The connection between governance and compliance is important for modern business management. While governance is about defining the strategic direction and creating a framework for responsible management, compliance ensures that the organization's actions are in accordance with laws, internal policies, and external requirements. It is in the balance between the two disciplines that the organization can achieve effective risk management, build trust, and ensure sustainable business operations.
The core of governance and compliance
Defining governance
Corporate governance comprises the principles, mechanisms, processes, and structures that are used to manage and control the organization while also ensuring responsibility to stakeholders and a long-term sustainable direction.
It is about creating responsible and transparent leadership that ensures the organization achieves its goals in a sustainable and ethical way. Governance also involves looking after the diverse interests of stakeholders - from shareholders and employees to customers and general society - by creating a clear framework for decision-making and risk management.
The purpose of governance is to strengthen trust in the organization and ensure that all actions are in accordance with both values and laws.
Defining compliance
Compliance refers to the systems and procedures the organization implements to ensure it complies with applicable laws, internal policies, and contractual obligations. It's not just about avoiding legal sanctions but also about building trust.
Compliance includes everything from documenting and monitoring internal processes to training employees on proper conduct and ensuring that the organization's actions align with both legal requirements and ethical standards. By prioritizing compliance, the organization reduces the risk of legal conflicts while also creating a culture where integrity and accountability are the foundation for decision-making and daily operations.
Main differences between governance and compliance
Governance and compliance emerge from different needs and have their own areas of focus. Compliance is a tactical discipline that is about ensuring that all necessary checkboxes are checked. In contrast, governance is more strategic and holistic. It's about creating a long-term direction for the company and defining the overall way it positions itself ethically and responsibly to stakeholders and society.
However, this is a simplified way of looking at the two areas, because in practice they overlap - and when governance and compliance are combined, a strong synergy is created.
How do governance and compliance intersect in GRC?
An effective GRC strategy has governance, compliance, and risk management as three complementary mechanisms that work together to strengthen the organization's ability to create value, maintain credibility, and manage challenges.
Governance sets the tone from the top of the organization by establishing the strategic direction. It creates a foundation where values and goals form the framework for risk management, prioritization of initiatives, and decision-making. Governance also ensures that compliance is maintained through systematic monitoring and reporting, such as:
- Clear structures for monitoring, e.g., internal audits, KPIs, and regular reports.
- Early identification of deviations in order to quickly initiate corrective actions.
- Transparency and accountability through data and insights to management and relevant stakeholders.
Compliance converts governance principles into action by ensuring the organization complies with necessary legal and regulatory requirements. It works as an operational tool to ensure that the strategic guidelines are implemented in practice.
Risk management acts as a bridge to ensure that governance objectives are not undermined by unforeseen risks and that the requirements of compliance are prioritized in accordance with the strategic direction of the organization.
An example of the interplay between governance and compliance can be seen in data security and sustainability. When it comes to data security, governance can set a policy of zero tolerance for data breaches, while compliance puts the policy into practice through encryption, ongoing audits, and standards such as ISO 27001. In the same way, governance can define a strategic goal of carbon neutrality by 2030, while compliance ensures adherence through reporting requirements and internal processes for measuring and documenting the carbon footprint.
The collaboration between the two disciplines makes the organization flexible. Governance identifies strategic needs for adaptation, while compliance turns these needs into actions and ensures compliance with new requirements.
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Culture and environment are foundational for robust compliance
A strong compliance culture is essential to ensure that governance and compliance are working in practice.
Governance contributes to the creation and maintenance of culture by integrating compliance into daily operations so it becomes a natural part of the organization's operations rather than a one-time task. Ongoing training and education of employees help to establish an understanding of compliance across the organization. Further, clear and regular communication about compliance promotes accountability and a shared understanding of the organization's values and goals.
When a culture is built around compliance, it strengthens the organization's cohesion and creates an environment where accountability and integrity are in focus.
Why is it important to work holistically with both areas
Governance and compliance are two sides of the same coin. Addressing the disciplines in silos weakens their combined impact and creates a number of challenges that can have consequences for the organization's stability and credibility - specifically:
Fragmented risk management
Without an integrated approach, risk management becomes disconnected. Governance can overshadow compliance by focusing on growth and strategic objectives without taking into consideration the regulatory constraints. Compliance can be drowned in details without looking at the bigger picture of the organization. This results in a blind spot where essential risks are overlooked or reactions are delayed.
Inconsistent decisions and conflicts
Working in silos often leads to contradictory priorities. Governance can initiate strategies that are not operationally possible within current regulations, which creates internal conflicts and delays. At the same time, compliance risks implementing processes that don't support the organization's long-term goals.
Inefficient use of resources
When governance and compliance work without coordination, it leads to duplication of tasks such as risk assessments and internal audits. This consumes both time and resources and can cause confusion among employees who have to navigate between overlapping requirements and goals.
Weak organizational integration
Working in silos undermines organizational cohesion. Employees and management receive unclear signals about priorities, which reduces engagement and creates a culture where responsibilities and goals are not clearly defined.
Benefits of a holistic approach
A holistic approach to governance and compliance as a combined strategy will eliminate disadvantages and create a stronger organization. Governance provides a framework for values and goals, while compliance ensures they are implemented through operational and concrete actions. This allows the organization to react quickly and effectively to changing demands and challenges without losing focus on its strategic goals.
Furthermore, it strengthens both internal and external relationships. Internally, it creates clear guidelines and increased accountability across the organization. Externally, it sends a strong signal about professionalism and accountability.
