Global Risk Management Solutions Risk Management and the Board of Director: Moving Beyond Concepts to Execution Anton VAN WYK Partner, Global Risk Management Solutions – Southern Africa, PricewaterhouseCoopers, Inc South Africa

Global Risk Management Solutions Risk Management and the Board of Directors: Moving Beyond Concepts to Execution Anton van Wyk November 2002

Global Risk Management Solutions “There’s nothing like a big screw up to make a board get into the bowels of the real problem.”

Global Risk Management Solutions Definition of governance Essentially, corporate governance is the means of ensuring due and adequate control over the strategy and direction of an organisation and the stewardship, use and disposition of its assets - both financial and non-financial - in achieving its key objectives. It is a function of: Leadership and direction Risk management and control Reporting

Global Risk Management Solutions Leadership and Direction Vision, mission, values Organisational integrity Goals, strategy and policy Appoint CEO/executive management

Global Risk Management Solutions Leadership and Direction Primary characteristics Discipline Transparency Independence Accountability Responsibility Fairness Social responsibility

Global Risk Management Solutions Leadership and Direction Balance between performance and conformance Starts in the boardroom and ends in the boardroom Forward-looking - proactive governance approach Stakeholder-inclusive approach Importance of meaningful corporate disclosure The market will dictate what represents good governance practice

Global Risk Management Solutions Risk Management and Control Board responsibility and accountability for risk management:  Total process of risk management  Effective system of internal control  Risk management philosophy, strategy, policy Management responsibility for risk management:  Design  Implementation  Monitoring  Integration

Global Risk Management Solutions Risk Management and Control  Risk management should be embedded in day-to-day activities  Board to set risk strategy and policy  Board to determine of appetite for risk  Risk management and control to be objective-driven  Ongoing risk assessment (formally once a year)  Broad view of business risk (“downside” and “upside”)  Wide range of business risks (financial and non-financial)  Importance of technology and systems  Need for business continuity planning  Public disclosure on risk management (risk statement)?  Appointment of Risk Committee?

Global Risk Management Solutions Risk Management and Control Board’s today expect that their organisation has: The commitment of senior management to the risk management process Established an effective, robust process to identify, assess and manage risk Aligned its risk management process with strategy and business objectives Identified significant risk areas and received detail on management mitigation response Established a culture that rewards appropriate risk management, based on the accepted risk appetite of the organisation

Global Risk Management Solutions Risk Management and Control ORGANISATIONAL RISK FACTORS IDENTIFY AND PRIORITISE MEASURE AND MANAGE REVIEW AND MONITOR INFORM AND REPORT

Global Risk Management Solutions Reporting The traditional financial reporting model is no longer adequate Declining relevance of earnings as an indicator of future performance The market wants more information about non financial measures Extreme volatility Individual stocks Entire markets High concentration of value Top 5% of companies have 60-80% of total market value The rest are fighting for a small part of total capital market share.

Global Risk Management Solutions How to close the Value Gap Understanding Create a dialogue with investors and analysts to agree on the most important measures. Quality Develop methods and systems for generating valid information. Reporting If information is important internally, provide it externally. Information Provide information investors and analysts need to make investment decisions. Perception Verify that the market’s needs are truly being met. Continuous Feedback Loop

Global Risk Management Solutions A new form of corporate reporting Strategy Governance and management Structure Risk management Innovation Brand Customers Supply chain Human capital Intellectual capital Information technology Corporate citizenship and reputation Social Ethical Environmental ENVIRONMENTAL HUMAN & SOCIAL INTELLECTUAL BRAND & REPUTATION FINANCIAL ASSETS INVESTORS CUSTOMERS EMPLOYEES BUSINESS PARTNERS COMMUNITIES CURRENTLY MEASURED VALUE SUSTAINABLE BUSINESS VALUE FORMS OF VALUE STAKEHOLDERS

Global Risk Management Solutions Good governance - 10 key questions for the Board 1.Does the Board comprise a sufficient number of individuals with the appropriate mix of credibility, skills, experience and demographic diversity to lead and direct the organisation and to retain full and effective control over it in the pursuit of its objectives? 2.Is the Board satisfied that it has taken all appropriate steps, including the appointment of focused committees, to ensure that it discharges its responsibilities for good governance in the organisation? 3.Does the Board operate transparent processes of performance measurement, evaluation and related reward for directors and members of executive management?

Global Risk Management Solutions Good governance - 10 key questions for the Board 4.Does the organisation have an effective system for the identification, evaluation, monitoring and measurement of all risks impacting its ability to achieve its objectives? 5.Does the organisation comply with all legal and regulatory requirements to which it is subject? 6.Does the organisation have an effective internal audit function? 7.Has the organisation adopted social and environmental management practices that allow it to measure its impact on the communities within which it operates, by means of established performance indicators?

Global Risk Management Solutions Good governance - 10 key questions for the Board 8.Has the organisation adopted and communicated to internal and external stakeholders clear guidelines and standards for organisational integrity, against which organisational and individual activities are measured? 9.Does the organisation make regular and full disclose in meaningful, understandable and balanced terms on all financial and non-financial issues of relevance and interest to shareowners and other stakeholders? 10.Is the Board satisfied that the external auditor enjoys unimpaired independence and objectivity in the execution of the external audit mandate?

Global Risk Management Solutions New approach to governance The Board and executive management need to achieve the appropriate balance of social, environmental and economic stewardship, necessary to ensure ongoing value protection and value creation for shareholders, by balancing the interests of legitimate stakeholders. Clarity of goals and objectives Identification of stakeholders Understanding of value drivers Identification of risks A new kind of: management practice performance measure systems and technology accounting auditing (external & internal) risk assurance reporting

Global Risk Management Solutions A final thought... “Many who plan to seek God at the eleventh hour die at 10:30.” Sign above entrance to border control post Kasungula, Zambia