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Duncan Fitzgerald, Partner, PricewaterhouseCoopers

Corporate governance
July 2009

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PwC

Agenda
1. What is the scope of Governance? 2. Examples of governance issues in the public sector 3. Helping boards respond to the downturn

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Slide 2

Agenda
1. What is the scope of Governance?
2. Examples of governance issues 3. Helping boards respond to the downturn

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Slide 3

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 and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account.
ASX Corporate Governance Council

The art of effective management


PwC

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

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1. What is the scope of Governance?


1.2 Key components of an effective Corporate Governance framework I
Board Structure Board Structure & Composition & Composition

II
Board Operation Board Operation and Effectiveness and Effectiveness

III
Strategy, Strategy, Planning and Planning and Monitoring Monitoring

IV
Robust Risk Robust Risk Management and Management and Compliance Compliance Processes Processes

V
Transparency Transparency and Disclosure and Disclosure

VI
Corporate Corporate Citizenship Citizenship (Social, Ethics, (Social, Ethics, Environment) Environment)

Composition and organisation Induction and training Board remuneration Succession planning / identification and nomination of potential directors

Boardroom conduct and relationship Audit committee Nomination committee Remuneration committee Governance and IT Oversight committee Disclosure committees

Vision and mission Strategic / corporate plan Corporate and management performance monitoring Information technology strategy Human Resources

Risk management framework Internal control

Financial reporting Enhanced reporting

Code of conduct Business ethics Employee relations / Health and safety Social responsibilities

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1. What is the scope of Governance?


1.3 Two broad corporate governance models exist ...but these are a world apart
Market model prevalent in the UK and US (also known as the Anglo-Saxon capitalist model) Control model commonly found in Asia, Latin America and much of Continental Europe

Dispersed ownership Sophisticated institutional investment Active private equity market (including IPOs) Active takeover market

Nonexecutivemajority Boards Broadly aligned incentives

Concentrated ownership Reliance on family, bank and public finance Underdeveloped new-issue market Limited takeover market

Insider Boards Incentives aligned with core shareholders Limited disclosure Inadequate minority protection

High disclosure High degree of shareholder equality

Institutional context

Corporate context

Institutional context

Corporate context

Source: Mastering Business in Asia Corporate Governance, 2005


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1. What is the scope of Governance?


1.4 Call for improved governance and international harmonisation
Source: PwC 9th Annual Global CEO Survey Globalisation and Complexity 2006
CONVERGENCE: DEVELOPED VERSUS EMERGING ECONOMIES To what extent will globalisation lead to a convergence of the following areas: DEVELOPED ECONOMIES
Corporate Governance standards Accounting standards Stakeholder reporting standards

EMERGING ECONOMIES

6 6 8 11 9 22

36 47

42

15 24 16 15 11 5

6 9 9 9 9 9

20 19 18 30 24 36

42 33 39 36 39 36

29 37 32 24 23 15

30 38 45 48

41 36 34 20

Environmental standards Stock market listing standards Tax codes

22
-%+

-%+

Not at all

To some extent

To a large extent

To a very large extent

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1. What is the scope of Governance?


1.5 Regulatory convergence over the last decade
UK 1992 Cadbury Report 1998 Hampel Report 1998 2003 2006 2008 Combined Code 1999 Turnbull Report 2000 Financial Services Authority 2003 Higgs, Smith Reports CANADA 1994 CoCo Criteria for Control 1994 Dey USA 1992 1999 2002 2003 2004 2006 CHINA 2002 CG Guide for Listed Companies 2004 Provisions to Protect Interests of Public Investors 2005 Guidelines for Investor Relations of Listed Companies 2006 Amended Companies Law and Securities Law JAPAN 1998 2001 Japan Corporate Governance Forum 2004 CG Principles for Listed Companies KOREA 1999 Korea SE Act & Commercial Code KSOX INDIA HONG KONG 1999 Code of CG 1993 2004Hong Kong Code 2006 revised SEBI Clause 49 THAILAND 1999 Best Practice Code for Listed Companies 2002 2006 Principles of Good CG

COSO Internal Control Blue Ribbon Sarbanes-Oxley New York Stock Exchange Rules COSO Enterprise Risk Management COSO Internal Control for SMEs

INTERNATIONAL 1993 G30 Report 1999 2004 OECD Principles 1998 Basel I for banks 2004 Basel II for banks 2008 Draft ISO 31000 ERM
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MALAYSIA 1994 Revised KLSE Listing requirements 2001 Code of CG SINGAPORE Companies Act and Listing requirements 2001 2005 Code of CG INDONESIA 2001 2006 Code for CG AUSTRALIA SOUTH AFRICA 1999 2004 Risk Management Standard 1995 2002 King Reports 2003 2007 ASX Governance Principles
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1. What is the scope of Governance?


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

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1. What is the scope of Governance?


1.7 Effective corporate governance and related functions and structure

Remuneration Committee Other special committees

Board of Directors Chief Executive Officer

Audit Committee Risk Management Committee Chief Risk Officer IA department

Sales

Purchase

Human Finance Resources

Compliance

Reporting Communication

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1. What is the scope of Governance?


1.8 Challenges for government officials on the governance of public bodies
Public organisations Stakeholders Private/public companies

Public values / perception focus

Board of Directors Executive Directors Non- Executive Directors*

Shareholders value focus

Management Operating Strategy


Process

People, Process, Technology

Internal controls and risk management practices


Technology

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

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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

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Slide 12

2. Examples of governance issues in the public sector


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 underreporting 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 in contracting 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. Examples of governance issues in the public sector


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. Examples of governance issues in the public sector


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 without adequate 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. Examples of governance issues in the public sector


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 how profits 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 managing
emerging risks. - Ignorance or complacency with black swans or very high impact/low likelihood events

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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

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Slide 17

3. Helping boards respond to the downturn


3.1 Strengthen the role of the Board
The Vision

Tomorrow

Be globally recognised as a board and leadership that goes above and beyond statutory obligations, to lead good governance debate in protecting the collective interests of its members and stakeholders

Now

Develop framework to monitor executive and business performance 1. Clarify roles 2.


Assessing impact of credit crisis Building trust with business partners and shareholders

2008

Perform regular health checks Use framework to set corporate and executive mandates

Set up Turmoil team 3. Assess impact of prolonged recession 4. Cash and business conservation workshops 5. Develop action plan with tangible actions, timeframes and resources

2007
Focusing on growth and ensuring few if any errors Investing in new growth opportunities Status quo on compliance Growth and investment plans on hold

Re-visit action plans and business strategy periodically


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3. Helping boards respond to the downturn


3.2 Focus on global 10 priorities for Boards and C-suites in times of turmoil 1 Take a closer look 2 Act decisively, spot the real risks 3 Focus on what really matters prioritise 4 Remember cash is king

5 Manage your cost base

Go the extra step quickly and add real value


8 Recognise the value of your people 9 Take your stakeholders with you
Evaluate the likely impact of the downturn on your stakeholders; and understand their agendas.

6 Reliable management information is key

7 Plan for different scenarios

10 Take advantage of the opportunities

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Thank you

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