Corporate Governance & Business Continuity

Corporate Governance

Business Continuity CIMA CPD Engagement*

Facilitator : Anand Sampath

Dec 4th 2010

•Attention : This presentation has been made solely for the consumption of CIMA students and members for their CPD

engagement. There is no commercial intent or solicitation of any kind behind this. While references from other

research/findings publicly made available have been made , the views stated herein are solely of the facilitator .1

‘End of day’ Objectives & Agenda

BUSINESS CONTINUITY

� A – Concept and thinking behind

BCP/BCM

� B-Understanding benefit/cost

CORPORATE GOVERNANCE [CG]

� A - Appreciate the context of CG � B-Understanding benefit/cost

� C-Implementation and

Preparedness

� A - Appreciate the context of CG

� B- Be aware of the Key CG

legislations and history of CG

initiatives

� C- Essence and Practice of CG

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@ Corporate Governance ….and the leaders are !

2002 , Audit and Accounting

firm embroiled in most of the

early 2000 accounting scandals

3

2010, Failure to disclose Repo

105 transactions to investors2002, Overstated Cash flows

2002, Improper Accounting

2009, Falsified

accounts

2002-06, Pricing & Off label

– Healthcare fraud

2008, Excessive risk

taking w/o controls

early 2000 accounting scandals

2002, Biased

research and

Conflict of

Interest

History of CG – Some Corporate Governance initiatives

U UK/Europe US/Canada Other parts of the World International Initiatives

DCGK [Ger], 2002

Economiesuisse - Voluntary [Swiss] , 2002

Richtlinie der Schweizer Börse SWX [Swiss] 2002

SOX, 2002

Winter Report, 2002

Higgs, 2003

Smith, 2003

Combined Code, 2003

IFAC Gov In Public Sec, 2001

TransPuG [Ger], 2002� Executive Decisions

� Creative Accounting

� Secrecy

� Industry Guidance

� Investors Seek Big Ideas

New World

(2003-2010)

� Executive Accountability

� Compliance Accounting

� Transparency

� Industry Oversight

� Investors Seek Value

Old World

(1995-2002)

Eurosox, 2007

OECD Principles of CG, 2004

UK Corp Gov

Code, 2010

SEC 33-9089, 2010

1990

4

20101995 2000 2005198519801975

King [SA], 1994

FCPA , 1977

Cohen , 1978

Treadway, 1987

COSO Internal Control , 1992

Cadbury, 1992

Greenbury, 1995

Hampel, 1998

Turnbill, 1999

Blue Ribbon, 1999

CEPS Working report, 1995

IFAC Gov In Public Sec, 2001

CICA [Can] , 1995

Keidanren[Jap], 1997

KonTraG [Ger], 1998

Bosch Report[Aus], 1995

Vienot Report [Fra], 1995

� Investors Seek Big Ideas

� Guidelines

� Management

� Investors Seek Value

� Policies

� Governance

CG Speak - Video

Vikram Pandit Bloomberg

5

Vikram Pandit Bloomberg

Before we get to the subject …. understanding conflicts/issues

Stakeholder

groups

Shareholders/

Owners

Board of

DirectorsManagement

Regulatory

Authorities

Customers

Shareholders/

Owners VsTunneling Agency problem Agency problem

Board of

Directors Vs

Reverse Agency

problems

Goal Congruence

Crisis

National Policy

CrisesDirectors Vs

Management

Vs

Mini-agency

problem

Power Crisis

Regulatory

Authorities Vs

Non-

Compliance

Non-

Compliance

Customers VsDemand-Supply

Mismanagement

Demand-Supply

Mismanagement

Shil, N. C. (2008). Accounting for good corporate governance, JOAAG, Vol. 3. No. 16

Corporate Governance – Some Definitions

Good corporate governance is characterized by a ‘firm commitment and adoption of ethical

practices’ by an organization across its entire value chain and in all of its dealings with a

wide group of stakeholders encompassing employees, customers, vendors, regulators and

shareholders (including the minority shareholders), in both good and bad times. To achieve

this, certain checks and practices need to be whole-heartedly embraced.

