Avoid the hidden cost of doing business | Ep. 61

The ROI Podcast

Besides another economic recession, nothing can stop a company's growth faster than business regulation violations. These hidden costs sneak up on many business owners at the worst time, if we let them. So what's our best defense? An even better offense. Whether you're planning a new start-up or a seasoned business professional, this episode will both educate and give you the necessary tools to protect your organization from unnecessary regulation violation fines.

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Show Notes:

MATT:

Regulations – the rules of the road within business; a term carrying many mixed feelings. Some say we have too many, others say we have too few. Regardless of where we stand, the reality is we must comply with the laws of our land or face penalties. On this episode, we’re sitting down with Judith Wright, Assistant Clinical Professor of Business Law at Kelley, whose helping us play by the rules and protect what we’ve worked so hard to build. Let’s get to the podcast…

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MATT:

Welcome to another episode of the ROI Podcast presented by the Indiana University Kelley School of Business. I’m your host, Matt Martella alongside Associate Dean of Academic Programs, Phil Powell. If this is your first time joining us, welcome to the podcast. We put out a weekly episode to help organizations make better business decisions. And for those who are sharing this with friends on social media, we want to say thank you. We are very honored you find enough value in our weekly content to pass these episodes along.

And Phil, I think today’s topic carries a lot of value, especially for those of us in the early stages of organizational development. However, no matter how established our companies are, there are some great take-a-ways on this episode to protect not just ourselves, but our clients, our employees, and our organizations.

PHIL:

Absolutely Matt. We’re taking a dive into business regulations because so many times, organizations are unaware they may have requirements, restrictions, or compliances they must follow. And it’s the failure to follow these regulations that cripple businesses of every size. But before we dive in, it’s important to establish why regulations exist in the first place.

Judith Wright: A lot of people think, "Oh, there's too much regulation and regulation is bad." Until something happens to you. And then people say, "There ought to be a law!" Right? You've heard that phrase before? So, let me just give you an example of that. All businesses have to provide worker's compensation protections. So what that means is the government looks to business to provide for compensation for individuals who are hurt while they are at work. This is not new law. It's ancient law actually. And has been around since the 1800s and earlier than that even in Europe, then we brought those ideas to the US of course when we formed a country here. So, since the industrial age, if you get hurt at work your employer has to provide some protection for you, has to help you recover from that. Without that, think about what would happen. If you went to work and got hurt severely, theoretically, an employer could call your family, tell them to come get you and just plug in another worker. That doesn't seem like a fair way to treat workers. So I kind of liken it like this, this will make sense to you, it's like driving a car. You get behind the wheel of a car, and you're expected to know all the rules of the road, and comply with all the rules of the road. And if you don't you can be pulled over and ticketed for that. So when you get behind the wheel of a business, and you want to drive that business, you're supposed to know all the rules of the business, and if you don't comply, you can be ticketed for that lack of compliance.

MATT:

It’s important to understand that regulations exist for protection. It cannot be stated enough. Of course they’re not perfect and according to Judith, they are usually lagging from what’s actually happening in the marketplace. And as she mentioned as an example, though it can be burdensome for an organization to comply, they are meant for organizational safety. Just like monopoly regulations protect industries and keep competition alive, environmental regulations make sure our drinking water is clean, and health regulations make sure we get the right treatment.

PHIL:

It’s easy for organizations to say that regulations hinder their business or more regulations need to exist. That’s not the point. Regardless of our beliefs about regulations, the reality is, they exist and we have a legal obligation to comply. We want to make it clear, our focus is helping us leaders be proactive and educated about regulations affecting our industry rather than having to react to sanctions and pay fines for breaking the rules. Especially for violations we unintentionally are not following. If your organization is currently facing some government sanctions, stick around because Judith offers some next steps for your business.

MATT:

So let’s start with being proactive. As organizational leaders, it’s our duty to understand, not only our industry, but how we are to operate, legally, as a business. The hard thing is, we are so consumed with growing our organization that we do not have the time to follow each law being passed into Congress - and ask if it applies to our industry. So how do we stay educated? The first way to be proactive on industry regulations is by joining a Trade Association.

Judith Wright: So what these organizations do, essentially, is help educate members about running a business in that specialty area. So they provide newsletters, they have webinars, they have training programs, they provide market information, what's going on in your market, what are the trends. They do consumer studies. They have technology reports. Economic impact studies. All kinds of things that, if you're willing to educate yourself, help you feel more in control of those issues. So if there's a new rule proposed, for example. I saw the other day that the start of California is looking at banning plastic straws. So if you're a business that uses plastic straws, that's suddenly of interest to you. But the trade association can be in there early on helping influence whether the government actually bans them, if so, how the ban will take place and what kind of straws are ok and what kind are not and influence the outcome of that. Helping the regulators understand the cost of making this change for folks that are using plastic straws.

