Better Companies, Better Societies Global Corporate Governance Forum Role of Board of Directors in Corporate Governance Financial Media Workshop Chile, January

Outline of Presentation  What is Corporate Governance?  Building effective Board Governance  The different roles related to the Board  Some Concluding Thoughts! 2

3 What is Corporate Governance? boards and directors leadership Corporate Governance is a mechanism through which boards and directors are able to direct, monitor and supervise the conduct and operation of the corporation and its management in a manner that ensures appropriate levels of authority, accountability, stewardship, leadership, direction and control. “The importance of corporate governance lies in its contribution both to business prosperity and to accountability.” Paragraph 1.1, Committee on Corporate Governance: Final Report Hampel Committee “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals…… The aim is to align as nearly as possible the interests of individuals, corporations and society.” Sir Adrian Cadbury Corporate Governance Overview, 1999 [World Bank Report]

4 It’s about Leadership………!  Leadership for efficiency…… ↳ to compete in the global economy, create jobs  Leadership for probity (honradez, rectitud)….. ↳ because investors require confidence ↳ to provide assurance of management's integrity  Leadership with responsibility…. ↳ to take account of broader stakeholder interests  Leadership that is accountable and transparent ↳ to build trust in companies and in the economy!!

5 Building Effective Board Governance  Defining key board roles ↳ Board Chairman ↳ Chief Executive Officer ↳ Board Directors - executive and non-executive  Putting in place board governance arrangements ↳ Board committees to support decision process ↳ Supporting functions to regulate processes ↳ Board procedures and rules, e.g. conflicts of interest ↳ Delegated authorities for management  Ensuring proper oversight and supervision ↳ Management reporting and public disclosures ↳ Assurance processes and controls

6 The Board of Directors is Pivotal “The board should exercise compelling and relentless leadership and should not underestimate the power of leading by example - evidenced by high levels of visibility and integrity, strong communications, and demanding expectations. This leadership should be clear to ALL within the organization, as well as shareholders (accionistas) and other stakeholders (grupos de interés).” Boardroom Behaviours A report prepared for Sir David Walker by the Institute of Chartered Secretaries and Administrators, UK June 2009

7 Audit Committee Remuneration Committee Other Committees Board Committees Strategy Board of Directors Achievement of strategic objectives and value creation Fulfil responsibilities and duties in law and prescribed functions Board Operations Chairman Board Meetings Reporting & Disclosure Internal Controls & Assurance Executive Committee Internal AuditExternal Audit Other Assurance Providers Management Combined Assurance Model Governance System and Controls Corporate Policies & Procedures Board Governance Instruments Monitoring and Evaluation Key Areas of Responsibility CEO & Management Shareholders Information and Communication Corporate Secretary Source: KPMG Board Governance Framework

8 Chairman as Leader of the Board  Primary role ↳ Provide overall leadership to the board  Function ↳ Principal link between board and CEO/management team ↳ Responsible for board agenda and work plan ↳ Work with board committee chairmen ↳ Involved in selection and induction of new directors ↳ Counsel individual directors on their performance ↳ Participate in discussions with investors, key stakeholders

9 CEO as Leader of the Company  Primary role ↳ Lead the management team, reporting to the board  Function ↳ Work closely with board chairman ↳ Responsible for performance of management team ↳ Formulate corporate strategy, annual business plan and budget ↳ Responsible for corporate and financial objectives ↳ Formulate major corporate policies ↳ Ensure continuous improvement in services and products ↳ Manage relations with investors, major customers, regulators ↳ Responsible for company’s long-term sustainability

10 Board Structure and Composition  Balancing executive and non-exec. participation  Ensuring an effective selection process ↳ Key personal and professional attributes ↳ Skills aligned to strategy and business ↳ Also fill board committee requirements, where appropriate  Some general guidelines ↳ Must have time to devote to responsibilities ↳ Must exercise judgment in best interests of company ↳ Must be informed about the business and its markets ↳ Must avoid interest conflicts between personal and business ↳ Must treat board information confidentially ↳ Should act objectively and be receptive to other perspectives ↳ Should prepare adequately for meetings, regular attendance

11 Common Legal Principles of Directorship  Exercise reasonable standard of care ↳ Special business acumen or expertise not necessarily required ↳ Not necessarily liable for errors of judgment ↳ Given events following financial crisis, will this change?  Duty to act in best interests of the company ↳ In other words, for ALL shareholders, not special interests “The legal framework and company charters should not permit practices (such as “pre-meetings” and instructions on how to vote by shareholders whose votes placed a director on the board) wherein shareholders may limit the ability of directors to exercise their duties to act in the best interest of the company and all shareholders.” Paragraph 90, OECD’s White Paper on Corporate Governance in Latin America

