They say that ‘compliance’ is the ‘new governance’ in the corporate world, and rightly so. The correlation between corporate governance and compliance is irrefutable. With compliance, organizations adapt their behaviors to existing regulatory frameworks and social norms.
In the old days, such a description exemplified governance and was the mandate of the board of directors. But truth be told, compliance isn’t just a traditional form of corporate governance. It’s much more than that!
While there are many similarities between compliance and governance, equally numerous differences set the two terms apart.
Compliance ensures that a company adheres to industry laws, external standards, and policies. On the other hand, corporate governance lays out a broader framework for running a company and balancing stakeholders’ interests.
Compliance and governance could easily be distinguished based on scope, key objective, approach, enforceability, implementation, orientation, and accountability. I’ve shared an overview of this comparison in a table below.
This guide will help you master the differences between corporate governance and compliance, their resemblance, and how they work together. Let’s dive in!
Summary of Key Differences Between Corporate Governance and Compliance
| – | Corporate Governance | Compliance |
| Scope | Focuses on adherence to internal policies and the company’s strategic direction | Focuses on adherence to external laws and regulations |
| Key Objective | To develop a more responsible and sustainable business framework | To ensure the company operates within the confines of the laws and industry standards |
| Approach | Principle-based (doesn’t focus on specific industry laws but offers a broader framework for accountability) | Rule-based (focuses on adhering to specific industry laws and regulations) |
| Enforceability | Policies are internally set; thus, their enforcement is at the board’s discretion. It’s not necessarily obligatory. | Policies are externally set, and thus, their enforcement is obligatory. |
| Implementation | Through detailed framework and structures that govern the company’s strategic direction | Through detailed policies, procedures, and training on industry regulatory standards |
| Orientation | A more strategic orientation | A more tactical orientation |
| Accountability | The board has the overall oversight role | The Chief Compliance Officer has the oversight role |
Key Takeaway:
- Corporate governance encompasses the management approach by the board and senior executives in running an organization.
- Corporate governance’s benefits include accountability, transparency, improved decision-making, fairness, risk management, investor confidence, and staff retention.
- Compliance is how an organization adheres to industry regulations, policies, and laws.
- Compliance falls into three major categories: operational compliance, regulatory compliance, and ethical compliance.
- Notable benefits of corporate compliance include risk mitigation, improved company culture, boosted productivity, and enhanced company reputation.
- Compliance and corporate governance share similarities in terms of shared goals, accountability, risk management, ethical leadership, control implementation, long-term sustainability, training needs, and monitoring.
- Compliance and governance differ in scope, key objective, approach, enforceability, implementation, and accountability, among other parameters.
- Corporate governance and compliance work together to create a supportive work environment, foster ethical integrity, enhance stakeholder trust, and maintain the company’s reputation.
What’s Corporate Governance?
Corporate governance refers to the system by which organizations are run. It includes the framework for managing relationships between the board of directors and other stakeholders – shareholders, management, workers, regulators, and the community.
Importance of Corporate Governance
Companies need corporate governance for different reasons, which include:
- Accountability: Corporate governance ensures that key decision-makers, including the board of directors, executives, and senior managers, are accountable for their decisions. When the right governance structures are in place, everyone is answerable for their actions.
- Transparency: Corporate governance demands openness in financial reporting, budgeting, resource allocation, and decision-making. It requires that stakeholders be engaged and provided access to timely and accurate information. Everyone recognizes the need to conduct the company’s affairs transparently.
- Improved decision-making: Good governance makes the company’s leadership accountable and transparent, which means they can make better decisions. They can adequately engage stakeholders, do due diligence, and seek advice from industry experts and insights from committees before making decisions.
- Fairness: One of the pillars of good governance is fairness. Good governance dictates that stakeholders are treated without partiality. Clear policies should be in place to discourage conflicts of interest and protect the interests of all stakeholders. Moreover, governance ensures inclusion and diversity, promoting fairness and equality.
- Risk management: Corporate governance requires that companies establish the right frameworks and measures to manage risks. The company can outline mechanisms for recognizing, assessing, and countering risks whenever they arise.
- Investor confidence: Corporate governance improves investor trust through transparency and accountability by the leadership. It becomes easier for investors to trust the leadership with their money, which allows them to comfortably inject more funds into the company and improve its performance.
- Staff retention: Good governance calls for good practices like inclusion, diversity, ethics, and integrity, which makes it easy for existing staff to feel needed by the company. They become more satisfied with the job conditions and leadership, which makes them want to stay with the company longer.
