Many businesses today are subjected to a myriad of regulations. In order to ensure compliance with the large and dynamic bodies of federal, state, and local rules, many businesses create internal policies and systems to facilitate adherence to the law. However, such policies and systems exist in a dynamic marketplace filled with resource constraints and other business considerations. So, how do corporate managers construct internal compliance policies for their firms? What rules and regulations do they prioritize? How do they design internal systems to reflect the realities of law and enforcement?
In a recent article, Strategic Compliance, Professor Geeyoung Min offers a sharp and insightful perspective on these questions and more. Through an astute and deep analysis of a hand-collected dataset of corporate policies on insider trading and related party transactions from companies making up the Standard and Poor’s (S&P) 500 index, Professor Min reveals the policy customizations that occur at the firm level. Specifically, she reveals how firms customize internal policies on insider trading and related party transaction, oscillating between stringency and leniency. These revelations illuminate, inform, and interrupt conventional understandings about corporate compliance and internal policies.
The article begins by grounding its examination in the larger corporate and legal context of growing demands for written internal corporate policies. According to Professor Min, this rise in demand for firm-based policies is driven in large part by regulatory enforcement actions, shareholder engagement, and recent court decisions concerning the oversight duties of corporate directors and officers. In response to the rising demand, firm managers and compliance departments have produced more policies tailored to the unique regulatory and businesses concerns of their firms. Collectively, the article explains that this dynamic of corporate policy production serves as a private ordering mechanism for corporate law and compliance.
Next, Professor Min examines her hand-collected data from S&P 500 companies, demonstrating that corporate policies are not static but are actively tailored to either tighten or relax compliance depending on the perceived intensity of external oversight and enforcement. The data indicated that insider trading policies tend to be more stringent, often extending beyond the requirements of federal common law on insider trading. For instance, many companies prohibit trading in any other company’s stock based on material, nonpublic information, a stance that exceeds the traditional insider trading doctrine. Conversely, the data indicated that related party transaction policies at the examined companies often include categorical exclusions or waivers that narrow the scope of prohibited actions.
The article then explains that this divergence in corporate policy stringency and leniency is a strategic move to allocate compliance resources effectively, focusing them on areas with higher external enforcement while relaxing controls in areas with less regulatory scrutiny. Professor Min calls this approach “strategic compliance,” and defines it as firm behavior whereby “[c]orporate policies amplify the incentives to implement stringent internal monitoring where external enforcement is rigorous and adopt lenient internal monitoring where external enforcement is weak.” (P. 433.) Additionally, Professor Min argues that while strategic compliance is “not necessarily problematic,” it can lead to regulatory vacuums and hinder the ability of firm managers to acquire important governance and compliance information. (P. 434.)
The article closes by proposing a set of pragmatic recommendations for firms, shareholders, regulators, and prosecutors to better align and incentivize corporate policies with the larger goals of corporate compliance aimed at better corporate governance. These recommendations are proffered with the intention of better harnessing the benefits of firm-specific policy customization to reflect external regulatory realities.
Modern businesses have to comply, manage, and respond to a growing and complex set of regulations. As such, it is not surprising that much attention, discussion, and resources have been dedicated to understanding and improving business regulation, compliance, and governance in recent years. Good corporate compliance initiatives should not be merely about avoiding liability and enforcement actions. Instead, they should be centered on effectuating the larger welfare-enhancing and profit-enhancing objectives of better corporate governance. Ultimately, corporate policies, corporate compliance, and corporate governance—when working well in concert—should have shared values and shared aims.
Toward that end, this recent article by Professor Min provides a fresh, informative framework for creating internal corporate policies and compliance programs that better align with the values and aims of good corporate governance. Given resource constraints and other competitive business pressures, creating and sustaining such policies and programs consistently is a difficult task, but Professor Min’s insights should make the task clearer, more principled, and ultimately more achievable going forward.
