An effective, systemically efficient compliance program can offer a competitive advantage for a company by helping it deliver better financial results.
This principle lies at the core of the evolving megatrends of ESG investing and sustainability programs at multinational corporations. Recently, by way of example, Blackrock and State Street Global Advisors’ annual letters to portfolio companies highlighted the value they both place on a company’s good governance practices due to their ability to generate positive returns. This presents an opportunity for Compliance officers to build and develop Sustainable Governance as opposed to technical compliance programs that are outdated in light of this strategy.
As you complete annual reports, regulatory filings and/or testing this month, consider whether you are delivering Sustainable Governance, and if not, seek appropriate guidance so you can lead on delivering better results in the coming year.
Due diligence for new investments or products and services offers an ideal opportunity for compliance officers to provide an ROI for the company and its customers. In particular, compliance officers can apply Sustainable Governance to great effect on the following aspects of due diligence:
- Prospective service provider assessments
- Sales and marketing material reviews
- Software algorithm audits
In each case, compliance officers that ask the right questions help the company manage foreseeable risks and achieve greater efficiency with its capital. Different regulatory and ethical issues apply to each one of these categories, so exploring both recent enforcement actions and investment trends can guide compliance officers towards crucial insights your fellow employees may overlook.
Investment Due Diligence: In a Fordham Environmental Law Review
article, I and my co-authors Tucker Pribor and Kate Starr stressed the importance of implementing ESG principles into the decision-making processes, and how it newly empowers compliance personnel as key consultants in an organization’s business decisions. Those compliance professionals can perform valuable leadership on due diligence assessments where ethical and operational efficiency concerns overlap, such as the basis for impact claims and the transparency of cost structure. My interview with Professor Cynthia Williams, who recently filed a rule-making petition with the SEC advocating for ESG disclosure standards, gives valuable advice on determining which questions should be asked.
For instance, if an ESG investment includes a guaranteed impact, what is their basis and are there exclusions? Has a trusted third party assessed the claims to ensure their veracity? What KPIs will they use to measure their adherence to their goals?
Sales/Marketing Material: Sustainable Governance-minded compliance officers will continue to scrutinize not only traditional marketing materials but also company-wide social media accounts. Does the promotional material (including RFPs and white papers) accurately depict the products or services made available to customers, particularly retail investors? SEC OCIE enforcement guidelines issued for this year continue emphasis on protecting seniors and retirement savers, so how are campaigns directed to these markets presented? As for social media, who is posting to the company account and what functionality should they have?
AI: Both FINRA and the SEC have acknowledged the ability of robo-advisers to provide low-cost financial advice. However, concerns persist about the ability of these new innovations to perform adequate risk assessment for new investors. Do they recommend investments that are too risky? Are they analyzing the income and debt load of the investor adequately enough to suggest appropriate investments? Some questions regarding robo-advisors also focus on the sorts of questions asked of the investor during the onboarding process. Can the algorithm determine inconsistencies in the client’s responses to the questions, and adjust accordingly? Can customers change their own risk ratings? Does detail on portfolio reports provide transparency, or are they too cursory? The recent SEC enforcement actions on Wealthfront as well as Hedgable rested in part on poorly designed algorithmic procedures – as well as inadequate compliance programs that could have otherwise prevented this enforcement.
Properly empowered to examine business processes, compliance officers using Sustainable Governance will add value and avoid costly errors, particularly for a company’s new products and initiatives. As new innovations are implemented and new demands are made of companies, new questions will have to be asked and answered. Using Sustainable Governance, you as the compliance officer can ensure the results of the inquiry will lead to business decisions that will help your organization grow.
Beth Haddock is author of Triple Bottom-Line Compliance – How to Deliver Protection, Productivity and Impact, and advocates delivering sustainable compliance that increases brand protection, risk mitigation, productivity, and employee engagement.
To receive a concise snapshot of how your current compliance program is serving you, take Beth’s complimentary assessment.