Usually when one thinks about investing in compliance, it is in the context of an organization investing its efforts and resources into its Compliance and Ethics Program (hereafter “Program”). But that’s not what I’m talking about.
For a long time now, some investors have considered religious, social and/or political stances or actions of organizations when making investment decisions. It should come as no surprise that the next evolution of “responsible investing” may well be focused on an organization’s Program.
As an expert who routinely assesses such Programs, often due to potentially catastrophic compliance or ethics failings, I greatly appreciate the degree to which a robust and effective Program reduces corporate liability/risk. In my mind, less risk of corporate liability/penalty (i.e. suspension/debarment, prosecution, de-listing, etc.) = less investment risk.
In 2012, I began incorporating Program design assessments into my personal investment considerations. It is not without its challenges, as many publicly traded organizations do not make a great deal of information about their Program publicly available. Moreover, even when a fair amount of information is publicly available, it may only be sufficient to assess the design of the Program and not whether or not the Program has been effectively implemented within an organization.
For those not familiar with such assessment, a “design” assessment is intended to determine the degree to which a Program’s design comports with compliance & ethics industry standards and the United States Sentencing Guidelines (Section §8B2.1 – “Effective Compliance and Ethics Program”). An “implementation” assessment is intended to determine how effectively the Program is, among other things, overseen, managed, communicated and implemented within an organization.
When I am not able to find any information about a publicly traded organization’s Program on an organization’s website, I immediately disqualify that organization for any further investment consideration. In my mind, such a glaring lack of regard for compliance and ethics speaks volumes as to ethical tone and risk management, among other things.
For those publicly traded companies that make available some information about its Program, the next hurdle relates to whether or not it is sufficient to allow even a rudimentary Program design assessment. Where the amount of and type of information falls just short of that necessary to piece together some idea as to how well the Program is designed, I have found that an email to the investor relations contact and/or General Counsel may result in more information. The response to such a request alone tells me much about the organization’s regard for a Program’s importance.
Where a company makes a great deal of information about its Program publicly available, regardless of the results of my design assessment, I at least take some comfort in seeing that the organization appears to take compliance and ethics seriously. For a few of these companies where I felt the Programs fell a little short in terms of design, I nonetheless elected to invest in those organizations as they appeared to be on the right compliance and ethics path.
It will be interesting to see if this becomes a more commonly applied piece of analysis for other investors. There is no data that I am aware of that has been compiled to reflect any correlation between stock price and compliance & ethics programs, but it sure would be interesting to see!
One thing is certain. If your company has a good compliance program, let people know about it.
The Fraud Guy 