CG_risks opportunties and trends_IFC_v6_ RZ V2 Dakar

Report
RISKS, OPPORTUNITIES AND
TRENDS IN CORPORATE
GOVERNANCE
Roman Zyla
Senior Corporate Governance Officer
IFC Corporate Governance Group
Dakar, Senegal
October 2014
Overview
•
Africa Rising but still risky
•
Scandals in our markets
•
Opportunities from within:
•
Building better boards
•
Focus on controls
•
Some trends we are seeing
•
Conclusion
2
‘AFRICA RISING’
• 10 years of uninterrupted growth
• 7/10 top growth markets.
• $80B expected in 2014/15
…yet massive challenges remain
• Ebola
• Migration
• Disenfranchised youth
• Skills gap
• Regulatory vacuum
Biggest business threat to any market … uncertainty
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Scandals in our markets
Board of Directors
 Average age: 68 (two
board members over 80)
 # of women: 1
 # of bankers: 2
 1director is a theatre
producer
 1 director also on board
of Red Cross
 3 new members since
turn of the century
 Others all appointed in
1994 (at time of IPO)
 Chair of the Board, CEO,
and Chair of the Risk and
finance committee – all
the same person
 The other member of the
2 person risk committee
is 80 years old
What’s
wrong
with
this
picture?
4
Would you invest??
Uncertain..?
Semper aliquid novi Africa affert
-Pliny the Elder-
SCANDALS IN OUR MARKETS
Africa Bank – lowest % of non executives – and only 3 have banking experience – and a CEO too forceful
for the bank’s good.
Africa Portland Cement (Kenya) – procurement and financial flaws – boardroom breach of CG 15% loss of
value of the company
CMC (Kenya)- Management and directors signed misleading financial statements - non execs barred
from corporate seats
Centum (Kenya)– failed to report profit warning – then dropped 84% annual profit. Company under
receivership owing to CG issues and poor strategy
Air Mauritius (Mauritius) - hedging kerosene contracts, audit fraud
Mauritius “false” corporate directors” - 6 directors heading more than 3000 companies.
Ethiopia faced a spate of prosecutions of corporate executives for undertaking banking business in the
market.
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Perpetuates sense of uncertainty
in African companies
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OPPORTUNITIES
II. Structure & Functioning of Boards of Directors
•
•
•
•
Roles & Responsibilities (vis-à-vis mgmt)
Composition & Structure, incl. committees
Independence & Skills
Remuneration & Evaluation
III. Control Environment
•
•
•
Internal Audit Functions
Internal Control Systems
Risk Management
I. Commitment to Good CG
•
•
•
Dedicated CG officer
Written code of CG
Board committee on CG
IV. Transparency & Disclosure
•
•
Financial reporting
Information disclosure
V. Treatment of Minority Shareholders
•
•
•
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Shareholders’ meetings & Share voting
Representation & Fair treatment
Access to information
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Opportunities from within
Key functions of the Board
• Monitoring effectiveness of the company’s governance
• Monitoring and managing potential conflicts of interest
• Overseeing disclosure and communications
• Reviewing and guiding corporate strategy and risk policy
• Ensuring the integrity of the firm’s accounting and financial reporting systems, including the
independent audit and that appropriate controls are in place, in particular, systems for risk
management, financial and operational control, and compliance with the law and relevant
standards.
OECD Corporate Governance Principles Section VI
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Opportunities from within
Board & Management Roles in Risk Governance
Board
Business Operations
Approve
Implement
Audit/Risk committee
Senior management,
risk management
Board/board
committee
Review
Monitor
Policies, high level
limits and stress
tests
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Propose
(adjustments)
Senior management
Executing and
monitoring
transactions
Opportunities from within
Good Practices to Implement:
1. Understand the evolution of "risk thinking" at the company
2. Establish a clear definition of what "risk" means at the company
3. Know the line between risk oversight and risk
4. Consider re-thinking the chief risk officer role and skill set
5. Monitor the company-wide risk culture
6. Avoid the trap of false precision
7. Get out of the weeds by taking a deep dive
8. Regularly review--and test--crisis management plans
* NACD 8 Recommendations
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Mitigate risk, eliminate
uncertainty
TREND
Improved Board Composition and Selection
Crisis revealed need for greater independence, quality and diversity:
•
Increased role for audit, compensation & nomination, and risk committees and related technical issues
•
Higher legal liabilities and scrutiny
•
Need for greater diversity to tap talent and avoid group think
Push towards audit committees and independent members started in 2003:
•
Enron, Worldcom, Parmalat, etc.
Regulators, investors and boards themselves are re-emphasizing and expanding these requirements:
•
Independent members from 1/3 to majority on boards and on committees
•
Non-executive chair
•
Board evaluations, board profiles, and search firms for board members
•
Limits on brokers voting with management
•
Formal minority representation on boards
•
Targets for women on boards
•
Mandatory quotas
•
Comply or Explain
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TREND
Gender Diversity
• UK names and shames companies with no female board members
• Of all FTSE 100 companies female representation accounts for 8.4%
• Fortune 500 companies with the highest representation of women board
directors attained significantly higher financial performance* Companies
with highest % of women on boards outperform companies with lowest/no
% of women on boards:
• Return on equity: 53%
• Return on sales: 42%
• Return on invested capital: 66%
Would it have happened if it was Leman Sisters?
