Corporate compliance as a strategy for business improvement

While compliance is considered by the boards of South African companies as the most significant risk they face in 2007 and beyond, it can serve as an opportunity for business improvement and the creation of competitive advantage.

That’s according to Dr Marna Jackson, Senior Manager, Governance & Sustainability at Ernst & Young, who says internal and external stakeholders expect performance-driven and sustainable compliance initiatives from the businesses in which they have an interest. “Directors are clearly expected to take cognisance of these expectations and establish appropriate structures and processes to ensure that the businesses with which they are entrusted comply with relevant rules and laws.”

She says compliance can be considered as the terms under which an organisation is licensed to operate; some of these terms are transversal and will apply to all businesses, while others are more specific to certain industries.

Jackson notes that Ernst & Young’s Audit Committee Perspectives 2007 Survey has found that boards of directors are aware of this responsibility and its gravity, identifying compliance as the most significant risk they face. “Not living up to this expectation can have deleterious results for a business, even resulting in the closure of companies,” she adds.

As examples, Jackson points to a recent clampdown on businesses which flaunt occupational health and safety legislation in August 2007. “Department of Labour inspectors in Rustenburg in the North West Province have closed down the operations of two construction companies which have failed to comply with the provisions of the Occupational Health and Safety Act and Constructions Regulations,” she relates.

Businesses can also face stiff fines and penalties should they not apprise themselves of and comply with legislation, regulations and standards which apply to their industry; for example, she says construction companies can be fined up to R5-million should they fail to secure environmental clearance prior to commencing construction. “While construction is used as the example, companies in almost every line of business must meet minimum standards while compliance with legislation such as Labour laws applies to any business which employs people,” Jackson adds.

In addition to direct financial costs, significant non-financial costs of non-compliance are possible, such as:
· Jail time. A Newlands-based employer was arrested and imprisoned for failing to comply with the labour laws and for obstructing inspections at his workplace.
· Non-compliance can cost human lives. Recent mine accidents have resulted in the deaths of mineworkers, while a 13% in the number of deaths due to silicosis in 2006 highlights risk to human life.
· The knock-on effect of non-compliance can include damage to brands which could have a negative effect on a company’s share price and decreased staff morale.

Reputational damage
The impact of damage to a company’s good name as a consequence of failure to comply with applicable legislation and regulations may not have an immediate financial impact, but in the medium to long term it can be crippling. Jackson points to an Internet study by researcher Nielsen (October 2007), which has shown that more than 78% of worldwide consumers rate the opinions of other consumers as the most important influence on buying decisions.

“With the information age, disgruntled customers and pressure groups have recourse against companies which they feel have erred, acted unfairly or failed to meet heir obligations. For example, they can easily set up a website where irreparable harm can be done to a brand name,” she explains.

Taking legal action against such an attack is quite ineffectual. “Apart from time and cost issues as well as problems with jurisdiction if a domain name and website is registered and operated in a foreign country, the brand name will already be tainted by the time the case reached the courts,” Jackson points out.

Meanwhile, the effects of low staff morale on incidences of fraud, theft and the increase in accident rates in a company, is a well-known phenomenon.

As a result, prevention is a far better remedy than cure; compliance is a key strategy to ensure avoidance of consumer censure and to maintain a fair and equitable workplace. “The solution is to ensure that the compliance function has evolved from the traditional ‘keep us out of trouble’ approach to a performance-driven one which has business improvement as its goal,” says Jackson.

“This will enable an effective and integrated compliance infrastructure which not only helps detect and prevent non-compliant behaviour, but which can also enhance business performance and drive competitive advantage.”