Category: The GRC Pundit Blog

This is the 2nd blog in a 5-part series on developing a strategic plan for Third Party Governance/Management in your organization.

With an understanding of where you are at and where you want to go with 3rd Party Governance, the next step is to make sure your team and systems are ready for the journey. The physicist, Fritjof Capra, made an insightful observation on living organisms and ecosystems that also rings true when applied to 3rd Party Governance, Risk Management, and Compliance (3rd Party GRC): 

“The more we study the major problems of our time, the more we come to realize that they cannot be understood in isolation. They are systemic problems, which means that they are interconnected and interdependent.”^[1]

Capra’s point is that biological ecosystems are complex and interconnected and require a holistic understanding of the intricacy in interrelationship as an integrated whole rather than a dissociated collection of parts.  Change in one segment of an ecosystem has cascading effects and impacts to the entire ecosystem.  This is true in 3rd Party GRC. What further complicates this is the exponential effect of 3rd party risk on the organization.  Business operates in a world of chaos.  Applying chaos theory to business is like the ‘butterfly effect’ in which the simple flutter of a butterfly’s wings creates tiny changes in the atmosphere that could ultimately impact the development and path of a hurricane. A small event cascades, develops, and influences what ends up being a significant issue. Dissociated data, systems, and processes leaves the organization with fragments of truth that fail to see the big picture of 3rd party performance, risk, and compliance across the enterprise and how it supports the organization’s strategy and objectives.

The organization needs to have holistic visibility and situational awareness into 3rd party relationships across the enterprise. Complexity of business and intricacy and interconnectedness of third party data requires that the organization implement a third party management strategy. 

The primary directive of a mature 3rd Party GRC program is to deliver effectiveness, efficiency, and agility to the business in managing the breadth of 3rd party relationships in context of performance, risk, and compliance. This requires a strategy that connects the enterprise, business units, processes, transactions, and information to enable transparency, discipline, and control of the ecosystem of third parties across the extended enterprise.

Organizations need to ensure that the various departments and roles involved in governing 3rd party relationships are on board and willing to work together in a cohesive strategy. The goal is to provide the greatest balance in collaborative 3rd party governance and oversight to allow for some department/business function autonomy where needed, but focuses on a common governance model and alignment that the various groups in 3rd party governance utilize. A federated approach increases the ability to connect, understand, analyze, and monitor interrelationships and underlying patterns of performance, risk, and compliance across 3rd party relationships, as it allows different business functions to be focused on their areas while reporting into a common governance framework and architecture. Different functions participate in third party management with a focus on coordination and collaboration through a common core architecture that integrates and plays well with other systems.

The goal is to have centralized 3rd party governance oversight to create consistent and aligned strategy with a common 3rd party governance process, information and technology architecture. Organizations with this collaborative approach report process efficiencies reducing human and financial capital requirements, greater agility to understand and report on third party performance, risk and compliance, and greater effectiveness through the ability to report and analyze 3rd party risk and compliance data. The goal should not only to manage risk and compliance, but to integrate 3rd party governance in the context of performance, objectives, and strategy in relationships.

To achieve the full benefits from an 3rd party GRC strategy, GRC 20/20 recommends the following next steps:

• Gain executive support and sponsorship of the third party governance strategy.The organization needs to work in harmony on third party governance. Different groups doing their own thing handicap the business. Executive support is critical to align the organization.

• Develop harmonized systems and processes. Key to success is identification of shared processes and information for 3rd party GRC across the enterprise. This includes identifying technology and information solutions to support integrated information and process architecture.

This team needs to be aligned to share a common vision to move to an integrated approach to 3rd party GRC across the business that includes an understanding of risk and compliance in context of performance and objectives in third party relationships.

^[1]Fritjof Capra, The Web of Life: A New Scientific Understanding of Living Systems (New York: Anchor Books, 1996), 3.

Supporting 3rd Party GRC Research . . .

