PwC_Corporate Governance in Real Life

8/3/2019 PwC_Corporate Governance in Real Life

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Duncan Fitzgerald, Partner, PricewaterhouseCoopers

PricewaterhouseCoopers

Corporate governance

July 2009

PwC


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Agenda

1. What is the scope of Governance?

2. Examples of governance issues in the public sector

3. Helping boards respond to the downturn

PricewaterhouseCoopers Slide 2


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Agenda


2. Examples of governance issues




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1. What is the scope of Governance ?

1.1 Definition of Corporate Governance

There is no single model of good corporate governance.OECD

Corporate governance is the framework of rules, relationships, systems andprocesses within and by which authority is exercised and controlled in corporations.It encompasses the mechanisms by which companies, and those in control, are heldto account.ASX Corporate Governance Council

The art of effective managementPwC

Corporate Governance refers to the set of rules and incentives by which themanagement of a company is directed and controlled. It refers to the way rights andresponsibilities are distributed among the board, company management,shareholders and other stakeholders.

International Finance Corporation



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CorporateCitizenship

(Social, Ethics,Environment)

CorporateCitizenship

(Social, Ethics,

Environment)

Board Structure& Composition

Board Structure& Composition

Compositionandorganisation

Induction andtraining

Boardremuneration

Succession

planning /identificationand nominationof potentialdirectors

Strategy,Planning and

Monitoring

Strategy,Planning and

Monitoring

Vision andmission

Strategic /

corporate plan

Corporate andmanagementperformancemonitoring

Informationtechnologystrategy

HumanResources

Board Operationand Effectiveness

Board Operationand Effectiveness

Boardroomconduct andrelationship

Audit committee

Nominationcommittee

Remunerationcommittee

Governance andIT Oversightcommittee

Disclosurecommittees

Robust RiskManagement and

ComplianceProcesses

Robust RiskManagement and

Compliance

Processes

Transparencyand Disclosure

Transparencyand Disclosure

I IV VIIIII VI

Riskmanagementframework

Internal control

Financialreporting

Enhanced

reporting

Code of conduct

Business ethics

Employeerelations / Healthand safety

Socialresponsibilities


1.2 Key components of an effective Corporate Governance framework


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1.3 Two broad corporate governance models exist ...but these are a world apart

Source: Mastering Business in Asia Corporate Governance, 2005

Market model prevalent in the UK and US (alsoknown as the Anglo-Saxon capitalist model)

Dispersedownership

Non-executive-majorityBoards

Broadlyaligned

incentives

Highdisclosure

Highdegree of

shareholderequality

Active

takeovermarket

Active privateequity market

(includingIPOs)

Sophisticatedinstitutional

investment

Institutionalcontext

Corporatecontext

Control model commonly found in Asia, LatinAmerica and much of Continental Europe

Concentratedownership

InsiderBoards

Incentivesaligned

with core

shareholders

Reliance onfamily, bank and

public finance

Institutionalcontext

Corporatecontext

Limiteddisclosure

Inadequateminority

protection

Limitedtakeovermarket

Underdevelopednew-issue

market



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1.4 Call for improved governance and international harmonisation

Source: PwC 9th

Annual Global CEO Survey Globalisation and Complexity 2006

Stock market listing standards

Environmental standards

Stakeholder reporting standards

Accounting standards

Tax codes

Corporate Governance standards 42 1536

47 2422

36 1538

34 1145

41 1630

48 20 5

9

6

6

8

11

22

Not at all To some extent To a large extent To a very large extent

42 2920

33 3719

36 2430

39 2324

39 3218

36 36 15

9

6

9

9

9

9

CONVERGENCE: DEVELOPED VERSUS EMERGING ECONOMIES

To what extent will globalisation lead to a convergence of the following areas:

DEVELOPED ECONOMIES EMERGING ECONOMIES

- % + - % +



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THAILAND 1999 Best Practice Code for Listed Companies

AUSTRALIA 1995 Risk Management Standard

INTERNATIONAL 1993 G30 Report

UK 1992 Cadbury Report

USA

1992 COSO Internal Control

MALAYSIA

1994 Revised KLSE Listing requirements

CANADA 1994 CoCo Criteria for Control 1994 Dey

SOUTH AFRICA 2002 King Reports

JAPAN 1998 Japan Corporate Governance Forum

HONG KONG

1993 Hong Kong Code

KOREA 1999 Korea SE Act & Commercial Code

INDIA

1999 Code of CG

CHINA 2002 CG Guide for Listed Companies

INDONESIA 2001 Code for CG

2003 New York Stock Exchange Rules

1998 Basel I for banks

1998 Hampel Report 1998 Combined Code

1999 Blue Ribbon

2003

2004

2000 Financial Services Authority

1999

2002 Sarbanes-Oxley

2004 Provisions to Protect Interests of Public Investors

2004 2003 ASX Governance Principles

2004 Basel II for banks

2002 Principles of Good CG

1999 OECD Principles2004

2003 Higgs, Smith Reports

2006 2008

2007

2001

2004 COSO Enterprise Risk Management

2006 COSO Internal Control for SMEs

2004 CG Principles for Listed Companies

2006

2006

KSOX

2001 Code of CG

2006 revised SEBI Clause 49

SINGAPORE Companies Act and Listing requirements 2001 Code of CG2005

2006 Amended Companies Law and Securities Law 2005 Guidelines for Investor Relations of Listed Companies

1999 Turnbull Report

2008 Draft ISO 31000 ERM


1.5 Regulatory convergence over the last decade



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1.6 Internal Control Integrated Framework (1992) by the Committee of Sponsoring

Organizations (COSO)



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1.7 Effective corporate governance and related functions and structure

Chief ExecutiveOfficer

Sales Purchase HumanResources inance

Board ofDirectors

RemunerationCommitteeOther specialcommittees

IAdepartment

Audit Committee

Chief Risk Officer

Risk ManagementCommittee

Compliance

Reporting

Communication



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1.8 Challenges for government officials on the governance of public bodies

Process

Technology

Operating Strategy

Board of Directors

Executive Directors

Management

People, Process, Technology

Internal controls and risk management practices

Shareholders

value focus

Stakeholders

Public values/ perception

focus

Publicorganisations

Private/publiccompanies

Non- Executive Directors*

* Government officials are often appointed as non-executive directors, who are expected by thepublic to have an oversight responsibility but can only spend limited time at the organisation.



