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Execution + Compliance + Governance = Excellence in Cannabis 3.0

02/12/2019


This article was originally published in the October 22 – 28 issue of the Business In Vancouver newspaper and has been reproduced with permission.

MNP’s Peter Guo investigates some of the compliance hurdles that have been tripping up Canadian licensed cannabis businesses in the first year post-legalization. He offers actionable ideas, processes and policies entrepreneurs can take to reduce their risks, increase their access to opportunities and improve their standing with regulators.

Everyone thought growing and selling cannabis would be easy. After all, most Canadians ‘know a guy’ who’s been doing it for years — and doing very well, thank you very much.

The signs were always there: Aban­doned chocolate factories and aging greenhouses were reinvigorated. Rock bands promoted cannabis companies, and curated experiences with celebrities popped up. Police officers and politicians suddenly legitimized start-ups and started hanging out on Bay Street. Bankers, lawyers and accountants became financiers, advisors and promoters.

In the last couple years, we’ve been awash with capital, characters and cannabis — just surfing the wave, right?

Then why are we all feeling a bit soggy, rather than rip-curling this wave of excitement?

In less than a year, the industry is struggling to execute. Inventory and supply chain issues are vexing. Retail models stifle entrepreneurship and have created bottlenecks in providing product(s) to users — helping the black-market flourish and limiting consumer choice.

A recent visit to a private B.C. retailer underscored these problems. Numerous varieties were unavailable. Prices were slashed to cost to move old, dry flower. That retail cost floor, established by the provincial liquor distributor, at best has marginalized the consumer purchase incentive. Frankly, who’s going to buy bargain basement bud at premium pricing?

Regulations and supply chain issues stymie consumer choice and demand — which, viewed further upstream, manifests in aging inventories, immature logistics and manual labeling, packing and shipping processes. For those struggling, an inability to provide a steady supply of SKUs further exacerbates retail stockouts.

It also turns out cannabis isn’t that easy to grow. Certainly not under con­ditions for mass human consumption. We should have predicted that from large scale cultivation of other crops. Many executives who joined from pharma or food and beverage processing knew the operation and certification challenges. They also knew not to take regulations lightly.

Everyone loves slagging the government on regulations. However, these are the rules we all must play by. Imperfect as they are, they’re here for a purpose, still evolving and have been the foundation for Canada’s global cannabis leadership.

Producer regulatory failures have surfaced too many times in the past year. Licensing was a major hurdle in the rush to market but maintaining regulatory compliance has proved even more difficult.

Why do some licensed producers (LP’s) struggle to maintain compliance?

Ask anyone in food, beverage, tobacco, pharma, cosmetics, etc. — meeting industry and government standards is the starting point. Staying compliant is an operational and cultural imperative.

The industry is immature and regu­lations are still evolving. Growing pains are part of the problem, as new companies with evolving SOPs, pro­cesses, people, technology, etc. emerge. Plus, it is a challenge going from start-up to public company, where there are more than Health Canada regulations or EU GMP to comply with.

You can almost hear cannabis entre­preneurs roll their collective eyeballs and abdicate compliance to lawyers, accountants and auditors. And that is a fundamental problem.

Establishing an entrepreneurial and enabling compliant culture while raising capital, constructing new buildings and creating policies, processes, teams, technologies, seem to be inherently complex, if not completely at odds. It is overcoming these barriers and establishing the right policies, practices, mindsets and oversight that will separate the sustainable winners from those who come crashing down.

So, what should we do?

Establishing the right frameworks takes a deliberate approach. The it­erations can be somewhat ad hoc, but the intention cannot be. The rules are not meant to be broken and frankly shouldn’t be bent.

View compliance as table stakes. Just as most LPs started early and worked hard to receive their licenses, early should also be the approach to financial and disclosure controls, cybersecurity and a code of conduct that clearly defines expectations.

Get the right people involved in up­holding these table stakes, just as LPs did for Health Canada licensing. Seek external help if your current team lacks expertise and the right people for operational, executive and governance roles.

Don’t be afraid to seek guidance to establish the right management struc­tures, define key policies, processes and internal controls and recruit teams that have the experience to help with these challenges. Find independent board members who have diverse and deep experience to provide oversight and guidance.

Assess and test operations, policies and controls and report the results on a regular basis, across the organization and to the board.

It’s not actually new.

Many other industries and those entrepreneurs have gone through this. They’ve learned, overcome challenges, enhanced compliance, driven opera­tional excellence and established strong governance. We just have to apply it in the cannabis industry so we can go from budding operations to a thriving global industry.

Peter Guo, CPA, CA, CISA, ABCP, MBA, is MNP’s B.C. Cannabis and Industry Risk Services Leader. To learn more about how our team can help you overcome your compliance hurdles, contact him at 604.637.1513 or [email protected]