GRC 20/20 has defined this in our key research paper (currently being revised):

• Third Party Management by Design

GRC 20/20 is also presenting on how to build a business case for and evaluate the range of 3rd Party GRC solutions in the market:

• Buyers Guide: Third Party GRC Solutions

GRC 20/20 is also facilitating several upcoming workshops on this topic as well:

• Third Party Management by Design, Atlanta – April 15th
• Third Party Management by Design, Houston – April 17th
• Third Party Management by Design, Seattle – September 24th
• Third Party Management by Design, Minneapolis – September 26th
• Third Party Management by Design, Charlotte – October 7th

Other Case Studies, Strategy Perspectives, and Solution Perspectives on Third Party GRC can be found here.

The UK Senior Manager’s Regime and Certification Regime (UK SMCR) is a paradigm shift in regulation and accountability. In one context, I have used the analogy that it is the “One Ring” in Tolkien’s Lord of the Rings. Instead of a ring, it is the:

One [REGULATION] to rule them all, One [REGULATION] to find them [RISK, COMPLIANCE, CONTROL], One [REGULATION] to bring them all, and in the [ENFORCEMENT] bind them.

UK SMCR is a significant challenge for financial services firms. This year, the Financial Conduct Authority (FCA) is applying the regulation to all firms governed by the FCA: over 58,000 organizations. This is the governing regulation of all regulation and risk as it enforces senior manager/executive accountability for all aspects of risk and compliance. It puts personal accountability on senior directors and executives if there is negligence or lack of due diligence in managing risk, conduct, compliance, and controls. These senior managers could go to jail or be personally fined (and their organization cannot reimburse them). It is the UK SMCR regulation that sees that other risk and compliance is properly managed across the organization. For example, Barclay’s CEO was recently fined £640,000personally under UK SMR/CR.

This is a significant shift from responsibility to accountability. The difference may seem subtle, but it is real. Accountability means . . .

[The rest of this blog is continued as a guest blog by GRC 20/20 on the SureCloud site]

Last week a Global CECO (manufacturing company operating in more than 60 countries with over 17,000 employees) reached out to me on a research piece I had published back in 2012 (a report I wrote for OCEG). It was a SWOT Analysis of the CECO role. This CECO asked me if I had updated this as it had provided him insight into his career and direction six years back and curious how my research and thoughts on this have changed since then. Before we get into the my current SWOT analysis on the CECO role, it is important to understand a few things happening that is shifting the role of compliance in organizations . . .

• Compliance the Bastion of Organization Integrity. For the past fifteen years I have stated that if we could rebrand the CECO role I would advocate it to be the Chief Integrity Officer, but we already have a CIO so that most likely will not work. Integrity is the purpose and focus of compliance and ethics. This is becoming more and more apparent as the years move on and the compliance and ethics role evolves.
• Compliance is Dealing with Lots of Change. The greatest challenge for the compliance and ethics function is keeping up with change, and then keeping all that change in sync. There is a barrage of regulatory, risk, and business change happening. Global financial services firms are dealing with 216 regulatory change events every business day (source: Thomson Reuters). Other industries are seeing a similar onslaught of evolving legislation, regulation, litigation, and enforcement actions. But the business is changing just as rapidly through shifts in strategy, employees, technology, mergers/acquisitions, and more. The challenge is keeping all that change in sync. Being intelligent about the law or regulation does not make you compliant if compliance is not operational in context of an evolving and dynamic organization.
• Compliance Becoming an Independent Function in the Organization. There has been increased pressure for the compliance and ethics function to report outside of legal. This comes from a string of consent decrees, deferred prosecution agreements, non-prosecution agreements, corporate integrity agreements, and changes to the US Sentencing Commission Organizational Sentencing Guidelines. Compliance has the duty to discover and fix, while legal generally has the duty to deny and protect. This can be at odds with each other and a conflict. So in the slight majority of organizations we now see that the operational aspects of compliance now reports outside of legal. As a result, compliance functions are getting their own budgets and looking for improvements in compliance/ethics strategy, process, and technology to support their initiatives.
• Compliance Accountability (more than Responsibility). Regulations like the United Kingdom’s Senior Manager’s Regime/Certification Regime (which has had a cascading impact on other jurisdictions such as Australia, Singapore, Hong Kong, Japan, Ireland) is focused on putting senior managers and executives personally accountable for compliance failures as a result of negligence or lack of due diligence. Last year, Barclay’s CEO was fined over £640,000 (nearly $900,000) under UK SMR/CR in context of a whistle blower issue. He personally had to pay this and the bank cannot reimburse them. I have likened UK SMR/CR to the one regulation to rule them all, one regulation to find them, one regulation to bring them all and in the enforcement bind them (for all of you Tolkien fans). It is the regulation of all regulations that puts personal accountability and exposure on senior managers and executives.
• Compliance Roles Gaining Risk Management Skills. Another paradigm shift I have been monitoring for the past twelve+ years is the dichotomic differences in compliance between the USA and much of the rest of the world. In the USA you have a very prescriptive, check-box mentality to compliance. Organizations want their checklist and if they check the checkboxes they want their get out of jail free card. This is in contrast to what we see in the UK, across Europe, and much of the rest of the world which takes a principle, or outcome-based, approach to compliance. In this approach organizations are not given a checklist, but what the expected outcomes or principles are. The way one organization achieves compliance is different from the way another organization might choose to get there. The focus is on the end results. This is requiring that compliance executives have a stronger background in risk management as they have to understand the compliance risk and choose the best approach to mitigate the risk for their particular organizations situation. As regulations are written with a cross-jurisdictional impact, like GDPR, this means that principle/outcome-based approaches are making a global impact requiring compliance executives to build strong risk management skillsets.
• Compliance as a Federated Function. There are lots of departments of compliance – corporate compliance, HR compliance, IT compliance, quality compliance, environmental compliance, health & safety compliance. The CECO role is becoming a facilitator and leader of compliance across these departments in a federated and collaborative capacity.

