Corporate Governance VS Compliance and their importance in the workplace

04/14/2020

As Corporate Governance and Compliance are two developing fields which have become an obligation towards every organization and corporation as well as governmental entities to abide by, it is crucial for everyone to understand their importance and the reasons behind their obligatory enforcement.

Definition

Corporate governance is the set of regulations and processes by which an organization is functioned and ruled by. It is the system that governs the company in order to attain or reach its goals by involving actions plans, standard performance measures, and corporate transparency, which are in essence present to balance the interest of the organization’s stakeholders. Whereby compliance is the state of complying with up to date established guidelines, regulations, legislations, and international standards.

Objective

The objective of corporate governance is to look after the interests of the company’s stakeholder while improving the value of its shareholders, in order to enhance the overall performance of the company and reach the corporation, societal and economic goal. Corporate governance focuses on how the organization is managed, directed and governed while monitoring those aspects.

Compliance is more risk based oriented-where risks are identified, control measures are implemented for their prevention, and constant monitoring is conducted for their detection.

Breakdown

Both corporate governance and compliance are intertwined as one cannot exist without the other. There is no objective behind establishing laws if their enforcement is not guaranteed. Therefore, by setting the principles of corporate governance, the company must ensure their compliance is being effective. However, it is important to note that although corporate governance and compliance fall under the same umbrella, they are merely very different with respect to the aim behind the incorporation of each field.

The umbrella by which both fields fall under is called “GRC”-Governance, risk management, and Compliance. While they are all in correlation, governance is concentrated on the long term performance of an organization in which the adapted principles will have to involve a strategic method that has that effect. For instance, incorporating policies to satisfy the interest of a stakeholder. This decision takes place internally between the boards of directors. On the other hand, the adaptation of compliance measures originates from an external source, which will oblige the organization to develop the necessary methods to comply with the rules. For instance, the establishment of a new anti-money laundering law which will accommodate the company’s policies and procedures.

In the event where a breach of regulation occur, its consequences come in different forms for each field. In corporate governance, the grounds for punishment are in accordance with the company’s board of director’s discretion on how to deal with the breach, such as termination for example. Whereas in compliance, since the laws enforced are not optional, not implementing legislations could lead to severe legal actions, penalties and fines by governmental entities.

Analysis

Though the two fields are intended to protect the organization against the same kind of risks, corporate governance regulates and identifies how to deal with the involved risks, while compliance ensures that those regulations are within the scope of the law. Those risks could consist of: financial, strategic, and operational risk among other hazards that any enterprise could face, which could be recognized through a SWOT analysis. Therefore, the implementation of proper corporate governance and compliance procedures shall help organizations both control and manage their risks. For instance, be more cost effective, control the standardization of processes, and develop the tools for quick adaptation to regulatory changes.

Elements of Good Corporate Governance in an organization

In the process of following the rule of law, there are certain elements and keywords that are fundamental to establish a good corporate governance. These include:

-Legislations

-Transparency

-Accountability

-Responsiveness

-Fairness

-Social Responsibility

1- Legislations:

The establishment of proper legislations is core prior to any other element since the formation of a fair rule of law is what drives the rest of the company to abide by the principles as well as ensure the effectiveness and efficiency of the acquired regulations, which should also be for the protection of the stakeholders.

2- Transparency:

Transparency means that information should be visible in an easily accessed location to the concerned and non-concerned parties. Information include the governance policy and procedures that every stakeholder should be essentially aware of, as well as the effect deriving therefrom. It should be well known that their enforcement means complying with the set rule of law.

3- Accountability:

Accountability is one of the most important elements of good corporate governance since being held accountable for actions is the best method to ensure the efficacy of complying with the laws. The encouragement of whistleblowing, which is the act of telling about a wrongful act, is also a fundamental component for accountability.

4- Responsiveness:

Responding to the stakeholder’s needs is one of essential elements in corporate governance because responding in a well and quick manner certifies the coherence of the organizational process.

5- Fairness:

A company that follows the values of fairness in their workforce portrays its association with the values of good corporate governance, as complying with justice and equality offers value to society.

6- Social Responsibility:

In correlation with the above element, the value to society offered is a social responsibility which ensures compliance within the organization’s civic duty. This includes the organization’s involvement in economic, social, and environmental practices while meeting their commercial growth.

Compliance and Regulatory Framework in an organization

In the practice of complying with up to date established guidelines, regulations, legislations, and international standards, compliance follows a specific framework in order to stay in accordance with those established laws.

Framework:

The compliance framework is divided into three categories: The statutory, the Board, and the Organization. The statutory-which involves all updated legislations as well as the company’s constitution. The board- which involves the board charter that is in essence a policy document that defines the stakeholder’s responsibilities in the organization. The organization- where policy and procedures are established and will vary depending on the organization.

The compliance framework is aimed at setting the risk and the necessary measures to tackle them. For example:

Risks: Fraud, Counterfeit, Money Laundering and Counter Terrorism Financing

Approach: Due Diligence for business partners, Implementation of a Track and Trace strategy, Implementation of a proper ‘Know Your Customer/Counterparty’ strategy, Proper internal and external reporting and so on.

Therefore, an organization shall follow three important steps to ensure the proper implementation of compliance measures. These consist of: The construction of proper policies and regulations, their implementation, and their effectiveness; which shall be executed upon distinguishing the risks involved in the organization.

Accordingly, the establishment of the laws shall be more appropriate in which their implementation may take place through developing programs based on the respective threat. In order to insure its effectiveness, regulatory monitoring shall be applied with communication and training procedures.

Legislations

There are no particular legislations with the heading of compliance or corporate governance. Corporate Governance measures are taken within the organization, which ultimately emerge new laws within the company. Corporate governance regulations are measured through the extent of meeting the OECD principles. However, as there are also no specific legislations titled compliance, compliance is confirming to the rule of law. Therefore complying with the relevant old and new laws, policies, standards and regulations, while using key performance indicators as a measurement to make sure there are being met, is the applicable law in the compliance field.

Applicable law includes: legislations, statues, codes, rules, guidelines, ordinances, regulations, rules, orders, permits; by which complying with them is both a legal and moral obligation.

Conclusive Remarks

Lack of corporate governance procedures could lead to corruption, loss in revenue and even the dissolution of a company since stakeholders may feel threatened or at risk. In addition, Lack of compliance procedures makes the company susceptible to lawsuits for being non-compliant which could also lead to the dissolution of the company for being uncooperative with the laws.

Thus, internal control, corporate disclosure, applying good corporate citizenship and putting into practice good regulatory compliance measures, leads to better operational results which would protect the organization’s reputation.

As a result, the integration of good corporate governance and compliance regulations does not only benefit the business and prevents it from risks, but also encourages investors to participate in the economic growth. For that reason, every corporation whether private or public shall incorporate a proper self-assessment to evaluate its submissiveness to the rule of law prior to conducting external auditing, to safeguard their institution.

Good corporate governance and compliance measures can promote tong term sustainable goal and for that reason, its implementation is extremely crucial in any organization as it is part of their corporate social responsibility to respect. By making sure all areas of your organization are working together and maintaining standards, major disasters and failures shall be prevented.

By: Lana Fadel

Picture source: https://www.freepik.com/free-photo/technology-connection-online-networking-medias-conpt_3533270.htm#page=1&query=compliance&position=6

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