Compliance Based Investing

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.

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The Fraud Guy

John has over 24 years of fraud investigations, forensic accounting, corporate compliance & ethics, and audit experience. He has applied his extensive experience in these areas across a wide array of areas and industries, frequently assisting counsel, government agencies and companies with internal corporate investigations and other matters arising from alleged fraud or misconduct. John is a thought leader and expert on Corporate Monitors/Compliance Monitors, a practice area involving the imposition of an independent third party by a gov't agency or department upon a corporation to verify that corporation’s compliance with the terms of a settlement agreement. John has previously served in a leadership role in a federal Monitorship and was involved in four other federal monitorships: two as the named Monitor, one as the "Independent Business Ethics Program Evaluator" and the other in support of the named Monitor. In these roles, John has reported to the Department of Justice, the Department of Interior, the Department of Transportation, the Small Business Administration, the Federal Highway Administration and the Massachusetts Department of Transportation. His practical experience as a Corporate Monitor and extensive knowledge in this area is currently being applied to the development of formalized Standards for Corporate Monitors, through John's Membership on the Task Force on Corporate Monitor Standards of the American Bar Association. John is a frequently sought speaker on the topic and has provided practical advice, ideas and strategies to lawyers, government officials, and corporate executives involved in such matters, as well as newly appointed Corporate Monitors. Prior to Artifice, John spent over 5 years as a leader in the fraud investigations and forensic accounting practice of a large publicly traded international financial consulting firm. Before that, he served for 10 years as an FBI Agent, specializing in complex fraud investigations.

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