- Supportive environment: Good governance calls for supportive work structures, such as training programs, career development, and fair remuneration, which make it comfortable for the workforce to achieve important milestones and career growth.
What’s Compliance in Corporate Governance?
Corporate compliance (a term for compliance in corporate governance) refers to systems, policies, and processes that an organization employs to ensure adherence to industry laws, regulations, and standards. Its primary goal is to safeguard the organization from legal risks, image defamation, and other risks by ensuring it runs within acceptable legal and regulatory frameworks.
Compliance may fall into any of these three categories:
- Operational compliance deals with frameworks that govern a company’s daily operations, such as cybersecurity protocols and health and safety standards.
- Regulatory compliance involves adhering to sector-specific regulations and policies, such as labor and environmental regulations.
- Ethical compliance involves upholding ethical corporate practices such as anti-corruption, anti-fraud, and anti-bribery policies and ensuring employees follow a code of conduct.
Importance of Corporate Compliance
Corporate compliance can benefit organizations in several ways, which include:
- Risk mitigation: Corporate compliance minimizes non-compliance risks, which could result in financial penalties and legal actions. For example, a company’s average annual cost of non-compliance is about $14.82 million. This is much higher than the average cost of compliance, which is about $5.47 million. Each year, non-compliance costs continue to soar, burdening non-compliant corporate entities.
- Improved company culture: Compliance ensures a company aligns its operations with industry standards and works towards creating a positive and supportive work culture.
- Boosted productivity: Corporate compliance streamlines a company’s operations, resulting in efficient resource use and accountability. It also increases staff morale, resulting in improved productivity.
- Enhanced company reputation: Corporate compliance protects the company’s image by improving stakeholder confidence. Customers, suppliers, investors, regulators, and the general public become more confident in the company’s leadership and direction.
Similarities Between Corporate Governance and Compliance
Corporate governance and compliance share several similarities, which are as follows:
1. Shared Goals
Compliance and corporate governance share a few goals. Both frameworks work harmoniously in creating an environment where a company can realize its shared goals while running sustainably and ethically. Such goals include:
- Ensuring transparency and accountability
- Improving stakeholder trust
- Protecting company reputation
2. Accountability
The board has the oversight mandate of ensuring compliance with existing industry standards and laws. The board directors hold senior management and executives accountable, and governance is in play. What’s more, governance includes mechanisms like audits and whistleblower policies that are critical to monitoring compliance.
3. Risk Management
One of the board of directors’ key responsibilities in governance is overseeing the company’s risk management. For that to happen, existing risk management protocols must be adhered to, and the board must ensure that the correct risk compliance programs are in place for everyone to observe.
4. Ethical Leadership
Corporate governance encourages ethical leadership as an essential component of enforcing compliance. By leading by example, the board and top executives set the tone for ethical behaviors within the company, and employees have no choice but to follow suit. They comply!
5. Control Implementation
Robust internal controls underpin both governance and compliance. These controls ensure that the company’s operations are ethical, efficient, and effective. Both frameworks require internal audits, risk management protocols, and reporting channels that align with compliance requirements and company goals.
6. Long-term Sustainability
Both governance and compliance lead to long-term sustainability. Compliance protects the company from financial and legal risks, while governance provides strategic direction and leadership to create long-term value for stakeholders.
7. Training Needs
Both governance and compliance require a mindset shift and continuous adherence to the best corporate practices. As a result, constant training and development are needed in both cases.
8. Monitoring
Compliance and governance are both progressive processes that require continuous monitoring. A company has to put measures in place to track its governance and compliance efforts to recognize where it needs to improve and what it needs to maintain.
Key Differences Between Corporate Governance and Compliance
As much as corporate governance and compliance have much in common, they also differ in a big way. Here are the factors that separate them:
1. Scope
In compliance, rules and regulations originate from outside. These industry standards must be met for the company to operate within the bounds of the law. However, they do not necessarily have to align with the company’s objectives.
In contrast, the rules and regulations for corporate governance are set internally by the board, shareholders, and C-suite leadership. Consequently, they reflect the company’s overall vision and strategic objective.
2. Key Objective
The primary purpose of governance is to develop a responsible and more sustainable corporate framework that facilitates decision-making and ethical leadership. On the other hand, the key objective of compliance is to ensure the company operates within the confines of the law and applicable guidelines.
3. Approach
Compliance is more of a reactive process. Companies adopt compliance measures and standards in reaction to existing regulations and policies that demand adherence. This protects the company from profound legal implications due to non-compliance.
