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Risks, opportunities and trends in corporate governance

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Presentation on theme: "Risks, opportunities and trends in corporate governance"— Presentation transcript:

1 Risks, opportunities and trends in corporate governance
Roman Zyla Senior Corporate Governance Officer IFC Corporate Governance Group Dakar, Senegal October 2014

2 Overview Africa Rising but still risky Scandals in our markets
Opportunities from within: Building better boards Focus on controls Some trends we are seeing Conclusion

3 ‘Africa Rising’ 10 years of uninterrupted growth
7/10 top growth markets. $80B expected in 2014/15 …yet massive challenges remain Ebola Migration Disenfranchised youth Skills gap Regulatory vacuum Biggest business threat to any market … uncertainty Footer

4 What’s wrong with this picture?
Scandals in our markets Board of Directors Average age: 68 (two board members over 80) # of women: 1 # of bankers: 2 1director is a theatre producer 1 director also on board of Red Cross 3 new members since turn of the century Others all appointed in 1994 (at time of IPO) Chair of the Board, CEO, and Chair of the Risk and finance committee – all the same person The other member of the 2 person risk committee is 80 years old What’s wrong with this picture? Would you invest?? Uncertain..?

5 Scandals in our markets
Semper aliquid novi Africa affert -Pliny the Elder- Scandals in our markets Africa Bank – lowest % of non executives – and only 3 have banking experience – and a CEO too forceful for the bank’s good. Africa Portland Cement (Kenya) – procurement and financial flaws – boardroom breach of CG 15% loss of value of the company CMC (Kenya)- Management and directors signed misleading financial statements - non execs barred from corporate seats Centum (Kenya)– failed to report profit warning – then dropped 84% annual profit. Company under receivership owing to CG issues and poor strategy Air Mauritius (Mauritius) - hedging kerosene contracts, audit fraud Mauritius “false” corporate directors” - 6 directors heading more than 3000 companies. Ethiopia faced a spate of prosecutions of corporate executives for undertaking banking business in the market. Result is that investors see and hear of uncertainty in African markets. I am reminded of the apocryphal story of a complaint about youth : “what is happening to our young people? They disrespect their elders, they disobey their parents, they ignore the law. They riot in the streets enflamed with wild notions, their morals are decaying. What is to become of them.” The quote is often attributed to Plato, I often wonder if a similar quote may be found for corporate scandal – it appears that every decade brings out new versions of the same old stories. Perpetuates sense of uncertainty in African companies Footer

6 II. Structure & Functioning of Boards of Directors
Opportunities II. Structure & Functioning of Boards of Directors Roles & Responsibilities (vis-à-vis mgmt) Composition & Structure, incl. committees Independence & Skills Remuneration & Evaluation III. Control Environment Internal Audit Functions Internal Control Systems Risk Management I. Commitment to Good CG Dedicated CG officer Written code of CG Board committee on CG IV. Transparency & Disclosure Financial reporting Information disclosure How does the market in Africa assure stability and project certainty? We cannot easily overcome Ebola or migration issues through the instrument of a corporation, but we can work on our own companies to ensure that we have done our part in reducing uncertainty - corporate governance is the opportunity from within. And this is borne out in new studies that continuously inform that well governed companies are strong performers, The real opportunity is for Africa to jump ahead of the curve and to not fall into the traps of poor govenrance other regions have fallen into but to be aware of the trends coming and to engage in V. Treatment of Minority Shareholders Shareholders’ meetings & Share voting Representation & Fair treatment Access to information Footer

7 Key functions of the Board
Opportunities from within Key functions of the Board Monitoring effectiveness of the company’s governance Monitoring and managing potential conflicts of interest Overseeing disclosure and communications Reviewing and guiding corporate strategy and risk policy Ensuring the integrity of the firm’s accounting and financial reporting systems, including the independent audit and that appropriate controls are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards. Cover quickly, then move on OECD Corporate Governance Principles Section VI Footer

8 Board & Management Roles in Risk Governance
Opportunities from within Board & Management Roles in Risk Governance Implement Monitor Propose (adjustments) Review Approve Policies, high level limits and stress tests Executing and monitoring transactions Business Operations Senior management, risk management Board/board committee Board Audit/Risk committee Senior management Should be one cycle for both risk and strategy together, Our clients, are usually doing good if there are two separate cycles for risk and strategy. Key is to marry these up.

