Why do companies obey the law? Compliance in a self-regulated business is habit that needs to be nurtured.

English: Risk bow-tie for regulatory complianc...

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One of the challenges faced by businesses is how sustain compliance with corporate governance rules.  The recent corporate scandals such as Enron, WorldCom and others shows what happens when the internal corporate culture diverges from corporate governance.  The challenge is particularly severe in industries that are self-regulating to a large extent. Sectors such as finance, media and law-enforcement are susceptible to abuse. The workers in these fields often have an organisational autonomy to get the desired result.  In finances, it is t make the deal and reaps the profit. In the media, it is to get the exclusive.  In law enforcement it is to make the major case.  The actors have great responsibility, and autonomy, to meet these results. In sum, the rogue employee is more likely in a field where organisations are self-regulating.  However, this is more than an issue of a rogue employee, it is about the organisation.

What is the theory behind this?

What, then, is to be done to keep an organisation from becoming dysfunctional?  The question is more than just avoiding a rogue employee; it is about avoiding a rotten barrel.  [Insert links]  What is needed is a return to first principles.  At the root of each organisation has to be awareness, reinforced throughout the organisation that obeying the law comes before the profit, before the exclusive, and before the big bust.  If the law is compromised the results are tainted. Thus, the organisation must instil and show an ethos that its work is always done within the law.

What are the practical steps?

Moving from the theoretical or the philosophical, there are important practical steps. These are drawn from the following study of law enforcement.

First, the selection of new employees is critical. How the organisation chooses its new recruits, how they are treated, and how they are promoted will decide the success of the organisation. The same criteria have to apply to how the recruits follow the organisation’s corporate governance system.  The new recruits should not be promoted simply because they are successful, it is vitally important that they

Second, the organisation needs to consider how and why it rewards its employees.  The ultimate success of a company depends on its ability to deliver for its measure of success: profits, stories, arrests.  In each of these areas, an organisation will set goals for its employees.  Evidence from the Enron scandal showed that the HR policy of “rank and yank” led to perverse outcomes where the wrong behaviour was encouraged and rewarded.  For the law enforcement, where arrests lead to promotions and not being an end in itself, there is a challenge around what is called the goal-gradient issue.  According to the theory, the farther away a worker is from their goal, the less they will be working to achieve it.   What is necessary is to have frequent goals that can be achieved and still stretch the worker.  The goal is not to have targets, which by itself only creates perverse outcomes.  All the work has to be for the organisation’s overall success.

Third, the organisation has to ruthlessly cut any double standards or the appearance of double standards within it. If employees see senior officers “getting away with” infractions for which junior officers would have been punished, the message is sent.  The same can be said for poor performance or performance that is legally or ethically dubious.  If someone who cuts corners to deliver success is encouraged and promoted, it will send a message throughout the organisation that such behaviour is tolerated.   The rules have to be applied with extra attention against senior officers. If senior officers have the appearance of being corrupted in any way, an organisation must investigate with extreme vigour or it sends the wrong message to the public and to the others in the organisation.

In the recent phone hacking scandal was that senior Metropolitan Police officers resigned as soon as they realized their situation was untenable.  By doing that, the senior officers showed that the overall organisational success was more important.  The appearance of impropriety by senior officers could not be tolerated. As a result, they acted in accordance with the highest standards to remind the organisation that such behaviour cannot be tolerated.

The fourth element, not covered in the article, but implicit throughout, is the need for strong line management.  If the immediate manager or supervisor is not actively involved in supervising or managing the work, there is a greater chance of inappropriate habits and behaviours developing.  There is a need for what has been called “active management”.  Although this report is based on local government, its principles can be applied to regulatory compliance.

To put the rule of compliance into the broken window theory, the organisation has to deal with small infractions to keep the large ones from developing.  If the workers understand that infractions will be found out, will be punished (fairly) and there is a severe consequence for themselves and the organisation, the chance for compliance is higher.  The steps can help the organisation to develop an internal culture where collective efficacy is demonstrated about corporate governance. The organisation works together to support the rules and succeeds within the rules.

Will this work?

We can instil compliance within an organisation. However, the organisation has to live by its rules or it will, literally die from them and it can create the habit of following them.  Every day a worker or a manager makes a choice, whether to obey the organisation’s rules or follow their own rules.  How they resolve that choice each day will be guided by how well the organisation, and their colleagues, has the habit of following those rules. In time, if senior managers make bad choices and are not challenged by their colleagues or their subordinates, the choices will accumulate into a flawed culture.  In the end, that culture will either remain compliant or it will become corrupted.  We cannot stop people from exercising their free will to the wrong ends, but we can certainly make it harder for them to do so within an organisation that is habituated to following the rules.  The choice, in the end, is whether the organisation accepts or rejects the behaviour that is improper and whether that habit is inculcated throughout the organisation.

About lawrence serewicz

An American living and working in the UK trying to understand the American idea and explain it to others. The views in this blog are my own for better or worse.
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1 Response to Why do companies obey the law? Compliance in a self-regulated business is habit that needs to be nurtured.

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