Key considerations for cannabis executives and boards

September 04, 2019

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Let’s take recent cannabis industry events as an example to learn from: cultivating unlicensed product leads to Health Canada involvement, which leads to stock plummeting and a top-down pattern of leadership personnel leaving. While this is an extreme example, it’s worth the attention of cannabis executives and boards.

Compliance with government regulations carries massive reputational risk. And while that responsibility falls with management, oversight responsibilities fall on the board. Both parties work to protect shareholder value, enforce governance, and maintain compliance.

In light of what recently took place in the cannabis industry, our team would like to share some insight into what boards and senior management should be thinking about to prevent the risk of similar events taking place in their company.

Proper sourcing

With the inherent scrutiny that cannabis companies face, every aspect of compliance needs to be monitored and under control. It’s important to understand regulations enforced by the Cannabis Act, Health Canada, as well as provincial governments. Cultivation, processing, labelling, storage, and distribution are among the areas for consideration.

All companies with a large stakeholder base, particularly publicly-traded companies, should perform an annual risk assessment. This assessment involves active risk management and reporting functions to ensure sufficient controls are in place, and that policies are up to date and working efficiently.

Within the cannabis industry, an ongoing and active enterprise risk management program would drive companies to identify the critical importance of licensing early on, enabling them to be proactive rather than reactive in obtaining required licenses. Monitoring activities and having ongoing internal dialogue helps identify and evaluate potential risks along the way, as well as how to mitigate them.

Positive company culture

Company culture is one of the main determining factors for attracting and retaining talent. It’s a combination of the values and personality of the workspace, as well as the dynamic between employees. With the nature of cannabis companies scaling up so quickly, it can be a challenge to both establish and maintain a company culture that reflects the right values and priorities throughout the company’s growth.

Board members and executive management influence the actions of the organization through their attitudes, support, and prioritization of issues. Setting a tone of taking compliance, control, and security seriously is essential. When your ability to generate revenue is dependent on licensing and enforcing regulations, this tone is crucial.

Diversity of people and thinking is important in nurturing an open perspective within an organization. Developing a unique culture takes time in a nascent industry like cannabis. And building one that’s balanced and reflects a diverse set of views, opinions, and experiences is key for the company’s success.

Governance process

A Whistleblower program is an essential component of governance in multi-stakeholder organizations. It allows an open channel for employees, members, and the public to communicate issues they feel need to be raised. The anonymous nature of a Whistleblower policy offers a more inviting opportunity to those otherwise unwilling to share sensitive information.

As cannabis is a highly regulated industry, it’s important that companies have appropriate policies in place to reduce the risk of uncommunicated issues getting out. An oversight like this could ignite a threat to shareholder value internally, prior to becoming a scandal.

Compliance across all verticals

In addition to compliance with growing operations and distribution, corporate compliance with business and trading parameters is critical for public companies. Policies and procedures for insider trading, anti-bribery and corruption, anti-money laundering, Sarbanes-Oxley, or National Instrument 52-109 all need to be monitored and internally enforced. Fast-growing companies have to deal with changing dynamics within new product launches and product development. This involves constant implementation of new regulations, expanding into subsectors like edibles, incorporating revisions, and monitoring procedures to ensure compliance.

Management and the board need to evaluate these procedures and recommend solutions that support the current state of all business activities, as well as future plans.

IT system integration

Cybersecurity deserves attention no matter what organization or industry you’re dealing with. For cannabis companies with retail operations, customer information is a very high-risk area to consider. Compliance with the Personal Information Protection and Electronic Documents Act (PIPEDA), as well as with privacy acts throughout the U.S. are very important to keep in mind.

Because of the nascent nature of the products and industry, cannabis companies should be taking necessary precautions to manage inventory control effectively. In this digital age, IT systems can support almost any area of an organization. It’s essential that the company has all the tools to help scale their growth. An annual review of IT systems is recommended to make sure they’re continuing to support the company’s vision and expansion.

Changes in IT might be necessary for control and optimization of data storage, quick data and transaction processing, accuracy of information, insight, and analysis. IT capabilities should be able to support all stages of aligning operations and administration.

Major IT system changes require appropriate due diligence by the organization to ensure information from the old system is appropriately added into the new one, that it’s easily accessible, and that it’s adequately processed.

Looking forward

Having policies and procedures over legal, regulatory, corporate, and other requirements is critical in a space with as much external interest as cannabis. The pressure is on regulators to deliver safety and control to the market. Further, market participants need to safeguard the opportunity for material decline in shareholder value. Boards and management should be asking questions and seeking answers to help them keep their companies competitive while maintaining compliance. It’s imperative to build a team of people and technology to bring your company’s vision and strategy to life. Optimally, when the executive management team and board are a collaborative group, it creates more opportunity for action.

To discuss any of these matters further, please reach out to our team.