Compliance Culture 101: Why It Matters and How to Strengthen It

Importance and Benefits

Modern compliance management took shape in the 1960s due to bid-rigging and price-fixing in the corporate world. Regulators intensified their efforts following the Enron and WorldCom scandals in the early 2000s, protecting the general public from fraud. Today, compliance has become a cornerstone of organizational governance. It’s not merely optional; it’s fundamental to organizational success.

Aside from avoiding legal and subsequent financial problems, building a culture of compliance has numerous benefits for companies. Clear policies and efficient frameworks streamline operations, reducing confusion and boosting productivity. Prioritizing adherence to regulations fosters trust, solidifying relationships with stakeholders. Most importantly, creating a culture of compliance promotes a positive work environment, driving innovation and long-term growth.

Real-World Applications

Many companies are now adopting ongoing compliance practices instead of reactive measures, navigating the continuously evolving regulatory landscape to reduce risks associated with non-compliance. Here are specific compliance culture examples:

• Code of conduct training ensures employees understand their roles, particularly regarding ethical behavior, company policies, and regulatory compliance. Pfizer’s Blue Book serves as a guide to reinforce the importance of compliance culture.
• Transparent reporting mechanisms empower workers to report unethical practices without fear of retaliation. Volkswagen implemented a whistleblower system to rebuild trust in the general public.
• Leadership advocacy sets a clear tone of compliance from the top. When leaders’ commitment to initiatives is visible, employees work doubly hard to achieve Governance, Risk, and Compliance (GRC) goals.
• Regulatory audit preparedness through regular internal audits allows organizations to address potential issues before external regulators come for inspections. It’s crucial in healthcare sectors, such as biomedical research, medical device manufacturing, and pharmaceuticals.
• Sustainability initiatives integrated into compliance strategies strengthen the company’s Corporate Social Responsibility (CSR) efforts. Lego plans to eliminate single-use plastics in packaging by 2025 and shift to more sustainable materials by 2030, making the company a leader in the toy industry.

Key Elements of a Strong Compliance Culture

Building a culture of compliance is challenging, particularly if the company is starting from scratch. Although companies have different needs depending on market dynamics, industry regulations, risk profiles, and corporate governance structures, the following core elements are essential:

Leadership Commitment and Ethical Guidance

Ethical behavior starts from the top. Senior executives, board members, and department managers should set the standard for the entire organization. It includes developing a well-defined code of conduct that outlines ethical principles, acceptable behavior, and regulatory expectations.

Clear Operational Policies and Procedures

The code of conduct must be translated into practical day-to-day actions. Policies and procedures create specific instructions on handling tasks, responding to regulatory changes, and efficiently keeping relevant records for easy access and review.

Ongoing Training and Communication

Compliance training and communication ensure employees understand the organization’s obligations to investors, partners, regulators, and the general public. These build awareness of standards, ethical conduct, and specific responsibilities.

Continuous Monitoring and Auditing

Monitoring aids in identifying emerging threats, while audits provide formal documentation of the company’s comprehensive evaluations (e.g., financial transactions, operational processes, and employee behavior). These proactive efforts detect, investigate, and address compliance risks.

Timely Response and Risk Prevention

This element involves incident investigation, enforcing disciplinary actions, and enhancing corrective and preventive measures to prevent future breaches. Establishing dedicated teams for each task (e.g., investigation, incident response, and information dissemination) is vital to fostering a culture of compliance.

Common Challenges

Organizations, both large enterprises and especially small start-ups, face numerous obstacles while building a strong compliance culture. These are some of the most common ones to anticipate:

• Resistance to change, wherein employees are reluctant to embrace new processes, is fueled by fear of increased workload or job insecurity.
• Lack of leadership support, especially when allocating the necessary resources, hinders training, tech integration, or additional staffing.
• Limited awareness leads to unintentional violations. It usually suggests limited resources, but this could also mean that training is seen as a one-time event rather than an ongoing process.
• The evolving regulatory landscape makes it difficult for companies to stay compliant, especially those that operate in different jurisdictions.
• Weak reporting systems stem from employees’ fear of retaliation when they relay information about aberrations, negligence, and outright violations.

Best Practices in Fostering a Culture of Compliance

Companies can build a strong compliance culture and handle the usual challenges if they stick to a structured approach. Here’s an easy-to-follow guide with some of the best practices:

Step 1: Define core values and develop corresponding policies.

Core values establish a clear ethical foundation, guiding the company’s behavior and operational decisions. Involving the employees in this process promotes buy-in and ensures policies are practical and realistic.

The code of conduct includes the following:

• Core values and principles
• Ethical guidelines
• Legal and regulatory compliance
• Workplace conduct
• Reporting and investigation procedures
• Consequences for violations
• Training and awareness programs
• Process for review and update

Step 2: Secure leadership commitment.

Demonstrate the “tone at the top” ideal by ensuring corporate leaders provide the necessary resources for initiative, and participate in compliance activities. Appointing a Chief Compliance Officer (CCO) to oversee compliance initiatives promotes the culture.

Step 3: Conduct training and awareness programs.

Equip employees with the knowledge to recognize, prevent, and report risks. Follow these specific best practices:

• Tailor training content to specific job roles (e.g., HR, finance, IT).
• Use real-life case studies of regulatory compliance to engage workers.
• Conduct periodic (e.g., quarterly, annual, etc.) refresher training to reinforce concepts and update employees on regulatory changes.

Step 4: Foster open communication.

Encourage transparency by promoting a speak-up culture to address issues before they escalate. Here are some effective mechanisms to consider implementing:

• Anonymous whistleblower channels
• Zero-retaliation policy
• Feedback loops
• Compliance culture survey
• 360-degree evaluation

Step 5: Monitor and enforce compliance.

Identifying potential issues is easier when the company adopts a monitoring system. Aside from enabling managers to investigate the issue comprehensively and enforce disciplinary actions for non-compliance, it promotes integrity among workers and ensures accountability.

Step 6: Adapt to regulatory changes.

Stay ahead of emerging regulations to update policies, procedures, and training programs. These are some ways that can help compliance officers get on top of the evolving landscape:

• Compliance audits and impact assessments
• Regulatory horizon scanning tools
• Engagement with regulatory bodies and industry leaders

Step 7: Evaluate compliance status and make improvements.

Measure the effectiveness of the compliance programs by reviewing Key Performance Indicators (KPIs). This helps identify areas for improvement and ensure continuous growth and business resilience.