Practical insights for compliance and ethics professionals and commentary on the intersection of compliance and culture.

Compliance challenges for start-ups in disruptive industries

In today’s fast-paced business world of innovation and advanced technologies, every company seems to offer the next in-demand disruption. Ever since the days of the dot-com boom and bust in the late 1990s and early 2000s, in the infancy of e-commerce and internet-based or networked products and services, companies have been striving to identify revolutionary items and ideas to market to consumers eagerly awaiting the next life-changing thing to buy. Start-ups in Silicon Valley and entrepreneurial communities all over the world want to develop the next iPhone that will transform every aspect of modern human life. Companies that provide services instead of making products all want to be the next Airbnb, the Uber of their industries, and so on.

But are those companies, and those goals of disruption for the sake of itself, anything to which companies should aspire? Companies in all business sectors are trying to emulate technology companies, and they may not be the best role models in terms of regulatory compliance, risk control frameworks, and business integrity fundamentals. Disruption and sustainability aren’t necessarily mutually exclusive, but many of the companies that were visible pioneers in the current wave of technological innovation and development cut ethical or foundational corners to focus on growth, sales, and branding. Companies in the new generation which seek to copy their success and single-minded commercial focus will run into legal and supervisory obstacles sooner rather than later, now that their predecessors have overstayed the honeymoon period of lax regulatory attention and are running afoul of legal, tax, and compliance concerns all over the world.

The start-up community’s response to public exposure of fraudulent or insufficient business practices – such as companies buying their own products to falsify sales success for partners and investors, or violating straightforward business operations rules like participating in mandatory state insurance programs to maintain company licensure – is to go on the defensive and blame the media. Worse yet, they want to claim stand-out corporate misconduct from their start-up peers are the exception, not the rule, and distance themselves from it, without doing any self-examination or risk assessment to feed-forward into their own continuous improvement.

However, the venture capital firms that are keeping these start-up companies striving toward their disruptive ambitions have a fiduciary duty to their funders to contain reputational risk that could stem from these companies’ public relations and legal problems. The “bad apples” theory cannot win the day in identifying why so much goes so wrong at so many start-ups that were once ambitious and backed by prestigious funders and now have failed, and are being sued by fraud, investigated for investor abuse, accused of forgery or inappropriate accounting practices, and have otherwise missed out on reaching disruption and instead fallen into disrepute.

In any business dominated by private companies getting rich quick, delving into areas which are within loopholes or blind-spots to current legal and regulatory enforcement agendas, transparency is the victim to innovation and doing things the right way, with respect to ethical concerns or compliance requirements that could pop up further down the road from the beginning, is subverted in favor of making money, attracting more investors, and bringing a product or service to market first and with the most attention. “Fake it till you make it” is a toxic approach to management and is no kind of leadership whatsoever. Ignoring legal and regulatory requirements cannot go on forever, as the many bans and service stoppages Uber has experienced in the last year well show. Companies may be able to grow quickly this way, but they cannot keep their business running or have much hope of holding onto their ill-gotten gains unless they tread carefully with regulators and supervisors from the start.

The cultural forces at work here are strong, and disconcerting. Founders with no experience as CEOs and even less experience as functional managers or ethical leaders are given millions of dollars by investors and pressured to be geniuses, redefine business and whatever it is they have to offer to the market in everything they ever do, and succeed at all costs. Liberties are taken, misrepresentations are made, and not every brilliant troublemaker with a crazy idea and a team of engineers turns out to be any good at actually running a legal, functioning, mature business.

The hope, supposedly, is that people will merely bend or flaunt the rules, and not break them, but who’s making the distinction? The moral hazard is great of creating an incentive for behavior that would even lead incrementally to a company that is not in simple compliance with the legal requirements for operating a business in the city, state, or country where it is located. Cautious onlookers assume that maybe if a few corners are cut at the beginning when things are small, it will all work out okay because by the time the company gets big, someone who likes paperwork or understands laws will stumble along and lend a hand. This is immature and short-sighted thinking.

