Are you keeping track of your compliance costs?
[This essay was originally posted at The Conflict of Interest Blog.]
A recent post reviewed some new and important research showing a positive correlation between companies having a culture of integrity and being profitable. Since then, the Ethics Resource Center issued its 2013 National Business Ethics Survey, which showed a decline in workplace misconduct which the study authors believe is likely attributable (at least in part) to C&E programs. And, a study conducted for ADP, which was released earlier this week, apparently showed that a “strong employment-related tax and payment compliance program can help lead to benefits beyond financial performance.”
At a time when the benefits of C&E are receiving so much attention it seems only fair that the costs of C&E should be considered too.
Compliance costs come in various forms. Among the most prominent are salaries and related expenses for in-house personnel doing C&E work on a full- or part time basis (i.e., not just C&E officers but, to some extent, personnel in HR, Legal and Audit). Another category of out-of-pocket C&E costs are those incurred for external products/services, such as computer-based training, hotline providers, case management or other GRC software or C&E program assessments. Out of pocket costs, of course, are fairly easy to calculate – and are, I believe, often taken into account by government officials in weighing the efficacy of C&E programs.
Somewhat less prominent are the costs implied by the amount of time spent by employees on C&E measures – meaning employees generally, not the C&E team or others with management responsibilities for the program. Company-wide training – which can consume tens or even hundreds of thousands of hours in large companies – is an obvious example of this, but there are other types too, such as time spent by business personnel monitoring various compliance measures or doing due diligence. While not always measured by companies, these costs can be significant. Knowing – at least, in a broad way – what this sort of cost is can be useful too; among other things, it can help convince skeptical employees of the seriousness of management’s commitment to strong C&E.
There is also a third type of cost, which is more often overlooked – which concerns the impact that C&E programs can have on business decisions. For instance, as reported yesterday in the FCPA Blog, a recent survey by Alix Partners “of general counsels and compliance officers found that 30% of companies in North America, Europe, and Asia stopped doing business with a partner because of corruption risks.” While perhaps hard to put a dollar amount on, forgoing business opportunities clearly can be a cost of compliance.
Another useful example of this third type of cost is imposing discipline for violations of company C&E policy notwithstanding the fact that the individual in question is a top performer or is otherwise economically valuable to a company. Any time I assess a company’s C&E program I ask whether a company can point to examples of incurring this sort of cost, as I do the stop-doing-business type of cost.
This third category of cost is, of course, the hardest to measure in any quantifiable way. But it can be very useful for showing – whether to the company’s workforce or enforcement personnel – seriousness of purpose in C&E matters. And keeping track of these and other costs is a way of ensuring that your C&E expense becomes a true investment.