Compliance vs Risk Management: Here’s How They’re Different
Risks to an organization – wherever they originate – must be addressed. But often there is confusion about what falls within the compliance space and what is in the sphere of risk management. While both compliance and risk management help prevent threats and disruptions to an organization’s viability and bottom line, they are not one and the same. It’s important to understand the difference so you can make sure that you’re handling each well.
So what is compliance vs risk management?
What is compliance risk management?
Compliance is an important element of your business. It refers to your process for meeting the unique set of requirements, standards, and regulations that impact your organization.
In general, you can think of compliance as two-fold:
- Regulatory compliance. These are requirements that arise out of external regulations and laws.
- Corporate compliance. These are requirements that arise out of an organization’s internal policies and procedures.
Your compliance management process must encompass both of these elements and do the work of ensuring that you aren’t in breach of either your regulatory or organizational requirements. Most importantly, they ensure that you aren’t facing the potentially severe compliance risk that could arise from any breach – from fines to criminal penalties.
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What is risk management?
Risk management, on the other hand, is the process that you take to discover and identify your risks, and once you’ve identified them, assess and manage those risks. The risks that will potentially impact your organization are wide ranging, stemming from a variety of external and internal sources, and could have an equally wide range in terms of impact on your business operations and viability. These each need to be accounted and planned for within your risk management strategy.
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Compliance vs risk management – how are they different?
The terms compliance and risk management are often used interchangeably, and they are closely aligned. However, it’s vital to see that they are different. Compliance is a type or category of risk – albeit a very important one. On the other hand, risk management is an overarching process designed to protect an organization from risk generally, but also specifically from any risk that could lead to non-compliance.
This may seem like semantics, and on one level it is. But in truth, it is important to understand compliance vs risk management because it impacts how you handle these roles within your organization. In other words, you have to know precisely what it is you’re referring to, so you know precisely how to deal with it.
How they are different comes down to four main points.
Formulaic vs forward looking
Compliance is formulaic. The requirements and regulations that you are meeting in your compliance roles are pretty much set in stone, and your process for ensuring that you are meeting those compliance regulations – though it needs to be frequently checked and updated – is set in stone as well.
On the other hand, risk management is forward looking. In this role you are anticipating and forecasting risks that could occur and impact on your organization. Additionally you are constantly analyzing how much of an impact your organization could weather if these risks did occur (these are known as impact tolerances).
Lock step vs strategic
Managing your compliance risk tends to be a lock step process. In other words, your compliance is almost a checklist of requirements while your management is a highly sophisticated process of ticking the boxes to satisfy that list of requirements.
Alternatively, risk management is a strategic process. It requires that you understand the holistic risks across more than one area in your organization – including compliance – and that you’ve factored those risks into your integrated risk management strategy. It’s designed to support best practice decision-making and strong organizational outcomes by being focused on one or more major risk categories comprehensively across all risk and compliance functions.
Reactive vs proactive
As far as compliance vs risk management goes, compliance tends to be reactive. This means that your response tends to be a reaction to a requirement – whether internal or external – that is put into place. Your management then centers around how to best respond to that particular requirement, but it rarely (if ever) goes beyond that limited scope.
Risk management, on the other hand, is proactive. It looks to answer the question of response while also looking to see how it can add value into the organization generally. For example, a strong risk management process not only looks for risks, but also opportunities that might arise out of those risks. It proactively seeks out ways to transform downsides into upsides for the benefit of the organization.
Isolated vs integrated
Finally, compliance is an isolated set of processes and often not included as part of a broader holistic approach. Risk management is a broader approach. It is an integrated risk approach that creates impactful, value-adding risk management programs and comprehensively executes risk management strategies.
The benefits of this approach is that it shifts the focus from isolated to integrated. And by understanding how risks interact with each other, organizations can be better prepared to face changes and shocks as they arise and create opportunities for growth and greater success in a global marketplace.