9 Good Practices to Implement:
Opportunities from within Good Practices to Implement: Understand the evolution of "risk thinking" at the company Establish a clear definition of what "risk" means at the company Know the line between risk oversight and risk Consider re-thinking the chief risk officer role and skill set Monitor the company-wide risk culture Avoid the trap of false precision Get out of the weeds by taking a deep dive Regularly review--and test--crisis management plans * NACD 8 Recommendations NACD 2014 Advisory Council on Risk Oversight 8 key recommendations on risk governance: 1. Understand the evolution of "risk thinking" at the company – Should it be the BoD or RMC or AC? Depends on Company. Banks need RMCs and are becoming legally required to do so. For you, what do you think? 2. Establish a clear definition of what "risk" means at the company – Mgmt and BoD need to develop a shared definition. Start w/ Mgmt and move it to full board for discussion/approval. 3. Know the line between risk oversight and risk management – Like CG, need to find sweet spot in b/t CG and Mgmt BoD – S/ know risk appetite and top risks BoD S/ evaluate if Mgmt’s processes to ID risks and improves updates processes The board needs to ensure management is taking care of [risk management], and not run the show. We have to ask questions to satisfy ourselves that risk awareness is embedded in the company culture, but we’re not there to do it. 4. Consider re-thinking the chief risk officer role and skill set - certain people get attracted to risk, the quantitative type folks. These are not always who u want in CRO role. . . For Quants, it is easier and less risky to focus on the defense than the business strategy offensive aspect. This could lead to an emphasis on the more easily calculated risks and expected outcomes. While these risks are critical, it is important that the board communicate that the less easily defined “qualitative” types of risks and their potential consequences should also get proper attention. 5. Monitor the company-wide risk culture – b/c of the human element, needs to be integrated. Just b/c u have a CRO, doesn’t let everyone else off the hook. 6. Avoid the trap of false precision – Examine the process and range of possibilities and see how they were determined and what is driving mgmts expectations. If Mgmt says “this will never happen” that’s when the BoD needs to dig in. Be wary of Taleb’s Black Swans and / or Rumsfeld’s “Unknown Unknowns” 7. Get out of the weeds by taking a deep dive – Don’t veer away from strategic risks too far—where the board should focus—and toward operational, regulatory, compliance, and financial reporting risks-where mgmt should focus. 8. Regularly review--and test--crisis management plans Good Practices: Board structured to add value and avoid conflict of interest Board has appropriate skills to review and challenge management actions Ethical and responsible decision-making Clearly defined and documented ToR for directors & executives Independent verification and validation of financial reporting and processes Disclosure to stakeholders of all material matters Structure and process to identify and manage risk Clearly documented key roles & responsibilities, policies & procedures throughout the company Mitigate risk, eliminate uncertainty

10 Improved Board Composition and Selection
TREND Improved Board Composition and Selection Crisis revealed need for greater independence, quality and diversity: Increased role for audit, compensation & nomination, and risk committees and related technical issues Higher legal liabilities and scrutiny Need for greater diversity to tap talent and avoid group think Push towards audit committees and independent members started in 2003: Enron, Worldcom, Parmalat, etc. Regulators, investors and boards themselves are re-emphasizing and expanding these requirements: Independent members from 1/3 to majority on boards and on committees Non-executive chair Board evaluations, board profiles, and search firms for board members Limits on brokers voting with management Formal minority representation on boards Targets for women on boards Mandatory quotas Comply or Explain

11 TREND Gender Diversity UK names and shames companies with no female board members Of all FTSE 100 companies female representation accounts for 8.4% Fortune 500 companies with the highest representation of women board directors attained significantly higher financial performance* Companies with highest % of women on boards outperform companies with lowest/no % of women on boards: Return on equity: 53% Return on sales: 42% Return on invested capital: 66% * Catalyst.org/the Bottom line: corporate performance and women’s representations on Boards Would it have happened if it was Leman Sisters?

