Why risk, compliance, and ESG principles matter now more than ever

Unprecedented steps are being taken to reduce the spread of COVID-19. Governments are enacting strict travel restrictions, border closures, and shelter in place requirements. Many companies with international operations are faced with incredible headwinds or, in some cases, a fight for survival.

While it may initially seem counterintuitive during these trying economic times to stress strong risk, compliance, and ESG principles, companies with robust programs are most favorably positioned for the current environment and as competitive differentiators in the future.

Why risk mitigation matters

Following the chaos resulting from Hurricane Sandy on financial institutions and trading activities in 2012, the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Commodity Futures Trading Commission (CFTC) took the decisive action to jointly review the business continuity and disaster recovery planning of financial firms.

In that review, these regulators provided a playbook of best practice and lessons learned so companies could prioritize business continuity planning (BCP) and disaster recovery (DR) that improve recovery times by investing in remote access/backup systems for key functions to allow for continued operations. The playbook emphasized that companies should implement robust BCP and DR plans for contingency purposes as a best practice.

With the impact of COVID-19 now bearing down on the global economy, it will soon be apparent which companies heeded the regulators’ advice and put BCP & DR plans in place. In the words of arguably the world’s most-recognized investor, Warren Buffett, “you only find out who has been swimming naked when the tide goes out.”

The tide is officially out. BCP, DR, and incident management plans are critical tools for companies to manage through crisis and uncertainty. Much like insurance, it’s not often needed. But when the time comes, it fulfils an absolutely critical need for companies as a coordinated cross-functional tool to provide continued operations during challenging times.

Companies that viewed such plans as unnecessary cost centers or failed to allocate appropriate resources will reap the impact of those decisions; whereas companies that have robust plans will be able to identify this as a competitive strength with their clients, stakeholders, and key business partners by continuing to supply outstanding products and services and emerge with stronger relationships as a result.

Why compliance matters

Numerous publicly traded companies have pulled their earnings guidance in light of the continued impact of COVID-19. For the first time ever, U.S. GDP expectations for the first quarter of 2020 are estimated at double-digit negative growth rates. There will be substantial financial pressure on companies to satisfy short-term performance metrics, and potential exists for increased fraud and corruption risks.

From a regulatory compliance perspective, in-house legal and compliance professionals need to be aware of the macro environment by emphasizing the importance of adhering to the company’s values and culture. One approach is to partner closely with cross-functional colleagues in finance and procurement to be sure discretionary spending such as meals, gifts, travel and entertainment expenses, and vendor payments are closely monitored to not only reduce corporate expenses but also mitigate the risk of improper payments and insider fraud threats.

This type of payment monitoring is critical and supports the underlying business need to preserve capital during a downturn. An effective payment monitoring program can literally pay for itself by identifying questionable payments and ensuring a proper process is in place to review requests prior to payment. Analytics and big data can be used to flag payments that (i) are in exact round numbers and (ii) are made without proper invoicing or receipts. Similarly, running checks to cross-reference vendor and employee bank account numbers to identify any duplication can also mitigate potential insider fraud risk and avoid potential corporate waste.

Why ESG matters

On March 18, BlackRock, one of the world’s largest asset managers, issued a report, “Investment Stewardship – Engagement Priorities for 2020,” in which it emphasized a direct focus on sustainability-related issues for the upcoming proxy season. As stated in the report,

• “In our view, companies that embrace corporate governance and sustainability reporting as a strategic objective—as opposed to a compliance function—are more likely to generate sustained financial returns over time”; and
• “In our view, companies that better articulate their purpose and connect it with their long-term strategy are more likely to have engaged employees, loyal customers, and other supportive stakeholders. This gives a company a competitive advantage and a stronger foundation for generating superior financial returns.”

Large asset managers like BlackRock allocate capital to those companies reflecting these values and principles and adhere to the long-term culture of sustainability and strong governance. When operating capital is precious, such as the present, when an unprecedented global pandemic has resulted in a severe economic crisis, the powerful backing of BlackRock and other asset managers is absolutely critical. Again, to quote Warren Buffett:

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent. When bills come due, only cash is legal tender. Don’t leave home without it.”

Companies that adapt to the present circumstances without sacrificing their long-term values, ESG principles, and culture will be uniquely positioned to survive and thrive in the resulting environment.

Strong risk, compliance, and governance principles are competitive differentiators. In difficult times, businesses that are able to continue to provide excellent services without disruption, in an ethical and compliant manner with adherence to long-term sustainability principles will “be exactly the kinds of companies you would look to as role models.”

Michael F. Savicki is American Express Global Business Travel’s Vice President for Risk, Compliance & ESG - The Americas and Global Head of Commercial Compliance.