Governance tends to be more proactive. It involves setting up structures that anticipate future challenges or opportunities while ensuring the company’s long-term sustainability. Everything is done in advance and not as a reaction to external pressure.
It’s also worth noting that compliance is more rule-based, focusing on observing specific industry rules and regulations that vary across industries and geographical locations.
Corporate governance, in contrast, is more principle-based. It focuses on providing a broader framework for accountability and responsible leadership. It doesn’t concentrate on specific laws but is generally concerned with ensuring the organization is well managed.
4. Orientation
Corporate governance has a more strategic orientation. Companies must determine what they need to do, the reason for doing it, and their long-term vision. Compliance, on the other hand, can be tactical. It focuses on meeting industry requirements that have already been laid out.
5. Enforceability
Since the policies, rules, and regulations are internally set in governance, they aren’t necessarily obligatory. The company leadership internally decides how to enforce them and the consequences of their violation.
Meanwhile, the rules and regulations are obligatory in compliance as they are set outside the company. Non-compliance can have serious monetary and legal consequences.
6. Implementation
Compliance is implemented through rigorous policies, practices, and training on specific industry standards and regulations. On the other hand, governance is implemented by establishing detailed frameworks and structures that govern the company’s strategic direction.
7. Accountability
In governance, the board of directors has the general oversight role and provides strategic direction. The board oversees the establishment and implementation of the company’s strategic plan. It ensures that management serves the best interests of key stakeholders. Senior executives implement the board’s strategic plans and report their developments to the board.
At the same time, the advisory committee develops policies and monitors their implementation. Meanwhile, compliance is overseen by a compliance department or the Chief Compliance Officer (CCO). The CCO develops the compliance program and has the oversight role but reports to the board of directors directly (if it exists) or senior management.
Other Differences
Here are some other differences between corporate governance and compliance:
Key Aspects
Key aspects of compliance include:
- Regulatory adherence (meeting industry regulations and standards)
- Data privacy (protecting sensitive and personal information)
- Assessment and audit
On the other hand, key aspects of governance include:
- Access control (involves establishing who should access what resources)
- Data security (consists of protecting data from breaches and unauthorized access)
- Resource management (which is all about ensuring efficient utilization of resources)
- Cost management (ensuring that the spending aligns with the budgeting)
Pillars or Principles
Compliance is built on the pillars of:
- Proactive management
- Code of Ethics
- Risk analysis
- Surveillance or monitoring
- Preparation (constant training and development)
On the other hand, corporate governance is built on the pillars of:
- Transparency
- Accountability
- Corporate responsibility
- Fairness/equity
Correlation Between Governance and Compliance –How the Two Work Together
Despite their differences, corporate governance and compliance are almost inseparable. Companies have to employ both frameworks, and that’s mainly because of these reasons:
Supportive Work Environment
Good governance and compliance efforts create a supportive work environment where strategic and regulatory objectives are met. Governance establishes internal controls, which form the stage for effective compliance with regulatory standards. It ensures that all business operations run per defined strategic and ethical standards.
Effective compliance, on the other hand, solidifies governance frameworks by ensuring regulatory alignment. Compliance ensures companies adhere to external regulations and avoid non-compliance risks like fines and reputation damage.
Ethical Integrity
Compliance focuses on mitigating and avoiding legal risks resulting from non-compliance. Good governance, on the other hand, prevents more extensive ethical issues such as fraud and corruption. In that case, companies require both to foster a culture of ethical integrity across all departments. This is easier when all hands are on deck – that’s compliance and governance.
Stakeholder Trust
Internally, employees and other stakeholders trust a company more when it has robust governance structures. That includes having strong policies that all strive to have. Externally, consumers, investors, suppliers, and regulators also trust a company more due to its lofty compliance standards. Companies require the trust of all stakeholders to excel, and it’s a combined effort of good governance and compliance.
Improved Company’s Reputation
Governance ensures that a company operates within acceptable internal standards and is aligned with its strategic drive. Compliance ensures adherence to industry regulations and avoids reputational damage and other non-compliance risks. Companies need corporate governance and compliance to improve and maintain their reputations.
Embrace Corporate Governance and Compliance Today!
Kenyan companies require good governance and regulatory compliance to navigate the country’s challenging corporate landscape. Good governance is instrumental in providing strategic direction and leadership, while compliance ensures adherence to regulatory standards and external laws.
At the Center for Corporate Governance (CCG), we endeavor to unite the two worlds and enable our clients to understand and get the most out of them. Join our monthly corporate governance training today as we help you demystify the complexities of compliance and corporate governance.