12 New Internal Control Definition
TREND New Internal Control Definition A process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives. Operating objectives Reporting objectives Compliance objectives COSO – Integrated Framework, May 2013 Operating objectives pertain to the effectiveness and efficiency of the entity’s operations, including operational and financial performance goals, and safeguarding assets against loss. Reporting objectives pertain to internal and external financial and non-financial reporting and may encompass reliability, timeliness, transparency, or other terms as set forth by regulators, recognized standard setters, or the entity’s policies. Compliance objectives pertain to adherence to laws and regulations to which the entity is subject. Compliance objectives also include an entity’s adherence to: accepted standards in a given industry or a given country, and it’s internal policies and values.

13 Tax Avoidance/Minimization Strategies that affect Corporate Governance
TREND Tax Avoidance/Minimization Strategies that affect Corporate Governance ICGN / OECD Viewpoint Relevant questions for investors: Investors have a stake in the evolving ‘responsible tax’ debate in at least four respects: 1. As owners of companies that in turn pay tax, investors have a vested interest in any activity affecting profitability; 2. reputational and commercial risks arising from aggressive tax avoidance can form part of the battery of risks investors should monitor and question when necessary; 3. corporation tax can be seen as a ‘levy on the profit a company earns for its shareholders’, therefore it should be viewed as a tax on shareholders; and 4. from a broader societal perspective, the tax base of a country is fundamental to the country’s ability to provide infrastructure, legal protections and social services that help to build and develop an economy and support its citizens. 1. What is the nature of the board’s oversight of company tax policy? Is this discussed at the overall board meetings or in specific committees? 2. Does the board discuss company tax policies directly with the accounting firm providing tax services? 3. Does the board recognize that tax policy that may be perceived as overly aggressive may carry reputational risks? If so, does the board think in terms of a “risk appetite” for reputational risks that may related to tax policy? 4. How does the board satisfy itself that a company’s approach to tax may be appropriate or inappropriate? 5. Does the company have an articulated policy on its approach to corporate tax? Is this policy public and do company disclosures provide evidence as to how this policy is overseen and controlled? In some cases, short term benefits of tax efficiency might have longer term commercial consequences by negatively affecting brand value and stakeholder relations (customers, employees, civil society, governments, and regulators) that are critical for a company's long-term success. In extreme cases, negative consequences could affect a company’s license to operate. A very tricky issue and is more a public policy issue than a governance issue, although the increasing impression is that when these "too difficult to deal with" issues come up the policy makers seem throw a hospital to the investor community!! Investors & Regulators should hold company management and boards accountable for a company's tax policy to ensure that the company is not only acting legally, but within the bounds of acceptable social norms. This is primarily achievable by assurance in the form of public disclosures that oversight of tax policy comes under the purview of board oversight. Tax policies themselves should be sufficiently prudent to stand up to external scrutiny on a sustainable basis.

