Corporate governance, GRC, external audit, internal audit, compliance function, internal control – are terms we are familiar with, but can we be sure that we fully understand their scope and why do we need them at all? What do they have to do with dealing with risks effectively? In what ways can they improve the business of your company?
To understand better than just to be familiar with the term, let us first explore these terms
Risk management, along with corporate governance and compliance, together form a discipline known as GRC (governance, risk and compliance). The simplest explanation of its purpose is to ensure that the organization achieves its goals, and as a result increases the profit of the owners. Its implementation requires awareness of the presence of risk and the intention of all participants to comply with the guidelines expressed through business objectives. Coordination of GRC activities to the extent that the activities do not overlap, but include all risks to which the organization is or could be exposed, contributes to the achievement of business objectives.
Corporate Governance, on the other hand – deals with the relationships of management structures in organizations. The official definition says that corporate governance is a set of relationships between management, administration, supervisory board, and other stakeholders. It is a process by which organizations meet the rights and requirements of their stakeholders.
What is specific to the risk management function and the compliance monitoring function is that they usually react in advance, before a certain event occurs, and thus prevent certain costs, penalties, and negative consequences and reduce or avoid risks.
Now you must be asking what would all this mean in practice?
To better understand the importance of having an effective GRC strategy, it is best to use an example.
Let us explain this by giving a practical one. If a business owner has been thinking about the goals he wants to achieve in the next five years and one of those goals was to pay bills on time and to respond to customers to their complaints and inquiries on time (both objectives are usually bound by a legal deadline).
The assumption is that it is necessary to define internal assets (e.g. verification of competencies and skills of all employees, ensuring continuity in their education, systematization of jobs with a clear description of each position and responsibilities, rules on conditions for performing management duties, computer monitoring and objections in the information system, etc.).
As the compliance function and the risk management function have the task to test previously identified risks and risk scenarios every year, upon testing these, it was found out that there is no clear and transparent division of roles and responsibilities at the company level, that certain employees and directors have the same job description. Several organizational units have the same job title.
Therefore, it has been concluded that defined risk is not managed in a proper manner. To be concrete, in cases when the regulations require clearly defined roles and responsibilities, or codes of conduct, this represents a risk. A regulatory risk, to be precise. For example, when the law defines that the bill must be paid within a certain time and that the consumer’s complaint must be answered within the legally prescribed time.
When there’s an effective strategy drafted, tools are needed to ensure its implementation goes well. Diligent’s GRC offering has a couple of solutions on this matter, such as compliance software, but also consulting services to better identify where the potential risks are.
Is there anything else such strategies can contribute to?
Having an effective strategy like this one will contribute to the following:
- Managing risks on a company level. Anyone who does business of any kind is aware that risks are inevitable and various. A proactive business needs to be prepared to recognize it and to be able to handle it. With GRC, a business will be more than capable of its identification, assessment, mitigation, and proper reaction.
- Decision-making process will be improved. Such a system is not there to make a decision for you, but to offer assistance in collecting and simplifying information needed for making the best possible decision.
- It will surely help mitigate the risk and establish a rigorous plan based on rigorous actions needed to be taken if and when things go wrong. The overall strategy also improves how the business reacts to surprises and things that could not be predicted, thus preparing you for every possible scenario.
- Cutting down costs. As it was mentioned in the beginning, legal deadlines can result in fines and restrictions. Effective GRC in these terms means fewer penalties.
- Increased reputation. It is only logical that when you take care of things maturely, you will enjoy an image of a serious business, therefore investors will notice you. Potential employees will also find you a desirable employer.
- Effective communication. Using a different kinds of communication channels does not mean the process is clear, or without clutters. Intentionally or unintentionally it can happen that difficulties in communication are experienced when the data piles up. This is exactly what this strategy aims to – ensure a normal data flow, information reaching whoever it is supposed to reach, coordinating and harmonizing all units/departments.
- Effectiveness increase. After mentioning all the above, it is logical to conclude the communication effectiveness improves access to information to everyone in need. Additionally, there are no overburdening others with information they do not need to perform their task, making people work more effectively. Things start to move faster.
- Effectiveness is also increased when each process that can be automated, is automated and regulated with adequate standards and procedures. Positive business results are then inevitable.
Being an entrepreneur today comes with great challenges. Fast evolving technology and unpredictable business environment have the potential to either expose you to great challenges, or great opportunities. In any way, dealing with risk with the right strategy helps your business overcome insecurities and grow.