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“Corporate Governance is the system by which companies are directed and

controlled…”Cadbury Report (UK), 1992

“Corporate governance involves a set of relationships between a company’s management,

its board, its shareholders and other stakeholders ..also the structure through which

objectives of the company are set, and the means of attaining those objectives and

monitoring performance are determined.”Preamble to the OECD Principles of Corporate Governance, 2004

Corporate Governance – Objectives

Transparency –Stakeholder

Credibility & Confidence –

Investors, Lenders

Long term Growth &

sustainability

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Solution to Agency Problem

Openness, integrity &

accountability

Ethical Conduct of Business

Sir Adrian Cadbury - Boardroom roles

The crispest definition of a Board’s role is Sir John Harvey Jone’s “

to create tomorrow’s company out of today’s “

Role : The role of the Board is to direct not to manage

Composition : Balance of Board membership and choice of individuals are key

Chairman’s role : Chairmen are responsible for the effectiveness of Boards

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Role of Non-executive directors : Non executive directors have a particular contribution to make to the

work of a Board

Role of Board Committees : Board Committees are important structurally and for the tasks that they

undertake

Role of Executive Directors : Executive directors can be appointed solely for the value that they can add

to the Board

Two tier Boards : Supervisory and Management Board members

Role of the Company secretary : Provide impartial and professional guidance on Board responsibilities

Steward Hamilton* - Viewpoint

“Regulation, Corporate Governance and Boardroom Performance

Must be Shaken up if we are to avoid another Financial Crises”

Argues that :

Corporate Governance failures, and particularly lack of expertise among non-executive directors were

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Corporate Governance failures, and particularly lack of expertise among non-executive directors were

largely to blame for the financial crisis

Amongst a number of solution, he proposes :

Shareholders should take more of an interest in the qualifications of company directors and the “Big

Four” accountancy firms should be broken up”

*Professor of Accounting and Finance at IMD business school

CG – Key current legislations – regulations in the 2003-10 era

US UK India

CGSen. Paul Sarbanes (D–

MD) and Rep. Michael G.

Oxley (R–OH-4), the co-

sponsors of the

Sarbanes–Oxley Act.

1999, Recommendations of the

Kumaramangalam Birla Committee

1990’s, Commissioning of the

Cadbury, Greenbury and Hampel

Committees following scams

1998, First Combined Code

Series of corporate frauds in 2000 -

2002 - Enron, WorldCom , Tyco

Rep. Oxley’s Bill – CAARTA bill 2000, First Clause 49 of the Listing

agreement

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2002, Recommendations of the

Narayanamurthy Committee

2004, Revised Clause 49 of the

Listing Agreement w.e.f Jan 2006

1998, First Combined Code

Turnbill, Higgs and Smith

Committees provide further

recommendations

Revised Combined Code, 2003

[ again revised 2008 ]

Rep. Oxley’s Bill – CAARTA bill

passed . Sen. Paul Sarbanes

independently prepared bill

reconciled by a Conference

Committee

In July 2002, Pres. Bush signed it

into Law with both Houses voting

on it w/o change

<<And regulations are further changing …following the risk management failures / economic crises in 2008-09>>

SEC – Regulation 33-9089

& The Dodd Frank ActUK Corp Governance Code 2010

CG Voluntary Guidelines issued by

MCA during Dec 2009

agreement

US - Regulation 33-9809 by SEC

A Enhanced Compensation Disclosure 1. Narrative Disclosure of the Company’s

Compensation Policies and Practices as They

Relate to the Company’s Risk Management

2. Revisions to the summary Compensation table

B Enhanced Director and Nominee

Disclosure

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C New Disclosure about Board Leadership

Structure and Board’s role in risk

oversight

D New Disclosure regarding compensation

consultants

E Reporting of Voting rights on Form VI-K

UK - Corporate Governance Code 2010

A Leadership 1. Role of the Board : Effective board responsible for long term success

2. Division of responsibilities : Exec and non exec ; No one individual with unfettered powers

3. The Chairman : Responsible for leadership and board effectiveness

4. Non-executive Directors : Should constructive challenge new proposals .

B Effectiveness 1. The composition of the Board : Appropriate balance of skills, experience, independence and

knowledge.

2. Appointments to the Board : Formal , rigorous and transparent

3. Commitment : Time for discharging responsibilities effectively

4. Development : Induction ; should regularly update and refresh their skills and knowledge

5. Information and Support : Information to board to be timely and of quality

Principles Governing the Code : COMPLY OR EXPLAIN approach

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5. Information and Support : Information to board to be timely and of quality

6. Evaluation : Formal and rigourous ; Annual

7. Re-election : All members at regular intervals & subject to performance

C Accountability 1. Financial and Business Reporting : Board to present a balanced and understandable assessment

of the position and prospects

2. Risk Management and Internal Control : Board responsible for determining extent and nature of

significant risks in relation to strategic objectives

3. Audit Committee and Auditors : Formal and transparent arrangement with auditors regarding

accounting, risk and internal control

D Remuneration 1. Level and Components of remuneration : sufficient to attract , retain and motivate ; significant

proportion linked to corporate /individual performance

2. Procedure : Formal ; Transparent ; Not to decide own remuneration

E Relations with

Shareholders

1. Dialogue with Shareholders : Resp for Satisfactory dialogue based on objectives with the Board;

2. Constructive use of the AGM : Opportunity to communicate ; encourage participation of

shareholders

India- Corporate Governance [Voluntary] Guidelines 2009

I Board of Directors A. Appointment of Directors

B. Independent Directors

C. Remuneration of Directors

II Responsibilities of Board A. Training of Directors

B. Quality Decision Making

C. Risk Management

D. Evaluation of Performance of Directors

E. Board to ensure compliance of law

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E. Board to ensure compliance of law

III Audit Committee A. Constitution

B. Powers

C. Roles and Responsibilities

IV Auditors A. Appointment

B. Certificate of Independence

C. Rotation of Auditors

D. Clarity of Information

E. Internal Auditor

V Secretarial Audit

VI Whistle Blowing Mechanism

State of CG in India- KPMG Poll

15The state of corporate governance in India - A Poll - AUDIT COMMITTEE INSTITUTE [KPMG 2009]

State of CG in India- KPMG Poll

16The state of corporate governance in India - A Poll - AUDIT COMMITTEE INSTITUTE [KPMG 2009]

Summing up

Center for International Private Enterprise (2002) lists some of the main attributes of

good corporate governance :

� Reduction of Risk

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� Stimulation of performance

� Improved access to capital markets

� Enhancement of marketability of goods and services

� Improved leadership

� Demonstration of transparency and social accountability

End of discussion/presentation

on Corporate Governanceon Corporate Governance

18

@ Business Continuity – Climate Change – The largest

‘Continuity’ Initiative

The Copenhagen Summit [COP 15]

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Business Continuity – Contexts and Pressures

� No organisation is immune from disaster . As they are getting ‘ larger’ and more ‘complex’ – need

to shift focus from emergency response to emergency preparedness

� A basis for understanding strategic planning and dependencies

� A must for customers and business partners , in some cases

� Pedigree : depicting a mature and forward looking organisation . Often considered and integral

part of Corporate Governance

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Over five years, even a well managed organisation has an 80% chance of suffering an event that

damages its profits by 20%Oxford Metrica – www. Oxfordmetrica.com

Whatever the cause – equipment downtime, failure of utilities, supply chain, terrorism, fire , flood

, explosion or adverse weather , without BCP , the result is the same . Damage to brand,

reputation, competitive position and market share .

Sometimes, severe enough to lead to permanent closure…..

1984- Business Continuity – llustration # 1

The Bhopal disaster (also referred to as the Bhopal gas

tragedy) is the world's worst industrial catastrophe

The official immediate death toll was 2,259 and the

government of Madhya Pradesh has confirmed a total of

3,787 deaths related to the gas release

It is estimated 100,000 to 200,000 people have

permanent injuries. Reported symptoms are eye

problems, respiratory difficulties, immune and

neurological disorders, cardiac failure secondary to lung

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neurological disorders, cardiac failure secondary to lung

injury, female reproductive difficulties and birth defects

among children born to affected women

Factors leading to the magnitude of the gas leak include:

•Storing MIC in large tanks and filling beyond recommended levels

•Poor maintenance after the plant ceased MIC production at the end of 1984

•Failure of several safety systems (due to poor maintenance)

•Safety systems being switched off to save money—including the MIC tank refrigeration system which could

have mitigated the disaster severity

Business Continuity – Background and Context

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Business Continuity – Key aspects

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2010 - Business Continuity – Illustration 2

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Impact it created :

•Stock prices crashed – Investors Lost Billions in Market Value

•Severe reputation risk – from failed attention to BCP systems and to Safety norms

•Penalties from suits due to lost lives and business – Fund created - $ 20 Bn

Case Study – BP – What could have been done?

Environmental disasters is hard to predict but, government regulations could help. The investment to

develop new technologies must include disaster prevention.

Need to relook at the way Risk management was carried out – did we analyse earlier audit results

relating to system fitness and effectiveness , did we review all controls and check if anything was

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relating to system fitness and effectiveness , did we review all controls and check if anything was

compromised or not up to date, internal capability to control the process, etc

Real Prevention costs are very high - we would need to revisit the culture sees only cost vs. benefit

on such aspects.

Govt. views on onshore vs offshore projects - created a sort of moral hazard…

Business Continuity - Maturity - Marsh Study EMEA

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BS 25999 Collaboration - Adoption of the Standard sill far away – 49% undecided / 42% in 2 years

End of discussion/presentationEnd of discussion/presentation

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Back-ups

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How does India shape up?

Study of Corporate Governance in Asia

292008: CORPORATE GOVERNANCE IN ASIA: EIGHT CASE STUDIES - http://ssrn.com/abstract=1081954


Case Study Observed Largely Observed Partially ObservedMaterially

Not ObservedNot Observed

Basic Shareholder Rights India Korea, Malaysia,

Pakistan, Philippines,

Thailand

Indonesia, Vietnam

Participation Rights India

Korea

Indonesia, Pakistan,

Philippines

Malaysia, Thailand,

Vietnam

Shareholder’s AGM rights India Indonesia, Korea,

Malaysia, Pakistan,

Thailand

Philippines, Vietnam


Thailand

Disproportionate Control

Disclosure

India, Korea,

Malaysia, Thailand


Vietnam

Indonesia

Market for Corporate

Control

India Korea, Malaysia Pakistan ,

Philippines, Thailand

Indonesia,

Vietnam

Equal treatment for

Shareholders

Korea, Pakistan India, Indonesia,

Malaysia,


Vietnam

Prohibit Insider Trading Malaysia, Thailand India, Indonesia,

Korea, Pakistan,

Philippines

Vietnam




Disclosure of Interest Malaysia, Pakistan,

Philippines

India, Indonesia,

Korea

Vietnam

Stakeholder Rights

respected

India, Pakistan Malaysia,


Indonesia, Korea,

Vietnam

Redress for Violation Rights Korea Malaysia, Thailand India, Indonesia,


Vietnam

Performance Enhancement India, Pakistan Korea, Malaysia,

Thailand

Indonesia,



Thailand Philippines, Vietnam

Access to Information India, Korea Malaysia, Pakistan,

Thailand

Indonesia,


Disclosure of Standards India, Korea,

Malaysia, Pakistan,

Thailand

Indonesia,

Philippines

Vietnam

Accounting and Audit

Standards

Malaysia India, Pakistan,

Philippines

Indonesia, Korea

Thailand, Vietnam

Independent Audits Korea, Malaysia,

Pakistan, Thailand

India, Indonesia,


Fair and Timely

Dissemination

India, Korea Malaysia, Pakistan,

Thailand

Indonesia,

Philippines

Vietnam




Acts with Due Diligence

and Care

India, Korea Indonesia, Malaysia,


Thailand, Vietnam

Treat all shareholders Fairly India, Malaysia,

Thailand

Indonesia, Korea,

Pakistan, Philippines

Vietnam

Ensure Compliance with

Law

India Pakistan Indonesia, Korea,

Malaysia,


Vietnam

Board fulfils certain key India, Korea, Indonesia, Pakistan, Vietnam


Board fulfils certain key

functions

India, Korea,

Malaysia

Indonesia, Pakistan,

Philippines,

Thailand,

Vietnam

Exercise Objective

judgment

Malaysia India, Indonesia,

Korea, Pakistan,


Vietnam

Access to Information India, Pakistan Malaysia,


Indonesia, Korea,

Vietnam

Corporate Governance & Business Continuity

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Transcript of Corporate Governance & Business Continuity