Compliance Isn't a Trend

"What I'm hopeful for is that this has a Y2K feel about it.”  That’s the word from Lloyd Blankfein of Goldman Sachs this week when speaking about the bank’s current investment in compliance at a conference (http://www.cnbc.com/2016/02/09/at-goldman-traders-are-out-and-compliance-is-in.html). He also discusses how he forecasts that compliance costs will go down with automation and basing compliance personnel in cheap places -- like here in Texas.

While it is certainly true that any particular focus on narrow areas of regulatory compliance will wax and wane – we see that all the time – it is also true that a focus on a compliance and culture is here to stay and those that allow themselves to think it’s a transitory issue are not just missing the boat, they haven’t even found the shore.

First of all, unlike the Y2K issue, organizational compliance has no finish line.  There is no end to the problems that people in groups can create. And the policing and mitigation of those problems isn’t a matter of applying triage and moving on.  When an organization sees compliance as a stop-gap measure to get past a certain milepost, well, that’s a recipe for failure. 

If I were on the audit committee of the board of such an organization I’d have some questions about this perspective. I’d like to ask what type of effort can be expected from a resource that is told at the outset that the company is planning to automate their roles and fire them as soon as possible? What sort of tone does that set for the compliance department, let alone the rest of the organization? How much respect will a compliance officer brought into this environment command with the trading floor?

I submit the answer is “very little”. 

Compliance officers monitoring the activities at a bank like Goldman have to be sophisticated professionals, have to have the resources and tools to do their jobs, have to have respect and authority, and must have the open, full-throated support of their management.

I understand that a lot of this has to do with pleasing a small, powerful community of analysts that see these expenses as a drag on the bottom line. It’s up to powerful executives like Blankfein to change this narrative.  The answer should not be “look, we’re going to get over this ‘compliance’ thing as quick as we can” it should be “we are going to invest in a more compliant culture and that will pay dividends far beyond just avoiding trouble.” 

Blankfein is a smart guy and I know he can look at the abundant data that shows stakeholders, both outside and inside the organization, have different expectations from the analysts that decry these expenses.  Stakeholders today expect compliance and ethical cultures and disappointing them can lead to calamity -- including a big hit to the bottom line.  Look at the plummeting stock price and double-digit sales declines for Volkswagen as just one example.

Executives need to use their platform to change this dangerous and wrong-headed narrative.  This is not a trend.  This is how you do business successfully.