Mastering Compliance 3.0 to Achieve Business Goals

Compliance is often seen as a restrictive, thankless function that at best adds no business value, and at worst destroys it. That’s not true at all, but if there are company execs who think that, well that’s not their fault, it’s ours as compliance officers for not explaining it well enough. Compliance has a lot to do with achieving business goals, and it can add a lot of business value. Compliance can be honed to a frighteningly sharp competitive edge.

To understand “Compliance 3.0” we must accept that compliance isn’t static. It evolves over time as new regulations, technologies, and best practices emerge. In this article, I’ll explain what version 3.0 is, how we got here, pros and cons, the cost benefit analysis, and some practical guidance on implementing it.

By the end of this series of articles you might even be inspired to try Compliance 3.0 yourself!

What is Compliance 3.0?

Compliance 3.0 is only the latest paradigm shift in the field of ethics and compliance. It represents a transition from a reactive and rule-based approach to one that is proactive and risk-based. Compliance 3.0 focuses on the effectiveness of compliance programs, not just their existence or adequacy.

The evolution of Compliance 3.0 has been driven by several factors:

• The increasing complexity and diversity of regulatory requirements across different jurisdictions and industries.
• The growing expectations and scrutiny from stakeholders, such as customers, investors, employees, media, and civil society.
• The rapid development and adoption of new technologies, such as cloud computing, artificial intelligence, blockchain, and biometrics.
• The emergence of new risks and opportunities, such as cyberattacks, data breaches, social media activism, environmental sustainability, and social responsibility.

Compliance 3.0 requires a holistic and strategic approach to compliance management that aligns with the organization’s vision, mission, values, and goals. It also requires a culture of ethics and integrity that fosters trust, transparency, accountability, and collaboration.

How We Got to Compliance 3.0

Compliance 3.0 is the result of the evolution of compliance over the past decades. We can identify three main stages in this evolution:

Compliance 1.0: “Compliance is just box ticking”.

This was the initial stage of compliance that emerged in the late 20th century in response to major corporate scandals, such as Enron,

Compliance 2.0: “Compliance is a necessary evil".

This was the next stage of compliance that emerged in the early 21st century in response to new regulations, such as Sarbanes-Oxley Act (SOX), Foreign Corrupt Practices Act (FCPA), and General Data Protection Regulation (GDPR). Compliance 2.0 was characterized by a systematic and preventive approach that focused on implementing policies, procedures, controls, and training to mitigate compliance risks. Compliance 2.0 was often seen as a function or a department that operated independently from the business, often doing more harm than good.

Compliance 3.0: “Perhaps Compliance can add value”.

This is the current stage, emerging in the late 2010s in response to new challenges and opportunities in the business environment. Compliance 3.0 is characterized by an integrated and adaptive approach that focuses on achieving outcomes and creating value for the business. Compliance 3.0 is increasingly seen as a partner or an enabler that works closely with the business.

The Pros and Cons of Compliance 3.0

The previous generations were narrow, rules-based, and designed to ‘tick a box’ with minimal effort or investment. They were characterized by extremely negative views where compliance was seen as getting in the way of business, as a ‘necessary evil’ or ‘cost centre’. Compliance 3.0 represents a paradigm shift away from that perception to one that welcomes Compliance as a contributing business partner. Making the transition will require an investment of time and money, not to mention energy and belief – so, is it worth it?

Let’s start to investigate that with a quick look at the pros and cons of a Compliance 3.0 model, before moving on to a light touch cost/benefit analysis. By necessity everything I say here has to be general, it’ll be up to you to take it and apply it to your own situation, but if you have any questions or ideas please use the comments to share them ??

Pros (The Good)

Compliance 3.0 offers several benefits for organizations that adopt it, such as:

• Enhancing reputation and brand image by demonstrating ethical leadership and social responsibility.
• Increasing customer loyalty and satisfaction by delivering quality products and services that meet their expectations and needs.
• Improving employee engagement and retention by fostering a culture of respect, diversity, inclusion, and empowerment.
• Reducing costs and risks by preventing violations, fines, lawsuits, sanctions, remediation, and reputational damage.
• Driving innovation and growth by leveraging new technologies, data analytics, expanding market opportunities by accessing new customers, partners, and regions that value compliance and ethics.
• Fulfilling or exceeding the ethical and social expectations of stakeholders, such as customers, employees, partners, regulators, and society.
• Gaining competitive advantages from differentiating or positioning the organization as a leader or a pioneer in compliance and ethics.