PHIL:

These associations, typically, have full time staff members whose job it is to educate organizations on new laws and even laws being proposed that could affect the industry as a whole. For us leaders, the one resource that’s most scarce is time. We all have the same hours in a day, no matter what. So to have a team of individuals breaking down regulations affecting our organization is critical to remaining proactive. Judith also mentions that since many of these associations make up multiple businesses, they bring more influence to the law makers versus our organization as an individual.

Judith Wright: And it works because, if you or I own a coffee shop and we want to call the governor or the legislator and tell them what we think about it, they might take your call and be very interested. At the same time, a trade association represents dozens in a state and thousands nationally and therefore can kind of get the voice of the small business person before a government party in a way that you or I would find time consuming, maybe frustrating and maybe difficult to do.

MATT:

So now that we have an education pipeline for protection, the second way our organizations can remain proactive on regulation compliance is to invest into legal counsel sooner, rather than later.

Judith Wright: That said, ignorance of the law is not a defense. And so, often times, for example a health code violation, if they change something and you don't know, you're going to get cited for that for each day you're out of compliance, potentially. The cost of non-compliance is 2-3 times the cost of compliance. Meaning, if you fail to follow the rules and you get caught and you're subjected to fines, it's felt by experts that it's going to cost you 2-3 times the cost of just doing it right in the first place. And those costs come from things like fines, of course from doing things you're not permitted to do, but just the disruption in your business, the damage to your reputation, because the competitors do make hay with that. If there's, you know, a newspaper story that your company got cited for health code violations, your competitors are the ones who fan that flame. And then just the whole cost of having to restructure how you do business and get it on track. And the legal fees in terms of settling that. I think that's an important thing to realize, ignoring the cost of regulation can be very expensive down the road when it catches up with you.

PHIL:

The hours spent with a lawyer outside the courtroom are so much lower than having to hire one once our company is before a judge, which means a substantial cost reduction. When getting a lawyer involved early on, lean on their expertise for clarity. They are the ones to check our organization’s blind spots and make sure we’ve structured our companies properly. Start to ask other business owners who they work with – or better yet, ask the trade association for legal recommendations. And, should we find ourselves dealing with sanctions, we’ll have someone to defend us early on – which could mean the difference between keeping our doors open and polishing up our resumes.

MATT:

So we joined a trade association for our industry, we’ve met with a lawyer who checked our blind spots, as an organization, now it’s time to create systems within our company that make sure we stay compliant to these regulations.

Judith Wright: Go back to the driving the car analogy, we all know there are rules to driving a car, but that doesn't keep us from getting in there, learning them and driving that car. And it's the same in business. Once you get a command of those rules and you know, for example, when you drive down the road, every day, you don't consciously in your head say, "Oh, be sure to stop at the stop signs." You know, and it's an intuitive reaction on your part. Once you know the regulation in your business and you become comfortable with that and you've built it into your processes and you have confidence that you're doing things right, every time you do them, and you have a calendar that reminds you when to do filings and that sort of thing, it becomes just part of the intuitive why you do business. It's not scary, it's just the way that it is.

PHIL:

B-P comes to mind when I think of major violations. As we know, back in April of 2010, the Deepwater Horizon oil rig exploded – sadly killing 11 employees and leaking around 4.9-million barrels of oil, according to the U.S. Government - into the Gulf of Mexico. This caused major environmental problems along with legal battles, bad press, and huge fines. The EPA estimates that B-P has paid $4 BILLION in settlements, fines, and penalties. According to the White House Oil Spill Commission, B-P could have prevented the missteps that lead to the disaster by educating their workers and creating systems to comply with regulations. The report also states there were no procedure set on how to communicate faulty test results to experts. So as the leaders of our organizations, taking a little extra time creating systems within our organization that address regulation compliance could save us not just our jobs, but our organization as a whole.

MATT:

After we educate ourselves, get legal advice and make sure we have the right systems in place, the final take-a-way to be proactive on regulations is budget for them. If we’re an entrepreneur, do research to find compliance costs that affect our organizations and include it in our financial planning strategy. If we’re established as an organization, continue leaning into the trade association for ideas so that if we have to change compliance or add systems to protect ourselves, we have the cash to do so.

