Understanding GRC Fundamentals

1.0. Definition of GRC

GRC (Governance, Risk Management, and Compliance) is the?term first used to define a set of IT software and its practices in the early 2000s. GRC is about creating a shared understanding of an organization's business objectives and requirements and relating these objectives to an effective and efficient IT systems process. It also exists to manage IT risk and demonstrate compliance to build good corporate governance policies effectively. Before everything, it is essential to understand why a specific business needs IT GRC. With technology and globalization, many companies are moving towards a more digitized environment, and records of transactions in a paper-based format are slowly declining. This means business processes rely more on IT, and the IT system environment is becoming more complex and dynamic. The recent global financial crises and increased market pressure for better regulation have forced businesses to balance IT innovation and growth while managing their associated IT risk and compliance. IT GRC is a significant part of the bigger picture of IT governance and is answering a demand where businesses seek better IT structuring and cost efficiency. Governance is often regarded as an overarching function in which a steering committee or leaders of a business or IT project define strategic direction. A formal governance plan is only effective with risk management, which helps identify the deviation of intended plans and assess alternative solutions to minimize risk's effect. Compliance is needed to ensure that alternative solutions and IT management have met the initial governance plan and do not create further risk than was initially assessed. These changes in GRC activities often require phased reassessments to ensure no loss of compliance standards.

1.1. Importance of GRC

One of the critical parts of governance knowledge is regulatory and legal compliance. It is consistently ranked as the top driver behind the initiation of a GRC program. High-profile regulatory breaches have forced companies in heavily regulated industries to examine how governance, risk, and compliance initiatives within their organizations can help prevent and detect violations. Many of today's companies are concerned about the rising costs of complying with several federal and state laws and regulations. These companies are looking to move beyond a collection of dispersed, non-integrated compliance activities to a more formal and unified approach to reduce costs and provide their board members more confidence that they are managing compliance with applicable laws and regulations. This often comes in the form of a compliance management system, whether it be an extension of an existing enterprise risk management system or a separate initiative. Generally, overall it is recognized that effective GRC can help a company more efficiently and effectively abide by the multitude of laws and regulations that they are subject to while providing a higher level of confidence to stakeholders that the company is governed correctly and managing the risks that can hinder the achievement of their objectives.

1.2. Objectives of GRC

GRC's primary objective is to optimize internal control and effective deployment of resources to the advantage of the organization. It can avoid management discrepancies in areas such as audit fees. By unifying departments and functions such as internal control, finance, IT, and compliance, your organization can build high accountability, ensuring its capability to achieve its objectives. The second objective is to provide transparency in reporting. Internal control has always been a cornerstone of a company or auditor's ability to report on the reliability of the financial reports.?Unifying siloed processes and implementing a common language in risk and control increases financial reporting and disclosure reliability.?The third is to enable companies to better anticipate and react to risk, providing immediate and clear insight into resource allocation and its impact on risk. By understanding that risk is uncertainty that affects the achievement of objectives, GRC can clearly understand what level of risk is being taken to achieve those objectives. This is done by identifying and assessing the risk, defining a risk tolerance level, and linking that risk to current or proposed activities. When the risk is understood, the impact can be measured, and resources can be allocated to mitigate the risk to an acceptable level. The fourth is to reduce the cost of compliance. In today's world, more and more companies are finding it increasingly challenging to juggle the numerous regulatory and industry standards that are being imposed on them. Failure to comply can bring hefty fines, but successful compliance is often costly and inefficient. By strategically managing compliance across all risk and performance-related activities and assessing the performance of compliance itself, a company can lower its compliance costs by proving only the need to comply with specific regulations and the best way to do it. Lastly, the ultimate objective is to become a strategic management tool for sustainable competitive advantage. When GRC is fully implemented and achieved, it becomes part of the fabric of an organization and its culture. An organization will have a clear path of confidence and efficiency towards its objectives backed by a clear understanding of risks that affect them, with the ability to react quickly in adverse conditions, trust in the reliability of their reporting, more cost-effective resource deployment and a clear understanding of compliance requirements and the best way to meet them. This all accumulates to an insurance rate on achieving objectives higher than the current state, for less impediment and resources used.

