Regulation no match for good governance

By Mark Noble | September 21, 2007 | Last updated on September 21, 2007
4 min read

Many regulatory or ethical mishaps are created by situations that simple regulation cannot solve, a pair of leading compliance experts argue.

A focus on governance rather than regulation is a better way for companies to stay out of trouble, according to Janis A. Riven and Paul Belanger, co-presenters on good governance practices at the ninth annual Regulatory Compliance for Financial Institutions conference in Toronto.

Belanger, a partner with law firm Blake, Cassels and Graydon, who specializes in corporate compliance, says strong governance will influence decision making and sets the values and business objectives of a company.

To understand this, advisors should ask themselves which punishment is worse: a fine levied by an industry regulator like the IDA or MFDA; or the impact that an allegation — proven or not — has on a prospective client.

In a business that relies heavily on reputation, simply being accused of misconduct can be devastating. An advisor firm with a good governance model would be more concerned about its reputation than the monetary fine, and most likely would have compliance procedures in place to ensure unethical behaviour is stamped out, whether it contravenes regulations or not.

Regulatory compliance is merely a tool within an overall governance regime, in put place to ensure a company can maintain a reputation of integrity and meet regulatory requirements. Riven and Belanger argue formal compliance geared solely to meeting the letter of the law is a bare minimum solution to combating internal corruption.

“At the very least the organization has to stay in business, it has to survive and it has to grow and at the lowest threshold of this, it has to make sure it’s obeying the laws,” says Riven, a lecturer at Concordia University’s John Molson School of Business and the president of Chartered Secretaries Canada.

Riven says most well-run companies go above and beyond meeting regulatory requirements. These types of companies organically develop compliance as a way to meet their own governance objectives. They have an internal culture that champions ethics and a system that clearly defines accountability and responsibility.

She also says the best corporate governance structures impose both those requirements on people at every level of the company. The concept is simple, she says, yet still lacking in many organizations and has been a key factor in almost all of the major corporate scandals.

“Accountability has become a buzz-word in governance because of Enron, Worldcom, [and] Nortel. In these cases there were people who had tremendous power who didn’t seem to be accountable to anyone,” she says. “Nobody was watching over them. The whole governance structure had forgotten about accountability.”

Riven adds a good governance regime gets around this problem by implementing group decision making and ensuring even at the top, people are required to justify their decisions and defend how they fit into the company’s governance model.

A key way to do this is to foster a culture of transparency, both at the sales level and internally.

“You don’t want to attract clients who are widows and orphans when your strategy is to take very high risk,” she says. “With employees it’s the same thing. You don’t want employees working for you who aren’t going to fit into your organization.”

Belanger says one of the major vulnerabilities companies have are rogue employees who haven’t been integrated properly or simply don’t fit into the company’s culture.

Belanger says this kind of transparency is extremely important, otherwise employees can view the company’s policies as just another piece of paper, and will act independently of the company’s guidelines.

He says he favours the stick over the carrot, especially in financial services because compensation bonuses and commissions can be strong motivator for an employee to break with the company’s policies, especially if there is nothing illegal about what they are doing. Situations when a trader who takes on ever greater risks in order to recover losses is an example of the type of action which can have devastating consequences for a company.

In some cases good employees can also be rogues. Riven points to a case where a competent insurance executive who was well regarded in the industry moved from one company to another as a result of a merger. He was fired soon after the transfer, for travel expenses which were perfectly in-line with his former employer’s internal policies, but were considered outrageous in the new environment. Riven says the situation is unfortunate, because the company could have prevented the loss of a valuable employee simply by communicating its internal policies properly.

Finding the right fit extends to third-party providers, Belanger highlights. A company’s reputation can be on the line when picking a third-party provider, whether it is a dealer, wholesaler or even a call-centre to solicit business. Picking one that does not share a similar business model can change drastically change how your company is viewed.

“You’ve really got to understand the behaviour of the people you work with,” he says. “Even if third parties are involved, you’re still going to wear their behaviour.”

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Mark Noble