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Corporate Governance Toolkit for small and medium enterprises

Corporate Governance Toolkit for small and medium enterprises 16.2
 Corporate Governance Toolkit for small and medium enterprises: nd 2 Edition April 2005 CORPORATE GOVERNANCE TOOLKIT Forward This series of information sheets is part of the CPA Australia program to advance financial reporting and governance issues. It is sponsored by CPA Australia and authored by PricewaterhouseCoopers. CPA Australia (www.cpaaustralia.com.au) is a major international accounting body with membership of more than 105,000 finance, accounting and business professionals around the globe. PricewaterhouseCoopers (www.pwc.com/au) provides industry-focused assurance, tax, legal and advisory services for public and private clients worldwide. It assists clients to understand and implement good practice corporate governance principles and effectively integrate these into a framework meeting the client’s needs and circumstances. The Corporate Governance Toolkit focuses on the practical application of governance principles for small and medium enterprises and provides straightforward guidance. Corporate governance is constantly evolving to reflect the current corporate, economic and legal environment. The information sheets which make up the Corporate Governance Toolkit provide generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT Contents Forward 1 Overview 5 Performance assessment 1.1 What is corporate governance? 5.1 Performance assessment 1.2 Governance in an SME 5.2 Board performance assessment 5.3 Audit committee performance assessment 2 In the boardroom 6 Oversight and supervision 2.1 Roles and responsibilities 2.2 Directors’ duties 6.1 Delegations of authority 2.3 Role of the chairman 6.2 Risk management 2.4 Board composition 6.3 The internal control framework 2.5 Board committees 7 Practical guidance 2.6 Charters 2.7 Effective board meetings 7.1 Effective budgeting 2.8 Boardroom conduct 7.2 Compliance 2.9 Board papers 7.3 Early warning signs of failure 2.10 Minutes and action items 2.11 Access to papers and advice 8 Companies in Australia 8.1 Board awareness 3 The board and the organisation 8.2 ASX Corporate Governance Council: 3.1 Corporate values, ethics and codes of Principles and recommendations conduct 8.3 ASX Corporate Governance Council: 3.2 Stakeholder relations Disclosures 3.3 Conducting an AGM 8.4 CLERP 9 disclosures 3.4 Director education 3.5 Succession planning 3.6 Remuneration issues 3.7 The audit committee 4 The relationship with auditors 4.1 Selecting an external auditor 4.2 The external auditor relationship 4.3 Evaluating the external auditor 4.4 Internal audit 4.5 Overseeing the work of the internal audit functionCORPORATE GOVERNANCE TOOLKIT 1: Overview 1.1 What is corporate governance? Corporate governance is a topic that has received growing attention in the public in recent years as policy makers and others become more aware of the contribution good corporate governance makes to financial market stability and economic growth. Corporate governance is all about controlling your business and so is relevant, and indeed vital, for all organisations, whatever size or structure. The concept of corporate governance has proved difficult The basic principles of effective corporate governance to define precisely, because it covers a large number of are threefold: concepts and economic relationships that affect many Transparency Accountability Are the board telling us what Is the board taking people. The OECD has the following working definition is going on? responsibility? of corporate governance: Good, effective "Corporate governance is the system by which business governance corporations are directed and controlled. The corporate governance structure specifies the distribution of rights Corporate Control and responsibilities among different participants in the Is the board doing the right thing? corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and Based on these principles, organisations and markets procedures for making decisions on corporate affairs. By around the world have considered the appropriate doing this, it also provides the structure through which mechanisms for their markets. For example, the UK the company objectives are set, and the means of started their corporate governance regime with the attaining those objectives and monitoring performance." Cadbury Code of Practice published by the London Stock Exchange in 1992, which has been regularly updated, This is summed up in a quote from Corporate Practices 1 most recently as a new Combined Code in 2004. Other and Conduct, 3rd edition : examples include: “The essence of any system of good corporate ƒ the OECD, which publishes guidelines on corporate governance is to allow the board and management the governance freedom to drive their organisation forward but to ƒ South Africa, where the comprehensive King Report exercise that freedom within a framework of effective on Corporate Governance was issued in 2002 accountability”. ƒ Australia, where the Australian Stock Exchange Corporate Governance Council issued a set of principles of good corporate governance in 2003 ƒ Hong Kong, where the Hong Kong Society of Accountants has produced a number of relevant publications, including a updated basic framework of principles in 2004 ƒ the US, where various stock exchanges, such as the NY Stock Exchange, have set out specific requirements in relation to governance mechanisms. 1 Bosch Committee, Corporate Practices and Conduct, Third Edition, 1995, Australia The Australian recommendations of the ASX Corporate Governance Council, for example, translate to the basic principles as follows: How the elements translate into mechanisms • Encourage enhanced performance Creating an Is the board doing • Recognised and manage risk environment to the right thing? • Remunerate fairly and responsibly take risk • Recognise the legitimate interests of stakeholders • Promote ethical and responsible Is the board Clarifying the role decision making taking of board and • Lay solid foundations for management responsibility? management and oversight • Structure the board to add value Meeting • Safeguard integrity in financial reporting Are they telling us information needs • Make timely and balanced disclosure what is going on? of investment • Respect the rights of shareholders communities The King Report from South Africa expands on the three basic principles to separate out characteristics within 2 these principles , as a basis for its framework, and other country specific requirements may concentrate on specific parts rather then the principles overall. However, whatever regime is in place, when considering corporate governance issues, and specifically recommendations in relation to systems or mechanisms, it is useful to concentrate on the overall purpose of good governance: to assist organisations to achieve their strategic objectives. 2 The King Report characteristics are set out in information sheet 1.2 Governance in an SME. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 1: Overview 1.2 Governance in an SME The King Report on Corporate Governance for South Africa identified seven primary characteristics of good governance: ƒ Discipline - commitment by the organisation’s senior management to widely accepted standards of correct and proper behaviour ƒ Transparency - the ease with which an outsider can meaningfully analyse the organisation’s actions and performance ƒ Independence - the extent to which conflicts of interest are avoided, such that the organisation’s best interests prevail at all times ƒ Accountability - addressing shareholders’ rights to receive, and if necessary query, information relating to the stewardship of the organisation’s assets and its performance ƒ Responsibility - acceptance of all consequences of the organisation’s behaviour and actions, including a commitment to improvement where required ƒ Fairness - acknowledgement of, respect for and balance between the rights and interests of the organisation’s various stakeholders ƒ Social responsibility - the organisation’s demonstrable commitment to ethical standards and its appreciation of the social, environmental and economic impact of its activities on the communities in which it operates. the specific needs of an organisation at a given point in How does corporate governance time. apply to small and medium sized When corporate governance is discussed, it is often enterprises (SMEs)? spoken of in terms of a company’s corporate Many of the characteristics described above are governance framework. The key elements within an relevant to both SME’s and large listed public effective governance framework, and the issues companies. As an organisation grows in size and relating to each element, are set out on the following influence, these issues become increasingly important. page and are relevant to organisations large and small, in both the private and the public sectors. The However, it is also important to recognize that good table provides a useful structure for any company to corporate governance is based on principles consider its own approach to corporate governance underpinned by consensus and continually developing and the matters which may assist it to achieve its notions of good practice. There are no absolute rules strategic objectives. which must be adopted by all organisations. “There is 1 no simple universal formula for good governance” Many of the matters listed may not be directly relevant Instead emphasis in many localities, such as Australia, in all situations and some may not, in particular Hong Kong and the UK, has been to encourage circumstances, be within the board’s control, but it organisations to give appropriate attention to the provides a useful context in which any organisation principles and adopt approaches which are tailored to can consider its governance needs and how they might be most appropriately addressed. 1 Bosch Committee, Corporate Practices and Conduct, Third Edition, 1995 2nd EDITION. Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved xxxxx xxxxx xxxx Key elements of, and issues relating to, an effective corporate governance framework Board structure, Boardroom Regulatory Robust risk Corporate social Strategy, planning Effective and Relationship with composition and conduct, disclosures and management and responsibilities and monitoring appropriate management membership relationships and shareholder compliance committee performance communications processes structures Board charter Agreed and Communication with Policy/framework Code of Conduct / Vision and mission Charter and clarity in Clarity of roles and understood roles and shareholders and Code of Ethics: roles and responsibilities Director selection and Board commitment, Strategic / corporate responsibilities stakeholders responsibilities appointment process oversight and review plan Value adding Commitment to Composition and Annual report Structure shareholders NED independence Accountability Business plans Open and honest organisation disclosures and objectivity Skills / selection Ethical Risk processes: Annual budgets Consultative Induction and training Clear operational criteria and terms of standards Remuneration instructions and chairman and Monitoring and Accessible Risk Access to and Expectation of guidance: members Formal letters of evaluation identification relationship with employees Accountable appointment to independent advisors Independence and Delegations of Management Risk assessment directors Privacy Appropriate objectivity authority performance /measurement Management/board performance based Directors’ Code of monitoring and Compliance relationship Frequency of Conflicts of remuneration Risk response Conduct assessment meetings interest Conflicts of interest Performance Objective Robust appropriate Separation of Management evaluation Induction and training Policies and performance internal control and Improper payments/ Chairman and CEO succession planning measures procedures statutory and receipts Board agenda, Relationships with Skills/selection criteria Component strategies regulatory compliance reporting, papers and third parties / access Definitions of Political contributions and term of Chairman e.g. technology, frameworks minutes to external advice role and CAPEX Integrity of advertising Skills/selection criteria responsibilities Communication and Frequency, conduct, Annual performance and terms of directors training management and Employee relations review Clearly defined and outcomes of meetings Appropriate size well managed Monitoring, reporting Health and safety Relationship with and relationships with and certifications Confidentiality of reporting to the board Social and stakeholders and discussions CEO/CFO regulators environmental statements: Competent company obligations Continuous secretary Financial reports Trading policy disclosure obligations present true and and company Whistleblowing fair view announcements Effective and efficient risk management and control External auditor Internal audit CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.1 Roles and responsibilities The role of the board can be summarised as being to bring an independent and objective view to the organisation’s decisions and to oversee the performance and activities of management. What is the board’s role? The full range of a board’s responsibilities is extensive and includes: Performance Compliance/legal conformance Overall operations ƒ Ensuring the organisation’s long ƒ Understanding and protecting ƒ Establishing the organisation’s term viability and enhancing the the organisation’s financial vision, mission, values and financial position position ethical standards ƒ Formulating and overseeing ƒ Requiring and monitoring legal ƒ Delegating an appropriate level implementation of corporate and regulatory compliance of authority to management strategy including compliance with ƒ Demonstrating leadership accounting standards, unfair ƒ Approving the business plan, ƒ Assuming responsibility for the trading legislations, occupational budget and corporate policies relationship with CEO including health and safety and ƒ Agreeing key performance his or her appointment, environmental standards indicators (KPIs) succession, performance ƒ Approving annual financial assessment, remuneration and ƒ Monitoring/assessing performance reports, annual reports and dismissal of the organisation, the board itself, other public documents/sensitive management and major projects ƒ Overseeing aspects of the reports employment of the management ƒ Overseeing the risk management ƒ Ensuring an effective system of team including remuneration, framework and monitoring internal controls exists and is performance and succession business risks operating as expected planning ƒ Monitoring developments in the ƒ Recommending auditors and industry and the operating new directors to shareholders environment ƒ Ensuring effective ƒ Oversight of the organisation, communication with including its control and shareholders and other accountability systems stakeholders ƒ Approving and monitoring the ƒ Crisis management progress of major capital expenditure, capital management ƒ Appointment of the CFO and and acquisitions and divestitures company secretary ƒ have an appropriate level of skills and resources What is management’s role? ƒ perform against the established KPIs to deliver the The responsibilities of management are to: objectives of the organisation. ƒ recommend the strategic direction and translate the But at all times, the board must be in control. strategic plan into the operations of the business ƒ manage the company’s human, physical and Does a non-executive director have financial resources to achieve the organisation’s specific responsibilities? objectives - run the business Organisations commonly appoint individuals to the board ƒ assume day to day responsibility for the from outside of the organisation. This allows a fresh organisation’s conformance with relevant laws and perspective to be taken on the responsibilities of the regulations and its compliance framework board. These individuals are the non-executive directors. ƒ develop, implement and manage the organisation’s Non-executive directors do not have any additional risk management and internal control frameworks responsibilities over an executive director in their role as ƒ develop, implement and update policies and director, but the expectations and skills each director procedures brings to the board will differ. Common duties are ƒ be alert to relevant trends in the industry and the addressed in a separate information sheet ‘2.2 Directors’ organisation’s operating environment duties’. ƒ provide information to the board These duties are augmented by your operational ƒ act as a conduit between the board and the responsibilities to: organisation ƒ understand the organisation, its business, its operating environment and its financial position ƒ apply your expertise and skill in the organisation’s best interests ƒ assist management to keep performance objectives at the top of its agenda ƒ understand your role is not to act as auditor, nor to act as a member of the management team ƒ respect the collective, cabinet nature of the board’s decisions ƒ prepare for and attend board meetings ƒ seek information on a timely basis to ensure you are How important is the relationship in a position to contribute to the discussion when a matter comes before the board, or alert the chairman between management and the in advance to the need for further information in board? relation to a particular matter The relationship between management and the board is ƒ make informed decisions critical and must be supported by a clear segregation of ƒ ask appropriate questions. responsibilities. Management must: How does all this work in an SME? ƒ be accountable Small and medium organisations are often characterised by the high level of integration and overlap of board ƒ operate within delegated authorities membership, ownership and management. Many have a sole director. Where there is a board, it is often made up of members of the management team (executive directors), key stakeholders and/or their relatives. These facts do not change the roles and responsibilities, or the legal duties of the directors. In fact, it makes it more important that you understand the capacity in which you act at any given point in time. In these circumstances, the easiest approach may be to give specific attention to your role as a director and to encourage your board to meet formally on a periodic basis to address its responsibilities. It may also be prudent to consider whether your board and indeed your organisation might benefit from the inclusion of one or more non-executive/external directors. A well selected external director will: ƒ bring knowledge and objectivity to support the management team ƒ provide a valuable sounding board ƒ provide the catalyst to introduce an appropriate level of structure, process and formality to the board. 2nd EDITION. Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.2 Directors’ duties As a director, you have a number of specific legal duties which have developed from a number of sources over time. For companies incorporated in Australia, for example, these primarily stem from statutory obligations imposed by the Corporations Act 2001 and complementary relevant State legislation and Ordinances of relevant Territories. Other duties have arisen from precedents developed in case law. You should be aware of the specific legislative or industry requirements applicable to the country of your organisation. above usually extends your responsibilities to include What are my key duties? certain limited duties to creditors, employees, the In Australia, and many other countries, the fundamental community, government or other stakeholders. common law and statutory obligations of any director are the duties to: The business judgment rule? ƒ act in good faith, in the best interests of the company The business judgement rule provides that, if as a ƒ act with care and diligence director, you make a decision in relation to the business ƒ avoid conflicts between your role as a director and operations of the company and meet a number of any of your personal interests. specific requirements, then you will be taken to have These are extended by a range of specific discharged your duty to act with care and diligence. responsibilities including requirements in relation to the The specific requirements that must be met are that: preparation of financial statements and avoiding ƒ you made the decision in good faith for a proper insolvent trading. purpose In discharging these duties you need to: ƒ you do not have a material personal interest in the subject matter of decision ƒ support management to make the best decisions ƒ you have taken steps to inform yourself on the while avoiding the tendency to second guess them subject matter of the decision to the extent you ƒ encourage constructive debate in the boardroom reasonably believe to be appropriate ƒ ensure all relevant issues are given due ƒ you reasonably believe the decision is in the best consideration before a decision is made. interests of the company. As a director, you also need to be aware of the wide range of other legal requirements with which the Where can I find more information company must comply and that, as a result, have a direct on this important issue? bearing on your role and in some instances, attach There are corporate governance organisations in many specific personal responsibilities to you. Specific countries that provide additional information on directors’ examples include legislation in relation to privacy, duties. For Australian companies, the Australian Institute occupational health and safety, environment protection, of Company Directors publication Duties and trade practices, taxation and equal opportunity Responsibilities of Directors and Officers (17th Edition, legislation. 