2.0. Components of GRC

2.1. Governance

Governance in GRC is a system by which an organization is directed and controlled. It's about decision-making and the decision-making processes. A GRC framework will show how the organization can make decisions in its best interests. The governance system will provide a structure for implementing the organization's decisions and instructions and monitoring compliance and performance. If an effective system is in place, the likelihood of errors will decrease. If an issue does come to light, it will be easier to discover the root cause. Corrective action can be taken, and risk management can be implemented effectively. This should then increase shareholder confidence and stakeholder confidence. A high level of responsibility and ethical decision-making is required when using governance in GRC, often sacrificing short-term gains for long-term benefits. This requires a culture and value system to be in place that puts the organization first. This is how employees and management act and hold themselves within the decision-making processes. The intangibles make a difference; employees act on behalf of the organization in mind, and management displays leadership and fosters an environment conducive to the decision-making process. This leads to improved performance, sound accounting, and control with less room for fraudulent financial reporting. GRC promotes ethical and effective governance.

2.2. Risk Management

Risk management:?This is the most critical component from a business perspective. No company can be an island of its own; every company has to work in the market. The market is full of uncertainties. No one knows what the next moment has in store. Once HP clearly defines its risk appetite, it filters the risk associated with the objectives. Then, it tries to avoid the risk beyond its risk appetite spelled out. This risk avoidance is generally done by stopping to take action on those events that carry risk. Suppose it is not possible to avoid the risk. In that case, HP tries to transfer the risk to another party with less exposure to risk using insurance contracts or agreements with third parties, or it may sometimes go for hedging. If the risk is still not mitigated, HP tries to manage risk at an acceptable level by identifying and implementing actions to reduce the risk's probability and impact. An action plan is implemented, and the cost of action is compared with the cost of risk occurrence. If the price is higher, HP monitors the situation until the cost of action becomes less than the cost of risk occurrence and then implements the action. High probability, high impact risks are monitored continuously, and only in the last case scenario, i.e., with the adverse change in the event, is action taken to avoid the impact. If monitoring reveals that the event may not occur, as well as the?probability and impact, the action plan may sometimes be terminated. Step-by-step monitoring of the risks and mitigating them to an acceptable level helps assure stakeholders that company objectives will be achieved and also helps prevent any unanticipated failures in the business. This will call for periodic repeats of the risk assessment process. Failure to manage risk may lead to the failure of the business. Therefore, GRC and risk management, being an integral part of management, is the way to business sustainability for HP. Failure to manage risk may lead to the failure of the business. Therefore, GRC and risk management, being an integral part of management, is the way to business sustainability for HP.

2.3. Compliance

From specific laws and regulations, industry standards, and internal policies and processes.?Failure to meet these requirements can result in?fines, penalties, negative publicity, and loss of business. On the other hand, compliance provides a company with a clear-cut advantage. By instituting formal compliance programs, a company can identify its duties and responsibilities, effectively communicate these duties to employees, monitor performance, and take quick remedial action if their obligations are unmet. In so doing, a company can prevent legal or regulatory breaches. If one does occur, taking steps to avoid it can mitigate enforcement actions and penalties. A company that can represent that it has effective compliance programs can also reduce fines and penalties imposed for breaches. Compliance programs can also enhance a company's image by generating goodwill and adding to its competitive edge. As can be seen, the desire to avoid these negative consequences and attain these clear benefits gives rise to specific requirements or expectations. This is the essence of regulations, requirements, or duties a company must observe and fulfill. Step 1 in understanding compliance is identifying and understanding these requirements that affect an organization. Such requirements will come from various sources and change from time to time. A particular requirement may come from a law or regulation that affects only certain companies or an entire industry. Other requirements are sets of industry standards or locally and globally internally developed policies and processes to ensure the business is conducted in a particular way.

