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CORPORATE

GOVERNANCE AND RISK


MANAGEMENT

CORPORATE GOVERNANCE
The cornerstone of the
modern market oriented
economy

GOVERNANCE
Establishment of policies, and continuous
monitoring of their proper implementation, by the
members of the governing body of an organization.
It includes the mechanisms required to balance the
powers of the members (with the associated
accountability) and their primary duty of
enhancing the prosperity and viability of the
organization

CORPORATE GOVERNANCE
It refers to the processes and structures by
which the business and affairs of an
institution are directed and managed.
It is about building credibility, ensuring
transparency and accountability as well as
maintaining an effective channel of
information disclosure that would foster
good corporate performance.

CORPORATE GOVERNANCE
Doing the right things and doing things
right
Doing the right things for the organization
and doing things the right way independent
of personal interests
It is the processes and systems by which a
company is governed which ensure
appropriate checks and balances.

The essence of Corporate


Governance
Promote the efficient use of scarce resources
Promote the trust of investors
Good corporate governance has a positive link
to economic development and good corporate
performance
Funds will flow to entities which are seen to
have internationally accepted standards of
corporate governance

Corporate Governance
Why is it important?
Proliferation of financial scandals and crisis
Loss of trust of investors
Globalization lead to increasing cross-border
investment opportunities but investors may not
have knowledge about the regulatory
framework of overseas investees

Corporate Governance
Why is it important?
Investors are not willing to invest in
countries/companies that are corrupt, prone to
fraud, poorly managed and lacking sufficient
protection for investors rights
Securities and company law protection may help,
but not enough
Corporate Governance supplements the legal
framework

Corporate Governance
Why is it important?
Corporate Governance also plays an important
role in maintaining corporate integrity and
managing the risk of corporate fraud,
combating against management misconduct
and corruption

Major elements of
Corporate Governance
Board Commitment
Good board practices
Functional and effective control
environment
Transparent disclosure
Well defined shareholder rights

Corporate Governance Definition


the system by which business corporations are directed and
controlled
specifies the distribution of rights and responsibilities among
different participants in the corporation, such as the board,
managers, shareholders and other stakeholders
spells out the rules and procedures for making decisions on
corporate affairs
provides the structure through which the company objectives
are set, and the means of attaining those objectives and
monitoring performance
OECD

The OECD Principles of


Corporate Governance
1.
2.
3.
4.
5.
6.

Ensuring the basis for an effective corporate governance


framework
The rights of shareholders and key ownership functions
The equitable treatment of shareholders
The role of stakeholders in corporate governance
Disclosure and transparency
The responsibilities of the board
- The corporate governance framework should

ensure the strategic guidance of the company, the


effective monitoring of management by the board,
and the boards accountability to the company and
the shareholders.

What do the investors expect?


the Code of Corporate Governance
Practices

Board of Directors
Assume responsibility of leadership and
control of the corporate
Direct and supervise the corporates affairs
Make decisions in the interests of the
corporate

15

Board of Directors

Regular meetings
Active participation
Freedom to include items in agenda
Sufficient notice for board meetings
Access to advice and services of company
secretary and independent professional advice

16

Board of Directors
Full record of board/committee minutes, and
available for inspection
Independent non-executive directors should be
present at board meetings to discuss matter involving
conflict of interest
Abstain from voting if conflict of interest exists
Insurance coverage in respect of legal action against
directors

17

Chairman and CEO


Segregation of the management of the board
and the day-to-day management of the
corporates business
Balance of power at board level to avoid
concentration of power in a single individual

18

Chairman and CEO


Separation of Chairman and CEO
Division of responsibilities between Chairman
and CEO clearly laid down in writing

19

Chairman
Provide leadership for the board
Ensure the board works effectively and discharges its
responsibilities
Ensure good corporate governance practices and
procedures are in place
Ensure all directors are properly briefed on issues
arising at board meeting
Responsible for ensuring appropriate information
received by directors

20

Chairman
Encourage full and active contribution to the boards
affair
Ensure effective communication between board and
the shareholders
Hold annual meetings with non-executive directors
Ensure constructive relationships between executive
and non-executive directors

