What is business risk? How do scandals impact companies in ways seen and unseen? Those were just a couple of the questions raised in a recent Financial Times interview with Stephen Howard, chief executive of business-led charity Business in the Community. However, what I found most interesting was that Howard focused on tax risks and executive pay as being “at the top of the list of issues that are undermining trust in companies”.
Howard further identified tax risks as being at “the top of the agenda after a public outcry over tax scandals that exposed companies’ out-of-date thinking. Companies were caught out because they thought they were technically compliant but did not pay attention to the court of public opinion”.
He made a similar comparison about executive pay, noting: “This shift is taking place against a backdrop of economic, political and social instability, marked by a disaffection with elites and a feeling among much of the public that the economy is not working for them. A large group of citizens are distrustful of everything they hear and see.”
The answer to these quandaries is compliance. Not only does compliance articulate that ‘it is not that we could do it but should we do it’, but companies that operate ethically and in compliance generally do so with transparency that can be used as a shield if a regulator, the press, shareholders or other stakeholders ever come knocking over a particular issue. Yet, is it recognition of the risk in the first place that is a critical step. If you do not identify a risk, you cannot measure that risk and if you cannot measure the risk, you cannot manage the risk.
It is more than being the ‘right’ thing for a business to do; it is the better business decision to make going forward. Companies that have more robust compliance programmes are generally better run because compliance is burned into the business process of the entity. Better run companies are generally more profitable.
Avoiding any scandal that puts you on the front page of the Financial Times, The Wall Street Journal or The New York Times has always been an important goal for a company. Now avoiding such risks are an important business technique because the cost can be so high … whether that cost is a regulator penalty, shareholder confidence or loss of consumer trust.