Governance in The 21st Century
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Transcript of Governance in The 21st Century
The governance Professionals
TMAC 27th Annual ConferenceNiagara Falls, Ontario
Governance in the 21st century: the changing role of the board of directors
Gerard Buckley, BBA, FICB, ICD.DPartner, RSD Solutions Inc.
&Janis A. Riven, LLB,BCL,MBA,FCIS, Acc.Dir.Lecturer, John Molson School of Business
Concordia University, MontrealPresident, ICSA (Quebec)
The governance Professionals
copyright 2009 ICSA 2copyright 2009 ICSA 2
Agenda
• The emerging vision of governance
• Changing board duties and responsibilities
• Changing skill sets and behaviours
• The audit committee: a very special group
• Breakout exercise
The governance Professionals
Clean sweep at lotto corp.
“Finance Minister Duncan announces sweeping
changes in wake of expense claims”
• The CEO of troubled Ontario Lottery and Gaming Corp., Kelly McDougald, has stepped down and OLG board chair Michael Gough and the rest of the board of directors have also resigned, Ontario Finance Minister Dwight Duncan announced this afternoon
• You are a member of a temporary board appointed by Minister Duncan on Aug 31 and today is your first meeting.
• Discuss the agenda items you would like to propose for your first meeting
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The governance Professionals
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Corporate Governance- its not just complianceCompliance
– A way of managing legal, regulatory, reputational and certain operational risk by:
• Respecting rules and principles• Tone from the Top “the way we do things around
here”– Staying out of jail
Corporate Governance• The framework for the direction and oversight of the
enterprise• The process that ensures the direction, control, oversight
and evaluation of the enterprise, and its management. • The means to enhance the decision making process
The governance Professionals
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And why do we care?...
• Good governance is not merely being in compliance with laws
• Good governance enhances shareholder and stakeholder value by balancing demands of each
• Manages conflict of interest areas• Deals with ‘principal-agent’ problem• Good governance brings investor
confidence, economic stability, and increased flows of risk capital
The governance Professionals
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Directors’ Duties
• Corporate law sets out the following duties: – Fiduciary duty (duty of loyalty)
• Duty to act honestly, in good faith and with a view to the best interest of the corporation
– Avoid conflict of interest
– Duty of confidentiality
– Duty to disclose
• Imposed on each director
– Duty of Care• Duty to exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances
The governance Professionals
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Board Paradigm Shift
• Old Paradigm– Provides legal direction– Formal and routine– Passive board:
unquestioned personal loyalty to chairman
– Prestige, recognition, rewards
– Minimal contact and dialogue with other directors
• Engaged Board– Reviews and counsels
management– Open collegial dialogue– Active board: main
loyalty to company– Opportunity to make a
difference, meet challenges, build relationships
The governance Professionals
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Boards are now actively engaged in…
1. Strategy2. Investments and M&A3. Human resources / organization4. Financial management5. Risk management6. External relations7. CEO effectiveness8. Succession9. Corporate governance10. Other?
The governance Professionals
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eg: Green accounting
• Corporate accounting will get cleaner and greener—and perhaps even meaner.
• companies will be more eager than ever to offer up environmental indicators to show their good citizenship.
• green accounting is already starting to conform to one standard. – The Global Reporting Initiative
– 1,750 global companies expected to issue reports based on 2008 guidelines
The governance Professionals
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Eg: Sustainability reporting
• Global Reporting Initiative• Dow Jones Sustainability Index• FTSE4Good• UN Principles for Responsible
Investment• ISO 14001 (environment)• SA 8000 (human rights)• ISO 2600 (social responsibility)• UN Global Compact
The governance Professionals
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Eg: Risk Management
• Risk– Risk refers to the uncertainty that surrounds future
events and outcomes. It is the expression of the likelihood and impact of an event with the potential to influence the achievement of an organization's objectives.
• Risk Management– Systematic approach to risk taking
• Enterprise Risk Management (ERM)– ERM is the proactive execution of a senior
management sponsored entity-wide strategic process of assessing and responding to the collective risks that impact an organization’s ability to maximize stakeholder value.
The governance Professionals
Risk management
The board of directors has overall responsibility foridentifying and monitoring risks, and ensuringadequate control mechanisms are in place.
