Home Corporate compliance Why is corporate compliance important for businesses: an analysis

Why is corporate compliance important for businesses: an analysis

December 28, 2024

141

This article has been written by Biatris Kharkongor pursuing a Training program on Zero to Success: For Aspiring Content Writers from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Table of Contents

Introduction

In today’s dynamic business world, operating modes have changed drastically from the traditional offline version to dynamic online digital platforms. Multiple business developments exist ranging from large to medium start-ups and laws, regulations, policies, standards, and ethical behaviour. Knowing and implementing in your organisation and business is challenging.

The competition is huge and every business strives for perfection to stand out. Hence, the need to be up-to-date and consistent is the need of the hour for every business to survive and thrive well in this digital world of business. And how to achieve that?

Corporate compliance means adhering to a set of rules or laws. It is the systematic approach that every business or company needs to adapt itself to relevant rules, regulations, standard policies, and ethical behaviours.

Corporate compliance requires that every company or business must comply with these rules, laws and regulations at various levels: be it international, state, regional, or even local.

Failing to meet them will result in fines and penalties for violations of rules, hamper business growth and development, and cause employees dissatisfaction and a lack of trust in the customers and shareholders. Worse than that, it might heavily bring a downfall in your business as more capital is required to bear fines, etc.

In this article, we will go deeper to understand what corporate compliance is and why corporate compliance is important in today’s businesses.

What is corporate compliance in business

The word compliance in its definition is ‘the action of complying with command’. In corporate business, compliance, in a nutshell, refers to the way businesses, companies, firms, and organisations adhere to the rules, regulations, standard policies, and ethical practices governing their operations.

Incorporating compliance ensures safety and consistency in business, as laws and regulations are fully employed and frequently monitored in all spheres.

Corporate compliance starts with creating a compliance framework. This is followed by implementing and monitoring various policies, programs, and procedures like training employers, regular audits, risk testing, and ongoing checks to ensure the operations are legally and ethically compliant.

Compliance is for all big and small businesses. It can ensure smooth business functioning and growth. It can actively help identify and mitigate potential risks that result in fines and lawsuits.

Businesses, companies, and organisations must comply with the rules and regulations set by various authorities at local, state, and international platforms. Thus, proper knowledge, understanding, and practices of the applicable laws and regulations are required for the smooth functioning of businesses.

Compliance is an ongoing process. Staying informed and updated with the daily changes in advance helps greatly. Thus, corporate compliance is vital for every business.

State the importance of corporate compliance

The topmost priority of incorporating corporate compliance in any industry of any size is relatively simple, i.e., to identify and avoid risks in operating a business. If the industry fails to comply with the laws and regulations, it might lead to heavy fines and penalties and hamper growth in many aspects.

Here is the importance of corporate compliance for your industry.

To avoid legal penalties and fines

For any business or company to be protected from violations and run smoothly, one must ensure the business operates according to the laws and regulations at all costs. This will reduce legal risks like penalties and fines and boost the growth and reputation of the industry.

Failure to adhere to legal laws will harm the company’s reputation and credibility and the cost incurred on court hearings and appearances affects the industry.

Protect business image and reputation

Trust and loyalty must be cultivated to strengthen your business reputation when dealing with clients in every aspect of your operation. Clients invest in businesses and organisations that are compliant with them. Thus, maintaining a trustworthy relationship between them is everything in business.

Promotes retention of employees

The initiatives taken by any industry to create rules, regulations, policies, procedures, and ethical practices to operate and frequently monitor will guarantee employee satisfaction.

You can conduct compliance training programs so that every employee will know how to behave and act in the industry. It creates a deeper relationship between the industry and its employees.

As a result of this, the employees have a sense of safety that there rights are being protected and the old employees are well aware of the compliances as well. With good onboarding training, employees are able to handle sensitive information properly and protect data breaches.

Finally, the employees will continue working with the same organisation with dedication because of the good working environment. They will also inform the administration about any misconduct or violations that may occur in the company, which in turn will contribute to the smooth working of the organisation.

What are the different types of compliance

Different types of corporate compliance are implemented in sectors that the organisation adheres to follow. These compliances are imposed by the government bodies like rules and regulatory standards and the policies, ethical practices are created within the organisation.

The different types of compliance are as follows:

External compliance

External compliance refers to adherence to the rules, laws, and regulation standards set by the government body for the organisation. The organisation must follow these rules to operate the business in a compliant environment, protect employee rights, and help to build trust in clients, stakeholders, etc.

Certain acts, laws, and standard rules exist under external compliance. Some of these are:

Registration of the organisation and operations
Tax filing
Annual reporting and
Labor laws

External compliance is further divided into two subtypes:

Statutory compliances:

The state and the central government established these statutory compliances to ensure the welfare and protection of the employer-employee relationship. In India, organisations must adhere to the list of statutory rules. These rules are meant to be applied to all organisations; however, some are exempted depending on the size, nature, and operation.

