The financial scandals of the 1990s forced state and federal governments to take a look at the inner workings of boards of directors and management practices in regards to corporate compliance. Ultimately, they found that the bulk of corporations had developed a culture that benefited the interests of managers and board directors over those of their shareholders.
The lack of transparency allowed unethical practices to continue unchecked for decades. Until corporations got caught covering up financial deficits, it was easy to overlook what went on in the boardroom. In retrospect, it’s fairly easy to see where it all went wrong. The major factors that led to the public exposure of the downfall of several major corporations became the driving forces for corporate governance compliance accountability and responsibility.
Major Factors that Drove Corporate Governance Compliance
The best way to approach improving compliance issues is to take a closer look at the factors that drive them. The following four factors played a major role in uncovering the scope of corporate scandals:
- Markets are increasingly interconnected. This creates new opportunities for market growth, but it also creates new threats and makes it more difficult to anticipate the types of threats and their sources.
- Advancements in technology have occurred rapidly and globally. This progression opened up extensive outlets where corporations could conduct business faster than controls could be put into place. Corporations were not adequately prepared to deal with the scale of problems that new technology created.
- The number of people in virtually every country across the world has been growing. As population density increases, the financial impact of corporations holds the potential to negatively affect entire communities, cities, and regions.
- Free Market. Corporations have long upheld the philosophy that governments should practice minimal interference to allow them to tap unlimited growth potential. Many corporations take a short-sighted view of growth, preferring to focus on short-term gains, rather than consider short-term gains as part of their overall profitability margins. Moreover, many corporations compensate their managers and board directors based upon a snapshot of financial metrics, rather than on the overall financial scope.
Human Characteristics Play a Role in the Era of Compliance
By their nature, all human beings are imperfect. Everyone likes to have nice things. If we are truly honest with ourselves, nearly everyone wrestles with conflicts between greed and ethics. By virtue of their positions, board directors, CEOs, and managers have a higher responsibility to set their egos aside in favor of ethics and morality.
In his second inaugural address, President Franklin D. Roosevelt said, “We have always known that heedless self-interest was bad morals, we now know that it is bad economics.” His sentiment rings more true today than ever before.
Board directors and managers continually need to assess their own motivations for reconciling or conflicting with market changes, the corporate environment and the needs of their shareholders.
With the emphasis on corporate governance compliance, board directors and managers need to know the following principles of good governance and be willing to embed them into the culture of their corporations:
- Good ethics and morals
- Social responsibility
Corporate compliance is a performance issue. These principles reflect the relationship between the board of directors and management. The culture that leaders create at the very top level of the corporate structure has a trickle-down effect to the rest of the organization.
The Trend Toward Creating Compliance Departments
The costs of corporate governance non-compliance can be extraordinarily high. This is a major reason that corporations are trending toward creating new departments for the express purpose of assuring adherence to compliance measures.
Corporations create compliance departments and hire staff, but it’s important to recognize where compliance department employees get their authority. Their authority doesn’t come from state or federal regulations. It doesn’t come from the board of directors, management, creditors, shareholders or customers either.
Employees who work in compliance departments need to be aware of the purpose that their corporation serves and to connect its purpose with the government’s structures for compliance. Compliance departments continually study judicial and governmental actions as they relate to prosecutions that result from corporate non-compliance and regulatory enforcement actions. They can then apply their knowledge to the structure of the corporation.
Compliance departments consist of a corporate compliance officer (CCO) and staff. While the staff takes its authority from the pressures of governmental compliance, which demands that they operate at similar levels as their industry peers, the CCO reports directly to the board of directors. Compliance departments are separate from legal departments, though they carry the same weight.
Compliance departments are a hub of activity. They are responsible for surveying and monitoring the company’s performance in relation to its goals, as a means of checks and balances with management and the board of directors. The compliance department assesses the skills, diversity, and conduct of the board of directors, as well as the board’s relationship with the company president or CEO. In their communications with the board of directors and managers, CCOs take a partial role in overseeing risk management, ensuring corporate compliance and integrating compliance measures throughout the corporate framework.
One of the most important duties of compliance departments is to work with accounting departments and auditors to ensure that internal and external financial reports are accurate, transparent and reliable.
Their responsibility includes assessing the ethical tone across the scope of the organization. Compliance departments that cover all the bases and run like well-oiled machines protect the rights of shareholders.
Some Final Thoughts About Following Corporate Governance Compliance
Some of the smaller corporations have recently made noise about the increased cost of compliance cutting into their profits. Our society is becoming increasingly litigious, which puts every size of corporation at risk of financial loss. On a positive note, compliance measures provide natural incentives for businesses to grow in ways that are responsible and accountable.
The impact of the prohibitive cost of compliance for small and medium-sized corporations is quickly becoming one of the new hot topics in the corporate world. Just as a corporation’s compliance measures need to reflect the company’s culture, style, and other principles, some think that the degree of compliance measures should also correlate to the size of the company’s profits. Small and medium-sized corporations will need to voice their concerns and help develop fair practices in the coming years.
At the end of the day, what is good for large corporations is also good for small businesses and non-profit organizations.