Requiring too much compliance can damage a business
Variety is a happy feature of humanity. We need both freshthinking creatives to push the limits, and rulebound compliance officers to curb them.
Every positive opportunity comes with a risk of abuse; but without the risk, there would be no opportunity. If no-one were ever found to have broken the law, we could argue that compliance and caution had taken over too far. There would be no space even for honest initiatives, for fear of falling foul of some regulation.
Unfortunately, there is an uncomfortable, if slight, overlap between creativity and deviance. So if we legislate too heavily against deviance, we may unintentionally stifle creativity too. We need to fight fraud without inhibiting initiative.
Obviously, we want zero fraud and zero corruption. I tell new members of my company that genuine mistakes are part of the training budget, but integrity is the one value I do not hesitate to fire people for breaking. Dishonesty and stealing break trust, which breaks the culture of working together and destroys the company. So zero tolerance for lying, stealing and bribing. But please, keep pushing the limits of innovation.
Successful entrepreneurs are generally moderate risktakers — too much risk carries too high a chance of failure; but zero risk means zero business.
Similarly, banks aim for a low credit loss ratio (the proportion of loans not recovered), not zero. Zero defaults would imply that the bank withholds loans from too many good clients for fear of falling victim to a few bad ones.
A restaurant should never risk serving spoiled food that could poison patrons, so complying with health and safety regulations is not negotiable. But it would be a poor restaurant that made compliance its primary purpose.
To borrow terms from the competence literature, compliance is a threshold competence (a competence needed to enter the game), whereas cooking and serving delicious food attractively is a differentiating competence (a competence that makes your restaurant better than others).
The understandable instinct of a manager is to respond to every problem with a new policy, procedure or regulation to prevent it from happening again. But too much of that stifles the differentiating competencies, like the company that tried to stop staff abusing telephone time. It installed a cumbersome system that cost more than the savings on the phone bill, and at the same time irritated everyone, discouraged staff from reaching clients, and possibly sent the most creative employees to the competition.
Similarly, in nations we need a competent bureaucracy to enforce threshold competencies for national success, such as ensuring contracts can be enforced, people pay taxes, and people are treated fairly regardless of their wealth, status or political connections.
But for differentiating competence we need also to create a fertile ecosystem of opportunities and support that encourages enterprising people to take initiative. If a few then stray into illegal practices, hit them hard with the existing law, but avoid creating more unnecessary regulations that discourage everyone from trying legal things.
Sometimes the frustration doesn’t arise from too many regulations, but from their uncaring application. If I can’t get my goods across the border, have to wait months for the licence I need, or receive no response from officials meant to help me, then not only is my immediate business damaged but I’m likely to give up and take my enterprising spirit to another country. And if a bank declines my loan application on a technicality rather than for substantive reasons, the economy suffers through my reduced enterprise.
At the beginning of this column I called for zero tolerance for fraud and corruption. Alongside that we should offer warm encouragement for honest initiative. We should spend at least as much time encouraging excellence and innovation as requiring compliance.