Policy and procedure: Meaning, Criticisms & Real-World Uses

What Is Policy and Procedure?

Policy and procedure refers to the established guidelines and detailed instructions that an organization implements to govern its operations and ensure consistency, efficiency, and adherence to objectives. These frameworks are fundamental components of sound corporate governance, providing a structured approach to decision-making and task execution. Policies articulate the "what" and "why"—the principles and rules—while procedures outline the "how"—the step-by-step methods for achieving compliance with those policies. Together, policy and procedure create a clear roadmap for employees, promoting predictability and reducing deviation from organizational standards.

History and Origin

While the concept of establishing rules and methods for organized activity dates back centuries, the formalization of "policy and procedure" as a distinct element of modern business management largely emerged with the rise of complex corporate structures. The term "corporate governance" itself, under which policy and procedure extensively falls, gained prominence in the United States in the 1970s. This ⁵period saw increasing scrutiny over managerial accountability and a push for greater oversight following corporate scandals and economic shifts. Early corporate governance discussions began addressing the need for internal frameworks that could ensure companies operated ethically and efficiently, laying the groundwork for the widespread adoption and standardization of formal policy and procedure documents in businesses across various sectors.

Key Takeaways

Policy and procedure provide a structured framework for organizational operations, defining both rules and the steps to follow them.
They are crucial for ensuring compliance with regulations and internal standards.
Effective policy and procedure promote consistency in operations, reduce errors, and enhance operational efficiency.
They serve as vital tools for training employees and fostering accountability within an organization.
Well-defined policy and procedure contribute significantly to an organization's overall risk management strategy.

Interpreting the Policy and Procedure

Effective policy and procedure are not merely static documents but living guides that reflect an organization's values and operational necessities. Interpreting them involves understanding both the spirit of the policy (the underlying objective or principle) and the letter of the procedure (the specific actions required). For instance, a policy on data security outlines the commitment to protecting sensitive information, while its corresponding procedures detail encryption methods, access controls, and incident response steps. Proper interpretation ensures that employees apply the guidelines consistently, even in situations not explicitly covered, by adhering to the policy's intent. This requires clear communication from management and ongoing training to ensure that all personnel understand their roles and responsibilities in upholding the stated ethics and standards.

Hypothetical Example

Consider a financial advisory firm, "Apex Investments," that implements a new policy and procedure for client onboarding. The policy states that all new clients must undergo a thorough due diligence process to verify identity and assess financial suitability. The objective is to comply with anti-money laundering regulations and ensure appropriate investment recommendations.

The accompanying procedure would detail the steps:

Step 1: Collect government-issued identification and proof of address.
Step 2: Run identity verification through an approved third-party service.
Step 3: Conduct a risk assessment questionnaire with the client to determine their risk tolerance and investment objectives.
Step 4: Review all collected documentation and questionnaire responses by a senior compliance officer.
Step 5: Obtain final approval from the board of directors or designated committee before opening the account.

This structured policy and procedure ensures that every new client at Apex Investments receives consistent scrutiny, minimizing regulatory risks and aligning with the firm's client suitability standards.

Practical Applications

Policy and procedure are omnipresent in the financial world, serving as the backbone for regulatory adherence, operational integrity, and strategic execution. In investment firms, they guide everything from trade execution protocols and client communication to portfolio rebalancing and fee structures. For publicly traded companies, robust policy and procedure are critical for accurate financial reporting and maintaining investor confidence.

A significant real-world application is seen in the context of the Sarbanes-Oxley Act (SOX) of 2002. Enacted in response to major accounting scandals, SOX mandates that public companies establish and maintain effective internal control over financial reporting. This ⁴directly translates into the development and rigorous enforcement of detailed policies and procedures governing financial transactions, data accuracy, and disclosure processes. For example, a "Code of Business Conduct and Ethics" document, often required under SOX, outlines an organization's policies on conflicts of interest, compliance with laws, and the proper handling of information, with implicit or explicit procedures for reporting violations or concerns. These³ frameworks ensure that companies operate with transparency and integrity, protecting both shareholders and the broader market.

Limitations and Criticisms

While essential, policy and procedure are not without limitations. A primary criticism is that overly rigid or excessively numerous policies can stifle innovation, hinder employee discretion, and create a bureaucratic environment. When ²policies become too prescriptive, they may inadvertently punish good performers or prevent agile responses to unforeseen situations. For example, a strict, inflexible attendance policy might penalize a high-performing employee who needs a temporary modification for a personal emergency, leading to dissatisfaction or even departure.

Anot¹her challenge arises when policies are not regularly reviewed and updated, leading to outdated or irrelevant guidelines that no longer align with current operational realities or regulatory requirements. Inconsistent enforcement or a lack of employee understanding can also render even well-intentioned policy and procedure ineffective, undermining their purpose of promoting consistency and accountability. Such issues highlight the importance of balancing structure with flexibility and ensuring that policies are practical, clearly communicated, and periodically assessed for their continued relevance and impact on organizational culture.

Policy and Procedure vs. Internal Control

While closely related and often used interchangeably, policy and procedure are distinct from internal control, though the former directly supports the latter. Policies and procedures are the documented directives and instructions that dictate how an organization intends to operate. They are the how-to guides and rules of engagement. For example, a policy might state that "all expenses over $500 must be approved by two managers," and the procedure would detail the steps for submitting, reviewing, and approving expense reports.

Internal control, on the other hand, is the broader system of checks and balances, processes, and activities designed to ensure the reliability of financial reporting, promote operational efficiency, and encourage compliance with laws and regulations. Policies and procedures are fundamental elements within an internal control system. Without clear policy and procedure, internal controls would lack the necessary structure and guidance for their effective implementation. Therefore, while policy and procedure define the expected behaviors and steps, internal controls represent the overarching framework that leverages these definitions to achieve organizational objectives and mitigate risks.

FAQs

What is the primary purpose of policy and procedure in a business?

The primary purpose of policy and procedure is to provide clear guidelines for employees, ensuring consistent operations, regulatory compliance, and efficient achievement of organizational goals. They reduce ambiguity and establish a framework for decision-making.

Who is responsible for creating policies and procedures?

Typically, policies and procedures are developed by management, often with input from relevant departments (e.g., HR, finance, legal, operations) and approved by senior leadership or the board of directors. Their implementation is a company-wide responsibility.

How often should policies and procedures be reviewed?

Policies and procedures should be reviewed regularly, at least annually, or whenever there are significant changes in regulations, technology, organizational structure, or business operations. This ensures they remain relevant, accurate, and effective.

Can policy and procedure hinder efficiency?

Yes, if policies are overly rigid, too numerous, or poorly communicated, they can inadvertently create bureaucracy, stifle innovation, and reduce operational efficiency. The key is to strike a balance between necessary structure and practical flexibility.

What happens if an employee does not follow a policy or procedure?

Failure to follow policy and procedure can lead to various consequences, ranging from corrective action and disciplinary measures up to termination, depending on the severity and impact of the non-compliance. It can also expose the organization to financial losses, legal penalties, or reputational damage. Consistent enforcement is crucial for maintaining accountability.