Risk and Compliance for Business

Organisations big and small have to deal with a number of legal obligations and risky situations. What is the importance of compliance, and how can you ensure it’s matched within your organisation? This guide contains everything you need to know. 

Risk and compliance is a term that covers both an organisations legal obligations, things that can cause them issues down the line, and also strategies to account for both of the above. It’s also known as ‘integrity risk’.  

It doesn’t matter whether you’re big or small, public or private, business or non-profit. Fail to comply, and you could face major repercussions, from legal action, to fines to reputational damage. 

What does risk and compliance in business involve? 

Risk and compliance policies involve you identifying what your legal obligations are and making sure you match them. It also involves proactively finding potential risks and making sure they’re accounted for, and even putting in things for place for  

In some cases, you may want to go beyond your legal obligations. We’ll cover some of the benefits of doing so later. 

Some people will use the terms compliance and risk management interchangeably, but they’re actually two distinct, though related, concepts.  

Compliance is a reactive measure. You’ll need to respond to any changes in law and regulations as they arise. Risk management is a proactive one, as you need to spot and respond to potential risks before they occur.  

In short, compliance deals with the rules that have already been established. Risk management is about anticipating future potential compliance issues. 

By distinguishing between these two ideas, you can ensure you’re fully covered from both angles, going above and beyond the basic requirements and getting tangible benefits. 

There are some rules and regulations that the government will give you concrete guidance on how they expect you to conduct yourself. Tax codes are an example of this. Industry standards are also a form of external compliance. 

Think of external compliance as a source of external pressure that keeps organisations operating in a certain way. 

Internal compliance is the standards an organisation holds itself to, through internal policies and proactive decisions. In these cases, the law doesn’t care how a company handles the issue, it only cares that they do. A data privacy policy or a security policy are both examples of internal compliance. 

There are a number of areas that should be a priority when it comes to considering how to mitigate compliance risk. These areas are prone to issues when not managed properly. 

Illegal practices 

By ensuring maximum legal compliance, you’ll ensure you and your employees aren’t breaking any laws (intentionally or unintentionally).  Strong policies will help avoid cases of fraud, theft, bribery, money laundering and embezzlement. 

Corruption 

Corruption risk management (CRM) is a specific subset of procedures specifically designed to detect and remove this risk from your organisation. It covers everything from favouritism within HR, bid rigging in procurement, as well as asset management. 

Privacy breaches 

Violating privacy laws is another very common compliance risk, whether that’s through insufficient protection from cybercrime or poor data hygiene. You need to ensure you’re taking appropriate measures to protect data and prevent breaches. 

Process risks 

A process risk is the term for when a specific procedure for a process isn’t followed. For example, if you have a policy about accessing a network remotely, such as requiring this not be done on public Wi-Fi, that would count as a process risk. So does improper machinery maintenance. This may not cause any issues initially, which can cause violations to slip under the radar. There’s always a chance that things go catastrophically wrong next time. 

Human error is also a factor to consider with process risks. 

Environmental harm 

Any damage to living organisms in the workplace (or outside it). This can include things like hazardous waste disposal, groundwater pollution, and the destruction of natural habitats.  

Health and safety 

There are a range of health and safety (H&S) protocols that organisations should follow. In the UK, the Health and Safety Executive (HSE) is in charge of regulating these laws and can provide you specific guidance as to what’s appropriate for your workplace. You don’t, for example, need a strong policy on how to drive a forklift if you only have office employees. 

There are a lot of potential consequences for failing to consider how to manage compliance risk. Some of these consequences are more severe than others, but they can all have knock on effects on each other.  

Legal penalties 

This is arguably the most obvious and the most important consequence. If you’re noncompliant with the law, you could find yourself in legal trouble. This could lead to citations, fines or a suspension of your organisation, depending on the issue. 

For more severe infractions, this could even result in prison time for individuals. There have been various high-profile cases of CEOs and other high ranking employees facing jail time for fraud. 

Financial loss 

Fines are a more common punishment for compliance infractions. In many cases, the maximum fine is unlimited. The average fine for a health and safety violation is about £145,000, for example. In 2022, in the US, one famous mobile phone company was fined $350 million for a data breach that exposed the private customer data. 

That’s before you get into the cost repairing the damage, which can often be significantly more than preventing it in the first place. 