Cons (The Bad)

However, Compliance 3.0 also poses some challenges for organizations that need to overcome them, such as:

• Aligning compliance strategy and objectives with business strategy and objectives; and ensuring that they are communicated and understood across the organization.
• Developing and maintaining a risk-based compliance program that covers all relevant laws, regulations, standards, and expectations, and that adapts to changes in the internal and external environment.
• Measuring and reporting on the effectiveness and impact of compliance activities, using both quantitative and qualitative metrics.
• Communicating the value of Compliance to stakeholders, such as board members, senior executives, managers, employees, customers, suppliers, regulators, and society, in the design, implementation, and evaluation of compliance initiatives.
• Making a cultural shift to one built on ethics and integrity that goes beyond compliance and inspires positive behaviours and actions.

Cost/Benefit (The Ugly)

Compliance 3.0 is not a one-size-fits-all solution. It requires a careful assessment of the costs and benefits of adopting it for each organization and the math will be different in each case. Costs and benefits will vary depending on factors such as the size, nature, industry, location, maturity, and culture of the organization.

The first step is running that analysis for your company, in your specific present situation, in your market, etc. It must be specifically tailored, or it won’t have any value. While I can’t give you a pre-written one, I can help to set you off in the right direction.

To conduct a cost benefit analysis of Compliance 3.0, the organization needs to:

• Identify and quantify the relevant costs and benefits of Compliance 3.0 for the organization, using historical data, benchmarks, projections, and assumptions.
• Compare and contrast the costs and benefits of Compliance 3.0 with the current or alternative compliance approaches, using quantifiable ratios, metrics, models, and scenarios.
• Evaluate and prioritize the costs and benefits of Compliance 3.0 based on their significance, likelihood, impact, and alignment with the organization’s goals and values.
• Communicate and justify the results and recommendations of the cost benefit analysis to the decision-makers and stakeholders of the organization.

The costs of Compliance 3.0 may include:

• The initial investment in developing or updating the compliance strategy, program, policies, procedures, controls, systems, tools, and resources.
• The ongoing expenses in operating and maintaining the compliance program, such as salaries, training, audits, assessments, reporting, monitoring, and remediation.
• The opportunity costs of allocating time, money, and resources to compliance activities that could be used for other purposes.
• The potential trade-offs or conflicts between compliance objectives and business objectives, such as profitability, efficiency, agility, or competitiveness.

The benefits of Compliance 3.0 may include:

• The competitive advantages from differentiating or positioning the organization as a leader or a pioneer in the increasingly important fields of compliance and ethics.
• The direct savings from avoiding or reducing the negative consequences of non-compliance, such as fines, penalties, sanctions, lawsuits, settlements, investigations, remediation, and reputational damage.
• The indirect gains from enhancing or creating the positive outcomes of compliance, such as reputation, and qualitative indicators and benchmarks.
• The intangible benefits from fulfilling or exceeding the ethical and social expectations of stakeholders, such as customers, employees, partners, regulators, and society.
• Engaged, informed, supportive stakeholders, such as board members, senior executives, managers, employees, customers, suppliers, regulators, and society, in the design, implementation, and evaluation of compliance initiatives.

Wrapping Up

Compliance 3.0 offers many benefits for organizations that adopt it, but it also poses some challenges. Maximising the return on investment requires aligning strategy, developing the program, measuring effectiveness, engaging stakeholders, and building the right culture. To justify any associated costs it has to be the right thing for your company to do, and the right time to do it.

In this article, we discussed the pros and cons of Compliance 3.0 along with the costs/benefits/challenges it offers for organizations, and how to balance them. Before implementing Compliance 3.0 you should perform a detailed analysis like this to determine whether it fits with your organisation and, if it does fit, the right way to implement it.

What do you think are the pros and cons of Compliance 3.0 for your organization? Is it a realistic solution, or just textbook nonsense? Assuming it’s realistic, what did you consider in the cost/benefit analysis? And, if the analysis looks good, what benefits and challenges do you anticipate? Please share your insights in the comments below.

In the next article, I’ll provide some practical guidance on implementing Compliance 3.0. So, if it looks like this is a good fit for you, we’ll be exploring what to do about that.

Thank you for reading! ??

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See the next part of this series here:

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