Compliance and ethics each influence how business entities function on a day to day basis. One is a mandatory set of operational guidelines, and the other refers to how an entity chooses to behave.

A business needs both ethics and compliance to function effectively. Let’s break down the differences between the two and offer some strategies on how to abide by them both.

What is the difference between compliance and ethics?

Before we outline strategies for how to remain in compliance while also following ethical principles, it’s important to define both compliance and ethics. They do have their similarities, but there are also key differences between them.

Corporate compliance refers to the act of complying with a series of laws, by-laws, rules, and policies that regulate how entities operate. Many businesses have positions akin to Chief Compliance Officers, who oversee compliance programs that include ongoing training and communications for all entity employees.

Meanwhile, ethics revolves around moral principles rather than legal mandates. Some companies even create business ethics standards that outline morally acceptable and unacceptable behaviors when conducting business.

Are there similarities between ethics and compliance?

Compliance programs are enacted based upon jurisdictional laws established by regulators in a geographical area where an entity operates. However, some would argue that company culture is where compliance begins.

Company culture is developed using a shared philosophy of ethics, values, missions, and visions. These principles can instill a recognition that compliance is not only a legal requirement, but also the morally correct thing to do as an organization. In that sense, compliance and ethics do complement each other and inform how entities continue to operate.

What role does corporate governance play in compliance?

Corporate governance is another integral piece of the Governance, Risk Management, and Compliance (GRC) program that informs legal entity management. Corporate governance refers to an entity’s internal checks and balances that help the business remain compliant.

Corporate governance is more beneficial than simply supporting compliance. Analyses of S&P 500 corporations found that companies with strong corporate governance policies and procedures outperformed those with weaker governance by up to 15%.

Therefore, it can be argued that implementing effective corporate governance policies supports compliance and ethics, but it can also influence growth for the business.

What are the effects of non-compliance for an entity?

Failing to implement strong governance policies risks placing your entity in a position of non-compliance. If your business breaks the law or fails to observe federal, provincial, or state regulations, you risk subjecting your entity to the penalties of non-compliance.

What’s an example of non-compliance? Fiscal mismanagement or fraud are prime examples of white collar crime and non-compliant activities. Often, financial fraud occurs due to a lack of organizational structure and governance within an entity. Lacking the authoritative executives and directors to instill those important checks and balances, unethical and illegal practices are free to occur.

How to establish compliance and ethics within your entity

So, what’s the best way to implement corporate compliance and ethics throughout your organization? Many businesses use legal entity management software to establish their compliance programs and implement effective corporate governance. These programs, by extension, reinforce company culture that adheres to moral and ethical principles.

Using entity management software, you can create the Articles of Incorporation for your company. Articles of Incorporation are legally binding documents that must be created when launching a new entity or a subsidiary under that corporate umbrella. The Articles of Incorporation are then shared with the proper regulators to officially launch your business.

Additionally, you can use entity management software to establish organizational charts that document the hierarchy of executive authority. Your legal and compliance teams can use these organization charts to ensure proper oversight and signatory approval on any pressing business matters are enacted to remain in compliance. Regulators can also use copies of these organization charts to speak with the named executives in the event of an audit or other regulatory procedure.

The best part of entity management software is that it streamlines the entire compliance process for your entire team. The platform is intuitive and designed with pre-built templates of crucial corporate documents. Your team can use these templates to construct corporate compliance documents in a fraction of the time it would take to create these documents outside the platform.

In summary, entity management software helps your team work smarter, faster, and towards the goal of fulfilling your business compliance and ethics requirements.