Lexicon
What is compliance?
What is compliance when it comes to corporate governance? It is any work you do to ensure you operate according to what’s expected of you.
Compliance – in many forms – always gets more important for businesses; that’s been the trend for decades, especially in governance.
What is compliance?
It’s adhering to every law, regulation and ethical guideline that applies to your business.
Compliance is a vast area. Each firm has multiple responsibilities to adhere to standards, and those standards can come from stakeholders, regulators, and even the company itself.
Typical areas of that matter to companies are:
- Financial management
- HR
- Environmental impact
- Health and safety
- Data management
- Social responsibility
How does it work?
The top level is very simple: standards are set for a company, the company commits to meeting those standards, and the company uses structured reporting to demonstrate their work.
If a company fails to adhere to specific standards, it is called a failure or lack of compliance. This leads to penalties and other ramifications depending on the scale of the problem.
Compliance risk essentially quantifies these potential ramifications as far as possible. Most times, compliance risk refers to financial penalties; sometimes it can refer to other things like reputational damage.
What’s a board’s role in compliance?
The board’s role is to supervise the entire compliance programme of an organisation. This means acting as a reviewer, overseer, and critical assessment coordinator for the business’s effort to follow standards.
It will often be heavily involved in ethics, risk identification, assessing resources and mitigation strategies.
If the board uncovers serious risks during this process, the board must act on this, too.
In addition, the board must ensure it complies its own rules and regulations – including following the proper board recruitment, establishing an effective board charter, conducting meetings, etc).
Why is all this important?
Good compliance provides a vast amount of fundamental support for an organisation, ensuring it retains integrity and effective strategic planning. Without these things, a company runs the risk of severe damage.
Do requirements change across borders?
Yes, absolutely. The tricky thing with modern compliance is the interlocking web of regulations that companies must follow. That system is here to stay: as long as extensive cross-border business exists, there will be cross-border compliance.
Directors should, therefore, ensure their compliance programmes cover every relevant jurisdiction. If your business operates in the UK and EU, or the EU and US, you automatically have two sets of rules to follow. Many similarities will surface, but there will also be critical differences.