3.0. Benefits of Implementing GRC

They have improved risk management. Sixty percent of respondents say the primary goal of their GRC initiative is to improve risk management, and thirty percent rate their company's current capability in that area as reasonably low. Asked how their GRC approach can lead to improved risk management, respondents cite a broad range of factors - including better articulation and dissemination of risk management practices throughout the organization, earlier identification of risk, and a better understanding of risk exposures. "This gives us a framework to prioritize our spending in identifying and mitigating the risks that can have the highest impact on the company," says one executive.

Enhanced decision-making. Sixty-four percent of respondents said adopting a GRC approach can help support better strategic decision-making and enable companies to act on a more accurate risk assessment. Given the complex interplay of risk and revenue potential, nearly half of respondents say it takes more work to prioritize and make trade-offs on?strategic decisions (such as entering new markets or?lines of business). Only thirty-four percent express confidence in assessing and understanding the risk/reward trade-offs on such decisions.

Consistent with the emphasis on greater integration among risk and compliance activities, executives in our survey identified a range of potential benefits from a GRC approach. The survey results revealed that a GRC approach?can help companies make better strategic decisions, improve?risk management, and increase operational effectiveness - often leading to cost savings.?According to the survey results, the potential benefits?associated with a GRC approach are:

3.1. Enhanced Decision-making

The ultimate goal of any decision-making process is to arrive at a sound conclusion. 'Sound' in this context means both a pragmatically viable conclusion and sound in that once implemented, it does not have an adverse knock-on effect. There are several strategies to arrive at a sound decision. For example, a decision support system is designed to help a group or individual arrive at a decision by structuring and often simplifying the decision, usually resulting in the best course of action. Another way to improve decision-making is to implement more rigorous monitoring and review of decisions, allowing for systems to be put in place that rate the success of decisions and their implementation. This provides a feedback loop that can guide future decision-making by indicating what went wrong with bad choices. GRC can aid decision-making in several ways.

For a start, the unification of governance, risk, and compliance functions means that factors of each process can be more easily taken into account when making decisions. For example, the compliance function will provide a clearer view of regulatory obligations and inform decision-makers. This can be set against risk management functions indicating the risk posed by potential decisions and their impact on the organization. The more transparent and readily available information from GRC functions will be contained in further quality information provided by business intelligence and reporting functions. This is a marked improvement from pre-GRC decision-making, where information can be incomplete, and decisions are often entirely subjective. Buoyed by more precise information, GRC can also take decision-making down a more systemic route. This was already a growing trend in management. Still, it?was clear from "decisions" taken by banks and other corporations that led to the financial crisis that a more systemic, holistic view of the impact of decisions was needed. GRC can help by taking decisions and running them through simulation and scenario planning functions, allowing them to weigh potential decisions and their effects on risk and compliance positioning. This leads decision-makers towards informed choices with a firm idea of possible risks and how to mitigate them.

3.2. Improved Risk Mitigation

A business's risk management strategy is to manage all aspects of its financial exposures to minimize the potential for economic loss. Essentially, the company looks to take on no unplanned losses, whether it is an increase in costs or a reduction in revenue due to market risk. This goal can also be related to the goal of an ERP system, with GRC migrating from ERP to help fulfill this goal. GRC seeks to help achieve this by providing better identification, assessment, response, monitoring, and reporting risks to minimize them and formulate organizational reactions to events detrimental to the?company's success. Improved risk mitigation is the top benefit of GRC, as seen above. Eminence in each of the steps would lead to the desired effects. Overall risk can be reduced, resulting in potential savings for a company, an enhanced ability to anticipate events that can affect the company, and a systematic approach to improve response. This can build up a clear direction and agility in decision-making, enhancing?decision-making confidence.

3.3. Increased Compliance Efficiency

Increased compliance efficiency – why it's critical to pull centralized compliance activities out of business units and siloed operations and establish a corporate-wide compliance function. This is a direct effect of previous transformation steps – by consolidating information and enabling transparent reporting, the organization will require less time and money to manage compliance. The recent avalanche of new regulations represents a shift in the global business and regulatory climate that could lead to a new wave of compliance failures. Companies that pursue enhanced risk intelligence and dynamic governance capabilities will not be immune from legal and regulatory consequences of risk management failures. However, the ability to adapt and align risk management and compliance activities in response to changing risk and regulatory events will put them in a much stronger position. GRC is about 'doing the right things' and 'doing things the right way.'??If GRC is not improving operational effectiveness and efficiency,??it's not doing its job.?Finally, the option of standard and consistent processes for GRC activities represents the Holy Grail for compliance efficiency – this has been covered in Part 2 and the rest of this paper.