12 Benefits of Effective Board Committees  Assist the board in its decision making ↳ Brings together non-executives and management ↳ Allows detailed discussion on management matters ↳ But, filters out operational issues that remain with management ↳ And, focuses on strategic decisions required of the board  Supports board responsibilities in key areas ↳ Audit, internal controls and risk ↳ Executive compensation and management appointments ↳ Governance issues and corporate policies ↳ Nomination and selection of non-executive directors ↳ Others, e.g. health, safety, environment, etc.  Defined terms of reference and limitations  Generally, no executive powers

13 Instruments to Enhance Effectiveness  Board Charter setting out procedural rules ↳ Clarifies leadership roles and core responsibilities ↳ Reserves matters specifically reserved to board ↳ Sets management delegations and reporting arrangements  Comprehensive induction for new directors ↳ Legal and regulatory obligations ↳ Financial structure of business, budgets and KPIs ↳ Understanding of strategic priorities and current status ↳ Familiarize with business operations, e.g. site visits  Annual board work plan ↳ Meetings and budget cycle, annual reporting  Code of ethics or statement of business principles ↳ Defines corporate values and conduct of staff and directors

14 Role of Corporate Secretary Supervises and co- ordinates board papers & presentations Takes the minutes of board meetings Resolves organizational matters for board meetings Works closely with Chairman and CEO on board agenda Arranges the annual shareholders meeting and other special meetings Ensures compliance with the board procedures Oversees, conducts induction trainings for newly elected directors Explains the procedural requirements of laws, the charter, and by–laws of the company Key link between company and non-executive directors

15 Board Role in Financial Oversight  Duty to maintain proper accounting records  Periodic reporting of financial position, performance  Establishing, monitoring proper internal controls  Ensuring proper external controls and audit  Skills, knowledge required by directors

16 Board’s Role in Risk Management  The board should know about and evaluate the: ↳ Most significant risks facing the company ↳ Possible effects on shareowners ↳ Company’s management of a crisis ↳ Importance of stakeholder confidence in the organization ↳ Communications with the investment community  The board should ensure that: ↳ Sufficient time is devoted to discuss risk strategy ↳ Appropriate levels of awareness exist throughout the company ↳ Risk-management processes work effectively ↳ A clear risk-management policy is published

17 Not an easy task - Identified Risks  Strategic ↳ Unfocused strategy ↳ Strategy not aligned with capabilities ↳ Complacency arising from past success ↳ Unsuccessful acquisition/abortive bid ↳ Failure to manage major changes ↳ Reputational risk ↳ Loss of investors’ confidence ↳ Political/general economic risk  People ↳ Management leadership weak ↳ Inadequate succession planning ↳ Loss of key executives ↳ Poor employee motivation ↳ Internal communication weaknesses  Marketplace ↳ Failure to respond to market trends ↳ Missed opportunities – new tech., global markets ↳ Weak or obselete brands ↳ Over-reliance on a few customers ↳ Poor customer satisfaction – quality/timeliness  Ethical ↳ Failure to enact high standards of ethics ↳ Obtaining contracts unethically ↳ Stakeholder concerns on products/business probity – poor community relations  Suppliers/Outsourcers ↳ Over-dependence on suppliers/outsourcers ↳ Failure to manage cost/quality of outsourced service ↳ Supply chain problems ↳ Joint ventures, strategic alliances not working  Financial ↳ Cash flow/going concern problems ↳ Treasury operations risk ↳ Susceptibility to fraud/accounting irregularities  Legal/Compliance ↳ Failure to protect intellectual property ↳ Health, safety, environmental issues ↳ Litigation risk ↳ Breach of competition, corporate, employee, tax laws

18 “Boards must re-establish and enforce the standard that risks are to be undertaken for the benefit of their constituents, not for the personal gain of management.” George Vojta Chairman of the Advisory Board of the Yale School of Management Millstein Center for Corporate Governanance and Performance and Former Vice-Chairman, Bankers Trust Corp. Restoring Integrity and Trust

19 Six Critical Questions for Directors!  Do I believe I have all the information?  Have I the necessary skills to make this decision?  Do I have any conflict in this matter?  Objectively, is this a rational business decision?  Can I explain this in a transparent manner?  Is it a responsible discharge of my duties?

MCI’S GUIDING PRINCIPLES Build Trust and Credibility! ↳ Respect for the Individual ↳ Create a Culture of Openness and Honesty ↳ Set the Tone at the Top Uphold the Law! ↳ Avoid Conflicts of Interest ↳ Set Metrics and Report Results Accurately Do the Right Thing! ↳ Promote Substance over Form ↳ Be Loyal to your Company, your Family, yourself Philip Armstrong Global Corporate Governance Forum Telephone Thank You! 20