Regulatory compliance:

Regulatory compliances refer to the laws and rules established by regulatory bodies. Regulatory compliances in India are listed to pay close attention to implementing in the business. The regulations focus on organisation-specific standards and practices.

Internal compliance

Internal compliance refers to the policies, procedures, and ethical standards created within the organisation that must be adhered to. Internal policies or rules within an organisation are made to ensure smooth working of the organisation and to ensure that the organisation meets with goals.

Internal compliance also includes these:

Employee safety, welfare, and protection

Internal policies must provide employees with a code of conduct. This encourages employees to work professionally and ethically in a compliant, friendly working atmosphere.

Data privacy policies

One important internal compliance policy is to protect sensitive and confidential data. Internal compliance must employ data and privacy compliance regulations such as HIPPA, GDPR, COPPA, etc.

Financial compliance

Incorporating accuracy and transparency is challenging for a business in the financial realm but is a must-do to make business stay in the long run. Maintain all financial records, like financial reporting and bookkeeping, to meet all financial standards and policies.

Health and safety regulations

To ensure a healthy and safe working environment, it is essential to implement health and safety regulations and procedures in business.

How to create an effective corporate compliance program and ethical behaviour

Creating a relevant corporate compliance program is a difficult thing to do. You need prior planning before this and implementing a compliance program. The Federal Sentencing Guidelines for Organisations (FSGO) highlight eight (8) components that are required for an effective compliance program.

Therefore, here are a few steps to help you start a useful compliance program for your business and employees.

Set clear goals and establish compliance infrastructure

First and foremost, you must have clear goals and objectives in your business to create an effective compliance program. The governing body (Board of Directors) must have knowledge of the framework and operation of the compliance and what it entails.

Appointment of the overall person, like the Chief Compliance Officer or Chief Audit Executive, is required. He must be given sole authority over resources i.e., financial and human resources and to enforce complaints and direct access to report directly to the board.

They need to implement compliance at all costs and monitor the effectiveness of the compliance programs regularly internally. Know the pros and cons to help you choose the most fitting regulations and standards in a compliant business.

Assess the current scenario

Annually, semi-annually, or quarterly is a must-do risk assessment to know the progress of your current compliance practices. In doing this, you can identify if there are any risks of misconduct, legal violations, or non-compliance in your business and take necessary steps in areas that need immediate solving action, and improvement.

Get stakeholders / Board of Directors input

The senior management and board of directors are the most important people in implementing compliance plans and ethics effectively. Having an excellent team and sufficient financial resources are highly important. They must be knowledgeable about the implementation of compliance programs. They need to encourage ethical practices and talk about compliance programs to be implemented.

Your compliance program won’t run by itself: you will need one compliant officer, many officers, or special staff depending on the size of your business or organization. A well-planned compliance program helps establish a healthy working space that values rules and ethical behaviors among its members and customers.

Create standard policies and procedures

The organization and business must create clear, concise, written standard policies and procedures. It has to be readable and accessible to all employees at any point in time. Include all the guidelines regarding reporting misconduct, violations, etc. These need to be regularly reviewed and updated to comply with changes in laws and regulations for business trends.

Organise compliance program training for all employees

Once policies and procedures are done, conducting comprehensive training is very important. Right from the governing body, executives, leaders, employees, and if needed, customers and third-party agents need to receive proper training.

They must know compliance programs: laws and regulations, policies and ethical behaviours, and their roles and responsibilities to implement individually and as a team. The training must also include compliance with cybersecurity and other regulations so every employee exercises his duties to improve the company’s growth.

Run internal auditing, monitoring, and reporting

Frequent audits are important internally to avoid future risks. When companies stay updated with all the new compliance regulations, it improves business and prevents violations or any misconduct that might happen in the future.

Maintaining compliance is not a one-time thing; it demands continuous efforts. You regularly monitor all operations and adhere to corporate compliance policies and standards. Utilise the monitoring tools to identify potential risks, prevent them, and protect the company. A company must use monitoring tools to identify potential risks and prevent and protect the company.

Lastly, reporting every detailed follow-up of the activities or risks in the business is mandatory. The governing body and senior management leaders must know this. Reporting must be presented directly to the assigned persons, like the Audit Committee of the Board of Directors.

Improve your compliance program with compliance management tools

Many compliance management tools are available today like training tracking, audit support, policy management, etc. to track your ongoing compliance program. You can create a feedback channel for the employees to help identify whether the compliance programs are fully employed.