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Agenda






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2.1 Case 1: A higher-education institute in Hong Kong

Governance and organisational structures created misalignment between behaviours and stakeholders expectations

Governance arrangements between the University and its subsidiaries in the areas of consultancy and professional

services failed to ensure that the Universitys objectives were being met. This contributed to suspected cases of under-

reporting by staff members of such activities and using other means to avoid the requirements for income sharing with the

University.

In addition, a number of conflict of interest matters had been identified in a range of activities involving staff members incontracting and sub-contracting of services in relation to research projects.

Lessons:

The size of the management Board was too large which hindered the effectiveness of decision making, resulting in a lack

of accountability amongst those charged with governance.

Insufficient participation and monitoring by the Board into matters of strategic importance at the subsidiary-level.

Lack of adherence with established policies and procedures on a range of financial control matters.



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2.1 Case 2: Australian Wheat Board (AWB)

Failure to instil a culture of ethical dealing

The AWB was originally established as a statutory authority as a single board to centrally manage the distribution of wheat and was

subsequently listed on the Australian Securities Exchange in August 2001.

In 1990, the Iraqi government was sanctioned by the UN and could not utilise funds. To relieve hardship on the Iraqi people, Iraq

was allowed to buy food and pay for this out of an escrow account controlled by the UN under the Oil-for-Food Programme.

In contravention of the UN sanctions, the AWB knowingly agreed and paid transportation fees to the Iraqi government in exchange

for the renewal of the short term contract to supply wheat to Iraq under the UN Oil-for-Food Programme. The new short-term

contract price was inflated by the same amount as the transportation fees.

Lessons:

Management possessed a culture of superiority and impregnability and spent all efforts to hide the truth.

The conduct of AWB and its officers was due to a failure in corporate culture.



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2.1 Case 3: London Development Agency (LDA)

Lack of control and accountability over the effective use of public funds

LDA is the Mayor of London's agency responsible for driving London's sustainable economic growth, set up in 2000.

In early 08, it was reported that the LDA had misspent public money including allegations of corruption in LDA grants made to people

associated with Lee Jasper, the mayor's former advisor. In May 08, the new Mayor of London appointed a panel to investigate

allegations of mismanagement and corruption at the LDA.

The Panel identified failings in the LDAs leadership, governance and basic controls and concluded that the former LDA board was

ineffective.

The Panel identified weaknesses, including a failure to develop appropriate systems for selecting and monitoring projects, a failure to

share best practice amongst grant recipients and an excessive focus on spending the various project budgets available withoutadequate ongoing evaluation of value for money received.

Lessons:

The Board must be set up to ensure that it can effectively supervise management.

Public agency are not always set up to ensure there is sufficient accountability and control.



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2.2 Common Themes in corporate governance failures


Tone at the Top

- CEO, COO, CFO attitude on corporate ethics, internal controls, regulatory bodies.

More risk when away from head-office

- Out-of-sight Out-of-mind, especially when fantastic profits reported from afar for a few periods.

Inadequate Segregation of Duties

- Not just in policies and procedures, but in practice of operating and senior management.

Inadequate Management Oversight- A leave-alone bias, especially if the operating unit is reporting profits.

Trusting without verifying i.e., accept at face value, when there is more complexity.

- Most do not question howprofits were made with same thoroughness as they might ask to understand

reasons for losses.

Not proactively identifying issues i.e., not being proactive in identifying and managingemerging risks.

- Ignorance or complacency with black swans or very high impact/low likelihood events


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Agenda






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Developframework tomonitor executiveand businessperformance

Tomorrow

Perform regularhealth checks

Use framework toset corporate and

executivemandates

Re-visit actionplans and

business strategyperiodically

Growth and

investment plans onhold

Building trust withbusiness partnersand shareholders

Assessing impact ofcredit crisis

2008

Focusing on growth andensuring few if any errors

Investing in new growthopportunities

Status quo on compliance

2007

1. Clarify roles

3. Assess impact ofprolonged recession

4. Cash and businessconservationworkshops

2. Set up Turmoil team

5. Develop action planwith tangible actions,timeframes andresources

Now

The VisionBe globally recognised as a board andleadership that goes above and beyondstatutory obligations, to lead good governancedebate in protecting the collective interests ofits members and stakeholders


3.1 Strengthen the role of the Board

3 H l i b d d h d


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3.2 Focus on global 10 priorities for Boards and C-suites in times of turmoil

Go the extra step quicklyand add real value

Take a closerlook

1 Act decisively,spot the realrisks

2 Focus on whatreally matters -prioritise

3 Remembercash is king

4

Manage your

cost base

5

Plan fordifferentscenarios

7

Reliable

managementinformation iskey

6

Takeadvantage oftheopportunities

10Recognise thevalue of yourpeople

8 Take yourstakeholderswith youEvaluate the likely impact ofthe downturn on your

stakeholders; and understandtheir agendas.

9


Th k


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Thank you


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