ESG – the new Skilled Person / Monitor in town
In an interview with the FT this week the DoJ laid out their intention to launch a crackdown on corporate wrongdoing (paywall). It appears that the stick of enforcement is still the go to method for encouraging firms to put in place appropriate compliance programs. Enforcement can come in many guises – personally I have always thought that business restrictions are far more effective as a regulatory tool than fines – yet it is fines that grab the headlines. Although fines are not good for the bottom line, they are rarely of the magnitude to really hurt a company. And so, I have never witnessed a bank look to change their compliance culture due to the potential to be fined. In fact, some firms take the fine as a cost of doing business, put in place remedial actions, but don’t really change the culture that got them into trouble in the first place.
ESG may well be the carrot that entices CEOs and CFOs to fully commit to an effective compliance framework that achieves its stated purpose. CEOs are measured on many things – but arguably the one they (and shareholders) care most about is share price. A poorly performing share price has accounted for more CEO departures than compliance fines. In general terms the E pillar of ESG seems to have had more attention than the S and the G. However, the S and the G should not be discounted. If large institutional investors continue to allocate investment with these principles at the forefront of their decision making, taking a stake in a bank that has been censured for money laundering will not sit well. And if investment does not materialise and current shareholders sell as a result too, then the share price will likely head south. The result will be serious pressure put on CEOs to either resign or do something meaningful about it.
So a crackdown on corporate wrongdoing may well achieve its purpose – that of getting firms to fully commit to an effective compliance program. But the why firms commit to this, may not be exactly as Regulators intend.
If you’d like to discuss implementing sustainable compliance frameworks that focus on the purpose of regulation, please get in touch.
David