21

Board Composition
Balance of skills and experiences
Balanced composition of executive and nonexecutive directors
Non-executive directors should be of sufficient
calibre
Independent non-executive directors should be
expressly identified
List of directors updated and their respective role and
function identified

22

Appointment, re-election and removal


of directors
Formal and transparent procedure for
appointment
Succession plan
Re-election at regular intervals
Proper explanation for resignation/removal of
directors

23

Appointment, re-election and removal


of directors
Specific term for non-executive directors
All directors subject to retirement by rotation
at regular interval
Nomination committee formed to make
recommendation on appointment of directors
and succession planning for directors,
chairman and CEO

24

Responsibilities of directors
Keep abreast of the responsibilities as a director
Exercise duties of care, skill, integrity and diligence
expected
Ensure proper understanding of the operation,
business and the regulatory requirement
Contribute sufficient time and resources to serve the
corporate
Attend AGMs to share the views of shareholders

25

Non-executive directors

Active participation in board meetings


Bring in independent judgment
Take lead if conflict of interest arise
Serve on committees
Monitor the corporates performance in achieving
pre-set goals

26

Information access by
directors
Directors should be provided with accurate
and appropriate information in order to make
informed decision and to discharge their
responsibilities

27

Information access by
directors
Agenda and board papers should be sent in full
in a timely manner to directors
Information supplied must be complete and
reliable
Directors should have access to the senior
management for information
Information supplied should be of form and
quality to facilitate informed decision
28

Remuneration of directors and senior


management
Transparency of directors remuneration policy
Remuneration should be sufficient but not
excessive
Each director not to involve in deciding his/her
own remuneration

29

Remuneration Committee
Remuneration committee to be formed, mainly from
non-executive directors
Consult Chairman/CEO if needed
Access to professional advice, market comparable
information
Make recommendation on policy and structure of
remuneration
Determine specific remuneration packages of all
executive directors and senior management
30

Remuneration Committee
Review and approve performance-based
remuneration
Review and approve compensation
arrangement in connection with loss or
termination of office, dismissal or removal of
directors for misconduct

31

Accountability and Audit


Financial Reporting
Management provide explanation and information to
the board to enable them to make informed
assessment of financial and other information
The board should present comprehensive assessment
of the corporates performance, position and
prospects in annual and interim reports, pricesensitive announcements and other financial
disclosures

32

Accountability and Audit


Internal Control
Ensure the maintenance of sound and effective
internal controls to safeguard assets
Conduct regular reviews of the effectiveness
of the internal control system, covering
financial, operational, compliance and risk
management control functions
Prevent fraud, corruption, and malpractices

33

Audit Committee
Have clear terms of reference
A formal and transparent arrangement to apply
the financial reporting and internal control
principles and maintain appropriate
relationship with external auditors

34

Audit Committee
Full minutes of audit committee to be kept
Provided with sufficient resources to discharge
its duties
Independent from external auditors

35

Audit Committee
Make recommendation for appointment and
removal of external auditors
Monitor the effectiveness of the audit process,
ensuring auditors independence and
objectivity
Monitor the integrity of the financial
disclosures
Oversight of the financial reporting and
internal control procedures
36

Delegation by the Board


Formal schedule of matters specifically
reserved to the board for decision
Clear directions to management as to matters
requiring board approval before decision made

37

Delegation by the Board


Clear directions to the delegation of the
management and administration functions as
well as the powers of management
Review the arrangement for segregation of
duties between board and management
regularly
Board Committee to be formed, with specific
terms of reference, as needed
38

Communication with Shareholders


- Effective communication
Maintain on-going dialogue with shareholders
and make use of annual general meetings or
other general meetings to communicate with
shareholders
Transparency in corporate governance
practices and business performances through
proper and adequate disclosures
Encourage shareholders participation
39

Communication with Shareholders


- Effective communication
Separate resolution for each separate issue
Chairman of the board and chairman of each board
committees be present in general meetings to answer
questions at any general meeting
Chairman of independent board committee be present
to answer any questions in any general meeting to
approve transaction requiring independent
shareholders approval

40

Communication with Shareholders


- Voting by Poll
Inform shareholders about procedure for
voting by poll
Ensure proper compliance to regulatory
requirement about voting by poll

41

Corporate Governance
Corporate Governance is a dynamic process and is
continually evolving
AND
It has no boundaries or limits!