SWOT Analysis of the Chief Ethics & Compliance Officer Role

SWOT Analysis is a powerful technique for identifying strengths and weaknesses, and for examining the opportunities and threats a CECO faces in managing and maintaining organization integrity and driving toward a strategy of Principled Performance^®.  A SWOT analysis can help a CECO develop his or her career in a way that takes best advantage of one’s talents, abilities, and opportunities. What makes SWOT particularly powerful is that with a little thought, it can help uncover opportunities an executive can take advantage of. By understanding one’s weaknesses, an executive can manage and eliminate threats that could otherwise catch them unaware. More than this, using the SWOT framework, the CECO can start to distinguish him or herself from peers, and move quickly to develop the specialized talents and abilities needed to accelerate one’s career.

Approaching a SWOT analysis on a role/function like the CECO can be divided into:

• Internal Qualities
  • Strengths: Your personal professional capabilities 
  • Weaknesses: Your personal professional challenges
• External Dynamics
  • Opportunities: Organizational prospects to leverage and advance your career 
  • Threats: Organizational challenges to overcome and advance your career

Strengths: Professional Capabilities

• Enabler & leader, that strives to enable the organization to reliably achieve objectives while addressing uncertainty and act with integrity.
• Evangelist & visionary, that provides leadership, direction and insight for creating and protecting organization integrity, ethics, and values as well as maintain compliance with laws, regulations, policies, and procedures.
• Energetic & engaging, with good communication skills that builds interest in better approaches to compliance management, ethics, and values throughout the organization.
• Agile & versatile, that brings broad experience in compliance, ethics, regulatory issues, and corporate values and how they impact other business disciplines and roles.
• Dedicated & driven, a passionate goal-oriented problem-solver that moves the enterprise forward through strong execution of finding and fixing compliance and ethical problems while enabling the business to execute on strategy in a principled manner.
• Collaborator & facilitator, of compliance and ethics across a range of compliance functions scattered across the business and operations that acts as a partner with peers in the organization, adept at leveraging best practices and initiatives across operating units.

