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Executive Q&A: The Culture of Compliance
||The topic of governance, risk, and compliance has got financial services executives and board members talking-and that buzz won’t be fading anytime soon. Mark Schlageter, Managing Director of Governance, Risk, and Compliance for Thomson Reuters, discusses how compliance is changing for the better and the importance of data governance and management for financial services firms.|
FSOkx: Have you seen a “culture of compliance” emerging in organizations as a result of the financial crisis?
Mark Schlageter, Managing Director of Governance, Risk, and Compliance, Thomson Reuters: There’s absolutely a change in how financial services firms view compliance. When Sarbanes-Oxley was passed, we saw a significant shift in the culture of compliance that laid the foundation for today’s continued cultural change. People became compliance-oriented and compliance was discussed in the CEO’s office.
In the years since SOX, financial services firms have been hit with many new regulations. In addition, they’ve seen institutions such as Lehman Brothers fail. As a result, firms have stepped up their game, putting more resources on assertively monitoring compliance. Compliance is part of the fabric of top performing companies.
I can’t stress enough that this isn’t just a U.S. or developed world issue. Any firm that wants to be competitive on the world stage has to nurture a culture of compliance.
FSOkx: Do you believe that these cultural changes will be long-term or will there be a tendency for organizations to undertake more risky behaviors as the economic climate improves?
Schlageter: I think the change is sustainable and expect the culture of compliance to evolve to its next stage in which everyone—from technology to sales to the C-suite—will be talking about governance, risk, and compliance in every aspect of the firm.
FSOkx: Is compliance a burden?
Schlageter: Leading financial services firms are actually using compliance as a competitive advantage, particularly as a way to improve stock pricing. Those companies that stay out of the news have stock prices that surpass their competitors.
FSOkx: What have we learned about governance, risk, and compliance in the years since Lehman Brothers?
Schlageter: Governments learned that you need guardrails on the road to keep traffic moving the right way. Companies, especially highly regulated entities like financial services firms, learned the pitfalls of not being compliant and that they need to become much more fit in the eyes of the regulators. They learned that compliance takes budget, top talent, and focused energy. In the past, chairmen were former CEOs who came from the deal making side, but that’s changing. For instance, Citi named its former general counsel as chairman to ensure compliance and implementation of Dodd-Frank.
Shareholders learned that they can demand that companies augment their compliance budgets, bring in better talent, and use the right technology to ensure that the stock price progresses forward.
FSOkx: How have board-level responsibilities shifted in the past several years?
Schlageter: Over the last 12 years, board of directors’ roles in regulatory compliance has changed dramatically. It’s always on the agenda for well-governed companies. The board receives very detailed vulnerability reports and heat maps and takes a more operational approach to understanding compliance mechanisms.
FSOkx: How about the board members themselves?
Schlageter: The types of board members have changed and more have a compliance background. The board still wants the company to grow of course, but board members who understand the compliance ecosystem provide a great deal of value.
FSOkx: What still needs to change at the board level?
Schlageter: The board needs to appreciate the broader concept of risk from the shareholder point of view. Non-performance due to non-compliance needs to be elevated to the board. The board must pinpoint where the real vulnerabilities are by jurisdiction and what the management team can do to ensure compliance. They need to be as involved in compliance performance as they are in financial performance. I anticipate that the board will evolve to become even more involved in not just comprehending the compliance ecosystem but in understanding the best way to create a competitive advantage from compliance.
FSOkx: Is the board getting the information they need?
Schlageter: They don’t get enough information to provide the type of governance that they need to provide. There’s massive fines every week. I can imagine that every board member wants to be more proactive in preventing transgressions but the mechanisms for managing data are not available in many firms. Over the next five years, I expect that boards will spend more time ensuring that data dashboards are accurate and detailed.
FSOkx.: Is technology keeping pace with data management challenges?
Schlageter: There’s more work to do in data management. For example, the Foreign Account Tax Compliance Act (FATCA) requires ensuring that your customers are compliant with multiple jurisdictions yet most private wealth banks only have a single data field for nationality although clients often hold more than one passport. If a client checks the nationality field for Cayman Islands, a database search doesn’t reveal that they also hold a U.S. passport. Technology must change to house the new information financial services firms are collecting. We need more standards and tools that can help firms search and use data for both compliance and competitive advantage.
FSOkx: How important is process management?
Schlageter: Processes have become more important in avoiding compliance transgressions and the best performing banks in compliance are very strapped down and process driven. Firms are looking to hire people with Six Sigma and other process oriented expertise.