Regulation of corporate activity is increasing around the world, forcing boards of directors and senior management to take an active role in all matters of the company’s business- and especially in compliance with the law and industry regulations.
Distinguishing risk management from compliance may not seem relevant to some businesses, but the two are most certainly not the same. Understanding the distinction can mean the difference between simply avoiding risk and creating tangible value.
Of course, risk management and compliance are inextricably linked: organizations can protect themselves against numerous risks by following rules and regulations. In contrast, the risk management process helps protect organizations from threats that could lead to non-compliance, which is risk unto itself.
“Compliance” in business means adhering to regulatory guidelines and internal policies. For example, a components supplier or fabricator might need to certify or acknowledge that it complies with generally accepted laws, rules and regulations, or standards applicable to the supplier’s industry or where it does business.
An organization can have a robust risk management program without regulatory compliance, and vice versa. That said, compliance programs and risk management programs both help companies to maintain stability and integrity on multiple levels, which prevents risks to the organization’s legal liability, financial position, and physical assets.
What Is Compliance?
Compliance activities help a company adhere to a set of rules, regulations, or requirements. We can divide the term “compliance” into two categories:
- Regulatory compliance, which are the organization’s actions to comply with applicable laws, regulations, and external guidelines.
- Corporate compliance, which refers to the measures and security programs to guarantee that internal policies and procedures are followed.
Every organization should appropriate policies and procedures to meet compliance obligations in a timely manner. Furthermore, an organization should also have robust information security and a detailed record-keeping system to document those compliance activities.
Companies that fail to comply with codes of conduct, internal policies, best practices, and industry-related laws and regulations are exposed to compliance risks. These risks include regulatory enforcement actions, complete with expensive legal costs and possible monetary penalties; economic losses; lost customers and business partners; and more. Corporate reputation can also suffer during a compliance failure, too.
The core elements of an effective compliance program are summarized as follows:
- Designated compliance officer and compliance committee
- Standardized business practices
- Internal audits and controls
- Risk assessment
- Training programs and communication
- Internal monitoring, auditing, and response
What Is Risk Management?
Risk management is the process of identifying, assessing, and managing potential threats that could damage the organization’s ability to achieve its business objectives. These risks come from various sources, such as financial uncertainties, legal liabilities, technological problems, strategic management errors, accidents, and natural disasters.
A comprehensive risk management program enables a company to analyze all the hazards it might face. Risk management also looks at the link between risks and their influence on an organization’s strategic goals.
Enterprise risk management (ERM) also emphasizes the importance of managing positive risks. Positive risks are opportunities that can improve a company’s value. Any risk management program’s purpose is not to remove all risks, but rather, to preserve and create value by allowing executives to make informed risk decisions.
A company must identify potential risks before they can harm the business. Identifying potential risks makes it easier for the organization to take appropriate action to prevent them from occurring. This is also known as risk response.
Understanding risk is also crucial for project management because every new project brings new risks. An organization can identify project strengths, weaknesses, opportunities, and threats by developing an effective risk management strategy.
The following steps make up the overall risk management process and are followed by risk management plans:
- Determine the context. The organization needs to understand the context in which the rest of the risk management process will take place.
- Risk identification. The organization has to identify and define the potential risks that could adversely affect a particular process or project.
- Risk analysis. Risk analysis aims to improve the understanding of each specific risk and how it could affect its projects and objectives.
- Risk assessment. This allows the company to decide whether a risk must be prevented, mitigated, or willing to accept it based on its risk appetite.
- Risk mitigation. This phase includes risk mitigation processes, risk prevention tactics, and contingency plans to manage risks if they occur.
A company that plans for potential risks will respond more quickly to those potential risks. Successful project managers understand that risk management is vital because success depends on planning, preparation, results, and evaluation.
What Are the Similarities and Differences Between Risk Management and Compliance?
Risk management and compliance are linked in the following way. Risk management helps a company to address risks that might threaten its ability to achieve business objectives – and maintaining regulatory compliance is one of those objectives, just like hitting financial goals or reporting corporate performance to stakeholders. So compliance programs are a subset of risk management programs.
A robust risk management strategy, then, will allocate resources to compliance plans and processes while continually managing compliance risks. By investing in a comprehensive risk management plan, businesses can avoid the problems of dealing with non-compliance issues.
Their differences are noteworthy because compliance and risk management operations require distinct methods and execution strategies. Here’s how to contrast risk management and compliance:
Prescriptive vs. Predictive
Compliance is prescriptive and generally results in a more tactical, check-the-box approach. Risk management activities try to be predictive, anticipating risks; and require a strategic approach.
Organizations must comply with existing laws and regulations to be compliant. Risk management, on the other hand, must be more proactive.
Tactics vs. Strategy
Since non-compliance can result in costly fines and penalties, as well as reputational damage, it should not be underestimated. Compliance, however, requires more of a testing approach to assure that your organization obeys the rules. Risk management should rely more on long-term analysis to determine which risks are worth taking.
Risk Aversion vs. Value Creation
Compliance with rules and regulations rarely translates into value-generating business propositions without the long-range risk management approach. Compliance often stops at verification to avoid risk. Risk management can transform compliance into a winning value proposition, by building up a company’s ability to navigate demanding regulatory environments. That can make the company a more attractive business partner to others, also worried about navigating demanding regulatory environments.
Siloed vs. Integration
A siloed compliance department or isolated initiatives across various departments are frequently the driving forces behind compliance.
Effective risk management programs, on the other hand, cannot work in silos. You must integrate procedures, departments, and IT systems to evaluate the entire risks inside a business and manage them to prevent their consequences or generate value.
Simplify Your Compliance and Risk Management with ZenGRC
If you want your innovative risk management process and compliance policies to succeed, you can’t rely on outdated techniques such as spreadsheets. ZenGRC is an integrated software platform that can help you create and maintain your ERM program.
By combining all records, reports, policies, procedures, and checklists in one location, ZenGRC creates a single source of truth. Automation and reporting capabilities provide easy-to-understand data analysis and graphs. These tools clearly explain your risk profile and help you prioritize risk and compliance management initiatives.
The ZenGRC SaaS platform is an efficient solution for ongoing compliance. Companies don’t have to worry about their compliance posture because ZenGRC monitors it throughout the entire lifecycle and keeps up with the latest regulations and data protection requirements.
Schedule a demo to learn more about how ZenGRC can help your company simplify your compliance and risk management policies.