Why Corporations Don’t Realize Governance Risks Until Too Late

Entity governance refers to the internal policies, procedures, and ethical principles that guide how a corporation conducts its business and serves its stakeholders. Compliance, on the other hand, is how a business entity aligns its operations with external laws and regulations. While both are essential to running a responsible organization, they serve different purposes and require different approaches.

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.

Entity Governance vs. Compliance: Key Differences

Before diving deeper, here’s a quick comparison of the key differences:

• Source of rules: Governance comes from internal stakeholders (board, executives); Compliance comes from external authorities (governments, regulators)
• Nature: Governance is ethical and voluntary; Compliance is legal and mandatory
• Focus: Governance focuses on “how we choose to operate”; Compliance focuses on “what the law requires”
• Consequences: Governance failures damage reputation and stakeholder trust; Compliance failures result in fines, penalties, or criminal charges
• Timeframe: Governance supports long-term strategic planning; Compliance often requires immediate remediation when laws change

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.

Governance Failure vs. Compliance Failure: A Real-World Example

To understand the practical difference between governance and compliance failures, consider this scenario:

Governance Failure Example: A corporation’s board of directors approves executive bonuses without proper disclosure to shareholders. The company followed all legal requirements for compensation disclosure, but the board failed to communicate transparently with investors about the bonus structure. While technically legal, this erodes shareholder trust and damages the company’s reputation. The stock price drops as investors lose confidence in leadership.

Compliance Failure Example: The same corporation fails to file its annual return with the corporate registry by the deadline. This is a clear violation of corporate law. The company faces late filing penalties, potential administrative dissolution, and the directors may be held personally liable for the oversight.

In both cases, the corporation suffers—but the nature and consequences differ significantly. Governance failures are about broken trust; compliance failures are about broken laws.

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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 MinuteBox Supports Entity Governance and Compliance

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?

MinuteBox is entity management software 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.

MinuteBox helps your organization manage both governance and compliance through:

• Automated compliance calendars — Never miss a filing deadline with automated reminders for annual returns, renewals, and regulatory submissions
• Organizational charts — Maintain clear visibility into corporate structure, officer appointments, and reporting relationships
• Document management — Store and organize board resolutions, shareholder agreements, and governance policies in one secure location
• Compliance tracking — The platform highlights errors, statutory non-compliance, and date-based compliance tasks that may be lacking
• Audit trails — Maintain complete records of all changes and approvals for regulatory review

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.

Governance and compliance are important requirements for any business entity. Using an intuitive entity management platform like MinuteBox, you can ensure your corporation abides by these frameworks and functions at the highest standards of excellence.

A growing body of legal entities are using purpose-built legal entity management systems, according to Ernst & Young.

According to their report entitled “The General Counsel Imperative,” 65% of all companies use a purpose-built legal entity management system. Additionally, 85% of businesses with annual revenues that exceed $20 billion use these systems to report corporate governance obligations.

However, a significant percentage of those companies report technology challenges. Specifically, 62% cite challenges in tracking and reporting governance activities within their legal entity management platforms.

How corporate governance works

Corporate governance embodies all the rules, bylaws, policies, and procedures that ensure businesses remain accountable to their stakeholders. Effective corporate governance mitigates risk, provides transparency, and establishes structured workflows that allow corporate entities to fulfill their mandates and achieve their visions.

There are four ways that organizations implement and evaluate the effectiveness of corporate governance policies.

Interconnected relationships between people and stakeholders

Any business entity’s primary objective is to fulfill its vision and turn a profit while doing so. Corporate governance policies influence relationships between the people who determine an organization’s profitability. It includes how founders and board members set internal policies through the consumers and influencers who purchase the company’s products.

Align all stakeholders around a common purpose

Internal and external relationships allow corporate entities to grow their businesses. To ensure satisfactory relationships, the organization must establish a core purpose. Corporate governance policies align all stakeholders around that purpose so that they make decisions to achieve that common goal.

Establish processes that guide organizations to their goals

Businesses must have the tools to analyze and evaluate performance to achieve their purposes. Corporate governance establishes structured processes to track the business’ performance. You can amend your workflows over time, but your processes create a baseline for how to report productivity.

