It’s a Shield, Not a Sword

Businesses on the wrong side of the law often feel as if they’d been bludgeoned by instruments of jurisprudence, bearing a distinct scarlet letter from the administration of executive-based (re: administrative) and judicial-based (re: State/Federal Court) actions. Gone are the days of quiet settlements, and second chances: regulators in all industries increasingly look for large and small regulatory violations alike. Playing defense is more important than ever before. Creating a “culture of compliance” is a blunt phrase, the efficacy of which is up there with “it’s always in the last place you look”

However, the conflict between allocating resources to a cost-side employees rather than its revenue-facing employees need not be well-documented to be understood. The latter, representing the traders, brokers, engineers, product ideators, and strategists, often find themselves directly juxtaposed with the former, those who attempt to minimize costs: lawyers, compliance, finance, accounting, and a host of other others preventing commercial ills.

Attempting to turn a cost-minimizing function into one of profit maximization is not only misguided, it’s fundamentally dangerous. It would be quite difficult for an accountant, lawyer, or compliance officer (“Risk Reducers”) to prove how much money they saved the company because of things that didn’t happen (often to the chagrin of these individuals when year-end raises and bonuses are announced). Those that do attempt to commercialize their safety net might find it missing when it’s most important: when a potential regulatory infraction occurs.

This is, of course, intended to prove a single point: Compliance is a Shield, not a Sword. The programs and processes you introduce are designed to safeguard you from the significant tail-risks on the cost side of your commercial equation, not capture you margin on your productivity side, or use for the threatening of fellow market participants.

compliance word graph

Figure 1, above, represents a standard distributed model of a firm’s risk/reward (which I’ve modeled as normally distributed and directly correlated, that is 1 unit of risk = 1 unit of reward or loss). The Marginal Revenue (“A”), gained by attempting to monetize your “Risk Reducers,” is always significantly outweighed by the Marginal Cost (“B”). Specificity of numbers asides, the chart illustrates a basic premise, regardless of the level of kurtosis: Protecting all you do have with your “Risk Reducers” is far more important than using them as a weapon to gain a marginal advantage: Swords may fight debt, but shields save equity.

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