2002) provides a comprehensive overview. To whom do these duties extend? As a director, your key duty is to the shareholders as a group. However the legislative framework described nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.3 Role of the chairman The chairman is the most prominent position on the board, and one which has specific responsibilities. It is generally accepted that on average, a non executive chairman may spend up to two to three times as many days each year on their duties for a organisation as his or her fellow directors. The time and effort that it may take a chairman to effectively discharge his or her responsibilities is largely impacted by the organisation, the particular issues it is confronting at any point in time, the personalities and skills of the individual directors and the dynamics of the board as a whole. What is the role of the chairman? Meeting agendas and the flow of information It is the chairman’s responsibility to lead the board and In establishing the meeting agendas, the chairman facilitate constructive contributions by all directors to should meet with the company secretary and CEO to ensure the board functions effectively as a whole in determine which matters require the board’s attention discharging its responsibilities. and/or decision. One of the core competencies of any chairman is In seeking to have items added to the agenda, ensuring that board meetings are efficient and effective. management may need to provide written reports or papers. This is facilitated by: The agenda may need to allow for relevant presentations ƒ an appropriate meeting agenda which allocates to the board and where appropriate, management sufficient time to each agenda item attendance to discuss a particular agenda item. ƒ competent management of the information flows to the board to support agenda items The form and content of board papers is discussed ƒ managing boardroom discussions and ensuring separately in the information sheet ’2.10 Board papers’. conclusions/decisions are reached, are clearly understood by all directors and are appropriately Managing boardroom discussions recorded. The chairman needs to ensure: Because of the nature of the role, many corporate ƒ there is structured and open debate of issues governance regimes require or recommend that the ƒ he or she facilitates the contributions of all members chairman be an independent director. ƒ all issues are given due and appropriate consideration. The chairman has to ensure there is balance. He or she must maintain control without dominating the debate. The chairman typically allows the discussion of issues to proceed until the point of which a broad consensus has been achieved, or he or she is able to summarise an agreed-upon conclusion. Where dissention exists and no conclusions appear to be forthcoming, the Chairman must decide whether: ƒ the directors require additional information ƒ there may be particular benefits in postponing a What if the chairman is the CEO? decision on a specific matter The duties and skills required of a CEO are different from ƒ additional or external advice should be obtained. those required by the chairman of the board. For this reason, many corporate governance regimes require or In situations where there are serious disagreements, the recommend that the roles of chairman and CEO should chairman must manage this situation to its resolution. not be exercised by the same person. Some also Does a chairman have any other suggest that the CEO should not go on to become the chairman of the same company. This is also based on responsibilities? the view that there should be a clearly accepted division The chairman is the principal spokesman for the board of responsibility between the CEO and the chairman to and will be required to show leadership in difficult ensure an appropriate balance of power and authority situations. exists. There will be instances when he or she is called upon to The chairman manages the board and the board speak publicly on behalf of the organisation. Whilst this provides an oversight to the organisation acting on behalf may occur in certain instances, generally, this role falls to of the shareholders and other key stakeholders. The the CEO. CEO manages the organisation with powers delegated to In addition, the chairman is the key link between it by the board. management and the board. The relationship between If the chairman and CEO are one and the same person, the CEO and chairman is vital and, if it is to be effective, there is a risk that the benefits of independent oversight it must be based on co-operation, trust and mutual and an appropriate balance of power could be respect. compromised. The CEO should be encouraged to use the chairman as In smaller organisations, separation of the CEO and the a sounding board to discuss sensitive issues or matters chairman may not always be possible or feasible. In of concern. If the working relationship is a good one, the these instances, organisations may set in place other CEO will also seek the benefit of the chairman’s structures to meet the aims of ensuring that both of the experience and where the chairman is an independent, roles are implemented and that the benefits of non executive director, his or her more independent and independent oversight are met. These may include objective view. clearly setting out the specific duties of the individual in In discussing issues with the CEO, the chairman may their role as chairman (which is of particular importance if determine that certain issues require elevation for there are external directors on the board), nominating discussion at a board level. one of the external/non-executive directors as a senior NED who will undertake some of these duties, or If the company is a public company, the chairman will introducing written protocols for dealing with conflicts of also be required to manage the annual general meeting interest. and have a key role in the company’s relationship with any institutional investors. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.4 Board composition Effective boards work together in the interests of the shareholders. An effective board is not dominated by one member or factional group and it does not require members to be experts in all fields. An effective board does not just happen. It requires care, effort, thought and analysis to identify and select the right team of people to help the organisation with its current challenges and opportunities, to take the organisation forward into the future and to work in partnership with senior management, providing real oversight and value adding guidance ƒ strategic thinking What makes an effective board? ƒ knowledge of the organisation and industry. Different boards have different compositions of skills. The skill requirements depend on the organisation’s size, How do we determine the skills and nature, ambitions and the challenges it faces. professional experience we need An effective board is one that has the right mix of skills on our board? and experience and can work together as a team while There is no single correct answer other than to say that it encouraging diverse and healthy debate in the interests is increasingly important that the directors and of the company and its shareholders. particularly those serving on the audit committee, have an appropriate knowledge and understanding of financial To discharge its duties, the board must also be statements and other financial reports. structured in such a way that it has proper understanding and competency in the current and emerging issues Beyond this, it is beholden on the incumbent directors to facing the organisation; and can effectively review and consider the skills of the current board and to identify any challenge management’s decisions. additional skills or experience that are required. What qualities should I demonstrate Typically a board may have a mix of directors with skills in: if I am going to be an effective ƒ law director? ƒ finance, including accounting expertise There a number of personal qualities that each director should bring to a board regardless of their background, ƒ marketing or the particular skills and experiences that have ƒ operations relevant to the organisation’s activities identified them as able to make a valuable contribution to including, where important, international experience the success of the organisation. ƒ key industries in which the organisation operates ƒ corporate governance Individual directors should have: ƒ human resources ƒ the highest standards of personal integrity ƒ risk management ƒ excellent judgement and an ability to make informed ƒ mergers and acquisitions, if relevant decisions within time constraints ƒ specific matters, relevant to the company. ƒ professional credibility The key is to take an informed and measured look at the ƒ the capacity to think strategically and to demonstrate skills the organisation needs on the board and to make vision an honest assessment of how the current board matches ƒ sound communication skills up to those skills. This does not mean that individual ƒ sound inter-personal skills directors who are making a valuable contribution must ƒ team orientation. stand aside, but does require proactive steps to be taken to address any identified skill deficiencies without ƒ bring particular skills and qualifications to the allowing the size of the board to expand too far. organisation including an outside view, a balanced perspective and a “fresh set of eyes” To achieve this, the board or a nominations committee ƒ offer it the benefit of their external experience and should regularly review the range of skills, experience expertise and expertise on the board to enable identification of ƒ be well placed to consider major issues and potential knowledge gaps. initiatives from an objective perspective. It is also valuable for the organisation to have a formal Principles of good corporate governance emphasise the and transparent procedure for the selection and importance of a majority of non-executive directors in the appointment of new directors and a succession plan that boardroom, particularly of listed companies, where the ensures the maintenance of an appropriate balance of separation of the interests of the shareholders and skills, experience and expertise on the board. These management may be quite substantial. procedures can be shared with stakeholders to assist communication, for example they could be published on In Australia particular importance is placed on the the organisation’s website. separation of the role of the CEO (typically an executive director) and the chairman (typically a non-executive director). This is a view that has been adopted in a How big should a board be? number of other countries, including the UK, and is It is quality, not quantity that counts and there is no single gaining increasing acceptance internationally. This is correct answer. A small board of directors of the highest discussed in greater detail in the information sheet calibre, with complementary skills and experience and a ‘2.3 Role of the chairman’. degree of independence, can make for a more effective board than just sheer numbers of individuals. What is an independent non- Indeed a large board can very quickly become unwieldy executive director? and limit the opportunity for individual directors to make To be an independent non-executive director, a director an effective contribution. should be independent of management and free from any business or other relationship which could materially The board size should ideally reflect the needs of your interfere or reasonably be perceived to materially organisation and encourage efficient decision-making. interfere with the exercise of their independent Suffice to say, one size does not fit all. judgement. The board should regularly assess the independence of its directors. Many countries now What is the difference between an require or recommend that a majority of the board of executive and a non-executive listed companies should be independent non-executive director? directors. A board can be made up of both executive and non- The concept of independence has been considered by executive directors. many regulators and there are many slightly differing Executive directors are employees, and are usually “definitions” provided. It is important that you understand senior managers of the organisation. the legal or regulatory requirements in your country relating to your organisation, and that your board has Non-executive directors are not employees. They are articulated what it considers an acceptable definition removed from the day to day management and within these requirements. operational pressures of running the organisation. They are expected to: 2nd EDITION. Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.5 Board committees Committees allow directors to give closer attention to important issues facing the organisation than is possible for the full board in a scheduled board meeting. Committees are an effective way to distribute the work between the directors and allow more detailed consideration of specific matters. The number of committees, the size and mix, will vary from organisation to organisation depending on its size, complexity and the challenges it faces. Not all organisations will need to have specific committees. The smaller the organisation and the smaller the board, the less likely it is that board committees will strengthen the governance framework and provide real benefit to the board, the directors or the organisation as a whole. However, in each situation the need for and possible benefits of delegating some of the work of the board to a board committee should be considered on its merits. An alternative to creating a board committee, and one What makes board committees which is favoured by many small and medium sized effective? organisations with very small boards, is to adopt a model Regardless of the role of your committees, there are where the whole board fulfils the traditional role of several steps your board can take to contribute to its specific committees but that it meets separately, outside effectiveness, including: the normal board meeting, to attend to these responsibilities. ƒ developing formal, documented terms of reference for each committee This ensures the directors have sufficient opportunity to ƒ appointing an appropriate chairman – usually an focus on the specific matters required without independent, non executive director compromising the more strategic focus of the board meetings. ƒ appointing appropriate directors to the committee – typically the emphasis is on committee membership that is primarily/exclusively non-executive directors What committees might my and includes those directors with the expertise most company need? relevant to dealing with the issues at hand Audit Committee ƒ requiring regular feedback from committees to the board The most common committee is the audit committee. It ƒ ensuring the committee has appropriate access to is particularly relevant not only for large companies but independent professional advice also SMEs, not for profit organisations and public sector ƒ requiring absolute transparency on committee entities. The functions of the audit committee are activities considered separately in the information sheet ‘3.7 The audit committee’. Broadly the audit committee will ƒ ensuring the committee has appropriate oversee the external and internal financial reporting administrative support. issues, including internal controls over reporting and The key issue is that any committees set up serve the relationships with auditors. board’s needs and are effective. Committees should not be established simply because a board feels good Public sector organisations and some SMEs often have a governance requires it to have a number of committees. finance committee in addition to their audit committee. The responsibilities of a remuneration committee may Nominations Committee include: Nominations committees are also common. While this is ƒ development and review of executive remuneration particularly important for larger organisations, the role of and incentive policies a nomination committee – to provide an efficient ƒ the organisation’s recruitment, retention and mechanism for the detailed examination of the selection termination policies and procedures for executives and appointment processes of directors and officers – is and senior management also relevant to other organisations. The mix of skills and experience on a board is vital. ƒ performance based incentive schemes ƒ director remuneration policies If a nominations committee is set up, for larger organisations it usually will consist of at least three ƒ superannuation arrangements members, the majority being independent directors to ƒ consideration of disclosures required in the provide an objective view. The chairman of the organisation’s reports on remuneration matters committee will also be an independent director. Other Committees The specific responsibilities of the nominations committee may include making recommendations to the While risks are often included in the audit committee board on matters such as: remit, an organisation may establish a separate risk management committee which specifically address the ƒ the assessment of necessary competencies on the identification, mitigation and monitoring of the risks faced board and its maintenance by the organisation, whether financial or operational. ƒ selection criteria and process for appointing new Not for profit organisations, or others, may chose to set members to the board up a social responsibility committee that focuses on ƒ board and CEO succession plans broader and non-financial issues which are important to ƒ evaluation of board and CEO performance the particular organisation. ƒ the appointment and removal of directors and the CEO. How do I manage board Remuneration Committee committees? The number and substance of committees utilised by the The remuneration of the board and senior executives is a board will be dependent on the organisation’s activities, sensitive area and the board will often set up a separate and any specific legal or regulatory requirements. To committee to spend time on the relevant aspects of manage committees, the board should establish formal remuneration. charters which set out the roles and responsibilities, If a remuneration committee is established there will composition, structure and powers of that committee. usually be at least three members, the majority of whom This will ensure that the members of the board, are independent directors to ensure an objective view is committees and management are clear on the role of brought to the deliberations. Use of independent each and that matters are not duplicated or left out. directors will also avoid conflict of interest situations and Agendas and reports of committees should be made in can increase stakeholder confidence that the reference to the charter to ensure they remain focused. organisation’s best interests are being served. The Many organisations will also make the charters available chairman of the committee may also be an independent to other stakeholders, for example by publishing them on director. the organisation’s website. 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.6 Charters In the literature on corporate governance, much has been written about the need for committees of a board to have a formal charter or a statement of their terms of reference which sets out the committee’s roles and responsibilities and relevant administrative matters. A formal charter is important, as it provides a framework for the committee’s operations. It is also considered good governance for the board to have its own charter in place. ƒ the board’s relationship with management including What is a charter? delegations of authority and communications Typically a committee charter is designed to ensure there between directors and staff is a clear understanding of the committee’s role, not just ƒ board committees, including the board’s power to by the committee members, but by management and the establish committees, those in place at a given point board. in time, the process for appointing directors to committees and any relevant administrative There is also increasing acceptance of the value of a requirements board charter, particularly in small to medium sized companies, not for profits and in public sector ƒ the role of the chairman and the procedures should organisations where defining the operation of the board, the chairman be absent from a meeting of the board its roles and responsibilities and the separation of the ƒ the conduct of board meetings including the timing, role of the board from that of management, can be frequency, style and approach to meetings, and particularly valuable. details of quorum and voting requirements ƒ other operational matters including: A board charter ensures: o the content, preparation and distribution of ƒ the roles and responsibilities of the board are clear minutes and understood by all relevant stakeholders o the role of the company secretary ƒ the operation of the board and the relationship o circulation of papers between the board and management are clearly o attendance expectations defined ƒ when directors can seek independent advice, or have ƒ all directors have a clear understanding of the access to outside advisors manner in which the board will conduct itself and the organisation’s expectations of them as directors. ƒ membership issues including: o the independence of directors A board charter can be a powerful tool to contribute to o retirement of directors the effective and efficient operation of the board. o performance appraisal processes Even the smallest board can benefit from a written o the size of the board charter tailored to its specific needs. o qualifications and experience. What should a board charter cover? A board charter would typically address: ƒ the responsibilities of the board Do committees need charters? How often should governance Like the board, a well run committee operates most charters be reviewed? effectively when a written charter is in place. Each charter should be periodically reviewed, usually annually, to ensure the board/committee is meeting its A typical committee charter will cover: objectives and considering any new challenges the ƒ the overall purpose and objectives of the committee organisation may be facing. ƒ the size, frequency and timing of meetings It is important that the charter is a living document that ƒ the committee’s roles and responsibilities including moulds itself to the needs of the organisation. its particular areas of focus (for example, an audit committee’s charter will typically make particular Who should have access to board reference to financial reporting, dealings with the internal and external auditors and oversight of the and committee charters? internal control framework) The organisation’s board and committee charters should ƒ any delegation of decision making authority to the be available to directors, management, internal and committee from the board external auditors. It is becoming increasingly usual for ƒ the relationship with management and other organisations to also make them available to other stakeholders stakeholders, particularly shareholders. Hence it is ƒ reporting responsibilities and the ongoing relationship common to see board and committee charters, or with the board. summaries thereof, published on the organisation’s website. A committee charter will also cover relevant operational matters. How else might a charter be used? A well defined charter: ƒ provides particularly valuable information for new directors and will facilitate the induction process ƒ provides a valuable guide for the development of an annual agenda for the board or committee to ensure that, during the course of a year, they have given appropriate and due attention to all aspects of their role and responsibilities. This prevents a situation where there is undue focus on particular issues at the expense of other matters of importance to the company ƒ for a committee, provides a framework for reporting the committee’s activities to the board. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.7 Effective board meetings Board meetings should be conducted in an open and inclusive atmosphere that allows for healthy debate by all members of the board. The chairman has a key role to play in achieving this objective but individual directors and the company secretary have their own responsibilities. What are the key elements that contribute to an effective board meeting? An effective board meeting is generally characterised by: ƒ a capable chairman ƒ informed, well prepared directors ƒ seamless logistics in terms of the agenda, preparation and delivery of papers and the venue ƒ timely attendance of appropriate members of the management team for specific agenda items ƒ clear and timely decision making. Is how often we meet an issue? The frequency of board meetings will largely depend on the internal and external circumstances and any specific issues the organisation needs to deal with at a given time. As a general guide, the full board should meet no less frequently than quarterly. The boards of most large companies meet on a monthly basis, or more often, as needs dictate. Board committees typically meet less frequently than the board itself but again, this is directly related to the specific circumstances of the organisation and the Are there any other things I should charters of the individual committees. be aware of if I am to contribute to the success of a board meeting? How long should the meetings be? It is important for board members to have sufficient The length of your board meetings should be sufficient to notice of forthcoming meetings. When this occurs, it is give appropriate attention to the issues at hand. Some incumbent upon you to ensure you are able to attend, organisations are holding fewer, but longer meetings. you are available for the scheduled duration of the Board meetings can vary significantly in duration from meeting and that you allow yourself sufficient time to organisation to organisation – anything from several prepare for the meeting. You should challenge ideas hours to two days may be regarded as appropriate. The where appropriate, without being aggressive and you key is that the meeting should be long enough to cover should be receptive to the views of others. the matters for attention in appropriate detail. ƒ advising on and working with the chairman to What preparation am I expected to enhance board practices and procedures do? ƒ writing and circulating the minutes of the meeting Preparation is likely to involve reading and analysing the ƒ maintaining the statutory books and forms in board papers provided prior to the meeting and taking accordance with legal requirements appropriate steps to clarify any issues or papers you do ƒ keeping abreast of and informing directors of any not understand. changes to legislative requirements or governance Prior to the board meeting, you should receive a package expectations. of board papers in sufficient time to allow you to review It is important that the company secretary completely and consider them and follow up on any pertinent items. understands the board’s deliberations and the decisions reached to ensure they are correctly reflected in the The package you receive would typically include: minutes. ƒ an agenda and the supporting papers including: o the CEO’s operational report – providing an What is the company secretary’s overview of major events impacting the business role outside board meetings? since the last meeting The role and responsibilities of the company secretary o a financial performance report, focussing on KPIs will vary from company to company. However, an active and strategic performance company secretary for a fully functioning board is usually ƒ minutes of the previous meeting expected to: ƒ an action items list, noting responsible persons and ƒ be the board’s arms and legs, eyes and ears dates for completion ƒ be a source of advice and counsel for directors and ƒ papers on specific issues for decision, discussion or management information. ƒ anticipate and act to meet the needs of the board What is the role of the company ƒ assist the board to achieve an appropriate balance between conformance and performance secretary in board meetings? ƒ ensure that papers submitted for the Board meet the The company secretary plays a significant role in board’s requirements. ensuring that meetings are run efficiently and resolutions of the board are actioned on a timely basis. The key responsibilities typically include: ƒ working with the chairman to prepare the agenda and compile the supporting papers ƒ facilitating the smooth conduct of board meetings ƒ ensuring the timely provision of quality board papers ƒ arranging the attendance of the right people including members of the management team and advisors at the right time ƒ sourcing and making available expert advice nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.8 Boardroom conduct The manner in which a board operates will largely be determined by the chairman and will reflect his or her personal style. The level of formality which applies will be a particular feature that should be understood before you accept a board position, to ensure you will be in a position to make an appropriate contribution during the course of board meetings. How do I participate in boardroom How are decisions made? The traditional notion of the board voting on each matter discussions? put to them is rarely used in boardrooms today. The Some boardrooms are still particularly formal and all emphasis is on consensus decision making, which directors wishing to participate in a discussion must first focuses on securing the agreement of the full board. be recognised/acknowledged by the chairman. However, there is a clear move towards a more informal approach If you strongly disagree with a decision under this model, where directors are free to participate in discussions you may take the significant step of seeking to have your without first seeking the chairman’s permission. objection to the decision recorded in the minutes but this should not be viewed as a practice to be used, other than Your participation in any boardroom discussion must as a last resort. reflect the importance of your role and the usual social niceties: In the same way, it is no longer necessary, unless ƒ each of your fellow directors should be allowed an specifically required in the organisation’s constitution or appropriate opportunity to speak, subject to the by the chairman, to have matters “moved” and chairman’s overall control of the meeting “seconded” before a decision is made. ƒ your contributions should be concise, considered, informed and to the point How do I manage any potential ƒ emotive language, emotional conduct and personal conflicts of interest? attacks are inappropriate no matter how passionate Subject to the provisions of legislation, the organisation’s you may be about the subject under discussion own constitution and any other governing requirements that may be relevant, particularly for public sector boards, Discussion should be open and candid with appropriate a board is empowered to regulate its meetings and time allowed to discuss issues of substance. proceedings including the processes that will apply if there is a declared, actual or perceived conflict of interest. Conflicts of interest can arise where directors have personal interests in any transactions, contracts or businesses with which the organisation may be dealing and, which may impinge on his or her objectivity and independence. As a director, you have specific responsibilities under corporate legislation to declare any material personal interests in any matters that relate to the affairs of the company as soon as possible, subject to a number of ƒ recognise that your actions may reflect on the specific statutory exceptions. organisation and your conduct must not be called into question It is usual that you will be asked, on a periodic basis, to ƒ adhere to all codes of ethics, codes of conduct and provide the organisation with a listing of your personal standards of behaviour that apply to employees or interests to facilitate the identification of possible conflicts officers of the organisation. of interest. Whether this is undertaken or not and whether your interests are material or not, you have an ongoing responsibility to ensure you fully understand the board’s expectations of your conduct in relation to conflicts of interest. As a minimum, it is likely that you will be required to: ƒ alert the organisation to any matters in which you have or may be perceived to have a conflict of interest ƒ exclude yourself from the decisions on any matter about which you have or have declared such a conflict. This is a sensitive issue and there are a number of further options available to an organisation which your board may choose to adopt: ƒ you may be asked to excuse yourself from all discussions on the relevant matter ƒ you may be refused access to board papers on the relevant matter. Are there any other matters of conduct I should consider? You have obligations to: ƒ ensure that, at all times, you exercise independent judgment ƒ obtain enough information for you to be satisfied with the board’s conclusions on the matters put before you ƒ keep confidential any information you obtain as a result of your position as a director ƒ observe “cabinet solidarity” once a decision is reached nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.9 Board papers There is no single approach to be applied to the preparation, form, style and content of board papers. The requirements will vary from organisation to organisation and should be specific to the needs of the board. However, there are a number of principles that are applicable to all organisation’s to ensure the preparation of board papers is efficient and the information is presented in an effective way so that it can be readily understood and addressed by the board. What should be management’s key How much influence can the board considerations in preparing a board really have over the form and paper? content of board papers? Board papers should be concise stand alone documents “It is ultimately up to the Board to decide what that present the information the board will require to fully information it wants and when. The board can expect to understand the issues being raised and, where required, get input and guidance on what is appropriate and to make an appropriately informed decision. achievable, but cannot avoid the responsibility of specifying the information it requires so directors can It is unlikely that management papers can simply be 1 discharge their duties.” “recycled” as board papers. The information needs are quite different. Management papers may provide the Formal guidelines for board reporting, approved by the basis for a board paper, but the board paper itself should board, are a simple means to ensure the board’s be prepared with the board’s needs in mind, recognising requirements are clearly understood. These guidelines that non executive directors do not live with the business will set out the form, presentation and content every day. requirements for board papers, together with administrative procedures in relation to time of The purpose of each board paper should be clearly submission and the process for review and approval. stated. This is particularly important in assisting directors The guidelines should also provide that the control over to understand management’s requirements and to be distribution of board papers rests with the board. This is appropriately prepared for board meetings. This can be particularly important when distribution is undertaken achieved by allocating each board paper into one of electronically. three distinct categories: The board should ensure that these guidelines are ƒ for information purposes – papers aimed at keeping communicated to all staff who may be responsible for the the board informed of matters, for example, relevant preparation of board papers. It may also be appropriate press clippings, financial information to offer internal support to key personnel in the form of ƒ for decision – matters put forward that require the education or briefing programs and to distribute sample board’s decision or template documents illustrative of the recommended ƒ for discussion and input – discussion of matters prior style. to final recommendations, for example, concept papers seeking the board’s input in the planning It is important that what is ultimately presented to the phase, rather than simply when a final decision is board is concise and performance reports reflect relevant required. and approved KPIs and not superfluous information. 1 David White, General Counsel and Company Secretary, Perpetual Trustees Australia Limited Are there any views on the standard content of individual board papers? Whilst the style of board papers is important, the content is critical. The content of regular reports (for example, monthly management accounts) should be developed over time as a joint project between the board and management. For individual papers, the author must ensure the board is adequately informed on the issues facing the organisation and is clearly focussed on the critical risk How important is the presentation issues. of board papers and what should I Papers for decision or discussion should also include an expect? analysis of the different alternatives and the arguments Presentation that contributes to the ease with which the for and against the different options. Management’s information is understood and absorbed by the reader, is preferred option/recommendation, the reasons an important aspect of an effective board paper. supporting that view, the likely outcomes and the potential consequences of the proposed course of action Presentation specifications might include requirements must be clearly stated. The recommendation contained for: in a board paper, if worded carefully, form the basis of ƒ papers to be concise, accurate and easy to read, the minutes. using simple terms, with little or no technical jargon and a font size no less than 10pt Papers to be submitted should be vetted and supported ƒ papers to be carefully structured to provide all the by a senior officer, such as the CEO or company required information in a succinct and logical manner secretary prior to going to the board. ƒ bullet points, which reinforce a concise writing style, to be used in preference to long paragraphs Is there anything else I should ƒ using indicators tailored to the needs of the company consider? which are reported consistently month on month You should take particular care at all times to ensure the ƒ papers to include graphical and tabular analysis to confidentiality and security of all board papers provided summarise information, to facilitate understanding to you. and to focus the readers attention ƒ titles on any graphs to reflect the message illustrated in the graphical analysis, for example, “Continuing favourable trends in revenue growth”. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.10 Minutes and action items Minutes are the record of the issues discussed, decisions made and actions arising from the board and committee meetings. For companies incorporated in Australia, for example, the Corporations Act 2001 requires that minutes of meetings be kept, signed and preserved as a complete, accurate and objective account of the proceedings of meetings. As legal and regulatory requirements of directors become more onerous, minutes are an important record to show that the board has done what is required to discharge its duty of care. How will I know whether the board What is the process for finalising minutes are appropriate? the minutes of each meeting? Minutes should be clear, concise, well structured and Minutes will generally be prepared by the company unambiguous. They should not contain superfluous secretary from notes taken during the meeting. information nor be a verbatim recording of the dialogue at A draft will be provided for the chairman’s review within a the meeting. short time frame after the meeting while discussions and The minutes must clearly set out the decisions the board decisions are still fresh in his or her mind. or committee made during the course of the meeting and The chairman will review the draft minutes and arrange reflect the consensus nature of board decisions. It may for any appropriate amendments to be made. also be useful for them to evidence the process the board has worked through in reaching its decisions. This A revised draft of the minutes is then usually circulated to may include recording matters discussed, questions all directors. This may be as soon as immediately after asked of management and any additional information the chairman’s review, or alternatively, the draft minutes requested or on which the board relied which is not may be circulated with the papers for the next meeting included in the board papers. and ratified at that meeting. You must make a careful review of the draft minutes to There may be circumstances that require the decision of ensure you are happy with the record made and that any the board, where it is not practical to bring the board concerns you may have are raised before the minutes together. In these circumstances, the use of circulating are approved. resolutions for directors to sign may be appropriate. How can the board track the outstanding issues it has asked management to address? A board will often identify additional information it requires, initiatives it would like management to implement or other matters for management action or attention. In order to keep track of these matters, an action items list should be maintained by the company secretary, updated after each meeting and distributed along with the minutes of the meeting. It is good practice to have a brief description of the action to be taken, cross referenced to the relevant item in the minutes. The list should also note the responsible person and the date by which the action is to be completed. A review of the action items should be a standing item on the board’s agenda to ensure management are progressing with specific tasks in line with the board’s expectations. When an action has been completed to the board’s satisfaction, this should be reflected on the action list prepared after that meeting noting the date of completion and removed from subsequent lists. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 2: In the boardroom 2.11 Access to papers and advice In order to effectively discharge your duties as a director, there may be occasions where you need to seek external independent advice, at the organisation’s expense. Clearly, this needs to be carefully managed. Seeking additional information and advice from within the organisation, be it from senior management or staff also needs to be managed appropriately. What happens if I feel we need to Are there any specific things I need seek external advice on a matter to consider when speaking to the before the board? organisation’s employees? On occasion, there may be issues before the board or It is common for individual directors to seek additional decisions to be made on which you and/or the board feel information on a particular issue from within the it would be prudent to seek independent advice prior to organisation. Directors are usually encouraged to take reaching a formal conclusion. Situations may arise appropriate steps to clarify their understanding of an where you, the board or a board committee may wish to issue in advance of a board meeting rather than use up obtain independent legal or financial advice. It is within valuable board time for this purpose. your rights to pursue this; however, controls need to exist As a director, you are entitled to communicate directly to ensure the process is properly managed. with management; however, you should be sensitive to If there is a board charter in place, it will usually set out their existing responsibilities. the procedure for seeking external advice. Typically this Established channels of communication between will provide that: management and the board allow the board to seek and ƒ with the consent of the chairman of the board, an satisfy their information needs without undue disruption individual director or a board committee may engage to the core activities of management. outside advisors at the expense of the organisation It is not uncommon to have clear protocols in place ƒ where it is appropriate, and at the discretion of the addressing the interaction of the directors and chairman, the advice will be circulated to all organisation personnel. This facilitates a director’s members of the board or committee access, provides a measure of protection for employees ƒ all directors have access to the company secretary. in their dealings with the board and ensures prompt responses to director queries. An employee access protocol is also often set out in a board charter and will typically provide that: ƒ directors are free to speak directly with the CEO or a member of the senior management team who has prepared the particular paper for the board ƒ any contact with other personnel is to be arranged by the CEO at the request of the director. Where it is appropriate, directors should be encouraged to communicate with organisation personnel on an informal/social basis. This may include chatting with staff who have been in attendance at a board meeting, encouraging directors to attend staff related social functions and in some instances, specifically arranging opportunities for directors to meet the organisation’s personnel. If these activities are taking place, it is important that director respect the context of those discussions and temper any questions accordingly. Can I access information once I am no longer a director? You should make appropriate arrangements with the organisation before you leave the board to ensure you will have subsequent access to board papers and minutes relating to the period in which you were an active director. This should cover a set period after you have resigned, often depending on statute of limitations legislation, and should allow for copies of papers to be made at the organisation’s expense. You may consider entering into a formal “Deed of Indemnity and Access” or equivalent legal contract with the organisation. A “Deed of Indemnity and Access” will: ƒ confirm the indemnity provided by the organisation in favour of its directors and certain officers (and former directors and officers) under the organisation’s constitution; ƒ include an obligation upon the organisation to maintain an adequate directors and officers liability insurance; and ƒ provide right of access to organisation documents for directors and former directors. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 3: The board and the organisation 3.1 Corporate values, ethics and codes of conduct Managing, protecting and enhancing reputation has become one of the greatest challenges facing today’s board. The reputation of a business is a critical factor in the determination of its value. The values and ethics of the organisation need to be explicitly managed. ƒ guide directors and senior executives, as a minimum, The increasing scrutiny by regulators, lobbyists, non- as to the practices necessary to maintain confidence governmental organisations, consumer groups and the in the organisation’s integrity. Other members of staff media have the potential to affect an organisation’s should also have a code of conduct relevant to them market perception and hence value. It is therefore which may be the same as that for directors and important that the organisation’s values, and its code of senior executives or may be a complementary conduct, address the legal and other obligations owed to version; important stakeholders, including, for example, trade ƒ promote responsibility and accountability of practices laws, privacy laws, employment laws, individuals for reporting and investigating reports of occupational health and safety, equal opportunity in the unethical practices; and workplace, superannuation and environmental regulations. ƒ ensure compliance with legal and other obligations to legitimate stakeholders. An organisation’s code of conduct recognises the important role that business ethics play in the success of today’s business, encouraging the board to actively develop an organisational culture that is established on transparency, accountability and integrity. What does acting ethically mean for directors? The board is responsible for setting guidelines for business behaviour and provide guidance to directors, management and employees through formal policies and guidelines to help them recognise and address ethical issues. These policies should set the standard of ethical behaviour required of directors and officers and address issues such as conflicts of interest, insider trading, political contributions and the improper use of company information. In establishing a climate that encourages transparency, accountability and fiduciary responsibility within organisation, the board should: Why have a code of conduct? ƒ ensure its independence from management; A code of conduct is a formal expression of the organisation’s values and ethics. A code of conduct should: ƒ have in place procedures that promote honest and The company’s code of conduct and share trading policy ethical behaviour, including the handling of conflicts should be made readily available to investors and the of interest (both actual and apparent); public to ensure market confidence. ƒ ensure full, fair and understandable disclosure in Triple bottom line reporting (TBL) reporting and public communications; and Corporate Social Responsibility ƒ have a heightened awareness of ethical behaviour in Triple bottom line reporting (TBL) and Corporate Social the internal control environment and internal Responsibility are emerging concepts which focus a reporting procedures; business on not just economic performance, but also on ƒ provide the necessary mechanisms to report the environmental, social or other impacts its activities unethical conduct and help foster a culture of have. These ideas are based on the concept that society honesty and accountability; depends on the economy, and the economy depends on ƒ ensure compliance with laws and regulations; the global ecosystem, the health of which represents the ƒ prompt internal reporting of violations (and ultimate bottom line. whistleblower protections); and Many organisations see TBL and Corporate Social ƒ implement procedures to deal with insider trading. Responsibility reporting (or similar wider issues) as a tool In addition, the board should also pay close attention to through which businesses can build and maintain public non-financial issues such as: trust and thus their reputation. ƒ how management drives performance; and Some potential benefits of an organisation choosing to ƒ communication channels for questions, concerns, report on matters wider than economic performance suspected violations to be reported upstream, include: outside normal reporting lines. ƒ more informed and accountable decision making Insider trading process and greater transparency Insider trading is prohibited by law in most countries. In ƒ enhancement of reputation and brand Australia, both the Corporations Act 2001 and ASX ƒ effective communication to stakeholders of an Listing Rules require disclosure of any trading organisation’s principles and practices undertaken by directors or their related entities in the ƒ improved access to investors company’s securities. The company should establish a ƒ identification of resource and cost saving policy governing the trading of securities by its directors opportunities and officers to ensure compliance with legal ƒ reduced risk profile requirements as well as ensuring public confidence. The policy should also provide for the assessment of its ƒ link improvements in sustainability performance with effectiveness in ensuring compliance, this may involve financial opportunities the internal audit function. ƒ linking environmental and social risks with current financial performance A potential insider is a person likely to possess inside information that could materially affect the price of a However, prior to adopting such an approach in company’s securities. This includes directors, the CEO, reporting, an organisation must consider whether it is the CFO and other employees of the company who are aligned to the overall business strategy. The board involved in material transactions within the company or should also ensure that management and staff are have powers to influence the conduct of the company’s committed to the conversion to wider accountability and affairs. that it has adequate resources for its implementation. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 3: The board and the organisation 3.2 Stakeholder relations The board’s primary responsibility is to the organisation and by extension, to the shareholders or primary stakeholders of the organisation. However, as a director, you also need to consider the interests, expectations and legal rights of a wider group of stakeholders impacted by the actions of the organisation. Who are these other stakeholders? Creditors Stakeholders whose interests are relevant for legal, The board’s positive duty to creditors has been widely contractual or commercial considerations include: discussed and confirmed in case law and should be a ƒ employees particular focus for the board in times of financial ƒ customers difficulty. ƒ creditors Creditors have individual rights against directors in some ƒ institutional investors circumstances (for example, for debts incurred by the ƒ financiers/bankers. company trading while insolvent). Employees Directors generally do not owe a legal fiduciary duty to employees, but the board must be aware of: ƒ the importance of employee support and commitment to enable the company to achieve its objectives ƒ the specific obligations imposed by other legislation including occupational health and safety laws. Customers Without the customers there is no business. This evidences their importance to the organisation and the board. Understanding and responding to the needs or Institutional investors concerns of customers should not be left solely to Investors base decisions on the information they receive, management. It requires board attention. most of which comes from the organisations themselves. Boards should take an active interest in how the It is therefore, important to understand and respond organisation handles and resolves customer complaints. appropriately to the needs and expectations of the Pertinent statistics and key emerging issues outlined in shareholders as a group and to recognise that it is the customer complaints should be reported to the board on institutional investors and shareholder advocacy groups a periodic basis. that will be most vocal in their demands. In addition, privacy legislation relating to the use and Whilst publicly listed organisations are subject to specific rules relating to the disclosure of company information disclosure of a customer’s personal details will require an and the briefing of analysts and institutional investors, all organisation to ensure an appropriate compliance policy companies need to ensure they balance the expectations is in place. This policy should be approved by the board. and demands of this group of shareholders against the community. These are not fiduciary duties but are interests of their shareholders as a whole, and to ensure significant legal and moral obligations that need to be there is fair, equitable and consistent treatment of all considered as part of the organisation’s decision-making shareholders. processes and in the conduct of its business activities. Failure to understand and respond appropriately to Publicly listed organisations will require written policies relevant issues may have adverse financial, reputational and procedures that ensure compliance with capital or other consequences for the organisation. Some market disclosure requirements and requirements in organisations are choosing to use a ‘triple bottom line’ relation to accountability by its directors and officers. system of reporting which reports on social and The policies and procedures should provide for the timely environmental aspects as well as economic performance. and factual disclosure of all material information in a Others may prepare corporate social responsibility clear and objective manner that allows use by investors reports or sustainability reports. The decision on what when making investment decisions. These policies and and how to report is driven by the board’s consideration procedures would normally be publicly available. In of its stakeholders and their information needs. Australia, for example, these documents are required to be published on the company’s website under a clearly How to manage stakeholder marked corporate governance section. relations? A useful way to manage stakeholder relations, and one Financiers which is required in some countries, is to establish and Careful attention must be paid to the organisation’s disclose a written code of conduct, one part of which obligations to its banks and financial institutions. Many guides the organisation’s compliance with legal and other lenders will have covenants in place that require the obligations to legitimate stakeholders. organisation to adhere to predetermined ratios and other The board will be responsible for setting the tone and requirements in order to satisfy financing arrangements. culture of the organisation and overseeing the As a director, you need to have a clear understanding of compliance with the code including the management of these requirements and ensure that management are stakeholder requirements. The code of conduct should appropriately monitoring the organisation’s position to address the organisation’s legal obligations as well as ensure these covenants are not breached and penalties provide an avenue for employees to alert management or other consequences are not triggered. and the board of potential misconduct without fear of retribution. The code of conduct may also provide for the In addition, care should be taken to establish open handling of complaints by customers and other third communication with the organisation’s financiers, parties. engaging them in dialogue on a periodic basis and responding positively to their information needs and requests. Positive relations with the organisation’s financiers are important when facilities need to be extended, reviewed or revised. Are there responsibilities to the wider community? Environmental and trade practices law and public expectations require organisations to be socially responsible in their operations and dealings with the nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 3: The board and the organisation 3.3 Conducting an AGM The board’s principal responsibility is to the shareholders of the company. The annual general meeting (AGM) provides the forum for the board to meet with the shareholders to discuss the performance of the company and attend to a range of matters for which the specific approval of the shareholders is required. It is the shareholders who provide capital, so it is important that they have this forum to discuss company performance and related matters. For large organisations, the AGM can be a time consuming and expensive event. Many SME’s do not have the diversity of shareholders or face the same media scrutiny of their AGMs. However, this should not be used as a basis to underestimate the importance of the meeting. so each shareholder understands the factors reflected in What is the secret to an effective the year’s operating results. AGM? The chairman’s address should identify the successes One of the key elements to a successfully run AGM is the and make concessions where appropriate. The CEO is time spent in preparation. Careful preparation is required also likely to address the AGM and to offer some to get the right messages across, particularly in comment on the financial and operating performance of potentially difficult situations. the company since the last AGM. Discussions should The messages will vary. However, it is just as important represent a balanced account of the company’s that a shareholder in a small company understands the performance and not gloss over problems. The CEO and performance of the company and the key matters that chairman should ensure that their speeches are co- have contributed to that performance as it is for a ordinated, consistent and do not unnecessarily overlap shareholder in a large company. It is equally important each other. that shareholders be given the opportunity to ask the Pre-empting the likely questions and developing directors questions and to exercise their statutory rights appropriate responses in advance is an effective (for example, by voting on the appointment of directors). approach to ensure the board and particularly the The following comments assume the company has chairman, will be able to respond in an informed manner external shareholders who will attend the AGM and seek to any shareholder questions. information from the board. However, all companies can The board should ensure it is fully briefed by draw on the information provided below to avoid a management on any shareholder issues that may have perfunctory AGM or, worse still, one that happens on been raised since the last AGM and that they are firmly paper only. across the details of any major issues affecting or likely What preparations should we to affect the company. In addition, you should ensure that any shareholder issues raised at the last AGM have make? been appropriately addressed. You should define and address the corporate objectives for the meeting. What is it that the shareholders need to Each director standing for election or re-election should know? What do you want the meeting to achieve? consider how they plan to introduce themselves, what they want the shareholders to know about their skills and Your objective may be something as simple as conveying competencies and their capacity to contribute to the a clear vision for the company that any shareholder company in the future. would be able to repeat in one sentence or providing a non-technical explanation of the company’s performance Being prepared for any eventualities is vital to a Is anything required of the successful AGM. It may be appropriate to rehearse company after the meeting? presentations and the answers to questions to ensure the After the meeting, there will be a number of tasks to be board shows itself to be capable and competent in what completed. can be quite stressful circumstances. You should also ensure you are fully briefed on the The company secretary will need to prepare minutes of format and conduct of the meeting, the key strategies to the meeting, ensuring they are an appropriate and facilitate the smooth running of the AGM and when and comprehensive reflection of the content of any on what you may personally be required to speak. discussion. The minutes should set out the results of voting, including proxy numbers. It is advisable for the external auditor to attend the AGM to respond to any questions raised by the shareholders Any items taken on notice at the AGM will need to be regarding the conduct of the audit, or the preparation and addressed and commitments made need to be honoured content of the audit report. (for example, investigating a particular issue as a result The chairman of the company should allow a reasonable of a shareholder’s question). opportunity for members to ask the auditor questions Shareholders’ may wish to receive a copy of the record concerning the conduct of the audit of the preparation of the meeting and this should be arranged. Any other and content of the audit report. Some countries set out post AGM obligations on the company should also be specific legal requirements in relation to AGMs and addressed. attendees and these will need to be followed. The board and management may also find it useful to Is there anything else we need to have a de-brief session to discuss what went well, what do to ensure the smooth running of did not and what can be improved in the future. This kind of discussion will assist in planning for the next AGM. the meeting? Prior to the AGM, a notice of meeting will be sent to all Communicating with shareholders shareholders. The notice should disclose all logistical matters the shareholder will need to know, the matters on Companies should design and disclose a communication which shareholders are being asked to vote and details strategy to promote effective communication with of proxy arrangements. A notice of the AGM may be shareholders and encourage effective participation at distributed electronically. general meetings of shareholders. Procedures and relevant checklists should be in place to This may include setting out transparency issues, such ensure that the company’s constitution, the requirements as publishing information on websites, or setting out how of the relevant corporate legislation in the country of your the company plans to take advantage of electronic company’s incorporation, and other relevant communication including the use of websites, web requirements regarding AGMs are complied with. castings, teleconferencing and emails where possible to complement the release of material to shareholders and Appropriate arrangements need to be put in place to the public. ensure the formalities are addressed for all resolutions passed and arrangements exist for a poll to be conducted if required. A running sheet/agenda for the meeting is useful to ensure, as far as possible, the meeting tracks to a pre- determined schedule. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 3: The board and the organisation 3.4 Director education As a director, you have specific and significant responsibilities. You need the appropriate skills and knowledge to be able to discharge these responsibilities and to provide the oversight and supervision your organisation requires. ƒ the strategic plan and/or current year business plan What induction process should I including the budget undertake when I join a new board? ƒ a copy of the organisation’s strategic risk profile A personal induction process ƒ copies of the board and/or committee charters and minutes of recent meetings. When you are newly appointed as an external or non- executive director of a organisation, you may not have an Not all these materials will be available for all existing, detailed knowledge of that organisation. Where organisations but this list provides a useful checklist. You this is the case, you should take immediate, proactive should augment this list as you see fit. steps to understand the pertinent aspects of the Once you have had an opportunity to review these organisation and its operations. materials, you should seek to meet with key members of In particular, you should ensure you have: the management team to address any questions you may have. ƒ an appropriate level of knowledge of the industry(s) the organisation operates in You may have requested the background information ƒ a clear understanding of the organisation’s business listed above as part of your personal due diligence operations process prior to accepting a board appointment. Where ƒ a clear understanding of the organisation’s financial this has not been done, it should be your first step after circumstances your appointment. ƒ a clear understanding of the organisation’s strategy The CPA Australia publication “Finding the Right Board and direction and a high level knowledge of the for you” provides further guidance on issues to consider business risks that may affect its success when contemplating joining a new board. ƒ access to relevant background information on key employees and the other members of the board. Ask management to facilitate this induction process and assist you by collecting relevant materials for your review. As a guide, you might request: ƒ the annual financial reports for the last three years ƒ recent management accounts and management reports ƒ external correspondence with relevant third parties - for example, management letters from the organisation’s auditors ƒ copies of internal audit reports ƒ an organisational structure diagram attend relevant seminars or identify and review relevant Formal induction training materials on your own initiative. In situations where there are periodic substantial changes to the membership of the board (for example, in In addition, if you do not have a reasonable the public sector) or the organisation is of a reasonable understanding of financial reporting you should look to size, you may find there is a formal induction program in undertake specific training to ensure you are in a position place in which all new directors participate. to make an informed review of the organisation’s financial performance, management accounts and Typically this would include providing you with the annual financial reports. This is an important skill for all materials listed above, presentations from key members directors but is of particular importance if you are asked of the management team, site visits and similar activities to sit on the organisation’s audit committee. to develop your knowledge of the organisation in a timely and resource efficient manner. Training for executive directors If you are a senior member of the management team who has been asked to join the board, you clearly will not require all the information listed above. However, you should give careful consideration to aspects of the business that might be outside your area of direct responsibility. You need to ensure you have an appropriate knowledge of those activities to enable you to discharge your broader oversight responsibilities as a board member. It is imperative that, in accepting the appointment to the board, you clearly appreciate that the roles and responsibilities of a director differ from those of management - the role is not simply an extension of your management responsibilities. It may be appropriate to consider participating in specific director related training to help you understand your new role. Continuing professional training As a director, it is important that you work to stay up-to- date in relation to matters relevant to the company, the industry and the particular areas of expertise for which you have been invited on to the board in the first place. In many instances, management will assist you to do this. However, you might like to objectively consider your own needs in this regard and undertake relevant training, nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 3: The board and the organisation 3.5 Succession planning Succession planning for the CEO and management is a critical issue for many organisations. An effective board will ensure that there are policies in place to establish succession and selection criteria for the CEO. Planning for the succession of the board members themselves, also requires careful attention to ensure the board is equipped with the appropriate skills and experience to ensure the organisation can address its current and future challenges. periodic performance evaluations, will also assist the Do we need to consider succession board should it be required to make a decision to replace planning for the CEO? the CEO. Selecting a CEO is an extremely important decision for any board. No matter how good the incumbent, a board Where do we look for a successor? will, at some point in time be required to appoint his or For many organisations, the first place to look for a her successor. successor is within the organisation itself. This is a decision that can have an enormous impact on Identifying potential candidates and nurturing them is part the organisation and its future performance. With this in of a successful succession plan. This may include mind, the process of selecting a CEO should be rigorous, having an executive development program which carefully instigated and well planned. establishes clear career paths, is comprehensive, robust Before the selection process or even the search process and addresses the development needs of individual begins, the board needs to determine what the managers. organisation needs in its CEO if it is to succeed and the Time spent in front of the board over time, be it formally relative importance of each of those requirements. through presentations at board meetings or informally, allows the board to gauge an individual’s capabilities and Some key attributes and competencies for a CEO CEO potential. include: ƒ strategic thinking ƒ sound ethics and values ƒ capacity for decision making ƒ knowledge of the organisation or at least the industry ƒ sound communication skills ƒ energy ƒ intelligence ƒ relevant experience ƒ leadership qualities ƒ team building skills. Personal chemistry between the individual and the board is also an important consideration. It is common practice for the board to engage executive recruitment or selection specialists to look internally and Outlining these requirements on a proactive basis, in a externally to identify potential candidates for a vacancy. rational and structured manner, coupled with effective Indeed, even if there is a good candidate within the organisation, it is important to look at the other personal network in the search for potential directors. candidates on the market and make an informed This approach needs to be adopted with caution as it assessment as to the best candidate for the role. may not expose you to the most appropriate candidates. In family run companies, there may be the expectation of Increasingly, many boards are seeking the assistance of family members growing through the ranks. However, executive search firms. The board will brief the search the board must make its decision in the best interests of firm on their required skill sets and the search firm will the company and all shareholders, even if this results in provide a list of potential candidates. the conclusion that an external party needs to be The CPA Australia Directors’ Register may also be a recruited for the position. useful starting point for some organisations. Why do we need a board The chairman and managing director or an appropriate board committee then interview potential candidates to succession plan? assess their suitability and make a recommendation to An organisation’s constitution will usually specify the the board. number of years a director may remain on the board of a company before he or she is required to submit Should we also consider the themselves for re-election. This may result in the voluntary or involuntary retirement of a director. To chairman’s succession? minimise disruption and ensure continuity of knowledge, The role of the chairman requires a specific set of skills. it is important that the board ensures the rotation is Accordingly, the board needs to be able to respond to staggered so only a portion of the board is up for re- both the known future retirement of a chairman and his or election at any annual general meeting. her sudden departure. A director may also leave the organisation for other Planning for succession may include identifying likely reasons and the board must be prepared for this. candidates currently on the board and on other boards and appointing a deputy or vice chairman. A simple first step in board succession planning is to establish a criteria matrix for the board, identifying the mix of skills, expertise and experience that are particularly important to the organisation at a particular point in time and the individual skills of the current board members. The board can use the matrix to clearly identify the skills it will need to replace if a particular director retires and to identify any skill deficiencies that need to be addressed in the immediate to short term. How does the board go about identifying an appropriate non- executive director to join it? Selecting a non-executive director can be a daunting task. Often existing board members rely on their own nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 3: The board and the organisation 3.6 Remuneration issues The level and composition of remuneration for non-executive directors and executives should be sufficient and reasonable to attract and maintain talented individuals to fulfil those roles. A clear relationship between the organisation’s performance and executive remuneration also needs to be demonstrated. A remuneration policy should be designed in such a way that it provides an adequate incentive to motivate directors and management to pursue the long-term growth and success of the organisation, within an appropriate control framework. To mitigate reputational and governance risk it is important that the organisation’s remuneration policy be understood by all the organisation’s stakeholders. It is also important for the organisation to clearly distinguish the structure of non-executive directors’ remuneration from that of executives. stakeholders, when designed to provide rewards for What elements should a non- materially improved organisation performance. executive director remuneration Short term incentive plans commonly comprise cash package contain? based incentives delivered on an annual basis. Non-executive directors are normally remunerated by Performance is usually assessed against a “scorecard” of way of fees (in the form of cash, non-cash benefits, financial and non-financial measures at an individual and superannuation contributions and equity). organisation level. It is considered best practice that non-executive directors Long term incentive plans commonly comprise cash or do not receive options or bonus payments, participate in equity based incentives delivered over a three to five schemes designed for the remuneration of executives or year timeframe. Performance is generally assessed at be provided with retirement benefits other than statutory the organisation level against an appropriate peer group superannuation as this could be perceived to impact on of organisations, using relative (rather than absolute) their independent status. measures. However, sometimes smaller companies find that, due to Termination payments should be agreed in advance, cash restraints, they need to use options to obtain non- including detailed provisions in case of early termination, executive directors of an appropriate level of expertise. with a clear articulation of performance expectations. What elements should an executive Employment contracts should clearly define the individual’s role, and the terms under which the role is remuneration package contain? accepted, to avoid ambiguity or conflict upon cessation of Executive remuneration packages should involve a employment. balance between fixed and incentive pay. Fixed remuneration reflects the level of responsibility undertaken by the individual and the labour market conditions relative to the scale of the business. Performance-based remuneration, by way of short term and long term incentive plans, can be an effective tool in promoting the interests of the organisation and ƒ expensing and disclosure requirements; What needs to be considered? ƒ determining the allocation strategy; Company Law ƒ taxation purposes; and Many countries will have specific legislation which ƒ modelling to forecast the cost to the organisation and applies to remuneration. For listed companies in impact on capital management strategies. Australia, corporations law requires a remuneration The choice of valuation method needs to be understood. report to be included in the annual report (including disclosure of all remuneration to directors and to the top Other guidelines 5 most highly remunerated executives), AGM discussion on executive and director remuneration, and the In most countries there are other bodies and agencies remuneration report to be subject to a non-binding which produce guidelines in relation to the determination shareholder vote. and/or disclosure of remuneration. In Australia, for example, Principle 9 of the ASX Corporate Governance Other legal issues to be considered when using equity Council Principles of Good Corporate Governance make include gaining exemptions from prospectus several recommendations, including: requirements, the drafting of offer documents, the ƒ disclosure of remuneration policies and the design of conditions relating to offers (particularly for unlisted plans; entities) and employment law requirements. ƒ the establishment of a remuneration committee; Accounting Standards ƒ a clear distinction between non-executive director and executive remuneration; International and country specific accounting standards usually address remuneration disclosures. In Australia, ƒ equity-based remuneration to be approved by shareholders. for example, AASB 1046 requires disclosing entities to disclose all employment conditions, remuneration, equity, There are also guidelines established by various related party and loan information for ‘specified’ stakeholder bodies, such as the Australian Shareholders executives and directors. International standard, IFRS 2 Association, Business Council of Australia and the requires companies to expense the cost of share-based Investment & Financial Services Association. awards to employees (including options) over the vesting period. The future impact of the equity expense should What does a remuneration be modelled. committee do? Taxation Although more relevant for larger organisations, a remuneration committee can provide an efficient There are various taxation consequences of providing mechanism for determining appropriate remuneration equity-based remuneration for both the organisation and policies and overseeing remuneration risk management the director/employee. and controls. Corporate tax considerations may include the tax For smaller organisations, where such efficiencies may deductibility of shares provided, payroll tax and options to not be apparent from a formal committee structure, the defer tax if an employee equity plan is designed. board may meet outside regular meetings to specifically consider remuneration issues. Valuation and modelling Details about the role of a remuneration committee are Valuation of equity provided to employees is required for set out in the information sheet 2.5 Board Committees. various purposes which include: nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 3: The board and the organisation 3.7 The audit committee The most common committee of the board is the audit committee. The existence of an independent audit committee is recognised internationally as an essential part of good corporate governance. An audit committee is particularly relevant in medium sized organisations, not for profit companies and public sector entities as well as listed companies. Public sector organisations often have a finance committee in addition to their audit committee. What does the audit committee do? Who should be on it? In recent times, there has been a trend towards audit Regardless of the size or nature of your organisation, the committees extending their mandate beyond purely audit committee’s contribution will be enhanced if it has a financial and audit matters to include compliance and risk degree of independence from management. Larger or management as areas of focus. listed organisations should aim for only non-executive directors, a majority of whom are independent to allow for Accordingly, the audit committee often takes prime a full degree of objectivity from the matters being responsibility for: considered. ƒ reviewing the organisation’s annual financial reports and recommending them for board approval Given the heavy financial focus of an audit committee, members should have basic financial literacy and be able ƒ overseeing the relationship, appointment and work of to understand and actively challenge information the external and internal auditors presented. It is helpful for at least one member to have ƒ reviewing compliance related matters and internal financial expertise (i.e. a qualified accountant or other controls financial professional) and some members who have ƒ overseeing the company’s risk management specific industry knowledge relevant to the organisation. framework and processes. The specific roles of the audit committee and even its The important criterion is that members are able to name should be tailored to meet your organisation’s assess and constructively challenge information and needs. Examples include the Board Audit Committee, recommendations presented to them by management. the Audit and Risk Committee or the Audit and Finance Members should also be able to have candid discussions Committee. with their internal and external auditors over their A number of the roles an audit committee may perform proposed audit scope, areas where they believe financial are important even where the organisation’s financial risk exists and any recommendations made. statements are not subject to an annual audit. What will it do? The audit committee should have a formal charter which clearly sets out its roles and responsibilities, composition, structure, membership requirements and powers. When properly structured and given a clear mandate, audit committees can be of great value to companies and shareholders. The audit committee can enhance the credibility of financial reports and strengthen communication between auditors and management, which can, in turn, improve the quality of information provided to the shareholders or stakeholders and other users of the organisation’s financial statements. Under the broad responsibilities, the following matters may be within the remit of the audit committee: Oversight of ƒ Financial reporting, including accounting policies, disclosures, management reviews and other public statements ƒ Audit relationships, including the appointment, direction and performance of the external auditor, and the charter, authority and effectiveness of the internal audit function ƒ Compliance matters, including regulatory and statutory compliance procedures, codes of conduct and whistleblowing policies and ethical matters ƒ Internal controls, including management’s systems for ensuring effectiveness ƒ Risk management, including understanding key risk areas, fraud considerations and links to business objectives. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 4: The relationship with auditors 4.1 Selecting an external auditor The objective of an external audit is to determine whether, in the auditors’ opinion, the financial report is in accordance with the relevant corporate legislation in the country of your organisation’s incorporation and other mandatory reporting requirements. In doing so, the auditor expresses an opinion as to whether the financial statements and notes to the financial statements give a true and fair view of the organisation’s financial position at the end of the financial year and its performance during that year and whether they have been prepared in accordance with the relevant accounting standards and regulations. The advice of an external auditor with a wide and deep understanding of the organisation’s operations can be of enormous help to you and your fellow directors. It is therefore important to select the right external auditor for your needs. Do we need an external audit? How do we go about selecting an Legislation and the organisation’s charter will normally external auditor? determine if an external audit is required. For companies The independence of the auditor is a key issue to be incorporated in Australia, for example, the Corporations addressed but there are no set rules that you must apply Act 2001 sets out the criteria for determining which in selecting an auditor. Whichever selection method you organisations are legally required to prepare a financial use, it is important to determine at the outset what report and when an external audit is required. This attributes you require of your external auditor to ensure provides that listed entities, other public companies, the selection process is sufficiently robust. In most registered schemes, large and some small proprietary circumstances the person engaged will be a registered companies are required to prepare a financial report company auditor and be a member of an accredited which must be audited. professional body. Many companies, such as “small proprietary” and many Many large organisations undertake a formal tendering other organisations may not require an external audit by process. In this instance, the organisation will set out its legislation or by their charters. However, they may still requirements and seek a formal written response and prepare an audited financial report to meet the often a formal presentation from a number of audit firms. requirements of their shareholders or their bankers. It is important for the audit committee to ensure the What is the board’s role in selecting prospective auditors have been provided with a an external auditor? sufficiently detailed understanding of the organisation, its operations, its key personnel and any other information The board is usually responsible for the initial including group structures and financial statements that appointment of the external auditor. For a listed will have a direct bearing on each firm’s ability to develop company, this appointment is then ratified by the an appropriate proposal and fee estimate for your members at the next annual general meeting. The organisation. appointment process itself is overseen by the audit committee or the board. The audit committee and senior management may make Public sector entities, by contrast, may be allocated an separate reviews of the audit proposals. Where there external auditor by a relevant Auditor General or similar are a number of proposals, or if proposals are detailed, and so the board has little to no role in the appointment. management will usually provide the audit committee with a high level summary of each. Management should be encouraged to nominate their What should we look for in an preferred choice of auditor and to provide a detailed external auditor? critique in support of their recommendation. Management In selecting an external auditor, the final decision should are often well placed to provide important insight and not come down to price. advice on the appointment. You should give particular consideration to whether: If there is an audit committee, it will usually consider the appointment in conjunction with senior management and ƒ the fee is sufficient for the work you require will then make a formal recommendation to the board. ƒ the work is to be undertaken by people with an appropriate level of seniority, skill and knowledge It is important that the audit committee/board take ƒ you are satisfied that the work the auditors propose appropriate steps to inform themselves on the to do is sufficient to meet your needs and prospective auditors and to ensure they have been expectations appropriately diligent in considering management’s recommendation and forming their own views. A number of other considerations may determine the appropriateness of an external auditor. These may The selection process in a small organisation need not include: be this formal. However, the board must ensure that it is ƒ actual and perceived independence from your clear as to its own needs and expectations and those of organisation management, that these are communicated to the prospective firms and they form the basis of the ƒ an appreciation for the level of knowledge they have organisation’s decision. The organisation should insist of your organisation and the business, operational on a formal letter of engagement before any audit work and financial risks you face commences. ƒ their experience of auditing within your industry ƒ whether they are the auditors of your direct Some organisations may already have an audit firm in competitors and how they will ensure confidentiality mind and may choose to approach them exclusively. of information ƒ the calibre of the team put forward ƒ the personal chemistry of the partner, the board and senior management – mutual respect is critical. Once selected, it is important to establish an ongoing relationship with your external auditors. They are a key source of independent information and advice for the board and should be utilised where appropriate. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 4: The relationship with auditors 4.2 The external audit relationship As a board, or audit committee member, you must have a clear understanding of what your external auditor does, and perhaps more importantly, what they don’t do, to arrive at their audit opinion. The responsibility for ensuring that an audit is of a high quality, is sufficiently challenging, probative and independent, is as much the board’s as it is the auditor’s. It is therefore critical to ensure that you have an open and frank dialogue with your external auditor, with or without the presence of management. ƒ The audit team’s knowledge of the industry in which When is the right time to liaise with the organisation operates our auditor? ƒ Geographic coverage of the audit. The board or the audit committee should meet with the ƒ Fees charged by the auditor in respect of different auditor at least during the following stages of the audit: categories of work, for example, audit-related, tax ƒ Pre-commencement – to approve the scope of the and other non-audit services. audit service, discuss the auditor’s independence ƒ Rotation of individuals of the audit firm who have and agree the audit engagement letter. played a significant role in the audit. ƒ Planning – understand the planned audit approach, ƒ Auditor independence and conflict of interest discuss any emerging issues and to ensure the situations. auditor’s plan is aligned to the needs and concerns of In addition, country specific corporate legislation will set the board. out specific provisions in relation to external auditors and ƒ During the audit – to be updated of significant organisations required to be audited. You will need to matters relevant to the audit. ensure that your organisation has complied with these ƒ Resolution and completion - to discuss the auditor’s requirements as well as those imposed by any relevant findings. stock exchange your organisation may be listed on. Depending on the size of the organisation and the Annual planning phase auditor’s level of involvement with its activities during the year, the audit committee may also find it useful to draw Prior to setting the proposed audit scope, the board on the knowledge and experience of the external auditor and/or audit committee should have discussions with the by meeting them throughout the year. auditor on the organisation’s key risks which could give rise to a greater risk of material misstatement in the Auditors may also meet with individual directors as part financial statements. Based on this understanding of the of their audit. organisation, the external auditors are able to prepare a detailed audit scope and approach which will enable you Pre-commencement phase to obtain an understanding of what to expect from the Whether evaluating a current auditor or appointing a new external audit. It is at this point that you may wish to auditor, the board and the audit committee should review raise relevant questions which provide you with an the auditor’s performance, specifically considering: understanding of the following: ƒ The firm’s professional capabilities, resources and ƒ the objectives of the audit personnel assigned to the audit ƒ the organisation’s financial reporting requirements ƒ The firm’s audit approach – the policies, procedures, and the timetable in place to meet them risk assessment and conduct a firm employs in its ƒ the extent to which the auditor assesses the internal performance of the audit control systems ƒ the impact of recent changes in accounting principles or regulatory requirements on the preparation and presentation of your financial report ƒ how the auditor will coordinate their work with any internal auditors ƒ what the auditor perceives as risk areas to be tested ƒ how the auditors have arrived at their materiality level, how this will be applied and whether this is in line with your own understanding of the risks of the business and the related industry ƒ how any recent actions by the organisation, for example, mergers, acquisitions, restructures and Upon audit completion unusual transactions will affect the audit or the audit report Normally, the audit committee, management and the ƒ the auditor’s approach, and responsibility, to detect external auditor meet to review the financial statements fraud, errors and illegal acts and whether this is and the results of the audit. sufficient given your understanding of the The external auditor often provides specific comment on, organisation’s operations and business environment and develops suggestions for improvements to, the ƒ if there are numerous sites or business locations, organisation’s operations and internal control. which ones will be visited during the course of the audit, and how this was determined The audit committee should: ƒ how the auditor will present significant issues raised ƒ determine how the organisation should act on advice as a result of the audit and how these will be received from the external auditor and direct communicated with the board or audit committee management accordingly ƒ what steps the auditor will take to maintain ƒ monitor actions taken by management to resolve independence. issues raised by the external auditor including identified weaknesses in internal controls and During the audit fraudulent or illegal acts There should be a regular dialogue between the board ƒ discuss any difficulties which the auditor encountered and/or audit committee and the external auditor. This in the performance of the audit including any enables the overall effectiveness of the external audit restrictions senior management may have imposed process to be evaluated and also provides opportunities or sought to impose on their activities for the board to receive feedback from the auditor on the ƒ take steps to understand any matters (resolved or organisation’s system of governance and controls. unresolved) on which the auditor and management disagreed Good practice is for the board and/or audit committee to invite the external auditor to comment on: ƒ ensure the accepted recommendations as reported in the external auditor’s management letter are ƒ the manner in which management and the adopted and addressed by management on a timely board/audit committee has operated and responded basis to significant issues raised by the auditor ƒ investigate the reasons for any material adjustments ƒ the organisation and board’s responsiveness to to the financial statements. recommendations and requests The board may also require the external auditor to attend ƒ the effectiveness of governance processes from the the organisation’s annual general meeting. auditor’s perspective clear understanding of how these issues are to be Is there anything else we should be managed. doing to enhance the external audit? Are there specific auditor The audit committee should make a periodic assessment independence rules? of the external auditor’s performance. The frequency will Some counties set out specific provisions in company vary with an organisation’s size but large organisations legislation or other regulations. You will need to be will perform an annual review. This will usually involve aware of those applicable to your organisation. If your securing feedback from senior management regarding company is incorporated in Australia, the audit reform the quality of the services and combining these with the effected by the Corporate Law Economic Reform directors’ views. Program (Audit Reform & Corporate Disclosure) Act Any concerns should be discussed with the partner in 2004 (CLERP 9) is applicable to you. CLERP 9 imposes: charge of the external audit. ƒ some restrictions on the appointment of former auditors to the company as director or officer Open and candid discussions among all parties can lead ƒ restrictions on multiple former audit firm partners to a constructive resolution of any matters of concern. becoming directors or officers of listed companies Why is auditor independence ƒ a requirement for an annual independence important? declaration by the external auditor While your focus will primarily be on the effectiveness of ƒ a requirement for the company’s audit engagement the audit, you should also be aware of the other services letter to state that the auditor has to comply with the your auditor may be providing. Management may Corporations Act 2001 and its independence engage the audit firm for a variety of special services. obligations ƒ a requirement for annual and ongoing audit To perform their audit work effectively, the auditor must committee and board review of auditor independence be objective and independent of the organisation. You ƒ a requirement for rotation of audit partners. should therefore consider both the actual and the perceived effect on the auditor’s objectivity of any relationships the auditor has with, and the other services they provide to, both management and the organisation. The audit committee or board as a whole, should determine to its own satisfaction that the independence and objectivity of the auditor has not been compromised. Balance is an important consideration – the auditors should have excellent relations with senior management to assist them to do their job effectively and efficiently. Equally, the organisation may benefit from the auditor’s participation in other projects as they have a detailed and thorough understanding of the organisation, its culture and the particular issues it faces. It may be appropriate to set specific guidelines upfront in conjunction with the auditor to ensure all parties have a nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 4: The relationship with auditors 4.3 Evaluating the external auditor This tool is prepared by, and reproduced in full with kind permission of, the AICPA in the USA. Although it is based on the USA’s Sarbanes-Oxley Act and hence refers to American requirements, it may provide a useful starting point for other organisations’ deliberations. Evaluating the Independent Auditor: Questions to consider PURPOSE OF THIS TOOL: Under the Sarbanes-Oxley Act of 2002, the audit committee has the responsibility to hire, fire, and evaluate the independent auditor. In discharging this responsibility, the audit committee should answer a series of questions about its relationship with the independent auditor, and should ask key executives in the organization for their comments as well. In considering information gathered through the process of evaluating the independent auditor, it is important that the audit committee give consideration to the source of the information. For example, if the CFO/controller comments that they believe the auditor went too far in certain areas, that would probably carry less weight in your deliberations than if the CFO/controller comments that certain areas were not tested adequately. As with all deliberative processes, the audit committee should consider the different perspectives and motivations of those having input into the deliberations INSTRUCTIONS FOR USING THIS TOOL: The sample questions included in this tool are only a starting point to evaluating the performance and effectiveness of the independent auditor. Audit committee members should ask follow-up questions as appropriate and required. Not Evaluation of the Independent Auditor Yes No sure Comments Questions for Audit Committee Members 1. Did the auditor meet with the audit committee when FFF requested? 2. Did the auditor address issues of “tone at the top” and FFF antifraud programs and controls in place in the organization? 3. Did the auditor inform the audit committee of any risks, of FFF which the committee was not previously aware? 4. Did the auditor adequately discuss issues of the quality of FFF financial reporting, including the applicability of new and significant accounting principles? 5. Did the auditor communicate issues freely with the audit FFF committee, or did the auditor seem protective of management? 6. Does it appear that management exercises undue FFF influence on the independent auditor? 7. Does it appear that the independent auditor is reluctant or FFF hesitant to raise issues that would reflect negatively on management? Not Evaluation of the Independent Auditor Yes No sure Comments Questions for Audit Committee Members (cont.) 8. Is the audit committee satisfied with the planning and FFF conduct of the audit, including the financial statements and internal control over financial reporting (as applicable)? 9. Review all audit-related and nonaudit services conducted FFF by the independent auditor in the prior year. Are you satisfied that the independent auditor remains independent and objective both in fact and appearance? 10. Understand the size of the firm and its total revenues firm- FFF wide, for the office(s) providing a substantial amount of services to the organization, and the book-of-business of the partner-in-charge of the audit. Is the firm, the office or the partner dependent on the organization for a material percentage of its fee income? If so, the audit committee should consider whether this impairs the appearance of independence with respect to the organization. 11.a. How is the concurring partner (if applicable) FFF compensated? Notes: b. Is the concurring partner “protected” in the event a FFF tough call needs to be made? 12. Is the audit committee satisfied with its relationship with FFF the auditor? In making this determination, the audit committee should consider (a) whether the partner-in- charge of the audit participated in audit committee meetings, (b) whether the auditor was frank and complete in the required discussions with the audit committee, (c) whether the auditor was frank and complete during executive sessions with the audit committee, (d) whether the auditor is on-time in their delivery of services to the company. 13. Was the audit fee fair and reasonable in relation to what FFF audit committees know about fees charged to other companies, and in line with fee benchmarking data the audit committee might have available to it? 14. Did the independent auditor provide constructive FFF observations, implications, and recommendations in areas needing improvement, particularly with respect to the organization’s internal control system over financial reporting? Not Evaluation of the Independent Auditor Yes No sure Comments Following are some questions the audit committee should ask different individuals in the organization to assist in evaluating the performance of the independent auditor Chief Audit Executive 1. From your perspective in working with the independent FFF auditor, are you satisfied with the scope, nature, extent, and timing of testing performed by the independent auditor? 2. Did the independent auditor work with you to ensure the FFF coordination of audit efforts to assure the completeness of coverage, reduction of redundant efforts, and the effective use of audit resources? 3. a. Are you satisfied with the knowledge, skills, and abilities FFF of the staff assigned to do the audit work? b. Are you satisfied with the engagement leadership FFF assigned, including the partner(s), manager(s) and fieldwork leaders? 4. a. Did the independent auditor work with the internal FFF auditors according to the plan? b. Was cooperative work conducted in the spirit of FFF professionalism and mutual respect? 5. Are you satisfied that the independent auditor remains FFF independent of the company in spite of any audit-related, or nonaudit services the auditor provides to the organization? 6. a. Are you aware of any other information that might FFF impair the independence of the independent audit firm? b. Are you aware of any individuals on the audit team that FFF might not be independent with respect to the company for whatever reason? 7. a. If the choice were yours, would you hire the firm to FFF conduct next year’s audit? b. If so, what changes would you make? FFF Notes: CFO/Controller 1. From your perspective in working with the independent FFF auditor, are you satisfied with the scope, nature, extent, and timing of testing performed by the independent auditor? 2. Are you satisfied with the knowledge, skills, and abilities of FFF the staff assigned to the audit work? 3. Are you satisfied with the engagement leadership FFF assigned, including the partner(s), manager(s), and fieldwork leaders? Not Evaluation of the Independent Auditor Yes No sure Comments 4. a. If the choice were yours, would you hire the firm to FFF conduct next year’s audit? b. If so, what changes would you make? FFF Notes: Independent Auditor 1. Is the firm registered with the PCAOB as required if the FFF firm audits public companies? 2. What were the results of the firm’s peer review and/or FFF PCAOB inspection? Notes: Other Comments, Further Questions nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 4: The relationships with auditors 4.4 Internal audit An effective internal audit function can play a valuable role in assisting directors to fulfil their responsibilities and helping the organisation to achieve its business objectives. The need for an internal audit function will usually be governed by the size, risks and complexity of a business. What is internal audit? Do we need an internal audit Internal audit is commonly used as an independent function? appraisal activity for the review of operations within an An internal audit function can assist your board to organisation. discharge its oversight responsibilities for the organisation’s control environment. It can offer counsel on an organisation’s risks, controls and corporate governance while assisting the In determining the need for an internal audit function, you organisation to meet a wide range of business objectives should consider: – from reliability of financial information used in decision ƒ the size and scale of the organisation making, to effective and efficient use of resources for ƒ the organisation’s complexity/diversity enhanced quality, productivity and profitability. ƒ the organisation’s overall risk profile Internal audit is an internal control, that should be ƒ the history of past issues and incidents independent of management, and which functions by ƒ cost benefit considerations measuring, evaluating and providing an objective view of ƒ any other relevant internal and external issues the effectiveness of controls for the benefit of the board ƒ the existence of alternative mechanisms to provide and senior management. adequate assurance on compliance and the What the internal audit function encompasses and how it operation of internal controls. reports, varies between organisations depending on their If you determine that an internal audit function is not needs and structures. required, on even a part time or outsourced basis, the board should take any necessary steps to ensure it receives other, appropriate assurance that the system of internal controls exists and is operating effectively. What is an internal audit charter? An internal audit charter empowers the internal audit function and typically: ƒ provides for internal audit to have full, free and effective access at all reasonable times to all records, documents and employees of the organisation ƒ provides for internal audit to have direct access to the chairman of the audit committee ƒ sets out the reporting lines ƒ establishes the independent status of the internal audit function and its personnel. Should you outsource the internal audit function? An outsourced internal audit function may have significant advantages for small and medium sized organisations that require only a limited amount of internal audit work each year that does not justify hiring an appropriately skilled employee. Other advantages include: ƒ access to a wider range of skills which small, traditional internal audit departments may lack ƒ a solution to difficulties faced by organisations of all sizes in retaining specialist auditors (for example, IT or treasury specialists) ƒ enhanced independence of the internal audit function from operational management. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 4: The relationship with auditors 4.5 Overseeing the work of the internal audit function Increasingly, the board is expected to understand and take responsibility for ensuring the internal audit function is being properly and fully utilised. This is likely to be a role for the audit committee and will include considering the adequacy, qualifications and abilities of the internal audit staff. ƒ monitor management’s progress in addressing There is an increasing move among best practice bodies issues identified and recommendations made by to promote the idea that the head of the internal audit internal audit function is properly responsible to the board through the ƒ monitor progress against the internal audit work plan audit committee, and not to management. Boards wanting to show leadership will ensure the internal audit ƒ ensure the internal auditor has unrestricted access to function is directly responsible to the audit committee if the audit committee through the chairman of the there is one, and in any instance has clear authority and committee. board support. In addition, the audit committee should give specific consideration on an annual basis to: ƒ the adequacy and appropriateness of the internal audit work plan in view of the organisation’s risk profile ƒ the appropriateness of the internal audit charter/mandate and whether it has kept pace with the organisation’s activities and information and control systems ƒ the interrelationship of the work of the internal auditor and the work of the external auditors and the scope for synergies and savings Assessing internal audit ƒ the performance of internal audit and whether it is effectiveness both meeting the board’s expectations and adding The audit committee should evaluate whether the value to the business organisation is fully utilising internal audit skills and ƒ the adequacy of its resources and the proposed providing necessary support. Some questions to ask allocation of those resources include: ƒ the skills of the internal auditors and their capacity to ƒ Is the internal audit charter appropriate? Has it been understand the internal control implications of updated to reflect the organisation’s current activities, significant operational or technological changes risks and information and control systems? occurring within the organisation ƒ Does internal audit have adequate resources, both in ƒ the independence of the internal audit function and terms of skills and funding? the level of cooperation received from management ƒ Would the function be better resourced and delivered ƒ meeting separately with management and the if it was outsourced to an external supplier? internal auditors to ensure free, frank and open ƒ How is the internal audit program determined? communications. ƒ Does internal audit investigate areas significant to Throughout the year the audit committee should: the key operational and financial risks faced by the ƒ receive and review reports from the internal auditor business? on internal audit activities ƒ Does the organisation act on recommendations from internal audit and monitor the changes made? ƒ Do the internal auditors have an effective working relationship with the external auditors, and with organisation personnel involved in risk management processes? The audit committee should also take responsibility for approving or concurring the appointment, replacement or dismissal of the internal auditor, head of the internal audit department or the outsourced internal audit service provider. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 5: Performance assessment 5.1 Performance assessment Annual CEO performance evaluations are common practice for many boards. However, the board’s performance assessment responsibilities may also extend to include assessing the performance of the organisation and undertaking self assessment. How do we approach assessing the How do we measure the CEO’s performance? performance of the organisation? Proper evaluation by the board of the performance of The board is expected to monitor the performance of the senior executives and particularly the CEO is imperative. organisation and to assess that performance in light of A once a year chat over lunch is not sufficient. the goals and expectations reflected in the budget and business plan. This provides an important insight into To handle the delicate task of providing feedback and the effectiveness with which management is making a consequent determination in relation to the implementing the approved strategy and operating plans CEO’s remuneration, an effective board: and the appropriateness of those plans. ƒ has a documented process in place that combines Specific and relevant key performance indicators (KPIs) development plans, ongoing monitoring and periodic which include both financial and non-financial measures formal performance assessments provide a useful snapshot of the performance of the ƒ does not limit itself to providing feedback as a one organisation for the board, management and external off, stand alone event stakeholders. ƒ establishes clear-cut and comprehensive performance criteria and related metrics, together Frequently used KPIs relevant to SMEs include: with qualitative measures for evaluating performance ƒ revenue growth ƒ establishes a balance of measures linked to the ƒ earnings before interest and tax corporate strategy and business plan that ensure the ƒ profit margin CEO maintains a long-term vision while keeping a ƒ accounts receivable and/or inventory turnover close focus on short-term performance ƒ return on equity and/or assets ƒ agrees the performance measures and targets with ƒ debt to equity the CEO at the beginning of the appraisal period ƒ interest coverage ƒ includes external benchmarks, comparison with ƒ number of customer complaints per month peers and decision making ability in the assessment criteria ƒ number of man days lost ƒ has a clear, fair, relevant and competitive ƒ number of debtor days outstanding remuneration policy in place which appropriately ties ƒ actual capital expenditure versus target the CEO’s remuneration to the organisation’s long ƒ customer brand awareness (% recall) term performance. ƒ compliance incidents. Some boards find it useful to use a consultant to assist If the use of KPIs is to be effective: them in developing the evaluation and analysing and ƒ the KPIs must be comprehensive, tailored to your communicating the results. However, the board must not organisation and consistent with the business plan view this assistance as a means to avoid or distance and corporate strategy themselves from the assessment process. ƒ targeted performance levels must be set and ƒ the board’s relationship with management. performance trends tracked over time How do we approach the board ƒ the KPIs must be reported to the board on a regular basis with adequate commentary on achievement or assessment process? failure to meet the target objectives for each KPI. There are a number of different ways to undertake a board assessment. The most appropriate approach will Why do we need to assess the be governed by the size, structure and dynamics of the board’s performance? board and the personal views of the chairman and your fellow directors. Board performance assessment provides an excellent opportunity for a board to explore a wide range of issues Some boards adopt a very restricted view of the and ensures a consistent message to management. assessment process limiting themselves to the chairman having an informal discussion with individual directors on “…boards want to be seen to be applying the same the board’s effectiveness. degree of continuous improvement and reviews as is expected of the CEO and the senior executive team. If Other boards undertake a more formal approach and use board’s don’t deal themselves with performance issues a combination of: 1 they are hardly entitled to insist that management does” ƒ external facilitators Done well, board assessment can be an extremely ƒ assessment questionnaires productive process. A robust and successful ƒ confidential non-attribution interviews assessment process will give the board: ƒ a workshop discussion of the findings. ƒ a balanced view of its performance identifying the The use of a facilitator can be a key to the success of the positive aspects of the board’s operations and areas process as it allows directors to express their views and for improvement concerns confidentially, on a no-names basis, knowing ƒ a benchmark against which the board can assess its that these matters will be raised for attention in an progress and performance over time environment that is focussed towards constructive ƒ a basis to establish agreed performance objectives discussion and performance enhancement. for the board. The most comprehensive programs go further than this Whilst board dynamics and performance are clearly at and include: the heart of board assessment, a comprehensive process can also address key aspects of the board’s ƒ 360 degree feedback, which incorporates the views operations including: of management ƒ assessment of the performance of the chairman ƒ structure, roles and responsibilities of the board ƒ assessment of the performance of individual ƒ size and diversity directors. ƒ group dynamics and the conduct of meetings ƒ the processes for recruitment and remuneration of If your organisation prepares or is required to prepare a directors and senior management governance statement for inclusion in the annual report you should consider including a description of the board’s ƒ information flows, attention to key issues (ie strategy) assessment process for performance evaluation of the ƒ the structure, role and performance of committees board, its committees and individual directors and key executives. 1 Stan Wallis, Chairman of AMP and Coles Myer Limited, 2000 Corporate Public Affairs Oration: “Corporate Governance – Conformance or Performance”, June 2000 nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 5: Performance assessment 5.2 Board performance assessment – a sample guide This simple tool is designed to assist in assessing the effectiveness of the board. The tool takes the form of a series of assertions which should be awarded a rating on a scale of 1 to 5 by individual directors or by the board as a whole. . Once complete, the matters should be discussed at a board meeting. Discussions facilitated by a third party are often 1 able to bring additional value to the process .. 1 = Hardly ever/Poor, 2 = Occasionally/Below average, 3 = Some of the time/Average, 4 = Most of the time/Above average, 5 = All of the time/Fully satisfactory 1 2 3 4 5 Behaviours Setting strategy All Board members support and debate the organisation’s strategy and values, enabling them to set the tone from the top. Strategy All Board members have a clear understanding of the organisation’s core business, its strategic direction and the financial and human resources necessary to meet its objectives. Board performance The Board sets itself objectives and measures its performance against them on an annual basis Managing Board meetings and discussions Board meetings encourage a high quality of debate with robust and probing discussions. Managing internal Board relationships Board members make decisions objectively and collaboratively in the best interests of the organisation and feel collectively responsible for achieving organisational success. Managing the Board’s relationship with others The Board communicates effectively with all of the organisation’s stakeholders and seeks their feedback. Board members’ own skills Board members recognise the role which they and each of their colleagues is expected to play and have the appropriate skills and experience for that role Reaction to events The Board responds positively and constructively to events in order to enable effective decisions and implementation and to encourage transparency. Chairman The chairman’s leadership style and tone promotes effective decision-making, constructive debate and ensures that the Board works as a team. 1 See information sheet 5.1 Performance assessment 1 2 3 4 5 Behaviours Chairman and CEO relationship The chairman and the chief executive work well together and their different skills and experience complement each other Attendance and contribution at meetings All Board members attend and actively contribute at meetings Open channels of communication The Board has open channels of communication with executive management and others and is properly briefed Risk and control frameworks The Board’s approach to reviewing risk in the organisation is open and questioning, and looks to learning points from events, rather than blame 1 2 3 4 5 Processes Composition The Board is the right size and has the best mix of skills to ensure its optimum effectiveness. Terms of reference The terms of reference for the Board are appropriate, with clearly defined roles and responsibilities, ensuring that the right issues are being addressed Committees of the Board The Board’s committees are properly constituted, perform their delegated roles and report back clearly and fully to the Board. Company secretary The company secretary acts as an appropriate conduit for the provision of information to the Board and support to the chairman and the non-executive directors. Executive directors The contribution of the executive directors, as members of the Board rather than as senior executives, is effective Non-executive directors The non-executive directors contribute effectively to the development of strategy and the monitoring of the performance of management, providing both support and challenge. Meetings and administration The Board meets sufficiently often, and with information of appropriate quality and detail, such that agenda items can be properly covered in the time allocated Timeliness of information Information is received in sufficient time to allow for proper consideration, with scope for additional briefing if necessary Agenda items The Board cycle agenda covers all matters of importance to the organisation, is prioritised and includes consideration of corporate reputation, its enhancement and the risks surrounding it Annual General Meeting The company makes best use of its Annual General Meeting 1 2 3 4 5 Processes External stakeholders The Board has defined its external stakeholders and ensures that the organisation has the right level of contact with them. Risk management The Board uses an active and well-structured process to manage risk, taking account of the organisation’s activities and the breadth of functions across the business Induction and training Board members receive proper induction on appointment and ongoing training is available to meet development needs Succession planning There is appropriate succession planning for key Board members and senior executives Performance evaluation Board members are individually subject to an annual performance evaluation that measures their contribution and commitment. Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reservedCORPORATE GOVERNANCE TOOLKIT 5: Performance assessment 5.3 Audit committee performance assessment – a sample guide This simple tool is designed to assist assessing the effectiveness of the audit committee. The tool takes the form of a series of assertions which should be awarded a rating on a scale of 1 to 5 by individual audit committee members, or by the committee as a whole. The matters highlighted should be discussed at the next audit committee or board 1 meeting . 1 = Hardly ever/Poor, 2 = Occasionally/Below average, 3 = Some of the time/Average, 4 = Most of the time/Above average, 5 = All of the time/Fully satisfactory 1 2 3 4 5 Behaviours Understanding of core business All Audit Committee members have a good understanding of the different risks inherent in the group’s business activities Focus on appropriate areas The Audit Committee focuses on the right questions and is effective in avoiding the minutiae Quality of interaction with external auditors The Audit Committee actively engages with the external auditors regarding scope of work, audit findings and other relevant matters Quality of interaction with internal audit The Audit Committee demonstrates an appropriate degree of involvement in the work of internal audit and its findings Understanding of key financial issues The Audit Committee has a good understanding of the key financial issues, including quality of earnings, critical accounting policies and complex transactions Understanding of how assurance is gained The Audit Committee understands the interaction between the various sources of assurance available to it Rigour of debate Audit Committee meetings encourage a high quality of debate with robust and probing discussions Reaction to bad news The Audit Committee responds positively and constructively to bad news in order to encourage future transparency Quality of chairmanship The chairmanship operates satisfactorily in terms of promoting effective and efficient meetings, with an appropriate level of involvement outside of the formal meetings Frank, open working relationship with executive directors The Audit Committee members have a frank and open relationship with the 1 See information sheet 5.1 Performance assessment 1 2 3 4 5 Behaviours executive directors, whilst avoiding the temptation to become ‘executive’ Open channels of communication The Audit Committee has open channels of communication with company contacts which facilitates the surfacing of issues Perceived to have a positive impact There is an appropriate balance between the monitoring role of the Audit Committee and it being an “influencer for good” 1 2 3 4 5 Processes Members with appropriate skills and experience The Audit Committee comprises members with an appropriate mix of skills and experience, including recent and relevant financial experience Clear terms of reference There are clear terms of reference, with clarity as to role vis a vis the Board as a whole Clear as to risk management responsibilities The Audit Committee is clear as to its role in relation to risk management Structured and appropriate annual agenda There is a structured annual agenda of matters to be covered with focus on the right areas Sufficient number of meetings and access to resources The number and length of meetings and access to resources is sufficient to allow the Audit Committee to fully discharge its duties Concise, relevant and timely information Audit Committee papers are concise, relevant and timely and are received sufficiently far in advance of meetings Right people invited to attend and present at meetings Executive management and others are asked to present on topics, as appropriate Meetings held sufficiently far in advance of Board meetings Audit Committee meetings are held sufficiently far in advance of Board meetings to permit resolution of issues raised Attendance and contribution at meetings All Audit Committee members attend and actively contribute at meetings Sufficient time and commitment to undertake responsibilities All Audit Committee members have sufficient time and commitment to fulfil their responsibilities Ongoing personal development to remain up to date Audit Committee members undertake ongoing personal development activities to update their skills and knowledge Private meetings with internal and external auditors Private meetings of the Audit Committee, and not just its chairman, are held at least annually with both the external auditors and internal audit Role in relation to whistle-blowing The Audit Committee has been informed of the whistle-blowing procedures in place within the organisation and undertakes its defined role in relation to them nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 6: Oversight and supervision 6.1 Delegations of authority The board’s responsibilities include ensuring there are appropriate policies in place, supported by an effective framework of internal controls. One element of this framework is the formal delegations of authority from the board to the CEO and management and the board’s ongoing oversight and review of those delegations. Policy formation and delegations of authority As the board is ultimately responsible for all the actions and decisions made by the organisation, it must set in place specific policies to guide organisational behaviour, for example, codes of conduct, risk management policies and remuneration policies. In achieving the aims of these policies, the board needs to establish procedures and controls to implement the policies and be responsible for the assessment of efficiency and effectiveness of the policies and procedures. However, it is important to remember that such broad- based policy development does not cross into management’s role in the day-to-day running of the business. To ensure that the line of responsibility between board and management is clearly delineated, the board must develop policies in relation to delegations of authority. What are delegations of authority? In strict terms, the authority to enter into commitments or to take action on behalf of the organisation vests in the board. However, this is not consistent with the notion of an empowered responsible management team and does not recognise the practicalities – it is clearly not possible To be effective, the instrument that gives effect to the and not appropriate for the board to sign every cheque or delegations of authority must: approve every transaction. ƒ be written in simple language Delegations of authority are the mechanism to devolve ƒ cover the range of activities in which the organisation the power to do these things to the CEO and to other is engaged or expected to participate senior personnel within the organisation. However, the ƒ be appropriate to facilitate the smooth and efficient board must recognise that delegating its authority does operation of the organisation not allow it to abrogate the associated responsibility. ƒ be targeted to appropriately empower management ƒ commit to the payment of bonuses to make the operational decisions expected of them ƒ make decisions on staffing matters including ƒ clearly state the maximum authority levels for each appointments, terminations, remuneration, level of management for budgeted and unbudgeted promotions, bonuses, training and the use of expenditure contractors and temporary staff ƒ be communicated to all personnel to ensure all staff ƒ commence or conclude litigation are aware of their responsibilities ƒ undertake specific treasury related transactions ƒ be backed up by appropriate oversight, supervision ƒ authorise payments. and review to ensure the delegations are appropriate, up to date and are being complied with ƒ be reviewed on a regular basis to ensure the delegations continue to be appropriate. The board may clarify their responsibilities and those of management through a statement of matters reserved for the board or through the board charter or a similar document. The role of the board is to carry out the tasks it has reserved for itself and oversee management’s performance of the tasks delegated to them. The statement of matters reserved for the board, a summary of the board charter and/or a statement of delegations of authority to management could be made publicly available. What should be covered in the delegations of authority? As with any policy, the nature and structure of the delegations will vary from organisation to organisation. What may be material to one organisation, and require board approval, may only require divisional approval in another organisation. It is also important that the policy fits the agreed risk appetite of the board. Typically delegations will be expressed in both monetary and other terms and will cover authority to: ƒ enter into strategic commitments ƒ incur costs associated with core business processes and the ordinary operations of the organisation ƒ commit the organisation to capital expenditure ƒ enter into contractual commitments, for example, leases and guarantees nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 6: Oversight and supervision 6.2 Risk management Risk is generally associated with the possibility of something bad