3.4. Strengthened Organizational Resilience

Identifying the organization's resiliency is an integral part of risk management and organizational compliance. Considering the inevitability of risks materializing and non-compliance penalties, the impact on the organization has to be minimal. It should be able to bounce back to standard functionality. Unfortunately, this is much easier said than done. Only some risk or compliance activities have a clear-cut contingency plan and even those that do often require an overhaul of one or more business processes.?These measures are?not fully?effective due to oversight or lack of resources, and many risks can damage the organization without being detected or materializing on an issue.?This is where a GRC comes in as an all-encompassing preventative measure to insulate and protect the enterprise's core.

4.0. Best Practices for GRC Implementation

Integrating GRC into Business Processes GRC activities are accomplished by pursuing objectives and changes in risk and performance in any value chain. An activity-activity-based process and ownership are essential to bridge GRC activities into decision decision-making. They should utilize process, risk management, and control self-assessments to align and prioritize GRC activities in objective and risk criticality. GRC ownership of activities should be defined and reflected in resource and risk accountability measures. High-impact and high-probability risk events should have clear risk ownership and response strategies to ensure rapid response and decision-making.?The impact of changes in laws and regulations?or the internal control environment should be assessed to ensure required control and policy measures changes. Process changes in objectives or risks should have a defined impact analysis on the required control and risk treatment changes.?Utilizing?external consulting or coaching in specific methods and technologies for these activities is often practical.

Establishing a GRC Framework Despite common perception, a GRC oversight framework is not the starting point for GRC implementation. Still, it comes?out of the gate with a strategic view to pull these activities under a?standard?view to enable quality decision-making with effective resource utilization. There should be a statement of GRC objectives and desired outcomes, an inventory and assessment of current and required GRC activities and resources, and the design of a strategy and roadmap to close GRC capability gaps.

Best practices for implementation could?be generalized?as a step-by-step approach. Still, they?are often best described in?the context of?an iterative life cycle process, with feedback from one step providing input for improvements in future steps.?Critical?success factors include demonstrating business value for each activity and establishing ownership and accountability for GRC activities and desired outcomes.

4.1. Establishing a GRC Framework

Identifying the methods and tools is the last step in establishing the GRC framework. Methods are the techniques and practices used to do the GRC work. This involves adopting best practices and using innovative and cost-effective solutions. Tools are the enablers for methods, providing automation and efficiency in the GRC activities. Choosing the right mix of methods and tools is critical to the success of GRC. It should be ensured that methods and tools are apt for the GRC area, have low TCO and maintenance, and do not burden existing resources. Please always start with a pilot for a tool and make sure it's successful before a full-scale implementation.

After defining the strategy and objectives, the next step is to create a roadmap. The roadmap describes the path and the timeline for GRC, how the work will be done, and the sequence of activities. A roadmap enables better planning and resource utilization for GRC. It provides a holistic view of all the activities and helps prioritize and manage work. A roadmap should be simple and easy to understand. It should be simple enough to confuse people and flexible enough to accommodate business or IT environment changes. While creating the roadmap, one?must?prioritize the GRC areas based on the criticality and risk involved. The sequence of activities should always start with the policy and compliance issues, moving on to risk, and finally to the assurance activities.

Next, GRC should set clear and achievable long-term and short-term objectives. These objectives will define the success criteria for GRC and help align the GRC activities with the business and IT objectives. The goals should be realistic and add value to the existing scenario. For example, they are?implementing risk management for all business-critical applications in 2 years. Objectives will also help define the scope of GRC and give a clear direction to the implementation.