Determine the success of organizational performance

Business entities use corporate governance policies to measure the effectiveness of their performance. Evaluate the success of your corporate governance workflows. Did you achieve your goals, or did the workflows cause more setbacks than achievements? Accurately reporting on corporate governance performance helps the business set more realistic goals.

Challenges of reporting corporate governance performance

Corporate governance helps organizations make more strategic decisions to improve performance. Therefore, accurate reports on corporate governance are necessary to iterate and enhance performance.

So what happens if 62% of business entities have challenges tracking and reporting on corporate governance using legal entity management systems? There are many reasons why those organizations experience reporting challenges with their chosen platforms. These are a handful of the most common struggles.

Difficulty maintaining up-to-date entity management systems

The legal industry is noteworthy for its slow adoption of modern technology. In-house legal departments in large enterprise companies are more accepting of entity management technology, but there are still gaps in how businesses use those systems.

When legal departments are too reliant on older systems, there’s a risk that reporting data will be compromised. Older systems like binders of minute book records or countless files of Excel spreadsheets are less effective than more intuitive entity management platforms.

Uploading all reporting data into an entity management platform like MinuteBox eliminates errors with reporting data. The platform uses helpful wizards to guide general counsellors and their subordinates as they build diligent corporate governance records. The platform also warns the team if data is missing in the modules, ensuring corporate governance risk management.

Passive approaches to entity management that compromise data integrity

According to the EY report, corporate governance reporting challenges are at their highest within organizations where only legal departments use entity management systems. Companies often view the purpose of entity management systems as tools to house legal entity data.

Businesses with effective corporate governance reporting and performance evaluations recognize entity management software as a forward-thinking resource. These entities use their systems to evaluate organizational risk — internal and external — so that they can pivot accordingly.

Entities with global reach and numerous subsidiaries use entity management software for more real-time reporting. They use entity management software as a single source of truth by hosting, reporting, and evaluating data from all subsidiaries in one centralized platform. As a result, they make regular updates to corporate governance workflows.

Tedious and repetitive workflows impede corporate governance

Finally, many corporate entities rely on inefficient operating workflows. Businesses that use spreadsheets, physical minute books, or non-intuitive entity management systems subject their workers to tedious and repetitive corporate governance reporting tasks. As a result, workers struggle to complete governance reporting tasks by designated filing deadlines.

Modern entity management systems like MinuteBox automate most clerical, administrative, and data-entry tasks. The platform’s intuitive nature creates structured cloud-based minute book documents with modules highlighting what reporting data to insert throughout the system.

Automated workflows make corporate governance reporting more efficient and more effective. Detailed performance reports help stakeholders evaluate the effectiveness of their corporate governance programs.

If the program is successful, it can continue with only minor changes. If the data indicates anything less than success, stakeholders can review the evaluations and change their corporate governance processes.

Use MinuteBox to build effective corporate governance programs

Ensure your organization remains on the right side of corporate governance reporting. Join the MinuteBox revolution to build more structured corporate governance processes in an intuitive platform and streamline how you evaluate governance performance.

Since the 1970s, corporate governance has been a measure demanded by regulators to hold business entities and their leadership accountable. At the heart of corporate governance policies are efforts to instill greater ethical and transparent practices that corporations abide by when they operate.

Corporate governance trends have steadily evolved over the years, leading to the enactment and disregardment of specific policies. What remains consistent is a collective effort to maintain responsible governance practices that reflect modern times.

Current corporate governance trends

Some examples of historic corporate governance trends include integrations of governance, risk management, and compliance (GRC) policies to create legal and ethical protocols for businesses. GRC frameworks set benchmarks for responsible business mandates and enable organizations to adapt GRC processes when circumstances require them.

What are some of the top corporate governance trends impacting business entities in 2023 and beyond? Here are some of the most important considerations.

Current Trend #1: More enforceable ESG protocols

Corporate responsibility is a broad term that has taken on numerous meanings over the years. Most recently, corporate responsibility is shaped by an entity’s environmental, social, and governance (ESG) protocols.

A recent study by IBM determined that 70% of workers are attracted to companies with viable ESG programs. Where business was once solely about increasing revenue and driving growth, it’s since evolved into a more complex system. Today, shared social values between owners and employees give responsible business entities chances to recruit top talent to join their ranks.

