliance usually results in a revenue loss for the company and also damages reputation. (i.e., how employees, customers and other stakeholders perceive the company) Although the reputational effects of violations may be difficult to quantify, one thing is certain: multiple studies have shown that it is less expensive to invest in compliance than it is to litigate and pay fines or penalties.
In the insurance sector, for example, causes of non-compliance include:
- Multiple sets of ever-changing complex regulations across the jurisdictions of all 50 states, the District of Columbia and Puerto Rico
- Economic pressures that have resulted in the acceptance of lower underwriting standards, increased volumes of mergers and acquisitions and ventures into new product lines and markets, all of which increase compliance risk
- Labor-intensive, inefficient processes for managing compliance activities
Violations concern a wide variety of practices and procedures and are committed by companies of all sizes. A common breach involves annuity suitability requirements. To reduce the number of violations, it is incumbent upon carriers to treat their compliance activities with the same level of meticulousness they devote to other aspects of their operations, including claims, compensation and sales.
Given the high cost of litigation, smart management teams invest significant resources in making certain the entire organization is operating within the guidelines of applicable regulations and laws.
Smart executives also know that “doing the right thing” is always better in the long run because it:
- Strengthens financial performance
- Bolsters employee morale
- Builds reputation
Among Generation Xers and Millennials, reputation is of critical importance. Compared to earlier cohorts, these 20- and 30-somethings expect their employers to always operate with integrity and foster excellence using a “carrot” rather than a “stick.”
Having weathered The Great Recession, employees and customers in all age groups are increasingly receptive to working for, or doing business with, organizations that value integrity.
Almost every company contends that “people” are its most valuable asset, but only an organization that invests continually in the talents of compliance professionals is qualified to make that claim with any degree of truthfulness.