Trends - Compliance

Compliance, an underestimated competitive advantage

Prof Dr Andreas Kark, Professor at Heilbronn University, Faculty of Business and Transport
Published in: DiALOG - THE MAGAZINE FOR ENTERPRISE INFORMATION MANAGEMENT | MARCH 2015

Compliance in a company is much more than just a matter of avoiding liability. Properly understood and implemented, compliance makes an important contribution to optimising operational business processes and thus becomes a competitive advantage.

The classic definition of compliance
The term compliance is often translated as "avoiding liability". This is ultimately due to the definition of this term. Compliance initially means nothing more than the obligation of the company and its employees to comply with the relevant legal regulations and the company's internal guidelines.

This very broad definition means that even the smallest breach of rules in a company becomes a compliance offence. This not only results in an inflationary use of the term compliance, but also means that compliance is primarily seen as a legal problem. And thus the focus is on avoiding liability.

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Originating in the USA, the term compliance was originally used in medicine. A patient is compliant if they consistently adhere to their doctor's treatment instructions. After the term was later adopted by lawyers in the context of US antitrust proceedings, it found its way into the linguistic usage of German companies through the investigations conducted by American authorities against German companies accused of violating anti-corruption regulations (FCPA), among other things.

The American investigations in particular have contributed to the fact that when it comes to compliance, the focus is often only on avoiding liability, as the legal and therefore also economic consequences of compliance violations can be serious or even threaten the existence of the company and its employees: possible consequences range from fines and criminal sanctions to civil law claims for damages against the company or its employees. The latter may also face the threat of losing their jobs. Unlawfully acquired profits can be siphoned off, licences that have already been granted can be revoked and supplier contracts and cooperation agreements can be terminated. High consultancy costs and serious reputational damage can also be incurred.
Taken together, the economic consequences for the company can threaten its very existence.

The modern understanding of compliance
If you look at compliance from a business perspective, compliance can make a significant contribution to achieving an optimal economic result for the company. After all, business processes are only efficient if they lead to the best possible economic result and do not jeopardise business success through compliance violations. This is because the above-mentioned sanctions for compliance violations can make any business, no matter how profitable it may initially appear, uneconomical. Therefore, compliance is not only aimed at avoiding liability. Properly understood, compliance starts earlier: Compliance is aimed at legally impeccable corporate activity, because compliance is a natural part of every business process!

If compliance has been implemented correctly in the company, the resulting transparency ensures a reduction in conflicts of interest. A careful compliance analysis of business processes and their compliance risks also helps to identify weak points in operational workflows. Clear, non-overlapping task areas and defined responsibilities as well as better qualified and motivated employees also increase the efficiency of company processes. The best way to achieve all of this is to involve all employees in the company's compliance endeavours. This in turn contributes to a cultural change and a strengthening of the corporate identity. Compliance is transformed from an onerous duty into a common goal of ethical and sustainable corporate management.

As it is becoming increasingly important for customers to work with reliable partners, these compliance endeavours lead to a trust bonus for customers; customers who are even increasingly demanding compliance confirmations from their suppliers. Banks, too, prompted by the Basel II and III rules, are increasingly taking functioning compliance systems into account when determining the interest rate on corporate loans. Ultimately, the company not only protects its own reputation by implementing compliance in an appropriate manner, but can also improve it in comparison to the competition through compliance. This is furthered by the fact that it is no longer enough to simply make a profit. Rather, customers demand that these have been acquired by the company in a sustainable, ethical manner.

Compliance risk management as part of sustainable corporate governance
Sustainable corporate management requires that the company's compliance risks are also addressed. Risk-based, forward-looking compliance work therefore enables the efficient use of limited resources. Compliance risk management is the key to the success of compliance work. The identification of compliance risks on the basis of creative procurement and networking of information enables compliance risks to be counteracted through targeted measures following an analysis and assessment. The resulting documentation of the compliance risk management process helps both in the economic optimisation of operational business processes and in proving that, from a legal perspective, the company has done everything that could reasonably be expected to prevent legal violations.

Compliance is therefore above all:

  • sustainable corporate management,
  • an operational line task and
  • an instrument for optimising
... optimisation of business processes.

Properly understood and implemented, compliance is an increasingly important competitive advantage.

Prof Dr Andreas Kark, LL.M. teaches business law at Heilbronn University and advises medium-sized companies on compliance issues. His research and consulting activities focus on the efficient linking of corporate management with compliance, business ethics and corporate governance. In addition, he regularly gives guest lectures at chambers of industry and commerce, companies and associations. He is the author of the book "Compliance-Risikomanagement", published by C.H. Beck. Previously, he worked as commercial director of various subsidiaries and as head of a compliance department in a DAX 30 company.
www.compliance-consultancy.de

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Prof Dr Andreas Kark


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