The first task in this direction is defining the GRC strategy, which involves answering questions like why we want to GRC, what the significant drivers for GRC are, how GRC will support the overall business strategy, and what the desired outcome will be. While defining the plan, one also needs to assess the current state of GRC in the organization, i.e., what the organization is doing and should be doing for GRC. This assessment will be the basis for gap identification and will define the future path for GRC.

Establishing a GRC framework is the first step in the whole process. It is the most critical phase and holds the highest weight. A solid and robust framework ensures that the GRC initiatives are implemented efficiently and effectively in the relevant areas, creating synergy and reducing redundancies. It involves defining the strategy and the approach towards GRC, setting the objectives, creating a roadmap, and identifying the methods and tools to be used.

4.2. Integrating GRC into Business Processes

The most effective integration strategies vary a lot from organization to organization. However, in general, there are several elements to consider. The first is to ensure that the GRC structure maps to the organization's business structure. This will facilitate better governance and risk management and ensure that the compliance activities reduce, rather than add to, the overall cost of control. A mapping matrix between business and GRC activities can be a beneficial tool in achieving this. Another essential consideration is?deploying?GRC functionality to end users within the context of their everyday work. For example, they enable a business unit manager to run a risk assessment for their business unit or generate a compliance status report for their team. This often involves some level of GRC self-assessment by the business managers but creates a greater sense of ownership for risk and compliance issues and allows GRC expertise to be more effectively leveraged across the organization.

In some cases, it also involves automating or reengineering business processes to embed GRC controls within them. An example of such a control might be the automated generation of a segregation of duties conflict report for a given user when a new access role is assigned. This type of integration requires close collaboration between the GRC function and the business process owners.

4.3. Continuous Monitoring and Evaluation

Monitoring and assessing corporate culture and ethical climate are critical governance monitoring and evaluation aspects. The evaluation committee must engage in ongoing dialogue with management on the company's culture and ethics. Formal methods such as employee surveys or interviews and informal observation can be used to assess the company culture. Statistical analyses of data from surveys and interviews can be used to compare the company's culture to the desired state and identify areas of strength and weakness. This data can then be used to identify specific initiatives to improve the company culture, assess the impact of those initiatives, and compare the company culture over time.

To ensure these goals for governance, the board and senior management may find it helpful to establish a governance evaluation committee to implement a monitoring and evaluation system. Establishing clear objectives and key indicators of the company goals and performance is an initial step in the monitoring and evaluation. Using both internal and external performance measures and benchmarks will allow the company to assess its governance health and performance. Board members should require management to report to them periodically on the company's governance performance and the objectives and key indicators. The board's performance should also be assessed. These assessments may be implemented through informal discussions, surveys, or third-party evaluations. Data from performance assessments should be used to make informed decisions on improving areas of poor performance and building on areas of strength.

4.4. Training and Awareness Programs

Training may be targeted to the entire organization, particular business units, or specific roles and functions, and programs should be tailored to the relevant level of detail and the particular learning needs at each level. E-learning can be cost-effective and flexible, and various other methods may be employed, such as classroom training, workshops, or coaching. It is essential to create an open environment in which employees feel free to ask questions and admit their lack of understanding, as much tacit knowledge is often involved in GRC work, and ambiguity can lead to misinterpretation.

Some of the primary purposes of training in GRC are as follows: - To familiarize employees with the concepts of GRC and the reasons for the changes being made. - To inform employees about how GRC will change the way they do their jobs and the specific changes to be made. - To provide employees with the knowledge and tools needed to fulfill their GRC responsibilities. For example, training for a risk assessment coordinator in how to conduct an enterprise-wide risk assessment. - To ensure that change is not only on the surface but that employees internalize new methods and expectations.

Training and awareness programs the organization provides are essential elements of effective GRC. The level of understanding about GRC in general and the specific methods and responsibilities outlined in the framework will significantly influence the effectiveness of its implementation. GRC will represent a new way of thinking about risk and compliance for most employees, which will entail significant changes to individual job responsibilities. As with any organization-wide change, effective communication, and targeted training are essential to help employees understand what is expected of them and to build the skills needed to meet those expectations.