Corporate Governance and Enterprise Risk Management Derek Jackson, Senior Manager 5 September 2005 Corporate Governance Services 0
Overview Hong Kong Code on Corporate Governance Practices Corporate Governance Reporting Enterprise Risk Management How CG and ERM fit together Next steps Services 1
Hong Kong Code on Corporate Governance Practices Comply or explain approach Two-tier structure (Code provisions and recommended best practices) 45 Code provisions issuers expected to comply with, but issuers may deviate from. For half year and full year reporting, issuers must state: Whether it has complied with code provisions; and For deviations explain the deviations and give considered reasons Recommended best practices Exchange encourages issuers to comply and to state whether they have complied and to provide explanations for deviations. 2
Hong Kong Code on Corporate Governance Practices An effective board. responsible for affairs and for taking objective decisions (A.1) Transparent procedure for appointments and reelection due at regular intervals (A.4) Two key aspects clear division managing board and day-to-day affairs (A.2) Code Principles Directors to keep abreast of responsibilities and activities of issuer (A.5) Board must be balanced with skills and experience. INED calibre, strong independent element, must carry weight (A.3) Transparent policy for setting and fixing remuneration packages (B.1) Supply and access to information in a timely manner to enable informed decisions to be made (A.6) 3
Hong Kong Code on Corporate Governance Practices Balanced and clear performance assessment and prospects (C.1) Formal schedule of matters for decision making by the board and clear instruction to management on decision making (D.1) Board to ensure sound and effective internal controls are maintained [to safeguard assets and shareholders investment (C.2) Code Principles Board committees should be formed with specific written terms of reference on authority and duties (D.2) Formal and transparent arrangements for applying financial and internal control principles and relationship with external auditors (C.3) On-going dialogue with shareholders, using AGMs to communicate with shareholders (E.1) 4
Hong Kong Code on Corporate Governance Practices HK Code Provisions Directors/Board (A) Remuneration (B) Accountability and Audit (C) Delegation by the Board and communication with Shareholders (D/E) Agenda items, notice of meeting, secretarial services, given opportunity Meet regularly, adequate notice, Minutes should disclose sufficient detail on decisions reached Role of Chairman and CEO should be separate Independent directors identified Tailored induction/training Directors to allow time to understand business affairs Establish a remuneration committee Establish terms of reference Recommendations to the board on director and senior management remuneration policy Management need to explain financial info in front of board Responsibility for preparing accounts in CGR Boards responsibility to present a balanced, clear and understandable assessment Annually assess system of internal control Audit committee minutes, former Audit Partner prohibited within one year, terms of reference, sufficient AC resources Clear direction to management on powers, Management to report back before making decisions Formalise functions reserved to management and periodically assess Formalise functions reserved to the board and periodically assess Key terms and conditions of their appointment Prepare separate resolution for separate issues Chairman to attend AGM Audit, remuneration and nomination chairmen to answer questions 5
Corporate Governance Reporting CG Practices Statement on how principles of Code have been applied Statement on whether issuer meets Code provisions Details of deviation including considered reasons Audit Committee Role, function and composition Committee meetings held Work performed by AC Reasons for not having an AC (Stock exchange rule 3.21) Recommended Board and remuneration Composition and statement on how the board operates Director nomination Identity of CEO and Chairman Remuneration committee ToR Assessing performance and contract terms Description of remuneration policy and incentive schemes Mandatory Recommended Number of shares held by senior management Shareholder enquiry procedures Details of shareholders by type Where directors have performed C2.1: Explanation on how IC system defined Procedures for handling price sensitive information 6
Hong Kong Code on Corporate Governance Practices Code Provision C.2.1 The directors should at least annually conduct a review of the effectiveness of internal control of the issuer, and its subsidiaries The review should cover all material controls including financial, operational and compliance controls and risk management functions.. Corporate Governance Report disclosure requirement 7
Hong Kong Code on Corporate Governance Practices Internal Control and Risk Management A A basic framework : Issued on 29 June 2005: listed issuers are seeking to comply with h C.2.1 Risk management integral feature of the framework Focuses on objectives (e.g. compliance, financial reporting, operations) and the internal controls required to manage risks On-going monitoring includes assessing how significant risks have been b identified evaluated and managed As a separate annual assessment, the Board needs to form its own view on effectiveness of Internal Control. 8
Enterprise Risk Management External drivers Increased Country specific risks not all risks may be the same in every country Regulators are forcing the risk agenda through listing rules Stock prices are beginning to reflect internal control deficiencies Credit Rating Agencies taking good corporate governance seriously 9
Enterprise Risk Management Internal drivers Operational improvements e.g. manufacturing schedules Efficiency gains e.g. logistics Increased reliability on information and communication = improved decision making Increased staff motivation: Achievable goals and objectives Managing your business more effectively!! 10
Enterprise Risk Management Business Environment Strategic Management Strategy / Philosophy Risk Management Risk Strategy Governance & Regulations Corporate policies and principles e.g. Risk Appetite Leadership Culture / Structure Risk Structure Terminology Roles & responsibilities Reporting structures Communication & awareness Competence / Skills development Processes Risk Portfolio, Optimisation, Measuring & Monitoring Embed risk management in processes / systems 11
Enterprise Risk Management Improve Decision making Optimise Cost Improve Performance Compliance Management Reduce uncertainty associated with informality Prevent surprises through more robust risk identification Increase responsiveness to internal/external change Allocate resources better Assess risk proactively rather than after the fact Aggregate risk transfer and acceptance decisions Eliminate redundant/ unnecessary controls Integrate with business planning and performance management Improve communication and knowledge sharing Eliminate disconnects to reduce exposure to earnings and cash- flows Improve stakeholder transparency and communication Meet corporate governance best practice guidelines Manage organisational assets: physical, financial, customer, employee Take risks in line with expertise and core competencies Prevent surprises through more robust risk identification 12
How CG and ERM fit together CG Code applicable to all Main Board and GEM listed companies 1. Monitoring of IC; 2. Annual assessment of system of internal control Provision C2.1 (internal control) effective 1 July 2005 Comprehensive Business Risk Assessment, IAS Outsourcing and ERM Services Risk Management and Internal Control A basic guide Compliance with Code provision C.2.1 and business performance improvements 13
Next Steps Perform CG gap analysis Conduct risk assessment to support provision C.2.1 Annually review the effectiveness of system of internal control to support C.2.1 Review audit committee set-up and charter Review internal audit mandate and charter Internal audit services Consider implementing ERM. 14