*
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Catalyst.org/the Bottom line: corporate performance and women’s representations on Boards
TREND
New Internal Control Definition
•
A process, effected by an entity’s board of directors, management and other personnel,
designed to provide reasonable assurance regarding the achievement of objectives.
•
Operating objectives
•
Reporting objectives
•
Compliance objectives
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COSO – Integrated Framework, May 2013
TREND
Tax Avoidance/Minimization Strategies that affect Corporate
Governance
ICGN / OECD Viewpoint
Investors have a stake in the evolving ‘responsible
tax’ debate in at least four respects:
1. As owners of companies that in turn pay tax,
investors have a vested interest in any activity
affecting profitability;
2. reputational and commercial risks arising from
aggressive tax avoidance can form part of the
battery of risks investors should monitor and
question when necessary;
3. corporation tax can be seen as a ‘levy on the
profit a company earns for its shareholders’,
therefore it should be viewed as a tax on
shareholders; and
4. from a broader societal perspective, the tax
base of a country is fundamental to the
country’s ability to provide infrastructure,
legal protections and social services that help
to build and develop an economy and support
its citizens.
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Relevant questions for investors:
1. What is the nature of the board’s oversight of
company tax policy? Is this discussed at the
overall board meetings or in specific
committees?
2. Does the board discuss company tax policies
directly with the accounting firm providing tax
services?
3. Does the board recognize that tax policy that
may be perceived as overly aggressive may
carry reputational risks? If so, does the board
think in terms of a “risk appetite” for
reputational risks that may related to tax
policy?
4. How does the board satisfy itself that a
company’s approach to tax may be appropriate
or inappropriate?
5. Does the company have an articulated policy on
its approach to corporate tax? Is this policy
public and do company disclosures provide
evidence as to how this policy is overseen and
controlled?
TREND
IT Controls and Board Technology Committee
COBIT 5: Framework for IT Internal Controls
• COBIT 5 (Control Objectives for
Information and Related Technology), as
published by ISACA in 2012, provides
comprehensive framework to assist
enterprises in the governance and
management of IT.
• Recognizes the expanded role of IT as an
integral part of the business.
Board Level Technology Committee
Board of
Directors
Technology
Committee
• Used as the basis for the framework for
managing operational and information risk
in the context of Basel.
Other
Committees
Audit
Committee
CEO
CIO
COO
External
Auditor
CFO
Internal
Audit
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TREND
Changes in Audit Reporting – IAASB Exposure Draft
July 2013
Exposure Draft
Reporting on Audited Financial Statements:
Proposed New and Revised International
Standards on Auditing (ISAs)
1.Opinion/Basis for Opinion
2.Key Audit Matters
3.Going Concern
4.Responsibilities of Those
Charged with Governance
5.Auditor’s Responsibilities
6.Report on Legal and
Regulatory Requirements
TREND
Emergence of Stewardship Codes
Since 2004 OECD has called for institutional investors to disclose
• Governance and voting policies
• How conflicts of interest are managed
Institutional investors assets rebounded since 2008
• Global Mutual Funds (2013): 30 trillion USD
• Global Pensions (2012): 34 trillion USD
• Private equity, hedge funds, sovereign wealth and exchange traded funds ~13 trillion USD
Since 2008, calls for more active and effective ownership by funds has intensified
• UK Stewardship Code, 270+ asset managers signatories covering great majority of assets
under management
• EU UCITS Directive, requiring development of policies on voting and conflicts across EU
• US regulators & investors encourage engagement by asset managers: 64% engaging more
• Stronger legal and regulatory requirements to encourage fund engagement (including
voting) in Chile, India, Malaysia, and other emerging markets
• New stewardship code in Japan (130+ investors), voluntary codes in France, Italy, South
Africa and elsewhere
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TREND
ESG Agenda
• Various initiatives serving diverse audiences, issues and interests!
• Emphasis has shifted from natural resources industries to strongly embrace the
financial sector and private sector more broadly
• Financial crisis highlighted vulnerability of society to deep systemic economic
shocks with its impact on development and jobs
• Closely linked to corporate reputation - an important economic asset, value of
which ranges from 20% to 90% of a company's total market value.
• IFC- generated Equator Principles remains an important benchmark for major
banks along with IFC’s Performance Standards as a development tool for
emerging markets
A company’s reputation and bottom line are vulnerable:
Important to investors and consumers!
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Conclusions
Risks, Opportunities, Trends: Getting Africa ahead of the curve
• Africa has come a great distance and is expected to go a long way yet.
• There are challenges and these lead to uncertainty.
• Identify the potential risks – what is it that creates and perpetuates the uncertainty?
• Determine how to mitigate/eliminate the risks
• Focus internally – corporate governance offers up a proven and recognizable way to limit uncertainty
Look at the new trends in CG and get ahead of the curve
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Thank you!
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