A Systems Theory of Compliance Law

Compliance law and practice have taken a priority among business people and academics who study corporations. Companies face heightened regulation and scrutiny from a host of federal and state regulators in the US and abroad. Yet, despite the considerable progress made to understand compliance there are still many questions that are left unanswered, particularly from a theoretical standpoint.

My latest article titled ‘A Systems Theory of Compliance Law’ addresses compliance from a theoretical perspective to develop a more holistic understanding of the subject that yields better explanatory and predictive power. In my article, I conceptualize the various actors, institutions and relations that impact compliance practices. This is important since compliance is often viewed as a process and this yields inadequate explanatory or predictive insights. The behavior and practices of each conceptualized unit within what I call the compliance system comprise: regulators, firms, executives and inter-organizational structures. Each of these system-wide units are analyzed in reference to both economic and non-economic institutional forces that impact each of them. These economic and institutional non-economic forces impact each compliance system unit and explain compliance-related behavior across all levels within the entire system. This systems-level account, I believe, provides a much richer, fuller and accurate descriptive assessment of compliance law and practice. 

For example, it is important to highlight the role that regulators play in the compliance area, yet, equally important are the firms and their managers who must strategize and conceptualize a compliance program that is then executed at the operational level. Adopting a systems-wide perspective allows one to see how the various actors and relationships impact one another. In the article, I discuss the example of MF Global and its various compliance failures to illustrate how the various components of the system contributed to this massive collapse.

A systems approach to compliance offers several important revelations. First, the theory cements compliance as an independent area of scholarly inquiry. Some scholars believe compliance law is not distinct from say regulation, white collar crime or corporate governance. In the article, I take issue with that perspective and argue that compliance law stands as its own distinct area of inquiry. Important and relevant distinct legal domains such as corporate governance, administrative law, strategy and regulation are situated within the compliance systems theory as important, yet, distinct theoretical domains of inquiry that provide building blocks for compliance theory. For example, in the MF Global case various regulators within a shared regulatory space failed to coordinate their efforts to adequately oversee MF Global’s activities. These regulators created vague regulations that also encouraged an overly aggressive compliance strategy at this now defunct firm.

The systems theory also allows predictions to be made based on the economic and institutional forces that act within the system and across the various actors. Currently, compliance law theory fails to do this. Lastly, the systems theory of compliance provides a lens for normative analysis. For example, regulators and policymakers may adopt a systems perspective to address compliance failures and address the weaknesses in the system, rather than myopically focus on a few factors that in in the end may not yield effective or rehabilitative results.

David Orozco is an Associate Professor of Legal Studies, College of Business at the Florida State University.