Corporate governance is one of the key areas of focus for today’s board.
With growing attention on firms’ ethics, more transparency than ever and an ever-increasing list of regulations to comply with, governance and compliance take up a lot of the board’s time.
But compliance can be costly. What if you took a different approach, and failed to meet the standards set for you? What if you failed to keep up with the requirements of legislation or best practice? Do the costs of non-compliance outweigh the costs of compliance?
Getting it right vs getting it wrong – comparing the costs
Compliance is an essential element of the board’s role. Your directors are responsible for ensuring your firm is on the right path, both in terms of commercial strategy and ethical best practice.
In terms of compliance, the increased accountability for individuals introduced by – for instance – a number of FCA requirements also makes directors and other nominated individuals personally accountable for failures to follow the rules.
In some areas, complying with certain rules is non-negotiable. Breaches will lead to fines, negative publicity and – in the most extreme cases – being prohibited from running the business.
In other areas, good governance will give you a business advantage by enabling you to compare favourably to your competitors.
What are the costs of compliance?
Compliance costs are not insignificant.
From the board’s point of view, there’s the time cost of making decisions on governance issues.
Then there’s the cost of implementation. Whether you have an in-house compliance team or outsource to external experts, there is expenditure.
Technology solutions can be used to make compliance an in-built step in your processes, but again there is a cost attached to these.
A report earlier this year suggested that many boards are rather complacent about compliance. If this is the case, there’s work to do – and money to spend – to plug the gaps.
As well as making decisions on firm-wide compliance matters, the board itself needs to ensure its own processes are in line with regulatory and best practice standards.
Your board packs are a prime example of this. They contain corporate-confidential information; details of your proposed future strategies, investments and divestitures. How are they delivered? Are they sent by post or courier? Potentially left in porches or behind bins if your directors are out? Or emailed out via insecure or unencrypted links?
What would the costs be of changing this?
Boards sometime resist moving to more ‘high-tech’ solutions – online board portals, for instance – as they think the cost would be prohibitive.
In fact, when you take into account the direct spend on paper, electricity, post etc, plus the indirect spend on company secretary time in compiling packs, online solutions often compare favourably.
How about the cost of non-compliance?
While there are clearly costs to being compliant, there are also significant costs associated with regulatory failings.
There are costs in real terms, of course. A breach of the GDPR, which came into force in May this year, for instance, can lead to fines of up to €20m (£18m), or 4% of the firm’s worldwide turnover.
The Financial Conduct Authority is not shy of dishing out penalties either, with FCA fines rising tenfold from 2016 to 2017.
Regulations like the Senior Managers and Certification Regime put the emphasis on personal responsibility – and not just for designated Compliance Officers but across relevant senior management. Increasingly, firms are reaching the conclusion that compliance is everyone’s responsibility.
Then there are the opportunity costs – the fact that a compliance breach may cost your company business. With compliance and brand intrinsically linked, you can’t afford to under-estimate the impact any governance failing might have on your commercial performance.
What should directors be doing?
So, if you’ve concluded that the potential cost of non-compliance isn’t worth the risk – what should you be doing to ensure your board and your firm meet compliance requirements?
- Consider having a compliance expert on your board. Raising the profile of good governance is a sure way to get it higher up your meeting agendas.
- Identify whether technology can help. Consider exploring whether you can improve corporate governance with a board portal.
- Look at small wins – find out why something as basic as good minute-taking might be unexpected route to better governance.
- Make sure the board steps up to its responsibility. In many businesses, the Compliance team takes sole responsibility for governance. In fact, good governance should be everyone’s responsibility.
Compliance clearly has an associated cost. But the financial implications, both direct and longer-term, of failing to comply with regulations or ethical best practice can far outweigh the preventative cost.
The Compliance workload shows no signs of decreasing. An ever-growing list of requirements and regulatory changes makes the compliance role harder than ever.
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