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Grappling with governance

Beyond Play: A down-to-earth approach to governance, risk and compliance, by Dawn Pretorius

THE author has spent most of her working life in the practice of governance, risk, and compliance in large organisations. This book is a guide for business leaders and those charged with ensuring that they manage their businesses ethically, carefully and lawfully.

Many group governance, risk management and compliance together because they act as the practice of oversight on the functioning of business.

Every business needs to attend to risk, and mitigating risk is what makes business challenging. I doubt any business could ignore risk: for the farmer it was crop failure, for the sailor it was pirates and weather.

The forms of risk have changed as society has evolved. During the building of New York's skyscrapers, construction workers crossed beams tens of stories high without harnesses. Society has evolved and there is greater care for staff, customers and shareholders. Companies are now required to take more responsibility for their actions, and many more risks have become legal responsibilities.

The result is that risk management must now be high on any corporate agenda. Risk management is “a set of processes through which management identifies, accesses, and chooses how to respond to risk”.

Business managers need to be better informed of the responsibilities they have and how to handle them, which is why Pretorius’ book is so useful.

Of course, addressing risk well and timeously can be a source of growth and opportunity.

“Compliance” in a business context refers to adherence to the laws of the country of operation in general terms, and to those that apply to one’s specific sector.

Increasing care leads to compliance

Compliance is the response of an increasingly caring society that gave greater prominence to the welfare (in the broadest sense), of their people.

Early in the 20th century public safety agencies began to emerge to address responsibilities business should shoulder. Agencies ranged from those in the financial arena all the way through to those in food production - all to ensure the safety of the public.

The meat-packing industry is regulated to ensure that what went into your beef pattie was in fact beef and not pork, horse meat, or a host of other substitutes. The difficulty of compliance and the consequences of violation are evident 100 years later. Compliance itself poses a risk!

Compliance extends to the manner in which goods are sold as well. The Foreign Corrupt Practices Act came into law in 1977, when a number of US companies were found to be agreeing to pay bribes to foreign officials to secure contracts. Companies pay a heavy price for non-compliance so that the highest authorities of the company, the board of directors, has the responsibility to attend to compliance if for no other reason than the gravity of consequences.

Banks that wish to work within the global banking system have to comply with the restriction placed on who they can service. Credit Suisse paid $536m to settle charges of illegal transactions with countries against whom there are international sanctions. Lloyds TSB Bank paid $350m for their violations, Barclays $298m, and ING Bank $619m.

In South Africa non-compliance with legal restrictions on anti-competitive behaviour has cost many companies, in many industries, substantial fines. No company can afford to take a cavalier approach to compliance. A similar caution can be extended to compliance with staff-related issues.

Corporate governance is the requirement that the company conducts business as a good corporate citizen. Governance involves finding a balance between the economic and social goals of the company, and finding a balance between individual and communal goals. Good governance is the alignment of the interests of individuals, corporations, and society. It requires a set of processes and policies for directing, administering and controlling a company.

Pretorius notes that companies are a key component of modern society and are more present in the lives of citizens than governments and other organisations. As such, a company’s conduct needs to be exemplary to ensure a good society.

When companies fail to adhere to good governance the consequences can be as severe as those caused by Enron in energy, Lehman Brothers in finance, and Parmalat in dairy and food.

South Africa has seen the effect of the breakdown of corporate governance and its consequences with the collapse of the seventh-largest bank, Saambou. LeisureNet (Health & Racquet Clubs), Barry Tannenbaum’s huge fraud scheme as well as others are well-known examples.

“Markets exist by the grace of investors, and it is today’s more empowered investors who will determine which companies and which markets will stand the test of time and endure the weight of greater competition,” Pretorius suggests.

There are many for whom governance, compliance and risk management is not top of mind, as it should be. As you choose to do business with companies with good governance, compliance and risk processes, so do others. McKinsey Consulting Group found that investors in emerging market countries would pay a premium of 23% to 28% for shares in a company with “good” corporate governance.

You will find Pretorius’ book a good place to start as you grapple with governance, risk and compliance issues.

Readability:  Light ---+- Serious
Insights:      High --+-- Low
Practical:      High +---- Low

*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.

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