Time for South African firms to embrace compliance, governance and regulation

It is important to understand that regulation is often a proxy for both risk mitigation and common sense business practice, according to Michael Judin, Senior Partner at Goldman Judin. One example is the Financial Advisory and Intermediary Services (FAIS) Act, which provides effective guidelines for risk and financial advisers in interacting with their clients. FAIS and its accompanying codes merely reaffirm what the ethical adviser should do under the common law. One way to encourage compliance is to adopt a soft touch approach. Judin said that rather than foisting compliance, governance and regulation upon firms by way of codes, reporting requirements and a deluge of documentation, the regulators should focus on changing the mindset of organisations. As soon as firms realise the benefit of seeking out and embracing regulation, there is no looking back. Firms that are blind to regulation are also blind to risk. A number of interesting studies have been conducted to reveal three possible reasons for the so-called ‘risk blindness’ phenomenon. The first reason is that reward obscures risk—in that firms have an amazing ability to turn a blind eye to risk in favour of tangible reward.hideThe second reason—sunk costs—relates to our aversion to drawing the proverbial ‘line in the sand’ when losses are involved. We simply cannot accept the losses that are already incurred and prefer to hold on for a better end result, regardless of how unlikely or risky that result may be. Thirdly, we must consider risk aversion or the inability to consider what the future holds due to an inability to measure, predict or understand it. In an article posted to the Harvard Business Review blog network, titled Three reasons you underestimate risk, Srini Pillay concludes: “Risk blindness is something we are all prone to, and by asking three simple questions of how winning, aversion to loss, and paralysis in the face of the unknown impact our decision-making, we may be able to prevent much larger losses in the longer term.” Despite concerns over how South Africa deals with regulation, we can conclude that risk management is taken very seriously, by both the public and private sectors. Risk and regulation is sensibly accommodated in the private sector space thanks to the recently updated Companies Act and the King Report on Corporate Governance. King III—which was introduced in 2009—provides a summary of best practices in corporate governance that applies to all of South Africa’s listed companies. Work is already underway on an enhanced version of the King III document with the next instalment, unsurprisingly touted as King IV, being drafted over the next 18 to 24 months with extensive public participation. Why King IV? “We realised the absolute necessity to update the report not only to deal with new issues such as integrated reporting but also to better deal with the issue of risk,” said Judin. “One of the greatest risks we have identified is that very few executives have a full grasp of information technology (IT) so when we set about writing King IV the all-pervasive issue of IT will be dealt with extensively.” King I and King II contained very little information about IT; but by King III it was clear that risk—and more specifically risk related to technology—were critical concepts. “South Africa really needs to take a very serious look at our attitude towards risk and regulation,” concluded Judin. “If we want to become a member of the community of nations, to attract foreign direct investment, and to ensure that we become the great nation we have the potential to be then we have to change our mindset towards compliance, governance and regulation.”

Time for South African firms to embrace compliance, governance and regulation

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