What is GRC? Governance, risk, and compliance in detail
The first scholarly research on governance, risk, and compliance defined GRC as “the integrated collection of capabilities that enable an organization to reliably achieve objectives, address uncertainty, and act with integrity.” Since then, digital technologies and data volumes have exploded, but core business goals and values remain.
GRC meaning and definition
In simple terms, governance, risk, and compliance, or GRC, is the strategy and structure that keeps an organization secure and on track. Corporate governance, like the governance of a city or country, defines the principles and agreements that people live by – and provides the controls and support needed to achieve overall goals. Risk management identifies threats while introducing processes to protect against them. And finally, compliance management ensures that the organization abides by regulations, follows proper accounting practices, and operates ethically.
GRC is the strategy and structure that keeps an organization secure and on track.
Think of governance, risk management, and compliance as the three legs of a tripod that keep an organization in balance:
1. Corporate governance
The G in GRC stands for governance. More than just a rule book, governance helps connect organizational silos to ensure that activities across the company align with strategic goals. It supports a coordinated, productive workplace where all stakeholders – internal and external – understand how their contributions and interests fit in with those of others. It helps guard against redundancies, contradictory initiatives, and unnecessary costs. With a focus on resource management and accountability, it offers the checks and balances needed to “keep the house in order.” Its goal is to ensure principled operations, adherence to corporate values, and ethical business practices. Governance is also a mechanism for reducing risk and ensuring compliance by validating and managing information, its sources, and handling.
2. Risk management and risk mitigation
The R in GRC stands for risk. Anything that could potentially lead to a negative outcome in any aspect of the business presents a risk. Some risks – like a pandemic – are beyond anyone’s control. Others come from within and are due to operational, procedural, or technical weaknesses. Still others are due to external threats such as cybersecurity attacks and fraud.
Technology plays a vital role in the early detection of risk – but enterprise risk management requires more than technology. The organization’s values, processes, and commitment are vital to the way that it manages risk. A recent article in Forbes supports the growing need and desire for enterprise risk management (ERM) strategies that use “proactive, integrated solutions encompassing people, data, and infrastructure.”
Business risks fall into five basic categories, all or any of which an organization’s ERM and GRC strategies must be prepared to anticipate, mitigate, and, most importantly, prevent.
- Performance or operational risk has the broadest set of boundaries and the greatest potential variety. It comes from failures (accidental or intentional) across the structure, systems, people, products, or processes involved in any aspect of business operations.
- Compliance risk results from violations of laws, regulations, codes of conduct, or established standards of practice within an industry or organization.
- IT risk arises from the failure or misuse of IT, leading to loss or negative business outcomes. This can range from accidental IT failures to intentional fraud, hacking, or cyberattacks.
- Financial risk as a category of business risk means losing money on an investment or business venture. This may include credit risk or liquidity risk – or be combined with an operational risk such as fraud or mismanagement.
- Reputational risk can result from failures in any of the above four categories that lead to a weakened public perception of the business. Reputational risk offers less of a quantifiable loss but, nonetheless, is one of the most potentially destructive to any company or brand.
3. Compliance management
The C in GRC stands for compliance. In many cases, regulatory compliance failures can lead to enormous financial loss and severe reputational damage. In 2019, data-breach fines alone reached an all-time high, with the U.S. International Trade Commission publishing that in 2019, EU-based businesses had spent up to 4% of their annual global revenue on GDPR fines. And billions on top of that are spent every year in response to other legal and regulatory compliance challenges.
However, while it is complex and challenging to maintain, compliance is a rules-based practice and is, therefore, one of the more preventable risks if managed well. Intelligent technologies and modern GRC software solutions are at the fore when it comes to data management, predictive analytics, and real-time insights that are needed to maintain a robust and up-to-date compliance strategy.
What is a GRC framework and why is it important?
A GRC framework integrates firm-wide systems and processes to oversee all aspects of governance, enterprise risk management, and compliance. It provides the structured approach necessary to align an organization’s business strategy with its information technology – so that it can effectively manage risk and meet compliance requirements. GRC controls how the organization operates – as opposed to what it does. So it’s not about manufacturing or retail or professional services but about the way the organization works to fulfill its mission, in whatever field it operates – doing business ethically, prudently, and responsibly.
Why is a sound GRC framework more important than ever? Because today’s businesses are facing unprecedented complexities. In their Q3, 2020 Global Business Risk Report, Dun and Bradstreet ranks the Global Business Impact risk score at a record high. Furthermore, a recent study predicts that by 2025, the global cost of cybersecurity crime and data breaches will exceed US$10 trillion – more than triple the 2015 number. In response to these modern risks, there has also been a commensurate rise in global regulatory bodies. The Financer reports there are currently over 250 such bodies in the banking sector alone, leading to a change in banking regulations about every 12 minutes.
Who is responsible for GRC?
The responsibility for establishing and maintaining GRC plans and processes usually falls to the top financial and compliance executives (CFO and CCO) and their teams – with support from IT, HR, and operational team leaders across the organization. However, it’s one thing to devise an excellent GRC strategy; for it to be effective, it must be successfully embedded and integrated into the daily work activities across the entire business.
The best GRC and risk management strategies take a people-first approach so that all employees have a vested interest in helping to ensure the sustainability of the business. Reporting on the importance of preparing workforces for GRC technologies and digital transformation, a Wall Street Journal article notes: “As organizations prepare and work through a digital transformation, it’s vital to create a culture in which everyone is tech-savvy, and risk is everyone’s business.”
GRC and intelligent technology solutions
Artificial Intelligence (AI) technologies – which include machine learning, advanced or augmented analytics, and predictive analytics – are increasingly being used to transform risk management and regulatory technologies (RegTech). The ability to process, analyze, and learn from large, fast-changing data sets gives GRC professionals the ability to augment their human skills, use real-time analytical insights, and better visualize their immediate situation across multiple scenarios.
Robotic process automation (RPA) is a crucial tool in building more robust and effective compliance programs. RPA supports continuous control monitoring as well as full sample-auditing. This makes it easier to detect risks and anomalies. RPA tools also help to automate and streamline the repetitive and often voluminous administrative tasks associated with ERM and compliance. Blockchain adds additional power to GRC systems due to the security and immutability of its transactional records. Acting as a “single source of truth,” blockchain also minimizes risk in more hands-on areas of the business by ensuring accurate provenance of materials and goods – and their payment records – from anywhere in the world. As risk and compliance challenges grow more complex, intelligent technologies deliver the confidence and reliability to manage whatever the future brings.
The modern risk landscape is continually shifting and evolving. The pandemic served as a sharp reminder that from nations to corporations to individuals, we can all be leveled by the forces of nature. And as cloud solutions and intelligent technologies continue to evolve, cybercrime, data breaches, and fraud become an increasingly complex threat.
In this current environment of heightened risk and uncertainty, businesses need to leverage – and simplify – every tool possible to anticipate and manage risk. Achieving business objectives and maintaining strong compliance and governance standards is a growing challenge for every organization. The best businesses meet these needs with a people-first approach and an ongoing commitment to training and supporting their teams – from the top down – to leverage new technologies and innovate responsive GRC strategies.
SAP Insights Newsletter
Gain key insights by subscribing to our newsletter.