Risk assessment

The need to monitor and update the risk management programs to solve illegal actions in a compliant manner is a must. The first function of risk assessment is to identify and solve the most serious risk and most likely to occur.

The risk-ranking system to identify potential misconduct depending on its severity and occurrence provides an effective tool to take appropriate risk management as provided in the compliance program. Areas with high-ranking risks are first prioritised to solve first.

Apart from the above effective compliance program, an ethical culture or behaviour in the organisation and business must be cultivated. It will foster healthy, open communication among the employees operating in it. Ethical behaviour strengthens them and further prevents misconduct, violations, etc.

Compliance programs and ethical practices enhance the growth and development of an organisation. Both require frequent reviews and modifications to keep this compliance program well-aligned with the recent changes in regulations and policies of the state and within the organisation.

What are the advantages of corporate compliance

Enhances customer trust

The first and most important thing for any company is to develop client trust. Companies which work in accordance with the laws, regulations, rules, policies and ethics make customers feel safe from fraud as their rights are protected.

Customers easily agree to purchase the goods made by such companies because of a sense of security, but this is not the case with companies that do not comply with laws. This attracts customers, increases brand awareness, manages risks and helps in boosting the company’s overall growth.

Government laws and regulations

Companies that comply with the laws and regulations set by the government can work without any fear. In order to show that a company has complied with the laws and regulations, the compliance must be presented in the office of the senior management or the board of directors. When a company is incorporated, its operations must be in adherence with the rules and regulations in every aspect and within a dedicated time. This helps in solving the risk associated with legal violations and reduces penalties and fines, etc.

Protects the company from legal action

Data protection compliance. When a company complies with the laws and regulations, its financial losses like penalties, fines and lawsuits are also reduced.

A company also has to promote safety measures. When a company follows all the laws and regulations, the confidential data of its clients also remains protected.

Employee engagement and retention

The compliance officers have full authority to exercise compliance. They must ensure that the governing bodies know compliance laws, rules, regulations, policies, and ethical behaviour and exercise them at all costs.

Training needs to be conducted for employees of various departments on company compliance programs and policies. Also, training on specific equipment for specified employee experts in the field is a must.

The compliant company will attract talented employees to work for them in the long run. Monitoring and regular reporting on compliance practices will foster a healthy working atmosphere and increase profits in the organisation.

Whether a dormant company requires to adhere to corporate secretarial compliances

A dormant company is a company that is not actively trading or carrying on any business activities. However, even though a company is dormant, it is still required to comply with certain corporate secretarial requirements.

Why is it important for a dormant company to adhere to corporate secretarial compliances?

There are a number of reasons why it is important for a dormant company to adhere to corporate secretarial compliances.

To maintain its legal status. A company’s legal status is dependent on its compliance with the law. If a company fails to comply with the law, it may be struck off the register of companies and dissolved.
To protect its directors and officers. Directors and officers of the company can be held personally liable for any debts or liabilities of the company if it not properly managed. By complying with corporate secretarial compliances, directors and officers can help to protect themselves from personal liability.
To avoid penalties. Companies that fail to comply with corporate secretarial compliances may be subject to penalties, such as fines or imprisonment.

What are the corporate secretarial compliances that a dormant company must adhere to?

The corporate secretarial compliances that a dormant company must adhere to include the following:

Filing an annual return. Every company, including dormant companies, is required to file an annual return with the Companies House. The annual return must contain information about the company’s directors, officers, and shareholders, as well as its financial statements.
Keeping statutory registers. Companies required to keep a number of statutory registers, such as the register of directors, the register of shareholders, and the register of charges. These registers must be kept up-to-date and be available for inspection by members of the public.
Holding annual general meetings. Every company is required to hold an annual general meeting (AGM). The AGM must be held within 18 months of the company’s financial year-end.

Conclusion

Corporate compliance in business is mandatory as many challenges come into play. Many companies of varying sizes evolve every day. Plus, there are different types of compliance, i.e., internal, regulatory, statutory, and, external compliance set by the central and state governments.

Also, the company itself sets rules, policies, and ethical practices to be complied with to promote a healthier, compliant working environment. Having well-crafted, relevant compliance programs and ethical practices helps a company to increase trust from customers, shareholders, and third-party agents and boost the company’s reputation.

Effective compliance program training must be provided for every employee in the organisation. Regular monitoring, reporting, and auditing of the operations of these compliances must be done frequently.

Finally, the governing body, i.e., the senior management and board of directors and the compliance management teams or Chief Compliance Officer must ensure compliance programs and ethical practices are implemented at all costs for the smooth working of the company, the satisfaction of the talented employees, and the fulfilment of customers.

Why is corporate compliance important for businesses: an analysis

Introduction

What is corporate compliance in business