What You Need to Know About Effective Compliance Risk Management

By: Tayla Carpenter - Guest Contributor on September 29, 2023
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Small business compliance leaders have to perform a delicate balancing act: reducing risk without limiting their ability to pursue strategy and achieve objectives. This is especially true when it comes to legal and compliance risk because these risk events can bring operations to a halt or damage your reputation. But with effective risk management, you can simultaneously mitigate risk and maximize growth. With a thoughtful approach to risk analysis, your risk events become predictable, and you can engineer an effective risk reduction strategy that prevents legal and compliance issues ahead of time.

Shrinking your legal and compliance risk can be a challenge, especially when it comes to assessing, monitoring, mitigating, and reporting on risk in a timely manner. This article helps you address these challenges by outlining the key components of a compliance risk management program, its benefits, and how to prepare your business for an effective risk management system.

What is effective compliance risk management?

Effective compliance risk management involves identifying, assessing, monitoring, and mitigating risks associated with falling out of legal compliance. An effective system also includes assessing and mitigating the fallout associated with non-compliance, such as the financial and reputational results of an event.

For a small-to-midsize business (SMB) stakeholder, compliance risk management is crucial because it gives you a legal and operational framework you can work within. This frees you up to focus on growing your business.

With the right program, you address a key business problem: holding back from making decisions because you’re afraid of running afoul of compliance guidelines.

What are the key components of an effective compliance risk management process?

These components break down into three elements: identifying and assessing risk, mitigating and monitoring it, and reporting and coordinating efforts around risk.

When used in combination, the components of a compliance risk management process create awareness around risk, as well as position you to address it using a team-wide approach.

Risk identification and assessment

Identifying and assessing risk involves asking questions about compliance issues on the horizon and how to track new regulations. A risk identification and assessment system also includes methods for pinpointing best practices that surface the most relevant risks. These best practices apply to both your internal team and third-party vendors you partner with.

Risk mitigation and monitoring

Risk mitigation and monitoring focuses on managing risk without limiting your business opportunities. To strike an effective balance, you can think about whether risk mitigation is embedded in your company's workflows. It's also valuable to check if your compliance risks push the bounds of your company's general risk appetite.

Risk reporting and coordination

Sometimes, reporting risk is mandatory because of legal requirements. In other situations, your company may have internal governance requirements simply for the sake of being transparent with stakeholders.

Some key considerations when setting up a reporting and coordination system include [1]:

  • When and how to escalate compliance risk situations to senior management

  • Reporting on compliance risks to stakeholders, as well as effectively presenting them

  • Creating effective narratives that demonstrate the value of compliance risk management

  • Coordinating legal and compliance risk reporting across departments so we tell a single, cohesive story

What are the benefits of effective compliance risk management?

When you get your compliance risk management system up and running, you can increase your growth potential and, at the same time, boost the perception of your company among stakeholders. For example, an effective system can:

Increase stakeholder trust

Stakeholders know that you take their investment seriously enough to systematically reduce the risk of a compliance issue. For example, because you reduce the chances of getting hit with a fine for improper data stewardship, you safeguard both the finances and reputation of your company, which stakeholders are invested in.

Support business growth

Your business can grow more freely when you have a compliance risk management system in place because you know the limits you have to work within.

For instance, suppose you want to open a new office in Los Angeles. If you have a compliance risk management system in place, it will surface the data privacy laws as outlined in the California Consumer Privacy Act (CCPA). Your compliance management system can also provide you with direction regarding how to implement data security measures in line with California’s unique requirements.

Improve corporate decision-making

Decisions made at the corporate level can be more effective when those giving the go-ahead know their plan won’t create compliance issues.

To illustrate, suppose your business’s leaders are creating next fiscal year’s budget. The IT team has floated an idea to revamp your digital security system by installing a firewall. However, this would be expensive, especially when you consider the cost of maintenance and configuration.

Your compliance risks management team then explains that for the company to be in line with the Payment Card Industry Data Security Standard (PCI DSS), you need to have a firewall that limits inbound and outbound traffic in your cardholder data environment. [2] This makes the decision a no-brainer.

Prepare your business for effective compliance risk management

Getting your business ready for a compliance risk management system involves setting up processes and predicting potential roadblocks, especially when it comes to risk appetite. For instance, you can:

  • Create processes to identify the requirements for risk strategy building. This could involve allocating financial and human resources, as well as making sure those involved have the time they need to focus on formulating a strategy.

  • Set guidance of risk appetite for key objectives. To guide risk appetite, you may have to develop a system to quantify the risk-reward ratio for each opportunity. For instance, you could set a rule regarding the ratio of reward to potential loss. If you stand to make three times more than you might lose from a new venture, it gets approved.

  • Streamline processes and coordinate with other functions. The risk assessment process should be uniform and work for various departments. This way, everyone experiences a consistent, transparent risk evaluation process.


As we’ve outlined above, you can set up a system that mitigates risk without impeding business growth. If your compliance risk mitigation system has the key components, i.e., identification, assessment, mitigation, monitoring, reporting, and coordination, you’re in a powerful position to systematically assess and reduce risk. 

Next, you should investigate your options for digital risk management solutions to see which ones have the features and price points to fit your needs. Here are some links to help you get started: