Global Risk Management Solutions

Risk Management and the Board of Director:Moving Beyond Concepts to Execution

Anton VAN WYKPartner,Global Risk Management Solutions – Southern Africa,PricewaterhouseCoopers, IncSouth Africa

Global Risk Management Solutions

Risk Management and the Board of Directors:Moving Beyond Concepts to Execution

Anton van WykNovember 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.”

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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

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Leadership and Direction

Vision, mission, values

Organisational integrity

Goals, strategy and policy

Appoint CEO/executive management

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Leadership and Direction

Primary characteristics

Discipline

Transparency

Independence

Accountability

Responsibility

Fairness

Social responsibility

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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

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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

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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?

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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

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Risk Management and Control

ORGANISATIONALRISK FACTORS

IDENTIFYAND

PRIORITISE

MEASUREAND

MANAGE

REVIEWAND

MONITOR

INFORMAND

REPORT

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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.

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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

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A new form of corporate reportingStrategy

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

CURRENTLYMEASURED

VALUE

SUSTAINABLEBUSINESS

VALUE

FORMS OF VALUE

STAKEHOLDERS

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Good governance - 10 key questions for the Board1. 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?

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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?

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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?

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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

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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