Loss of productivity 

This one’s a little harder to measure. But poor compliance can lead to poor productivity from your employees. 

Let’s use H&S as an example. Poor workplace H&S will mean employees literally don’t feel safe working for you. That can really harm their productivity as they spend more mental energy keeping themselves safe. Likewise, if your employees know you’re deliberately skirting certain legislation issues, that can make them feel uncomfortable, and prevent them from doing their best work. 

Reputational damage 

Especially in industries where external compliance is a major factor, not following industry leading legislation can cause major issues for your reputation. If you’re found to be in violation of legislation, especially when your competitors aren’t, that can lead to a bad reputation that takes years to recover from. 

Reduced customer loyalty 

Customers want quality. Simply put, if you’re not keeping to legislation, that gives out signals that you don’t care about your product or service. At best, customers will think you’re running a shoddy company and leave at the first sign of trouble.

It’s not all doom and gloom! There are some great benefits to ensuring you understand the importance of compliance. You won’t just avoid bad consequences; you’ll also see your organisation grow. 

Alleviates risks 

Risk management lets you identify and remove the risks that could affect your business. By removing these, you will be get a more consistent operation that doesn’t fall apart when stress is applied.  

Improves business planning 

 A company that is aware of legislation requirements and how to keep risks to a minimum will naturally have a clearer picture of its own processes compared to one that doesn’t. You’ll conduct reviews, get stakeholder feedback, and be able to make more informed decisions. 

Limits financial losses 

Naturally, you’ll want to avoid fines, but there are other financial losses that come from poor risk management. 

Imagine a restaurant with a signature dish, but a key supplier has a shortage and can’t supply the main ingredient. Customers who can’t get the dish will leave disappointed, which can harm your bottom line for that day and others to come. A restaurant with a backup supplier sourced through risk management procedures will avoid this! 

Helps maintain quality 

A proactive approach to risk can avoid all kinds of problems, both with service levels and the quality of your product. 

For example, one key process risk is improper machine maintenance. If you have a process in place to keep that in top shape, the risk of breakages or faulty products will decrease, ensuring you’re sending out reliable products to customers.  

Upholds industry standards 

When an industry is seen as trustworthy, customers are more likely to engage with it. If you’re seen as an industry leader in compliance and risk management, then you’ll edge out your competition thanks to your sterling reputation. 

There are a number of steps you can take to get make sure your governance, risk and compliance are all in order. Once this is set up, it becomes much easier to keep on top of things, as you’ll create a foundation that amendments can be added to. 

Conducting a risk assessment 

Firstly, you need to figure out where your risks are, which means you need to do a thorough risk assessment. Talk to your managers and your employees to get a better understanding of what risks they face daily and can help you build that understanding into your plans. You’ll also want to gather data from across the organisation. 

Building a framework 

Who has ownership of each risk? Where does the buck stop? How likely are certain risks, and what is the impact if they occur? You may be familiar with risk assessment for H&S concerns, but you can use a similar framework for broader ideas. 

Using up-to-date software 

Up-to-date software will typically be more compliant than older outdated software. There have been numerous cases of major organisations using ancient technology and being exposed to massive data breaches, for example. 

Cloud-based software is a popular upgrade, as updates can be rolled out quickly and seamlessly without interruption. 

Keeping up with policy changes  

If your other processes are streamlined, and ownership clearly spelled out, your teams will have a lot more time to keep up with policy changes and industry trends, ensuring you’re ahead of the curve on any shifts. 

Performing due diligence on third parties 

In security, you’re only as secure as the weakest link in a chain. It’s a similar process with risk compliance. If you’re using a third party that isn’t compliant, and you haven’t done your due diligence, then you can be liable for their mistakes. 

There have been numerous data protection issues in the past few years where a company has had a leak because a third party they work with has an exploit, for example.  

Building a culture of compliance 

It’s not enough to have documents saying ‘we do this’, if you don’t have a culture where compliance is emphasised, it’s easy for employees and managers to let it fall by the wayside. 

Strong training can help with this, especially as part of your onboarding process. It shows you have this enmeshed in your company from the ground up. From there, you can create a trickle-down effect. Make sure your managers are acting 

If you want to keep your team compliant and minimise risks across your organisation, then MHR can give you the tools you need. From accessible cloud-based systems that let you get a picture of the entire company, to more compliant payroll that’s risk free, get in touch to find systems built around your needs.