Even if some philanthropic compliance officer did intervene, it would be too late to fix the cultural decay that grows at companies that do not have adequate business values and controls from the beginning. When people ask how it’s possible that business fraud and misconduct went on for years at some companies, or permeated every level of the organization seemingly without detection or interruption – this values void is the answer. To avoid a culture where cheating, misrepresenting, and making unethical decisions are all common, the foundations of the company must include cultural values where that conduct is expressly defined as unacceptable, and business governance structures to prevent, identify, and punish it when it happens.

For more on the challenges to ethical decision-making, and pitfalls for fraud and non-compliance, faced by start-ups, especially in the highly competitive advanced technology world of Silicon Valley, check out this article in Fortune from December 2016:  The Ugly Unethical Underside of Silicon Valley.

For further thoughts on the challenges that start-ups and emerging enterprises face with prioritizing compliance risk management, see this post on Tinder’s corporate culture and the role compliance can play in fostering professionalism in start-ups.  For practical tips, check out this post on compliance foundation must-haves for small businesses. And, check back next Wednesday, January 3, for a post on inexperienced (even if visionary) CEOs and the immature compliance cultures they cultivate by omission.


Essential compliance tips for small businesses

Owners and managers of small businesses often may not recognize the immediate importance or value of implementing a compliance program. Small businesses, especially new ones, are concentrated on surviving financially, refining their market and/or products, and identifying themselves and their leaders in an appealing and sustainable way. With these priorities in sight, compliance may fade to seem to be an optional function, something that can be started up in the future or only when necessary or required. However, establishing a compliance program from the beginning can actually service all those priorities. There are several compliance values and practices which can be easily implemented to get any small business off to the right start.

  • Create a Compliance Manual: Similar to an Employee Handbook, a Compliance Manual is the one-stop reference bible for the policies and procedures necessary for running daily operations of the business. These can be concrete, such as policies governing equipment use, information systems, or reporting of workplace injuries, or conceptual, such as Code of Ethics, gifts and entertainment guidelines, or anti-harassment policy. The policies should be tailored to the needs of the business. Don’t be intimidated; they can be simple as well as being a work-in-progress. Contemplating what rules are needed to cover a business’s practices can help to define what those are as well as provide the fundamental structure that can always be scaled up in the future.
  • Raise compliance awareness among employees: Employee training is critical for fostering a culture of compliance. This is true even if the business is a sole proprietorship with only the employee-owner to educate. All organizations are impacted by local, state, and/or federal regulations in at least some area of their operations, and all businesses would benefit from a strong perspective on ethics and integrity. Compliance awareness doesn’t require a comprehensive or expensive suite of training materials. It can be as simple as discussing dilemmas about conflicts of interest, learning about and checking for updates from the regulator of the business’s industry, or keeping an eye out on developments with competitors, peers, and stakeholders that may indicate changing legal or risk landscapes or shifts in the market to anticipate.
  • Reward ethical behaviour and compliance adherence: Employee integrity and individual contributions to a culture of compliance should be considered basic factors in evaluating performance across the organization. Indicate to employees in all roles that their conduct matters and is a measurable part of their performance. This is the most powerful, direct way to set a tone that employee culture rewards and recognizes doing the right thing consistently and identifying with strong values that reinforce that as a priority.
  • Consider sustainability in the pursuit of profits: Small businesses are reasonably driven by the intention to make the money they need to earn in order to survive and eventually grow. However, the ends do not have to justify the means – the means by which business is done will be what defines the image of the company. A poor reputation or a business model that does not build relationships will be bad advertising for the business and emphasize short-term survival over long-term success. Clients and products should be chosen with a clear vision as to how they can scale and grow and what identity or purpose they serve now and in the future.
  • Assess risk: Get in the habit from the beginning of thinking strategically about risk. In concert with sustainability, having an accurate and reliable identification and assessment of the risks to the business will help to direct growth and act responsibly on ambitions. Challenging business procedures to brainstorm about risks and consider whether they are being protected against adequately can be straight-forward yet packs a big impact in business planning.

Encouraging sustainable business practices, reasonable risk tolerance, employee integrity, and organizational ethics are all accessible and easy to implement business values. A corporate culture that promotes these genuinely and early in its foundations is well-prepared for business success.