Weaknesses: Professional Challenges

• Limited technical acumen, most compliance roles have grown out of legal that has often been more comfortable with documents and paper with limited understanding of how technology can make compliance more efficient, effective, and agile. When compliance executives are approached with technology they tend to find a solution to a specific problem as opposed to thinking big picture on how an integrated compliance technology architecture can provide greater contextual insight into compliance.
• Manual processes and myopic technology, related to the limited technical acumen, this overwhelms the compliance officer and function with documents and manual processes that takes time to reconcile and report. For example, one organization was spending 200 FTE hours building a compliance report that now takes them 1 minute.
• Project management skills are needed, compliance and ethics management has become a complex and intricate set of projects, tasks, and reports that requires compliance management to have an integrated view into compliance deadlines, resources, reports, and activities. This means that the CECO needs to have strong project management capabilities.
• Federated facilitation experience, while the CECO role is the figure head of compliance, this role often has a limited view into the expanse of compliance across departments. The CECO role needs to be the chief herder of the compliance cats to get various fragments of compliance scattered in business operations to work together collaboratively.
• Moving beyond checklists, the compliance function has a tendency to focus on corporate compliance checklists to find and resolve compliance issues, and now is being challenged to understand compliance risk and take on ethics, values, social responsibility, and become a champion for corporate culture.
• Stigma of the corporate cop, the compliance role has historically been seen as a corporate cop rather than a strategic and operationally influential champion of organization integrity. This leads to a misperception of compliance being the department of NO instead of the principled enabler of ethical business.
• Fire fighting and reactive approaches to compliance, where resources are consumed in investigations and putting out compliance fires which leaves little to no resources for proactive planning of compliance and ethics. The CECO is constantly behind in trying to keep a changing business compliant while reacting to ever-changing laws, regulations, and court and regulatory rulings.

Opportunities: Organization Prospects

• Focus on integrity, in which the the compliance and ethics function continually assesses regulatory, ethical, and social responsibility trends to develop a full understanding of mandatory and voluntary obligations and requirements for compliance that align with the organizations values.
• Federated Governance, Risk Management & Compliance (GRC) focus in which the CECO is part of an executive strategy to enable an organization “to reliably achieve objectives [GOVERNANCE], while addressing uncertainty [RISK MANAGEMENT], and act with integrity [COMPLIANCE].” This requires that the CECO be able to collaborate across the range of compliance areas that he or she has not typcially covered before to facillitate compliance across the organization.
• Leverage an integrated information and technology architecture to manage the range of compliance projects, tasks, assessments, exams/audits, investigations, policies, and training. So the organization has 360° contextual intelligence on compliance. Where there is one common portal for policies and training for employees.
• Enable the organization to be a Principled Performer to pursue competitive advantages with superior GRC capability aligned with compliance and ethics that is kept current and managed in a dynamic business, risk, and regulatory environment.
• Improve compliance reporting to senior management and the board by integrating compliance metrics, information into existing reporting processes and forms to assist in their fiduciary obligations of oversight of compliance.
• Build superior shareholder relations and broader stakeholder communications around ethics, values, and compliance activities.

Threats: Organization Challenges

• Third party risk and compliance in which vendors, suppliers, outsourcers, and such expose the organization to issues of fraud, corruption, social responsibility, and compliance violations across these extended business relationships that result in reputational damage and substantial fines and penalties. Over half of insiders are not traditional employees but third parties which requires that a compliance program extend across third party relationships.
• Keeping a changing organization in sync with changing compliance requirements, the volume of change impacting compliance is staggering. Being knowledgable at regulations and the law does not good if the organization is not operationally compliant. Keeping a dynamic business compliant with ever changing laws, regulations, and enforcement actions is a huge issue for most organizations.
• Lack of competitive edge as competitors with more agile, effective, and efficient compliance programs outpace the organization in the market as it is encumbered with slow processes and reactive approaches. This stems from:
  • Failure to implement adequate compliance and ethics infrastructure and architecture to monitor, mitigate, and respond to compliance and conduct risk of unethical conduct.
    
  • Inadequate integrated GRC technology infrastructure, which reduces the quality and flow of information.
    
  • Siloed processes and systems causing delayed reporting and inconsistent quality and reliability of risk information.
    
  • Document centric approaches handicap compliance reporting and relative value to the rest of the organization.
• Culture reinforcing compliance communication after an event or incident occurs, rather than proactively identifying potential problems before the occur.