Judith Wright: The US Chamber of Commerce did a study where they asked small business owners for information about the costs in their companies. And what they found was that, on average, a small business pays just under $12-thousand dollars a year, per employee to cover regulatory costs. Now I'm guessing most small businesses who are excited about their entrepreneurial business plan have not factored in $12-thousand dollars per employee to pay for regulation. And the same study found that on average a small business spends $83-thousand dollars to comply with regulation in its first year of start up. So that's a hidden cost... it's not hidden, it's just one that folks overlook. And as your business grows, and you get a little larger, additional federal laws starts to play. For example, some federal laws apply to businesses with 15 or more employees. So when you go from 14 to 15, suddenly you're in a realm of new regulation that you may not have thought about. And the thing that's interesting for people to take into account is that oftentimes the fine is per violation. For example, lawn care services frequently have to deal with disposal of grass and yard waste. Or clippings and trimmings from trees and that sort of thing. And more than half the states, at a state level, regulate how that waste gets disposed of. So if the rules changed on that and you think you're ok but you're not, each time you improperly dispose of that waste could be a separate fine. And let's say for sake of argument the fine is $1,000 per violation. But if you've disposed of things improperly for the last month or so, without realizing it, you could have multiple thousands of dollars in fines before you even realize you're doing something wrong. Now, does the government come and catch you in the net and say, "Oh, you've done something here." Not necessarily, sometimes they'll work with you to help you understand that.

PHIL:

And it’s examples like these that help us prepare for the ever changing regulations. Whether we’re on the brink of filing for that LLC or about to celebrate our 100 year anniversary, we can still become proactive to make sure our organizations continue its journey of success. Regulations will affect us in some capacity – if we educate ourselves, invite the right help, create systems of protection, and make sure we have the cash available, our organizations can enjoy life in the fast lane.

MATT:

Let’s switch sides now. Say, as an organization, we find ourselves in trouble. We violated a regulation and now we’re facing a penalty.

Judith Wright: Here is some legal advise, you don't call the regulator yourself and try to work it out. You really need legal counsel at that point. So number one, if you realize you have a problem, number one, face it, acknowledge it. Number two, get legal help now. If you don't already have a legal advisor, it's time to get legal help now. And let that lawyer help you interface with the government about how to resolve that problem. There are very few problems that can't be solved. Perhaps you can change your practices in a way that show you have a "good faith" effort going forward and they're not going to be so punishing with you. Perhaps you can negotiate a fine with the government. Honestly, they're there to make sure the protections are in place. They're not there to drive people out of business. But if you find that you really violated the law in some way, a lawyer is someone you should sit down with and talk to about it.

PHIL:

B-P still operates as an organization, despite the $4-billion in payouts, negative press, and setbacks they’ve endured since 2010. Now, hopefully we’re not facing major problems like B-P, but the take-a-way here is to endure. Acknowledge our violation and more importantly our responsibility going forward. Make the changes necessary, pay our fines, and then jump into proactive mode. It’s like a car accident or getting a speeding ticket. When we get back in the car, we become hyper aware or nervous, but what’s most important is the fact we got ourselves back in the car and on the road. Our business can make it through if we lead it the right way.

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MATT:

So let’s recap. Whether we agree with regulations or not or whether we think there are too many or too few does not change the fact that as an organization, we are obligated to abide by these laws. Embracing this truth helps us become proactive – keeping our organizations protected from fines. The first way we can be proactive on regulations is by joining a Trade Association. Not only do they provide the proper education, they voice our concerns to lawmakers with authority. Next, invest into legal counsel. They will ensure we have the right structure within our business to comply with regulations. Plus, if we find ourselves in violation, our legal experts already understand the inner workings of our organization, potentially saving us thousands in legal fees later on. Then, we need to create systems that ensure and protect our compliance. Whether its calendar reminders, check-ups, educational courses, or audits, create systems that keep our companies safe. Finally, complying with regulations costs money. If we work these costs into our startup plan or budgeting protocols, when we do have to pay, we’re not scrambling to find cash. And if we find ourselves facing regulatory penalties, it’s very important to acknowledge the problem, then get legal help as soon as possible. It’s highly discouraged to work with regulators alone. This could mean the difference between massive payouts or ultimately having our business shut down.

If you’ve enjoyed this episode and would like to hear more, head over to your favorite podcasting app. While you’re there, be sure to hit the subscribe button so you can receive the latest episode each week. Thanks again for spending time with us on the ROI Podcast presented by the Indiana University Kelley School of Business. I’m your host Matt Martella alongside Phil Powell, where we work to help organizations make better business decisions. We’ll see you next week.