Big 100 West: Compliance, competition and the cash incentive

Big 100 West: Compliance is about more than fear, experts say

Compliance concerns may be driven largely by the desire to say out of the regulatory spotlight, but it’s also a business strategy, a panel of experts told an audience during this week’s Big 100 West event in Orange County, Calif.

Aside from reigniting competition in an industry that, in many parts of the world, relies on "relationships" to drive success, developing compliance programs can make small companies more attractive to buyers and shareholders, according to the panel, sponsored by Porzio Life Sciences and featuring Edwards Lifesciences (NYSE:EW) chief responsibility officer Diane Biagianti, Covidien NYSE:COV) associate general counsel Adam Krauss and ReVision Optics regulatory affairs & quality assurance vice president R. Michael Crompton, led by Porzio Life Sciences vice president Michelle Axelrod.

The panel maintained that developing meaningful policies to keep a company on track is a project that’s within reach, even for the smallest of companies. The payoff could be significant for firms hoping to one day make a strategic exit.

"As an acquirer, we absolutely look at compliance programs. We have had deals that we’ve walked from because there just wasn’t enough structure for the size of the company," Covidien’s Krauss said. "Don’t kid yourself and think that we don’t discount the purchase price when we think about what we’re doing to have to do with compliance."

ReVision Optics’ Crompton agreed, citing his background at a small company that self-reported a compliance issue ahead of a planned initial public offering. The company hoped to sidestep years and millions of dollars in costs by getting ahead of the issue, which nonetheless turned into a "4-year odyssey with the Dept. of Justice." He learned that lesson the hard way, but compliance now plays a big part in his overall strategy.

"We look at [compliance] as a business system and we also look at it is as something, for a potential acquirer or if we go public, is a benefit to have," Crompton told the audience, warning small firms away from investors or advisors who recommend blowing off compliance for small firms. "Covidien may come and buy you, but there’s going to be a haircut on that deal because they’re going to factor in those costs."

The issue may be one of self-preservation and valuation, but it’s also something much bigger, Covidien’s Biagianti added.

"It’s not about the fear. It’s important that we don’t get hit with those costs, but it’s about what is our reputation built on, what’s our brand built on? What are we known for in the industry and can people trust us?" she said. "Not just our shareholders, but our patients, they know we’re doing to do the right thing with respect to them."

The message was well-received by the audience, but several small-business leaders expressed high concerns about the cost of compliance, which the panel acknowledged as a real but manageable burden.

"It’s a reality to say it’s costly to comply," Biagianti said. "Ultimately I believe compliance is about being a trusted partner, operating with ethics and integrity in everything you do. If you’re not trusted, is the shareholder ultimately going to benefit? No."

The cost of compliance, she added, is nothing compared to the cost of a federal investigation. Non-compliance penalties have amounted to millions or even billions of dollars, even for start-up companies, and the cost of the investigation alone can bankrupt a small firm.

"You can be a compliant company and not spend a gazillion dollars on compliance, using limited resources, having people take on a little bit of responsibility," Porzio’s Axelrod said. "It needs to come from the cultural aspect, to say ‘we’re doing to do things the right way.’"

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