14 IT Controls and Board Technology Committee
TREND IT Controls and Board Technology Committee COBIT 5: Framework for IT Internal Controls COBIT 5 (Control Objectives for Information and Related Technology), as published by ISACA in 2012, provides comprehensive framework to assist enterprises in the governance and management of IT. Recognizes the expanded role of IT as an integral part of the business. Used as the basis for the framework for managing operational and information risk in the context of Basel. Board Level Technology Committee COO Internal Audit Board of Directors CFO External Auditor Technology Committee Audit Other Committees CEO CIO COBIT 5 - Establishment of IT Controls: Critical IT processes are identified based on value and risk drivers. Detailed analysis identifies control requirements, the root cause of gaps and improvement opportunities. Business changes consider the criticality of IT processes, and cover any need to reassess process control capability. Approach to assessing IT control needs is conducted in a formal manner and IT process owners regularly perform self-assessments to confirm that controls are at the right level to meet business needs. IT owners seek to find ways to make controls more efficient and effective. The IT process criticality is regularly defined with full support and agreement from the relevant business process owners. Assessment of control requirements is based on policy and processes; following a thorough and measured analysis involving key stakeholders and independent reviews take place to provide assurance that the controls are at the desired level of maturity and working as planned. Improvement strategies are supported by business cases, and performance in achieving the desired outcomes is consistently monitored. External control reviews are organized periodically. INFORMATION TECHNOLOGY COMMITTEE   Purpose. The primary purpose of the Information Technology Committee is to assist the Board of Directors in fulfilling its oversight responsibilities for matters relating to technology and technology development as it relates to the Corporation’s businesses. Composition. The Information Technology Committee shall consist of a minimum of three Directors. Members of the Information Technology Committee shall be appointed annually by the Board of Directors upon the recommendation of the Nominating and Governance Committee and may be removed or replaced by the Board of Directors in its discretion. All members shall possess adequate information technology (IT) literacy to understand systems, security, risks and opportunities. At least one member shall be an independent non-executive director. The members shall elect a Chairperson from amongst its members. Responsibilities. In furtherance of this purpose, the Information Technology Committee shall have the following responsibilities: Providing general oversight of, and counsel on: the development and implementation of major strategies relating to the Corporation's approach to technical and commercial innovation and the process of innovation and technology acquisition to assure ongoing business growth, the evaluation of the implications of new technologies on the Corporation’s competitive position in its business in all geographic locations, research, development and implementation of new technologies in the banking and financial industries in which it operates, the research, development and implementation of improvements to the Corporation’s existing technologies, and all matters related to the protection of intellectual property, including patents, trademarks and copyrights, related to existing or new technologies of the Corporation and its businesses. Performing such other related functions in furtherance of the foregoing or as requested by the Board of Directors. The Information Technology Committee shall annually review and reassess the adequacy of this Charter and recommend any proposed changes to the Board of Directors for approval. The Information Technology Committee shall also review its own performance annually with a self-evaluation. The Information Technology Committee may adopt such additional procedures, consistent with this Charter, as its members deem appropriate.

15 Changes in Audit Reporting – IAASB Exposure Draft
TREND Changes in Audit Reporting – IAASB Exposure Draft July 2013 Exposure Draft Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs) Opinion/Basis for Opinion Key Audit Matters Going Concern Responsibilities of Those Charged with Governance Auditor’s Responsibilities Report on Legal and Regulatory Requirements

16 Emergence of Stewardship Codes
TREND Emergence of Stewardship Codes Since 2004 OECD has called for institutional investors to disclose Governance and voting policies How conflicts of interest are managed Institutional investors assets rebounded since 2008 Global Mutual Funds (2013): 30 trillion USD Global Pensions (2012): 34 trillion USD Private equity, hedge funds, sovereign wealth and exchange traded funds ~13 trillion USD Since 2008, calls for more active and effective ownership by funds has intensified UK Stewardship Code, 270+ asset managers signatories covering great majority of assets under management EU UCITS Directive, requiring development of policies on voting and conflicts across EU US regulators & investors encourage engagement by asset managers: 64% engaging more Stronger legal and regulatory requirements to encourage fund engagement (including voting) in Chile, India, Malaysia, and other emerging markets New stewardship code in Japan (130+ investors), voluntary codes in France, Italy, South Africa and elsewhere Removing uncertainty is not only for the investee companies but also fore the funds that invest.

17 TREND ESG Agenda Various initiatives serving diverse audiences, issues and interests! Emphasis has shifted from natural resources industries to strongly embrace the financial sector and private sector more broadly Financial crisis highlighted vulnerability of society to deep systemic economic shocks with its impact on development and jobs Closely linked to corporate reputation - an important economic asset, value of which ranges from 20% to 90% of a company's total market value. IFC- generated Equator Principles remains an important benchmark for major banks along with IFC’s Performance Standards as a development tool for emerging markets A company’s reputation and bottom line are vulnerable: Important to investors and consumers!

18 Risks, Opportunities, Trends: Getting Africa ahead of the curve
Conclusions Risks, Opportunities, Trends: Getting Africa ahead of the curve Africa has come a great distance and is expected to go a long way yet. There are challenges and these lead to uncertainty. Identify the potential risks – what is it that creates and perpetuates the uncertainty? Determine how to mitigate/eliminate the risks Focus internally – corporate governance offers up a proven and recognizable way to limit uncertainty Look at the new trends in CG and get ahead of the curve Footer

19 Thank you!


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