Keeping your company ‘on track’ is harder than it sounds. It’s a common assumption that once your company is off the ground, making some solid revenue and performing well in general — then all is done and you can sit back and relax.
This is far from the truth.
Maintaining this level of success means ensuring the behind-the-scenes work is done to the best of your ability. You must ensure the company is complying with all rules and regulations, managing risks sufficiently, and governing itself well.
This is where Governance, Risk Management and Compliance (GRC) comes in. GRC is a system or framework used by organizations to manage these three areas mentioned in the title — governance, risk management and compliance.
Let’s take a more detailed look at each of these concepts, judge why they are important, as well as identify how and where they can be used within your company.
Let’s get going!
What is GRC?
Governance, Risk Management and Compliance (GRC) is a system used by organizations to manage their compliance with rules and regulations, as well as risks.
The ‘governance’ aspect of GRC refers to the process and policies that an organization has in place to make sure it is run efficiently and effectively.
This includes having the right people in leadership positions, making decisions in the best interests of the company and shareholders, as well as being transparent about company operations.
‘Risk management’, on the other hand, is all about minimizing the negative impact of risks on the company. This can be done by identifying risks early, putting in place measures to prevent them from happening or at least mitigating their effects, and having a plan for what to do if they do occur.
Finally, ‘compliance’ is ensuring that the company adheres to all relevant laws and regulations. This includes things like keeping accurate financial records, following health and safety regulations, and so on.
As you can see, GRC is a way of ensuring that an organization is run in a safe, compliant and efficient manner. But how is this done and why is it important? Let’s take a deeper dive…
4 Aspects of Good Governance:
Good governance has 4 key aspects associated with it.
The people at the top of the organization need to be able to lead well. This means setting a clear vision for the company, making decisions in the best interests of all stakeholders, and being transparent about company operations.
The organizational structure is another vital part of good governance. It should ideally be designed in a way that promotes excellent decision-making. This could include things like having clear lines of communication, delegating authority appropriately, and so on.
The processes and policies that the firm has in place should be effective. This can go all the way from having adequate financial controls, to complying with all relevant laws and regulations.
An often underrated part of good governance that has to be looked at is your organization’s culture. This includes things like having a commitment to ethical values, having happy employees and encouraging transparency within the firm. Having characteristics like these within your firm will boost its chances of long-term success.
Why is Governance Important?
Good governance is important for a number of reasons.
Firstly, it helps to ensure that the company is run efficiently and effectively.
This means that decisions are made in the best interests of the company and its shareholders, and that operations are transparent.
Secondly, good governance helps to build trust between the organization and its stakeholders. This includes things like customers, employees, investors, etc. If stakeholders trust the organization, they are more likely to be loyal and engaged with it.
Thirdly, good governance helps to reduce risks. This is because decisions are made with risk in mind, and measures are put in place to prevent or mitigate risks.
Finally, good governance helps to ensure compliance with laws and regulations. Having the right policies and procedures in place ensures that the company adheres to all relevant rules and regulations.
The Importance of Good Risk Management
Good risk management is important for three main reasons:
- To protect the company’s reputation
- To safeguard the company’s assets
- To comply with laws and regulations
Let’s explore each of these in a little more detail.
To Protect the Company’s Reputation
A good risk management system can help to protect the company’s reputation by identifying risks early and putting in place measures to prevent them from happening.
This can help to avoid or at least mitigate the damage caused by negative publicity, for example.
To Safeguard the Company’s Assets
Another reason why good risk management is important is to safeguard the company’s assets.
This includes things like cash, property, equipment, and so on. By identifying risks early, you can help to protect these assets from being lost, stolen, or damaged.
To Comply With Laws and Regulations
Compliance with laws and regulations is another key factor as to why good risk management is important. These laws and regulations can relate to things like health and safety, financial reporting, data protection, and so on.
Identifying risks related to the law means you help ensure the company complies with all relevant laws and regulations.
5 Characteristics of a Good Risk Management System
1. It should be comprehensive: A good risk management system should cover all the potential risks a company may face, from financial and reputational risks to operational and compliance risks.
2. It should be tailored to the company: The system should be designed specifically for the company, taking into account its size, industry, business model and so on.
3. It should be proactive: A good risk management system should not only identify risks early but also be proactive in dealing with them, putting in place measures to prevent them from occurring or at least mitigate their effects.
4. It should be flexible: The system should be flexible enough to adapt to changes in the company’s operations, as well as changes in the external environment.
5. It should be supported by top management: A good risk management system should have the support of top management, who should provide resources and give clear instructions on how the system is to be used.
How to Implement Risk Management in Your Company
There are a few steps you can take to effectively implement risk management in your firm:
1. Assess the Risks
The first step is to assess the risks that your company faces, which can be done through internal and external audits.
2. Identify the Controls
Once the risks have been identified, you need to put in place controls to mitigate them. These can be things like financial controls, operational controls, compliance controls etc.
3. Implement the Controls
The next step is to implement the controls you have identified. This will involve developing policies and procedures, as well as training employees on how to follow them.
4. Monitor and Review
Finally, you need to monitor and review the risk management system on a regular basis to make sure it is working effectively.
Benefits of Compliance
A company that adheres to compliance regulations is one that is playing by the rules — both set by themselves internally, as well as those required by external authorities.
There are several benefits of compliance which can be reaped by organizations, some of which are listed below:
- By meeting or exceeding minimum requirements, businesses can improve their public image and build trust with employees, shareholders, investors and other stakeholders.
- Good compliance practices help businesses avoid costly penalties for non-compliance (which can sometimes be very high, as we will see later on in this article).
- Being compliant often requires companies to put structures and processes in place which help them to run their organizations more effectively and efficiently.
- In some cases, compliance with certain regulations may open up new markets or business opportunities for companies.
- Perhaps the most important is that it can help prevent your company from breaking the law. This is because compliance covers things like keeping accurate financial records and following health and safety regulations. If you don’t have a good compliance system in place, there’s a risk that your company could be fined or even shut down if it’s found to be breaking the law.
How to Implement Compliance Systems Effectively
There are many compliance risks that companies face today. Some of these include:
- Financial reporting fraud
- Bribery and corruption
- Health and safety violations
- Money laundering
- Environmental pollution
The list goes on.
The important thing to remember is that all companies, regardless of size or industry, face compliance risks. And if these risks are not managed properly, they can have a serious negative impact on the company — including financial penalties, damage to reputation, and even prison sentences for senior executives.
So, how can you ensure your company is compliant? The answer is to put in place a robust compliance management system. This should include:
- Clear policies and procedures that employees must follow
- Regular training for employees on these policies and procedures
- A process for reporting any compliance breaches
- Appropriate disciplinary action for employees who breach compliance rules
- Independent audits of the compliance management system.
By putting in place a compliance management system, you can minimize the risk of your company breaching rules and regulations. And if a breach does occur, you will be in a much better position to deal with it quickly and effectively.
GRC is a crucial part of business. Yes, making money and revenue generation is important — but you need to be very wary of the GRC framework your company is using to ensure long-term success.
Have a browse at each element of GRC as stated in this article and optimize each element of your framework. Good luck!