Diagnostic Review Observations

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Global Risk Management Solutions

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

Anton VAN WYK

Partner,

Global Risk Management Solutions – Southern Africa,

PricewaterhouseCoopers, Inc

South Africa

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Global Risk Management Solutions

Risk Management andthe Board of Directors:Moving BeyondConcepts to ExecutionAnton van WykNovember 2002

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Global Risk Management Solutions

“There’s nothing like a big screw upto make a board get into the bowels ofthe real problem.”

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Global Risk Management Solutions

Definition of governance

Essentially, corporate governance is the means of ensuring dueand adequate control over the strategy and direction of anorganisation and the stewardship, use and disposition of itsassets - both financial and non-financial - in achieving its keyobjectives.

It is a function of:

Leadership and direction

Risk management and control

Reporting

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Global Risk Management Solutions

Leadership and Direction

Vision, mission, values

Organisational integrity

Goals, strategy and policy

Appoint CEO/executive management

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Global Risk Management Solutions

Leadership and Direction

Primary characteristics

Discipline

Transparency

Independence

Accountability

Responsibility

Fairness

Social responsibility

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Global Risk Management Solutions

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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Global Risk Management Solutions

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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Global Risk Management Solutions

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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Global Risk Management Solutions

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 riskappetite of the organisation

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Global Risk Management Solutions

Risk Management and Control

ORGANISATIONAL

RISK FACTORS

IDENTIFY

AND

PRIORITISE

MEASURE

AND

MANAGE

REVIEW

AND

MONITOR

INFORM

AND

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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Global Risk Management Solutions

How to close the Value Gap

Understanding

Create adialogue withinvestors andanalysts toagree on themost importantmeasures.

Quality

Developmethods andsystems forgeneratingvalidinformation.

Reporting

If informationis importantinternally,provide itexternally.

Information

Provideinformationinvestors andanalystsneed to makeinvestmentdecisions.

Perception

Verify thatthe market’sneeds aretruly beingmet.

Continuous Feedback Loop

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Global Risk Management Solutions

A new form of corporate reporting

Strategy

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

CURRENTLY

MEASURED

VALUE

SUSTAINABLE

BUSINESS

VALUE

FORMS OF VALUE

STAKEHOLDERS

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Good governance -10 key questions for the Board

1.Does the Board comprise a sufficient number of individuals withthe appropriate mix of credibility, skills, experience anddemographic diversity to lead and direct the organisation and toretain full and effective control over it in the pursuit of itsobjectives?

2.Is the Board satisfied that it has taken all appropriate steps,including the appointment of focused committees, to ensure thatit discharges its responsibilities for good governance in theorganisation?

3.Does the Board operate transparent processes of performancemeasurement, evaluation and related reward for directors andmembers of executive management?

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Global Risk Management Solutions

Good governance -10 key questions for the Board

4.Does the organisation have an effective system for theidentification, evaluation, monitoring and measurement of allrisks impacting its ability to achieve its objectives?

5.Does the organisation comply with all legal and regulatoryrequirements to which it is subject?

6.Does the organisation have an effective internal auditfunction?

7.Has the organisation adopted social and environmentalmanagement practices that allow it to measure its impact onthe communities within which it operates, by means ofestablished performance indicators?

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Global Risk Management Solutions

Good governance -10 key questions for the Board

8.Has the organisation adopted and communicated to internaland external stakeholders clear guidelines and standards fororganisational integrity, against which organisational andindividual activities are measured?

9.Does the organisation make regular and full disclose inmeaningful, understandable and balanced terms on allfinancial and non-financial issues of relevance and interest toshareowners and other stakeholders?

10.Is the Board satisfied that the external auditor enjoysunimpaired independence and objectivity in the execution ofthe external audit mandate?

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Global Risk Management Solutions

New approach to governance

The Board and executivemanagement need to achievethe appropriate balance ofsocial, environmental andeconomic stewardship,necessary to ensure ongoingvalue protection and valuecreation for shareholders, bybalancing the interests oflegitimate stakeholders.

Clarity of goals and objectives

Identification of stakeholders

Understanding of valuedrivers

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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Global Risk Management Solutions

A final thought ...

“Many who plan to seek God at the eleventhhour die at 10:30.”

Sign above entrance to border control post

Kasungula, Zambia