Economy

CEOs’ woes as regulations cause headache

BDRegulation

Increasing regulatory requirements have toppled emerging or disruptive technology. PHOTO | SHUTTERSTOCK

Increasing regulatory requirements have toppled emerging or disruptive technology to become the biggest risk keeping chief executives of large companies awake, a survey shows.

Nearly a quarter of business leaders in East Africa now see regulatory risk as the greatest threat to the growth of the firms they run in the next three years, findings of the 2023 KPMG East Africa CEO Outlook suggest.

The number of CEOs worried about the risk posed by growing regulations on revenues of companies has more than doubled over 12 months, given that a relatively modest 10 percent of the corporate leaders saw it as a major threat last year.

Read: How regulatory deficit inhibits Kenya's fintech space growth

The findings — based on feedback from 50 CEOs in Kenya, Tanzania, Uganda, Rwanda and Ethiopia — suggest that the share of CEOs looking at emerging technology as posing the biggest risk to growth prospects has dropped to six percent from 16 percent in 2022.

Emerging and/or disruptive technology such as artificial intelligence (AI) has in recent years been cited as the biggest headache for C-suite leaders.

“I don’t think we have relegated the role of disruptive technology. We have all accepted that disruptive technology is something that is there and we have to deal with whether in banking, insurance, telecommunications, name it,” said Mary Wamae, the executive director for Equity Bank in charge of subsidiaries.

“What has happened is that as a result of implementation of product development using disruptive technology, we are now realising that there are some regulatory risks that are coming up.”

The KPMG survey found that generative AI has become a top investment priority for C-suite chiefs in the next three years as they look to detect fraud and fight cyber-attacks, overtaking attraction and retention of top talent.

“Although East Africa CEOs are eager to advance their investments in generative AI [which create text, photos, videos, code and 3D renderings, from the vast data they are trained on], they are aware of the risks that emerging technologies can bring and the need to manage them,” KPMG analysts wrote in the report.

“Security and compliance, ethical challenges, and lack of regulation are some of the concerns that CEOs have expressed.”

Ms Wamae said regulation in the region is largely following innovation, citing the mobile money explosion.

Regulation and oversight of technological advancement, she added, was “necessary to some extent” as it ensures a level playing field for operators and consumer protection through transparency in pricing.

“When you look at the area of artificial intelligence, for example, there are very particular risks that are coming up there. There’s data protection where there are issues of ethical consideration on how do you share the data, how do you use the data and what happens when there is data breach,” Ms Wamae said. “We have seen both local and global companies being given very heavy fines for data breaches.”

The ratio of corporate leaders in the region worried most about regulation is nearly three times their global counterparts.

The 2023 KPMG CEO Outlook, which also gets feedback from business leaders from global firms and those on the continent, suggests that a significantly low nine percent of the world’s business leaders see regulatory risks as the greatest threat to their organisations in three years.

The biggest concern for the global CEOs, the survey findings show, is growing political uncertainty at 18 percent.

This ties in with the levels of their counterparts in East Africa, the majority of which were polled from firms based in Kenya.

“One trader said to me ‘I see shelf space in supermarkets is reducing’ and when shelf space is reducing, then how are we going to employ all these youth?” Jaswinder Bedi, who chairs the board of Kenya Private Sector Alliance, posed. “We have a serious social obligation to the youth. But we are seeing some of these geopolitical disruptions are to a very unproductive society as opposed to the productive society.”

The findings suggest that confidence among corporate chiefs in the growth prospects of companies they lead has fallen to the lowest levels since the Covid-19 pandemic.

This points to a toughening economic setting characterised by rising interest rates, elevated inflation and increased regulatory compliance.

About 70 percent of business leaders say they expect their firms to grow in the next three years, a drop of 10 percentage points since last year.

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The optimism among chief executives in the survey conducted in July and August is the lowest since 2020 when it sank to 32 percent on Covid-induced disruptions.

The findings have come on the back of Kenyan firms complaining of rising operating expenses largely due to soaring fuel prices, fast-climbing electricity bills, and costly raw materials as a result of lingering global supply constraints amid a persistently weakening shilling against major global currencies and higher taxation.

The KPMG report shows more corporate leaders are confident in the growth outlook of countries where they are located (82 percent) and the global economy (72 percent) than the prospects of their own companies.

Only two percent of the companies expect earnings to grow by more than five percent in three years, with the leaders of the remainder of the firms projecting sales to rise at a lower speed.

“The CEOs are alive to trends that will negatively impact their businesses including trade regulation (which was cited by 82 percent of the corporate leaders), political polarization (60 percent) and public health crises (64 percent),” KPMG wrote in the report.

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