Corporate Compliance in Today's Business: Why is it Important?

Yulia Landbo

Yulia Landbo

Last updated: Jun 16, 2024 4 min read

Following the industry standards is a rule of thumb for any business striving to succeed. But is it a big deal to pay so much attention to these standards?

The short answer is yes, indeed. There are three pillars shaping the relevance of corporate compliance:

As one can guess, ignoring even a single one of them may result in quite severe consequences. Keeping business compliance switched on doesn’t mean just ensuring that the company consistently follows all the relevant laws and regulations. Analyzing all these requirements to understand their underlying reasons also highlights all the opportunities companies can benefit from their adherence.

Today, we’ll delve deeper into the world of corporate compliance in order to clarify what business compliance is, define its scope and requirements, better understand the importance of compliance and the benefits of being compliant, and review the possible consequences of corporate non-compliance.

Understanding Corporate Compliance

Corporate Compliance Meaning in Business 

So, what is compliance in business? Simply put, business compliance means an adherence of a company and its employees to all actual industry-specific or internal laws, regulations, standards, and ethical practices.

In other words, corporate compliance covers:

In the definition above, a formal policy is a guide that covers a broad range of similar issues, outlining the overall way a company should act in situations of a similar type. A compliance procedure, in its turn, is a set of instructions specific to a certain issue described in a relevant formal policy.

Compliance vs. Ethics  

Ethics is another quite close concept often used interchangeably with compliance. For example, both “being compliant” and “being ethical” often mean a company generally acts in the right way. The difference, however, is significant and based on the next nuances:

As a result, compliance looks black-and-white, making it possible to comply or not to comply, once ethics is grey and has various shades of it. For example, if a company is compliant to GDPR”, it obligatory meets all the specific GDPR requirements. While "acting ethically in order to respect privacy" (the statement “being ethical to GDPR” is a misuse)  means a company is committed to morally right and fair behavior in terms of individuals’ privacy.  

Corporate vs. Regulatory Compliance

At first glance, it may seem that there is no difference between what is business compliance and what is regulatory compliance, but the difference is significant. Let’s find out how they’re different.

Corporate Compliance Program

In order to be efficient, the process of maintaining compliance in business must always be ongoing. Here one should think about their own corporate compliance program — a system of internal guides and rules, integrating all the compliance efforts and helping to maintain compliance more efficiently and consistently for any business activities.

The overarching purpose of setting a corporate compliance program is to protect the organization. Below are also several goals that complement the main purpose and outline a high-level plan for a generic corporate maintenance program.

  1. Monitor legal and regulatory compliance issues to be always compliant with all relevant laws, regulations, and industry standards,

  2. Implement effective measures to identify and prevent compliance risks,

  3. Promote ethical behavior across the company,

  4. Establish detecting and reporting procedures for non-compliance issues,

  5. Arrange the staff training to keep employees aware of regulations and measures they need to maintain,

  6. Continuously improve the program with regular program reviews.

Legal and Regulatory Framework for Compliance in Business

The basis for corporate compliance requirements is a set of legal and regulatory acts affected, which forms a complex web of different obligations. These acts can be international, national, regional, or even local, covering financial reporting, employment practices, health and safety, data protection, anti-corruption, rational nature management, or any other aspect.

Benefits of Corporate Compliance And Consequences for Non-Compliance

Corporate compliance has everything in order to motivate companies to maintain it. This means a bunch of reasons for businesses why compliance is important, as an even bigger bunch of even more convincing negative consequences for non-compliance. 

Why Compliance Is Important

  1. Fewer risks. Staying compliant means better identification, assessment, and management of risks. This is expressed in regular updates on the legal and regulatory changes, early issues identification, instant reactions prior to escalation, and proactive prevention measures. As a result, both the probability of non-compliance and related damages on average are dropped near zero.

  2. Higher reputation. Businesses that are seen to be operating ethically and within the laws, build trust and confidence among their customers, employees, investors, and the general public. 

  3. Better corporate governance. An efficient compliance program is a powerful framework for decision-making and accountability. It fuels informed decisions of the board of directors with valuable input data, enhances the transparency of these decisions, and makes it possible to determine a person accountable for each non-compliance issue.

  4. Higher efficiency and effectiveness of operations. A multitude of compliance measures, among others, can contain those which streamline workflows, implement standardized procedures, or automate and monitor compliance-related tasks. 

  5. Higher stakeholder confidence and trust. Maintaining compliance continuously and without interruptions is a strong reputation gainer, sending stakeholders clear signals that the company is operating responsibly, ethically, and in accordance with all relevant laws and regulations.

  6. Higher employee retention. By providing people with a fair, professional, and safe working environment, you make them much more satisfied and less dedicated to potential job changes.

Non-Compliance Consequences

  1. Unplanned audits and increased regulatory control. A list of possible trouble for non-compliance starts from an instant boost of unwanted attention to your business from the regulative authorities. It usually begins with the audit — a costly and time-consuming process that may lead to even greater consequences from the list below. 

  2. Piercing the corporate veil. Usually, business owners and their personal equities are separated from business activities and protected from personal liability for corporate legal actions and debts. But in a case of non-compliance, the court may decide to pierce the corporate veil and restore personal accountability. 

  3. Damaged reputation. Public evidence of non-compliance may be highly destructive to the brand’s reputation. The results may vary from an insufficient drop of confidence to a complete destruction of trust with the inability to a continuation of making business under this brand.

  4. Fines. Non-compliance fines might be enormously heavy even for small businesses.  This results from the fact the size of the fine depends on the severity of non-compliance, not on the size of the business. For example, GDPR breaches can lead to up to 4% of yearly turnover or up to $20 million, whichever is larger. This rule made Meta poorer by $1.3 billion in April 2023.

  5. Business suspension or termination. When the non-compliance is severe enough, regulatory authorities can even revoke the company’s operating license, both temporarily or permanently.

  6. Imprisonment. For some violations, including fraud and other criminal activities, managers and executives involved can face personal legal consequences up to imprisonment.

Conclusion

It’s hard to figure out any other activity related to your business that has a better set of motivating factors than maintaining corporate compliance. 

Having an overarching purpose to protect the business results in fewer risks; a higher reputation among employees, stakeholders, and potential customers; higher employee loyalty; better corporate governance, and higher operational efficiency. On the contrary, non-compliance issues can lead to quite severe penalties, including huge financial fines, personal accountability of business owners up to imprisonment, as well as the termination of business. 

Taking into account both the pros of being compliant and the cons of not being, it’s quite easy to decide whether to maintain compliance or not.

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