CannTrust Shows Why Compliance Matters for Cannabis Industry

CannTrust Holdings Inc. stock dropped 48% after a news report by Bloomberg indicated that regulators found unlicensed grow rooms and provided them false and misleading information. Within five (5) days, the company lost over $174 million in market value. CannTrust may be the first, but it will not be the last, commercial cannabis business to suffer investor backlash after a regulatory infraction or be the party of a class-action investor lawsuit.

Cannabis businesses should learn from this event and perform an internal review of existing risk, governance and compliance controls around the procurement of cannabis, especially in states with cannabis shortages. A CannTrust employee interviewed by Bloomberg stated that the company was cutting costs and corners, indicating a lack of controls and culture of compliance.

An effective risk and compliance framework, along with a culture of compliance, protects an organization and its shareholders. Senior leadership must be familiar enough with the day-to-day operations to understand what risks are on the horizon and how to help the company head them off. This involves assessing the organization’s daily activities and processes to determine the types of events, that if they occurred, would stop business operations, prompt regulators to investigate, cause unfavorable headlines, or make consumers avoid your brand.

Senior leadership also sets the tone at the top for the expectations for the company’s vision, strategy, and growth. The company culture and the quality of senior management are imperative to ensuring that employees understand the rules of the road. The internal threats posed by employees are just as great as those posed by the potential contamination of a cannabis harvest.

If interested in cutting costs, cannabis businesses may utilize technology to automate as many processes as possible. Companies can utilize technology such as governance, risk, and compliance platforms to assess risk, document its processes and controls used to mitigate the risk and test whether they work. The automation helps contain headcount and creates a central repository for institutional knowledge, which is important in a high growth industry that is staffing up quickly.

The CannTrust regulatory disclosure is a wake-up call for the cannabis and hemp industries. The industry has matured and is being held to public market standards. The cannabis industry must ensure that it continues to mature by adopting public market governance and risk frameworks and controls. Market value can be erased overnight. However, well run companies establish culture and controls to prevent this from happening.