Taking GRC beyond the conventional enterprise

Taking GRC beyond the conventional enterprise: entire regulatory system in desperate need for disruptive innovation.

Extract from Business Finance Magazine – Eric Krell:

Is anybody happy with our current approach to business regulation and regulatory compliance?

My anecdotal research suggests not. On a recent vacation, I met many folks working in a wide range of professions. When I responded to their “what do you do?” question by explaining that I write about business ethics, risk management, governance and compliance, half of them groaned something along the lines of “Does business have any ethics?” or “Why bother?” The other 50 percent of my questioners seemed to work in private industry, and they also groaned – about the sorry state of business regulations – when they heard what I write about.

Both views over-simplify, and both views are correct (or, at the very least, understandable).

As a semi-retired management consultant recently confided to me: “Our whole system of business regulation is basically a big pile of [garbage].” His argument is that our current regulatory “system” (“pile of rules” is more accurate) represents the accumulation of many, many small victories: some by corporate interests and their lobbyists, and some by those who seek to rein in indecent corporate behavior.

Despite the rules, the misbehavior continues, spurring new rules — and adding burdensome compliance costs and work. These costs are borne by all companies, including those who have demonstrated honorable behavior for decades. Worse, many people outside the business realm group these honorable companies with the irresponsible enterprises. My vacation reading helps explain why.

One of the juiciest Spring Break reads in the April issue of Vanity Fair is Willam Cohan’s feature on a battle of hedge fund managers over the fate of Herbalife and its own corporate character. The article is populated with several villains (truly, none of the main characters come across as remotely likeable or even altogether human) and not one hero.

For GRC enthusiasts, this article contains prime examples of practices used to exploit the gray areas surrounding rules. One technique involves “talking your book,” the practice of broadcasting a hedge fund’s positions (long or short on a particular company) after the positions have been purchased in an effort to move the market (the stock prices of the company) in a way that is favorable to the position. “Talking your book, as it’s known on Wall Street, is not exactly kosher, but it’s done all the time,” notes Cohan.

Changing risk models to shrink losses, exceeding risk limits and hiding trading losses from risk managers are not exactly kosher practices, but they took place frequently enough within JP Morgan Chase to enable the $6 billion-plus London Whale loss to occur. (The U.S. Senate’s recent tome on the loss is getting all the news right now, but JP Morgan’s own reports — two of them — on the incident are equally enlightening.)

This is a familiar string of events:
– Bad corporate behavior (more specifically, bad behavior by employees within a company);
– Major losses (including some that require taxpayer help);
– CSI-esque investigative reports into how the bad behavior occurred (usually concluding that there was a *gasp* “risk management failure”);
– Congressional scolding; and
– New regulations (including some that cost companies exhibiting excellent behavior millions).

The retired management consultant I spoke with argues that this system – the entire regulatory system (including lobbying) — screams out for disruptive innovation.

For example, what if companies in certain highly regulated industries invited regulators, customers and other key stakeholders into the product development process earlier to get a green light or red light on a new idea well before investing years and tens of millions of dollars in its development? In other words, what if GRC extended beyond the four walls of the enterprise (via collaborations beyond traditional lobbying efforts)?

There would no doubt be numerous and significant obstacles to contend with. But solving those problems seems much more enticing and more cost-efficient than continuing to cope with a growing pile of rules that continues to make all stakeholders wrinkle their noses.

More … http://businessfinancemag.com/article/grc-desperate-disruptive-innovation-0319