Cultural leap needed to adapt business models to rapidly changing regulatory landscape, says Deloitte

Dr Johan Erasmus, director for regulatory and governance at Deloitte Southern Africa.

Managing the growing regulatory burden needs to become a key priority at board and management level, but many companies are not adapting fast enough, says director for regulatory and governance at Deloitte Southern Africa, Dr Johan Erasmus.

Organizations have faced a deluge of onerous regulatory requirements for more than a decade and there is no indication this will let up as the ripples of the 2008/9 financial crisis continue to be felt. Social and media pressures are also beginning to play an increasingly important role in setting regulators’ agendas.

Dr Erasmus says in this environment boards of companies must ensure regulation is a topic on their agendas and management should be asked to report to the board on new and proposed regulatory changes and their plans for responding to them.

“In South Africa, we have a raft of new changes companies need to grapple with,” he says. These range from new oversight bodies in financial services and banking to taxes on cross-border digital transactions and privacy rules via the Protection of Personal Information Act (POPI), which is expected to become effective shortly.

“Larger companies like cellphone companies and banks are already working to ensure compliance with POPI. But it is going to be a massive disaster for smaller to medium and even some larger companies who haven’t don’t anything yet,” says Dr Erasmus.

The higher global and South African regulatory burden means boards and management should seek to have open lines of communication with regulators, legislators, and industry associations in order to discuss proposed rules and the impact they will have on the organization and its business.

“And they should alert regulatory authorities to any unintended consequences or unnecessary burdens that may be created by a proposed rule change,” says Dr Erasmus.

Pay ratios and executive compensation policies are subject to increased scrutiny too, with remuneration committee proposals being challenged more regularly than they have ever been.

Companies are under increased pressure from stakeholders to expand, but also to meet their numerous social, environmental and governance requirements. And in South Africa, transformation remains a high priority as attempts are made to broaden the employment base. “At Deloitte, we saw transformation as a positive and embarked on it early to become the leader in our industry,” says Dr Erasmus.

Companies can expect increased pressure to make their boards more representative as gender diversity, in general, remains low.

Diverse boards are considered to be more effective because different perspectives can result in less risky decision-making and a better representation of stakeholders’ interests. “This suggests that a diversity of thought, not just gender, should be the objective of boards,” says Dr Erasmus.

While South Africa has made strides to improve its gender diversity, pressure is building on companies around the world to do more. According to the GMI Ratings 2013 Women on Boards survey, women held 11% of board seats globally, with South Africa ranking fifth in the world, with 17.9% female representation on the boards of the 59 companies included in the research.

In South Africa, the Women Empowerment and Gender Equality Bill suggested a 50% quota for board membership for women on large companies, but it lapsed in Parliament. However, Dr Erasmus says: “I would not be surprised if they re-introduce it.”

Almost a decade has passed since Norway enacted a law requiring that 40% of board members of publicly listed companies be women. Since then, other jurisdictions have introduced similar requirements, some of which make gender diversity mandatory for public entities while others set gender quotas to which these entities are required to either comply or explain their reasons for not complying.

According to Dr Erasmus further regulatory initiatives companies need to plan for include the Base Erosion and Profit Shifting (BEPS) project by the Organisation for Economic Co-operation and Development which, if adopted by G20 nations and others, will “significantly” change global tax rules. This refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.

“Anti-bribery, anti-corruption, and anti-fraud measures are also an increasing focus of many regulators,” concludes Dr Erasmus.