Day 18 of One Month to More Effective Compliance for Business Ventures

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One area not usually considered around your business ventures is the financial health of the joint venture partner, teaming partner, strategic partner or any other type of business partner or relationship which might occur in a business venture. It turns out such an oversight may have some significantly ramifications for an accurate picture of a business venture partner. The financial health of a business venture partner as not only a key metric but also a key tool which allows a more robust assessment prior to contract signing and in managing the relationship after the contract has been signed.

A business venture partner which is in a weakened financial position can come back to damage your business in a variety of ways. Obviously, a company which is under financial strain is more susceptible to cutting corners to obtain business. You can almost begin to see the fraud triangle forming at this point and a rationalization for committing a FCPA violation forming in the mind of a business venture partner.

But it is more than simply being open to potentially illegal conduct such as violating the FCPA to get business. Cyber security is a very hot topic and will continue to be so for the foreseeable future. A company that, at the beginning of a working relationship, maybe onboarding or the due diligence procurement event, one may do a series of checks from a compliance and info security perspective and that company looks fine, it gets green lit and it comes on board as a business venture partner. Over time, if that business venture partner is weakening in its financial condition, the chances are likely that they are going to begin under-investing in maintaining the quality of their cyber security program. Over time, a business venture partner of your company may induce increased risks for a cyber security breach, because that business venture partner is weakening and are not managing the financial condition of it on an ongoing basis. This might lead to a catastrophic failure such as with Equifax where the miss a leading indicator of that cyber security problem, fail to implement a software update or patch then it is too late. It has the impact to effect revenue, effect reputation and indeed your ability to do business together moving forward.

A database of financial health is important because “traditional risk management has focused more on protecting downside risk and detecting downside risk is being able to understand where a company or a partner exists on a spectrum of risks that can be from poor to really good, and that means a user of our data is in a position to be able to do more than just protect from a company’s failing for one reason or another, but be able to align with the strongest partners and that creates resiliency and a business venture partner ecosystem”.

This is considering your third parties in much broader manner which allows a more robust assessment of their strengths and weaknesses. The financial health of a business venture partner may tell you how well that business venture partner will perform. Such information can be useful to you for business planning, particularly around strategic risk. Understanding the financial viability of third parties, be they traditional vendors, business partners, or even fourth parties, can help you meet your compliance requirements, maintain operational stability, through the avoidance of business disruption and support business continuity initiatives. Even better, you can cut through siloes to develop risk management strategies across multiple business functions.

This moves compliance into the business process cycle, creates greater efficiencies and at the end of the day, more profitability. This type of approach allows the compliance function to demonstrate solid return on investment going forward. It also allows compliance to cut through many corporate siloes including such disciplines as business development, supply chain or procurement, manufacturing and finance.

Continuous improvement through monitoring of ongoing financial health is a tool where technological solutions can have an impact. Understanding the financial viability of third parties can help the compliance practitioner meet the Department of Justice (DOJ) requirement to more fully operationalize a compliance program. It can also lead to more and better operational stability and with that ever-sought increase in corporate profitability. As compliance moves into the business process, this type of review should become part of your compliance toolkit going forward.

Three Key Takeaways

  1. What is the financial health of your business venture partners? Do you even know?
  2. Poor financial results can open a business venture partner to engaging in risky behavior.
  3. Financial health monitoring is a key tool in maintaining ongoing monitoring of business venture partners.

This month’s podcast series is sponsored by Michael Volkov and The Volkov Law Group. The Volkov Law Group is a premier law firm specializing in corporate ethics and compliance, internal investigations and white collar defense. For more information and to discuss practical solutions to compliance and enforcement issues, email Michael Volkov at mvolkov@volkovlaw.com or check out www.volkovlaw.com.

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