The Compliance Game Needs Changes

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Compliance should be something that an organization “gets” (an outcome of more meaningful work) rather than treating compliance as something an organization “does” (an exercise constantly at risk of devolving into a check-the-box activity).

If I had a nickel for every time a professional athlete lamented “It’s just business, man,” I’d be as rich as a professional athlete (I’m thinking A-Rod money) – or a top SAC Capital Advisors employee.

Athletes have long uttered this platitude as a way of acknowledging the often-overlooked fact that sports teams make decisions based on cold, hard economic realities. Recent business behavior, though, suggests that business may have more in common with sports that some athletes realize.

In this video clip, Bloomberg Businessweek’s Sheelah Kolhatkar discusses how top SAC Capital portfolio managers could earn as much as professional athletes. Kolhatkar raises the question as to whether the sink-or-swim cutthroat culture at the hedge fund, which recently received an insider-trading indictment from the U.S. Department of Justice, “discouraged ethics.”

The SAC Capital culture receives prominent mention in the indictment, and it’s a safe bet that the culture discouraged a healthy approach to sound compliance. In a column on the charges against SAC Capital, James B. Stewart writes:

One new SAC employee, in an instant message to Mr. Cohen conveying information about Nokia, said he’d just gotten a lecture from SAC’s head of compliance, “So I won’t be saying much,” he wrote. “Too scary.” The government noted that this didn’t prompt any reaction from Mr. Cohen.

That depiction makes “compliance” sound more like “inconvenience.” It also sounds like compliance—at SAC Capital, and no doubt at other companies in many different industries—is ineffective. Everyone is looking for an edge, even those at the very top of their games, including SAC Capital traders and A-Rod. In enough cases, compliance has proven incapable of preventing individual behavior from going over the edge and beyond the rules to gain an advantage.

Who knows if SAC Capital’s compliance program was as procedurally impressive and sophisticated as it sounded? Stewart reports that SAC Capital invests “‘tens of millions of dollars,’ on compliance, ‘deploys some of the most aggressive communications and trading surveillance in the hedge fund industry,’ has hired big-name lawyers like Peter Nussbaum and Steven Kessler to oversee compliance, and has a staff of ‘no fewer than 38 full-time compliance personnel.’”

However sound the program was on paper, we now know that its processes and internal controls were not sufficient.

Certainly, SAC Capital employees could have benefitted from more ethics lectures as well as from a culture that treated these discussions as “meaningful dialogue” rather than as “lectures.” But my sense is that most companies would benefit from a dramatically different compliance mindset.

One game-changing idea on this count—an idea put forth by a leading ethics thinker—is to treat compliance as something an organization “gets” (an outcome of more meaningful work) rather than treating compliance as something an organization “does” (an exercise constantly at risk of devolving into a check-the-box activity).

I’m open to other compliance ideas, so long as they are game-changing. Changes are absolutely necessary now that it has become difficult to distinguish among our rules-breaking professional athletes and our rules-breaking business professionals.

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GRC expert Eric Krell supplies the Business Finance community in-depth articles and commentary examining governance, risk, and compliance.

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