Current Trend #2: Shareholder use of the universal proxy rule

ESG protocols reflect progressive corporate cultures, but boards of directors face even more pressure to enact responsible corporate governance. The Security and Exchange Commission (SEC) enacted a universal proxy rule to enforce greater transparency at annual corporate shareholder meetings.

Before the enactment of the universal proxy rule, shareholders could send separate proxy cards instead of attending annual meetings that list nominees to the board of directors. The general counsel struggled to organize management and shareholder nominees through multiple proxy cards, limiting transparency and accountability amongst board members.

The universal proxy rule requires all participants to list their nominees on one universal proxy card. The proxy rule is triggered when a member of the board solicits 67% of a company’s shareholders to enact a new nomination procedure. Shareholders can select the nominees they prefer regardless of who nominated them. The universal proxy card organizes nominations in a more structured format, creating diligent minute book records of shareholder meeting minutes.

Current Trend #3: Economic uncertainty impact on GRC strategies

Throughout the year, global inflationary pressures have forced central banks to instigate sharp increases in central interest rates. Rising costs placed added pressure on corporate managers and directors to maintain growth in an increasingly unstable economic climate.

While much of the world is now expected to avoid a painful recession, that doesn’t calm the uncertain waters. Corporate entities must review their risk management protocols and continue adapting to the uncertainty hanging over prospects for growth. Failing to heed risks to effective corporate governance until too late threatens to undermine growth forecasts.

Current Trend #4: Greater C-suite oversight from boards of directors

Income inequality has always been a concern, but it’s rapidly emerged as one of the most trying social issues of our time. In Canada, for example, Canadians are outraged that grocery chain CEOs are making record profits and lucrative bonuses, all the while food prices grow increasingly more expensive with no relief in sight.

Shareholders will hold C-suite leadership to greater scrutiny and accountability regarding key decisions and executive compensation. Greater oversight over corporate management will help enforce responsible governance, ethics, and accountability to limit the risks of public outrage over so-called unfair business practices.

Emerging corporate governance trends

In addition to current emerging trends, corporate entities must prepare for emerging matters that will impact corporate governance in the future. Here’s a quick overview of what issues will influence responsible corporate governance in the future.

Emerging Trend #1: Disruptive nature of AI

Artificial intelligence is impacting how businesses operate at all levels. As ongoing breakthroughs in AI capabilities continue to emerge, businesses must remain vigilant and adapt corporate governance protocols accordingly.

Emerging Trend #2: The role of business ethics

The example of grocery chain CEO compensation against the backdrop of increasingly unaffordable food costs for Canadians is a prime example of an ethically irresponsible practice. Public backlash tarnishes brand reputations, limiting opportunities to boost revenue and grow business. Expect ethics to play an increasingly important role in responsible governance.

Emerging Trend #3: Streamlined reporting structures

Corporate stakeholders must maintain oversight over all business operations. Yet many reporting systems are very outdated and complex, making it difficult to make fast efficient decisions about business policies. Corporations will require modern solutions like entity management software to centralize, consolidate, and streamline entity reporting data.

Emerging Trend #4: Modern talent acquisition strategies

Economic uncertainty won’t last forever, and companies will need to acquire the next wave of talent to foster future growth. Cultivating a corporate culture built around responsible governance, ESG policies, and values-based decision-making will help attract progressive-minded workers to join the ranks.

Use entity management software to support responsible governance

Creating and adapting corporate governance programs helps companies maintain their reputations, reduce risks, and cultivate reasonable growth prospects. Enforcing responsible governance requires a system that organizes and standardizes all GRC and ESG protocols.

Entity management software is one of the best systems for creating structured governance protocols. Entity management software functions as a single source of truth, giving stakeholders clear insight into the current state of the business.

All reporting data is stored within organized minute book templates. Additionally, you can build detailed organizational charts, cap tables, and shareholder ledgers directly within the entity management platform. Use this information to create a governance structure that encompasses current governance trends and allows you to adapt to emerging trends coming down the pipe.

Ready to organize your corporate governance in a more responsible and structured manner? Join the MinuteBox revolution and gather all reporting data into one location. Use that structure and convenience to enact responsible corporate governance across your organization.