Reputation Risk caused by Compliance failure can be costly!

So, maybe you thought Reputation Risk was just a passing phase.

Well, if you did, I urge you to read the story in the Business Day of Monday 29 September – “‘Tiger Brands cracks whip at the top”. You also may recall that I asked some questions about practices at the company in my blog post of May 2008:

The article in the Business Day mentions that the company secretary and two former executives will lose close on R19 million in share options after being reprimanded by the company for their role in anti-competitive practices involving the firm’s former healthcare subsidiary Adcock Ingram.

Ouch! The dangers of culture and decisionmaking practices.Leif Edvinsson and Michael S. Malone wrote in the book ”Intellectual Capital”, that “If we picture a company as a living organism, say a tree, then half of the mass or more of that tree is underground in the root system. And whereas the flavour of the fruit and the colour of the leaves provides evidence of how healthy that tree is right now, understanding what is going on in the roots is a far more effective way to learn how healthy that tree will be in years to come”

Tiger Brands are really acting now to root out unethical behaviour and restore their credibility. Acting in this visible and powerful manner certainly will assist.

I see that they also will be appointing a Group Compliance Officer. This is a good step, but at the same time it serves as a veiled warning for any company.

Compliance failure interestingly enough has been found to be a major source of Reputation Risk. Compliance has become a very important function and you just have to pick up the phone and contact the Compliance Institute of Southern Africa ( 27 11 642 7974) to learn about the growth in their membership.

Lack of Compliance has a number of impacts:

  • It damages Trust and ultimately Reputation
  • It is a Poor reflection of Company Standards
  • It has Reputation impact – Can we trust you?
  • It will invite further scrutiny – Studies for instance show that a company faced with a crisis is 75% more likely to have another crises in the next 30 days or so, because of increased scrutiny.

The term compliance describes the ability to act according to an order, set of rules or request; and the function of the Compliance Department is to ensure that the company provides and maintains an institutional framework that gives assurance that all applicable rules & regulations, laws, policies and procedures are adhered to.

This is the traditional view. Here I must caution that there are actually three levels of compliance to take into account in any framework:

1.Level 1 – compliance with external rules that are imposed upon an organisation as a whole

2.Level 2 – compliance with internal systems of control that are imposed to achieve compliance with the externally imposed rules.

3. Level 3 – This level is often ignored. This is the realm of stakeholder interaction and best practice in a court of public opinion. The conduct of rules govern the manner in which a business conducts itself in its relationships with stakeholders. These rules impose minimum standards of acceptable conduct upon regulated businesses, but what is acceptable?

What are the rules of stakeholder engagement and conduct? Compliance Officers will need to do their homework on the differing rules of engagement in dealing with various stakeholders. They will need to conduct research and attend workshops like the Stakeholder Reputation one so that they can understand which rules is appropriate.

Ultimately, there are 3 key lessons for us as managers from the Tiger Brands fallout and response:

  1. We need to comply with the laws, rules, regulations and policies that govern behavior of the organisation.
  2. Each of us is responsible for making sure that our own conduct and the conduct of those we supervise fully complies with all applicable laws and regulations.
  3. We must recognize that even the appearances of misconduct or impropriety can be damaging to the reputation of the organisation, and act to avoid them.

I have produced a white paper about the steps that I believe is necessary to foster a compliant culture in the organization. If you are interested in it, just e-mail me for a free copy.