• Ask questions about emerging risks• Clear committee mandates to ensure all risks are reviewed
– Audit v. risk committee?• Provide visible support to RM process• Link RM to strategic planning• Promote culture –’everyone is a risk manager’
The governance Professionals
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The board’s role:risk prioritization
Low Priority Risks
• Significant monitoring not necessary unless change in classification
• Periodically reassess
Secondary Risks
• Lesser significance, but more likely to occur
• Consider cost/benefit trade-off
• Reassess often to ensure changing conditions (move tohigh significance)
• •
Secondary Risks
Lower likelihood, but could have significant adverse impact on organization objectives
Key Risks
Critical risks that potentially threaten the achievement of organization’s objectives
Likelihood
Imp
act
Low
Rare Almost Certain
High
The governance Professionals
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The effective board requires new skill sets…..
integrity prudence experiencediscretion diligence availabilityloyalty competence objectivity training leadership knowledge teamwork
_________________________________
Availability, Competency, Integrity+ ...
The governance Professionals
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Effective boards need independence• Independence in Fact :
– Not subject to control by others - neither fear nor favour– Independence from management– Independence from controlling shareholder– Based on definitions – structural
• Independence of Mind– Think, speak and act independently with confidence and
courage– Be critical and responsive to change and new thinking– Have confidence and the will to make tough decisions,
including the strength to challenge the majority view– Be willing to risk rapport with Chair and other Directors
and / or C.E.O. in taking a reasoned, independent position
The governance Professionals
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The role of governance professionals
• Key role is the implementation and oversight of effective governance processes– Culture shift from growth to sustainability– Focus on key tools
• Accountability• Transparency • independence
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The Audit Committee…
• Why, Why, Why? How many of you have said this?
• Why do these old guys require all this information?
• How many of you have said this or have those thoughts
• The world is changing!
• Board Education is improving: ICSA, ICD, Directors College, CICA and many of the accounting firms now have Board Governance Practices. This is giving the independent director knowledge and he/she is using it!
The governance Professionals
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The Audit Committee…
• Audit Committee Members are personally accountable for their negligence (Duty of Care)
• If an employee is negligent they lose their job; if a board/committee member is negligent they can be sued!
• In simple language “the buck stops here” with the Board of Directors - not with the CEO.
• D & O insurance does not cover a director for neglect of their Duty of Care
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Audit Committee Structure
• Most boards required to have an AC• AC governed by OSC MI 52-110• Audit Committee Charter• External Audit reports directly to AC• Internal Audit either reports to or has direct line
to BOD• All members independent• Must meet financial literacy test• Whistleblower program• Audit Committee meetings planning document
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The governance Professionals
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The Audit Committee and Financial Risk Management
• Board risk assessment in many cases is managed by the AC
• How much strategic financial risk should or can the company accept. (Lemans, AIG, Barings etc.)?
• Who is responsible for the other risks in the organization’s ERM?
• There is a new book on ERM coming this fall on ERM that is worth reading:
Enterprise Risk Management: Today's Leading Research and Best Practices for Tomorrow's Executives John Fraser (Editor), Betty Simkins (Editor)
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The governance Professionals
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Roles and Responsibilities
• Risk Assessment• Assess process relating to control
environment• Oversee Financial Reporting including
MD&A and earnings press releases• Evaluate the internal audit process• Evaluate the external audit process
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‘Better’ Practices’
• Chair of AC of should be an expert (CSA does not require this: USA does)
• Minimum three members of AC, but more depending on business complexity
• Meet minimum 5 times a year, once for each quarter and extra meetings as required
• CSA does not require AC Charter; however, NP 58-201 Corp Gov. Guidelines recommend a written mandate
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Skills Required
• Ability to understand financial risks of the organization.
• Ability to understand financial complexities of the organization
• Ability to understand new accounting pronouncements for your organization’s industry
• Time !!!!!
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Authority of the Audit Committee
• Engage independent counsel and other advisors
• Set and pay the compensation for any advisors employed
• Communicate directly with the internal and external auditors
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Ontario Lottery and Gaming
In your same groups
• What questions should the new directors be asking?
• What went wrong and how should it be fixed?
The governance Professionals
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Shaping the board of the future
• Accountability: – Individual directors who understand their
responsibility • Focus
– Boards composed of right mix of skills and competencies –
• Creative tension – Relationship between board and
management – • Vision
– A broad view and understanding of all stakeholder needs
The governance Professionals Questions or comments?
Gerard Buckley
Partner, RSD Solutions Inc.
Email: [email protected]
Tel: 416.884.9522
&
Janis Riven
President, ICSA-the institute of governance professionals (Quebec)
Email: [email protected]
Tel: 450.226.7100