We all know about the cost of regulatory compliance, says Gunjan Sinha, chairman of MetricStream Inc, but how much do we know about its benefits?
Is regulatory compliance really desirable? While the cost of compliance to consumers and taxpayers is extremely well documented, what about the cost of non-compliance? This is still an uncharted area measured mostly through penalties levied on defaulting organisations and the negative media value it generates. Those who oppose the pressure of compliance, often argue that regulations only expand the bureaucracy, further burdening the industries that they seek to regulate.
But there is evidence to show that regulatory compliance by enterprises results in a positive impact on the quality of the products and services that they offer. It should be possible, therefore, to quantify the results of compliance in direct financial terms, although there are no tested and quantified hypotheses for this. No one disputes the fact that a significant body of regulation attempts to raise the quality of products that benefit or protect consumers. But, is it possible to quantify the gains so achieved?
There has been endless criticism in the press that the recent Sarbanes-Oxley regulation is overburdening companies; that it seeks to bring them in line with needless compliance. Obviously, there is some truth to this. But one should not forget that it was ordinary shareholders who ended up being short-changed by companies whenever they broke the inherent trust of the financial markets. I believe that the Sarbanes-Oxley provisions give CEO's an internal mandate to institutionalise what most of them have always wanted, but in many cases failed to achieve - real-time documentation and controls on key financial and operational processes.
A more correct operating perspective would allow business executives to turn the focus away from debates about the cost of meeting the regulatory provisions of Sarbanes-Oxley, and to concentrate on achieving greater competitive advantage through tighter process controls and metrics. This will not only result in a higher quality of financial controls and disclosures, it can also actually boost financial results through superior process automation and controls.
Take an example from the food industry in the US - a single diseased cow could push the entire industry to the brink of bankruptcy, disrupt markets and spread worldwide paranoia. Yet, business lobbies fought tooth and nail to stop cattle inspections. The industry did not heed the FDA's advice to avoiding mixing meat from downers into cattle feed.
The food industry abounds with examples where vast quantities of processed foods have had to be recalled from retail shelves because of relatively 'minor' lapses in production processes. Here, embracing regulatory recommendations with appropriate automation and tools could have given CEOs a way to define, automate and raise the quality of their food processing activities, delivering differentiated food products in the market that consumers would have felt safer about consuming.
Though US department of agriculture regulations may seem expensive to implement, complying with these stringent regulations provides for greater food safety and enhanced customer satisfaction, eventually leading to the protection of bottom lines.
Apart from food and drugs, occupational health and environment protection is flush with regulations as well. Businesses engage professional lobbyists to fight against regulatory controls to delay - if not limit - many of these regulations. For instance, regulations around global safety and OSHA regulations are increasingly becoming more vital, as we live in an inherently 'riskier' world post 7 / 11.
As we raise the quality of our safety processes, create better frameworks for corrective and preventive action, build an infrastructure of emergency preparedness and disciplined audits, not only are we being more compliant, we are also raising the safety of our employees and facilities worldwide, eventually resulting in better managed safety and environmental risks for corporations. These risk reduction initiatives translate ultimately into more predictable and sustainable shareholder returns.
Ironically, Indian companies are willing to spend much more on regulatory compliance overseas than in India, since the US, European and other international regulatory bodies have more stringent penalties for non-compliance. But recently, Indian regulators like SEBI have begun turning more rigorous.
Unlike in the past, when companies could get away with a mild slap on the wrist like a paltry fine of a few hundred rupees, today the competitive environment has ensured that companies consciously guard the brand value, shareholder trust and customer goodwill that adverse media publicity can so rapidly erode. As more and more Indian companies start to build strong brands, quality products and services, and reach out to consumers everywhere, it will become imperative that they follow strict regulatory guidelines for long-term growth and sustained consumer faith.
It is often argued that self-regulation is the best form of regulation, as it imposes minimal costs, both on corporations and regulators. The proponents of self-regulation denounce the surge of regulatory controls and cite historical examples where industry regulations have failed to work. But the advocates of self-regulation should also acknowledge that we now have an effective infrastructure for global communications in the internet, which allows a collaborative platform for regulators and corporations to work together across geographies and organisational boundaries.
Using the appropriate regulatory tools and processes, forward-looking corporations are bound to benefit from the effectiveness that regulations bring, while being able to scale down their cost of compliance. Perhaps we need to rethink how we can leverage technology more effectively, as we incorporate regulators and regulations in the fabric of our extended enterprise.