42

RISK MANAGEMENT
Identification, assessment, and
prioritization of risks
It is defined in ISO 31000 as the effect of
uncertainty on objectives (whether positive
or negative) followed by coordinated and
economical application of resources to
minimize, monitor, and control the
probability and/or impact of infortune
events or to maximize the realization of
opportunities.

RISK MANAGEMENT
Key Issues
Probability (likelihood) of event occurring
Severity (impact) of the event on set objectives
The strategies
Typically include transferring the risk to another
party, avoiding the risk, reducing the negative
effect or probability of the risk, or even accepting
some or all of the potential or actual
consequences of a particular risk

Common risks in
Financial Institutions
Credit Risks most simply defined as the
potential that a bank borrower or counterparty
will fail to meet its obligations in accordance with
agreed terms
Market Risks refers to the risk of loss to an
institution resulting from movements in market
prices, changes in interest rates, FX rates, and
equity and commodity prices.
Operational Risks the risk of loss resulting
from inadequate or failed internal processes,
people and systems, or from external events

HOW DO THEY
INTERSECT?
Company must focus on achieving growth and
profitability within appropriate risk control
boundaries
Group Risk Function to probe, analyze, mitigate
and accept risk within agreed appetite and
bounds
Customer needs and financial objectives
Corporate Governance: Monitoring and effective
controls, using a macro view of the institution
built around a shared cultural approach.

WHAT HAPPENS WHEN IT


FAILS
Lehman Brothers Founded 1850. Fourth largest
investment bank in US (after Goldman Sachs; Morgan
Stanley and Merrill Lynch). Declared bankruptcy
September 2008. following large exodus of clients;
drastic losses in stock and downgrade of assets by
credit rating agencies. Largest bankruptcy in US
history! Holdings shared between Barclays (NA
divisions) and Nomura (Asia-Pac, Europe and Middle
East). Financial accounting gimmicks; sub-prime
mortgage bets (large positions in securities backed by
lower rated mortgages). In first half of 2008, lost 73%
of value as credit markets continued to tighten had
to sell of $6bn of assets and lost $2.8bn.

WHAT HAPPENS WHEN IT


FAILS
Barings Bank Oldest merchant bank in London
(founded 1762) until collapse in 1995 after loss
from unauthorized speculative trades by its Head
Derivatives Trader, Nick Leeson in Singapore
lost GBP827m. Instead of buying and
simultaneously selling, Leeson held on to the
contract, gambling on future direction of Japanese
markets. Internal challenges doubled as both
floor manager and head of settlement operations.
No check and balance.

WHAT HAPPENS WHEN IT


FAILS
Barclays Rate-rigging scandal brought down
CEO, Bob Diamond. Fined GBP290m (approx
$450m). Possible criminal prosecution. GlassSteagall type action possible (division between
investment and commercial banking). CEO lost
$30m bonus

What to do- Risk Governance


Usually the board of directors have the following responsibilities:
Select competent board members; and establish guidelines to
govern the board
organization and structures.
Select competent executive officers, evaluate and compensate
them accordingly;
review and approve the management-developed strategy i.e.
approve the overall risk-appetite of the institution;
monitor the control of the environment;
ensure that the necessary corrective actions are taken to remedy
the situation;
ensure the compliance of the institution with its legal and regulatory
requirements;
Directors are to perform these functions in the best interest of the
shareholders and other stakeholders.

Corporate Governance

Thank you for listening!

Tess R. Dimayacyac
53

Take Home Quiz


What is Corporate Governance.
What is governance.
Why is Corp. Governance important.
o Give 3 reasons

What are the major elements of Corporate Governance.


What are the duties and responsibilities of Board of Directors.
o Give 3duties and responsibilities

Explain the board composition.


What are the duties and responsibilities of the Remuneration
Committee.
o Give 3duties and responsibilities

What should be done by the organization to avoid failures in


Corporate Governance.
Explain the Corporate Governance Framework.
Why is Risk Management important to the corporate governance of
an organization.

WRITE YOUR ANSWERS IN 1 WHOLE SHEET OF YELLOW PAPER


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