Governance and compliance are two umbrella terms that are part of the global corporate lexicon. Many legal professionals use these terms interchangeably, but should they?
While there are many similarities between corporate governance and compliance, there are profound differences that distinguish the two. When discussing strategies to enforce governance and compliance, it’s important to understand the distinctions between these two frameworks.
What is corporate governance?
Let’s begin by defining corporate governance. As a practice, corporate governance refers to a set of internal policies and procedures that ensure a legal entity conducts itself in appropriate fashions. The entity’s Board of Directors is ultimately responsible for setting the corporate governance framework.
Corporate governance frameworks compile a series of ethical principles that guide how an entity’s leaders conduct their business. The purpose of a corporate governance framework is to ensure business leaders act in the best interests of their stakeholders. An entity’s key stakeholders include the employees, the shareholders, the customers, the suppliers, and any creditors to whom the corporation owes outstanding debts.
Examples of how to implement a corporate governance framework can include things like:
Protocols to enforce accountability across the organization
Transparent communication policies throughout the entity
Reporting controls to enforce governance protocols
What is corporate compliance?
Corporate compliance is how a business entity aligns its own operating procedures with the laws and regulations that apply to the corporation. Corporate compliance frameworks are formalized policies to:
Prevent violations of those laws
Train employees on regulatory processes
Implement compliance procedures
Monitor and report on any violations of compliance protocols
The purpose of a corporate compliance framework is to minimize risk and prevent legal liability that threatens the integrity of the corporation. Failure to abide by these protocols leaves your entity at risk of financial calamity, similar to the collapse and bankruptcy of FTX that led to numerous criminal charges against senior leaders of that business.
How are governance and compliance similar?
Governance and compliance frameworks both refer to rules of conduct and controls on operational behaviours. The purpose of both frameworks is to establish guidelines to conduct business and hold everyone in the organization to a high set of standards.
Governance and compliance are also essential pieces of any entity’s Governance, Risk Management, and Compliance (GRC) agenda. As a concept, GRC was first established by the Open Compliance and Ethics Group (OCEG) in 2002. GRC is an integrated system that enables organizations to operate at principled performance.
How are governance and compliance different?
Now we get into the key distinctions between the two frameworks. Here’s what you need to know about the disparity between governance and compliance. These insights will help inform how GRC protocols are implemented throughout your organization.
Ethics vs. the law
The most important difference between governance and compliance is the legality of each framework. Corporate governance is a series of ethical principles that determine how key stakeholders of a business entity operate from day to day. Corporate compliance is bound by the law and jurisdictional regulations that enforce how a company must operate to avoid incurring criminal or financial penalties.
Internal policies vs. external mandates
This is another key distinction between governance and compliance. Corporate governance refers to the policies and procedures created within the organization by key stakeholders like executives, directors, or shareholders. These are internal rules and regulations that enforce business ethics and operational procedures across the organization.
Corporate compliance is a set of laws and regulations dictated by governments and regulatory bodies within the jurisdiction where an entity operates. Compliance guidelines are established by external authorities. The onus is on the entity to establish protocols that ensure the corporation remains in compliance with those established laws.
Optional vs. obligatory
Most legal entities choose to create corporate governance frameworks to abide by an ethical set of principles. However, corporate governance remains an optional policy. While it is highly common, there’s no mandate that forces companies to adopt corporate governance frameworks.
On the other hand, corporate compliance is a legally binding obligation. Corporations must follow the letter of the law in order to conduct their business and engage with customers. Failure to follow the laws will result in civil or criminal liabilities levied against the corporation.
Long-term planning vs. short-term remedies
Corporate governance can be as much of a strategic playbook as it is an ethical set of operational guidelines. An effective governance framework can form the basis of a long-term strategic plan that helps drive the growth and evolution of the business as a whole.
Corporate compliance is also part of a long-term strategy. However, if there are changes to jurisdictional laws or by-laws, the company must adapt with quick fixes or remedies to remain in compliance with the laws. Often, compliance is more of a reactive stance to these regulations.
How to ensure governance and compliance with entity management software
Now that you have a better understanding of the differences between governance and compliance, what’s the best way to establish both frameworks to help protect the interests of your business entity?
Entity management software is one of the best resources to both establish and enforce effective corporate governance and compliance. Entity management platforms are built by legal professionals for legal professionals, including compliance officers whose mandate is to enforce protocols that keep the corporation in compliance with the laws.
Entity management systems are designed to automate workflows and streamline the process of enforcing governance and compliance. Establishing governance and compliance frameworks requires an arduous amount of administrative and clerical work to create effective protocols. Entity management software saves invaluable working time by streamlining the workflows.
These platforms also have built-in compliance modules that walk your legal team through all the necessary steps to establish governance and compliance frameworks. You can establish a structured org. chart, calendars, workflows, and other regulatory templates. The platform intuitively highlights any errors, statutory non-compliance, and date-based compliance tasks that may be lacking.
Governance and compliance are important requirements for any business entity. Using an intuitive entity management platform, you can ensure your corporation abides by these frameworks and functions at the highest standards of excellence.