Death by Compliance

According to the Roman historian Tacitus, “the more corrupt the state the more it legislates.” The corporate equivalent is the weaker the corporate culture, the more it relies on rules, regulation and an all pervasive compliance function to try to control or police employee behaviour. We might accept that an expensive and overly bureaucratic compliance system is a small price to pay to protect the integrity of our institutions, but all too often it encourages managers to bask in the illusion of certainty and treat the symptoms rather than the causes of the corporate malaise. It is invariably easier to hire another compliance officer or to commission yet another audit than get to grips with a dysfunctional organisational culture or solve the problems that cause poor behaviour. The old IT cliché was ‘no one ever gets sacked by buying IBM’ and by the same token, managers tend not to be criticized for advocating stronger compliance, auditing and approval procedures, even when they don’t appear to add a great deal of value to the organisation.

Compliance has been one of the growth areas in business during the past 20 years. The major accountancy and consulting firms have been complicit – compliance represents a lucrative source of revenue – accompanied by nervous in-house legal advisors, spooked by the threat of increased regulation such as the ridiculously overbearing Sarbanes-Oxley. But has this compliance fetish made our institutions better equipped to deal with the problems that come their way or more adept at navigating an ever more complex regulatory and reputational environment?

I would argue that it has simply added a bureaucratic and cost burden. Imagine how much is invested by businesses and other institutions on compliance reviews that highlight problems but fail to provide solutions, audits that are designed to obfuscate rather than illuminate and strategic risk assessments that can’t anticipate future problems. The compliance culture has simply made weak institutions weaker. This was a theme explored by Francis Fukuyama in his book The Social Virtues and the Creation of Prosperity. He argued that what he described as ‘high trust societies’ enjoy enormous competitive advantages over ones that were dominated by mutual suspicion and therefore heavily reliant on tight, expensive and slow regulatory structures. High trust companies enjoy similar competitive advantages, investing the money that they would have spent on compliance and auditing on things that really do add value to corporate life. Culture will always be more important than compliance.

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