happening. However, many organisations are taking a wider view. While most organisations focus on preventing major hazards, an increasing number look at a range of uncertainties and a few organisations have broadened their perspective to see risk in terms of opportunity. ƒ A description of the material risks facing the What is risk management? organisation Enterprise wide risk management establishes processes ƒ A description of the system for identifying, assessing, for identifying, analysing and managing those risks which monitoring and managing material risks in the could prevent an organisation from achieving its business organisation. This should also include the objectives or strategies. It includes making links between organisation’s internal compliance and control risks/rewards and resource priorities. Risk management system. involves putting control activities in place to manage risk ƒ A description of how the effectiveness of the throughout the organisation by developing tailored risk organisation’s risk management system and its management plans. implementation is assessed. What do we need to consider in It is advantageous for a description of the organisation’s risk management policy and internal compliance and establishing a risk management control system to be made available, to ensure informed framework? decision making by current and potential investors. The board should establish policies on risk oversight and management. However, risk management is only truly both effective and efficient when line management takes direct responsibility. The board must recognise that it is not directly responsible for managing risk but that it can make a significant contribution to the risk management culture within the organisation. As a director, you cannot be sure all key risks are covered if you do not have confidence in management’s ability to identify them. Hence, as a board, you should look at management’s process to proactively identify and deal with significant risks, ask management to comment on critical risks and Key management initiatives the board should encourage ensure growth objectives are balanced with and oversee directly include: considerations of risk. ƒ articulating a clear unambiguous risk management The risk management policy should include the following policy that defines the organisation’s expectations key components: and the internal accountabilities for management of ƒ Acknowledgement of the board’s role to oversee the risks establishment and implementation of a system of risk ƒ positioning risk management as the responsibility of management and internal controls. each manager and employee as they go about their ƒ Requirement for the effectiveness of the system and duties its implementation to be reviewed at least annually ƒ establishing a robust approach to risk management What is the board’s ongoing role in which provides the organisation with a framework for: overseeing the risk management o identifying the risks related to the organisation’s framework? objectives as detailed in its strategic plan The board’s ongoing role is to ensure areas of significant including potential and actual barriers and critical business risk are identified and that management has put success factors arrangements in place for managing these risks. Your o identifying new risks as they emerge and board should ensure it understands the organisation’s changes in previously identified risks overall risk profile and is informed of high-level risks and o deciding what initiatives, programs or other changes so they can identify key concerns. actions are needed to deal with the risks in a positive, proactive, cost effective way Within the board, risk management issues are often o identifying or designing and implementing delegated to the audit committee. Where risk is controls to ensure the actions are carried out as concerned with financial reporting or legal and regulatory planned requirements, this has seemed the logical place to consider risk. However, if the organisation is considering o ensuring appropriate information systems and risks related to strategic issues, marketing, customer systems of internal control exist to facilitate care, technology, supply chain and other operational reporting on risk exposures and mitigation matters, it may be more appropriate to consider strategies delegation to another specific board committee. o monitoring the entire process and reporting to the board or relevant committee. An effective board and/or committee should: For larger organisations, the board may find it useful to ƒ ensure there is an effective on-going process to obtain statements or declarations from the CEO and/or identify risk, measure its potential impact against a CFO in relation to their risk management procedures. varied set of assumptions and proactively manage it ƒ ensure management has reached consensus on the The board should work with management to ensure the objectives, linked to the enterprise wide framework, most common pitfalls in the risk management process of each business unit, and which managers “own” are avoided. These include: which process. Risk management should be ƒ not using common terminology – everyone has a integrated into the way management runs the different internal definition of risk business. Performance metrics and compensation ƒ short-cutting the process, focusing on risk first rather plans should be linked to risk management than strategic objectives effectiveness ƒ putting implementation responsibility too low – it must ƒ ensure that management does not just look at be senior management existing risks, but also has processes in place to ƒ continuing to engage in activities and initiatives which identify new risks as they emerge are not aligned to company objectives (long-outdated ƒ be certain it is apprised of the most significant risks goals) and can determine whether the right actions are in ƒ identifying risk as a one-off activity without setting up place. a mechanism to identify future risks. 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 6: Oversight and supervision 6.3 The internal control framework A comprehensive, well-designed, fully implemented and effective internal control framework provides the right environment for the efficient running of the organisation’s operations, provides comfort as to the organisation’s compliance with applicable laws and regulations and reduces the risk of financial statements being materially misstated. What is an internal control The board typically delegates many of its responsibilities for the internal control framework to the audit committee framework? which is better placed to give it adequate and ongoing An organisation’s internal control framework is made up attention. of the policies, procedures, monitoring and Where this is the case, it is vital that there is a clear communication activities, standards of behaviour and understanding between the full board and the audit other initiatives that, combined: committee as to the nature and extent of the committee’s ƒ meet strategic objectives responsibilities. ƒ allow the organisation to respond appropriately to significant business, operational, financial and Some organisations may require the CEO and CFO to compliance risks give annual certification to the board that: ƒ safeguard assets from inappropriate use and loss ƒ the organisation has a sound system of risk from fraud or error management and internal compliance and control ƒ help ensure the quality of internal and external which implements policies adopted by the board; reporting, through the maintenance of proper records ƒ the organisation’s risk management and internal and information flows compliance and control system is operating efficiently ƒ facilitate compliance with applicable laws, regulations and effectively. and internal policies. A comprehensive internal control framework will include financial, operational and compliance controls. What is the board’s role in implementing an effective internal control framework? The overall responsibility for an effective internal control framework is the board’s – it must require the implementation of the framework, approve key policies and ensure management give appropriate attention to the project. However, it is important to recognise that the implementation and operation of the framework and the development of the component procedures are management’s roles. The audit committee and the board should ensure it is Do we have any ongoing comfortable with the reasoning behind the allocation of responsibilities for internal controls? resources in the testing of internal controls and the areas The board/audit committee has the responsibility for the identified for review during a particular year. ongoing oversight of the internal control framework. This is an important key to reinforcing the organisation’s commitment to and culture of internal control. Typically, the audit committee or the board discharges its internal control oversight responsibility by: ƒ having an ongoing focus on the operation of the control framework ƒ considering the risks to which the organisation is exposed, the assessed likelihood and potential impact of each risk, the company’s risk appetite and the efficiency and cost effectiveness of the processes which management has implemented to manage those risks ƒ requiring appropriate periodic reports from management, internal audit and the external auditors ƒ requiring regular reviews of the effectiveness of aspects of the internal control framework. What do the external and internal auditors review? It is important that the audit committee and the board clearly understand the degree to which internal and external auditors review controls. Reviewing the annual internal and external audit plans and engaging in open and frank dialogue with the auditors will ensure you are clear on what comfort you can draw from their work. The external auditor is required to test internal controls only over the areas where they intend to rely on particular controls in the financial statement audit. The internal audit plan however, will cover some or all of the operational, financial and compliance controls. In many instances, limited resources may mean that the internal audit plan may need to cover only certain controls in one period, and focus on other controls the following year. 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 7: Practical guidance 7.1 Effective budgeting Budgeting is the detailed operational link between an organisation’s strategic outlook/plan and its business plan, and the day to day operations for the forthcoming period. If the budget does not reflect the organisation’s assessment of risks, opportunities and strategies, then any performance evaluation against it, is almost meaningless. level. This can lead to a more correct calculation of What are the keys to an effective borrowing costs, and better working capital management. budget process? If management only prepares a budgeted income A budget is a statement of management’s and the statement, without a detailed interlocking balance sheet board’s expectations for the performance of the and cash flow statement, they are only looking at part of organisation in the forthcoming year. It is imperative that the picture and may put the organisation at risk as there a detailed budget ties to the financial analysis prepared is no check on what particular strains a profit and loss in conjunction with the business and strategic plans. It budget will put on the organisation’s working capital, establishes the agreed allocation of resources and can existing bank facilities and covenants. be an effective tool to determine financial viability and cash flow health. In order to make an intelligent review, a budgeted income statement must, as a minimum: An effective budget is also a three way budget which includes not only profit and loss projections, but a ƒ be based on an opening balance sheet projected statement of financial position and a cash flow ƒ define the assumptions on which it is based statement for each month. ƒ include a monthly budgeted balance sheet and a budgeted cash flow with supporting assumptions. Why is a three way budget so important? The income statement (profit and loss statement/ statement of financial performance) is only one aspect of the financial results of an organisation. A complete and comprehensive picture of performance of any organisation can only be assessed in conjunction with the organisation’s balance sheet and the cash flow statement. For example, the income statement of an organisation is influenced by amounts already included in the balance sheet. This may include prepayments, inventory, depreciation of fixed assets and interest on overdraft and What is the board’s role? bank loans. The board plays a particularly crucial role at different The cash flow statement allows an organisation to stages of the budgeting process. The board: measure its working capital management, but also allows ƒ is involved in the planning stage by setting the for the calculation of bank facilities required at a financial parameters in the strategic and more particular point in time, based on the forecast activity detailed business plan ƒ approves the final budget and ensures that it is consistent with the strategic and business plans. As part of this process the board should challenge management on the budget assumptions. What should we be reviewing throughout the year? Actual income statement performance on a monthly and year to date basis should be tracked against the respective budgeted periods. Monthly cash flows and key balance sheet items should also be compared against budget. Information provided to the board should include graphical analysis to aid interpretation and the identification of trends. It is not enough for management to provide the board with this financial data without some form of critical analysis. Management should ensure there is adequately descriptive, yet concise, commentary on key ratios and any significant variances from budgeted results. In addition, as the year progresses, it is useful to reassess the annual budget and assumptions made with known factors which may impact the achievement of budgeted results. These adjustments, or revised forecasts, should also be: ƒ reviewed and approved by the board ƒ compared, on a monthly and year to date basis, to the actual and budgeted performance with commentary in the financial information provided to the board ƒ prepared on a periodic (typically a quarterly) basis. 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 7: Practical guidance 7.2 Compliance The way business views compliance with laws and regulations is changing. This has partly been driven by regulators and partly by the courts, but predominantly by boards understanding that they need to ensure compliance is managed as part of the way the organisation does business. In recent times, there has been a shift away from the backward-looking checklist approach to compliance, towards frameworks that embed compliance as part of the business process, ensure all employees understand their compliance responsibilities, use risk management solutions to minimize the risk of compliance failure and provide greater comfort for senior management and the board. What is a compliance framework? Is a risk management approach to An organisation’s management of the regulatory and compliance appropriate? legal requirements affecting it is often achieved through a A risk management approach to compliance does not number of specific compliance programs, for example, a ignore or seek to minimise the need to comply with the trade practices compliance program or an environmental law. Instead, it recognises compliance as a type of risk, compliance program. These programs may include approaches it as a ‘whole of business issue’ and training and a range of other initiatives to ensure the enhances the organisation’s ability to address its relevant obligations are appropriately addressed. obligations in a structured manner. A well designed compliance program will: How important is compliance? ƒ aim to prevent and to respond to breaches of specific The extent and complexity of compliance requirements is laws, regulations, codes or organisational standards increasing. Failures in these areas may result in costs occurring in the organisation through litigation and/or penalties but may have far more ƒ contribute to a culture of compliance within the significant implications for an organisation. Compliance organisation, failures may result in damage to the organisation’s A compliance framework integrates the specific reputation or, in the worst case scenario, the death or compliance programs and the needs of the component injury of an employee, customer or third party. business units to provide a comprehensive, robust and Today, there is an established nexus between corporate consistent approach to compliance. behaviour, customer satisfaction and shareholder value which few organisations can afford to ignore. Typically the development of a compliance framework which draws together existing compliance programs will result in enhancements or modifications to those What do we need to do to ensure programs and the development of new programs to the board’s oversight of the address identified areas of exposure. compliance framework is effective? A key feature of an effective compliance framework is The organisation’s response to compliance is an issue that it makes compliance every employee’s responsibility driven by the board. In the first instance, you should take and allows the business to focus on the future and not the appropriate steps to ensure management: waste time, effort and money fighting fires. ƒ understands the external and internal compliance requirements facing the organisationƒ has comprehensive policies and procedures is place ƒ reviewing findings and reports of examinations by that, when followed, will ensure compliance regulators ƒ creates a business environment that encourages ƒ ensuring that management has reflected the impact compliance with policies and procedures of significant issues in the financial reports. ƒ integrates compliance risks and opportunities into the Periodic briefings and information from the internal core business strategy. auditor, general counsel, compliance officer, external auditors and management can provide much of the In some organisations, the audit committee may expand information the board needs. its mandate to incorporate oversight of the compliance framework and any emerging or other compliance issues In addition, each director should ensure he/she has a including litigation and contact with regulators. However, good understanding of the legislative and regulatory care must be taken not to overburden the audit environment in which the company operates. committee. An alternative approach is to establish a separate board How can I assess how well our committee purely for consideration of compliance current compliance management matters. A third option gives a committee, other than the measures up? audit committee, responsibility for the oversight of both It may be prudent to perform a high level compliance compliance and the organisation’s broader risk diagnostic for your organisation. Statements you should management framework. be able to use to describe your organisation include: The solution for your organisation will naturally depend ƒ compliance risk management is on the board’s on the size and complexity of your organisation and the agenda needs of the board. However, it is important to balance ƒ we fully understand how compliance risks affect our the workload of the audit committee against having too reputation many committees and the need to ensure the appropriate ƒ the organisation is flexible, adapts well to a changing sharing of information between committees and the regulatory environment board. Indeed, where a compliance framework is being ƒ our IT meets our compliance management needs implemented for the first time, it may be appropriate to retain initial oversight responsibility at a board level. ƒ our compliance management information is relevant and timely The oversight of the compliance framework should ƒ management accountability for compliance in all include: areas of the business is clear ƒ reviewing the effectiveness of the organisation’s ƒ performance objectives include compliance system for monitoring compliance with laws and ƒ internal audit and/or other functions monitor regulations compliance risk ƒ receipt of periodic reports ƒ we have identified new legislation that will impact us ƒ ensuring testing of compliance with laws, regulations ƒ our IT systems, including internet sites, are secure and organisational policies is incorporated into the ƒ we manage contracts effectively internal audit plan ƒ we protect the privacy of our customers, employees ƒ understanding the nature of any significant issues and suppliers that come to light and management’s investigation ƒ our environmental risks are managed and follow-up, including disciplinary actions ƒ we have an effective compliance framework ƒ reviewing trends in compliance and management’s plans to address systemic issues ƒ we can demonstrate that a culture of compliance is evident in our organisation. 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 7: Practical guidance 7.3 Early warning signs of failure In today’s competitive business environment, more and more businesses are facing the need to either restructure or wind down poorly performing business units. Every board must ensure it is in a position to be able to identify the early warning signs that the organisation, or one of its component businesses, is struggling. Why do organisations fail? If the early warning signs are recognised by the board and/or management, it may be possible to either: There are many reasons why a business may eventually ƒ turn the trading performance of the business around fail. However, there are a number of factors that appear to be common to those businesses which find or themselves in financial difficulty, and which are ultimately ƒ commence an orderly wind-down of operations and forced to cease operations. assets to avoid further losses from being incurred. While failure to change is at the root of many insolvencies, one or more of the following factors may What are the “early warning” signs? contribute to the early demise of a business: What should I be looking for? ƒ undercapitalising/over-gearing In addition to the matters listed above as the factors that ƒ inadequate planning contribute to the demise of an organisation, you should ƒ poor information systems pay careful attention to: ƒ overtrading/growing too fast Management and internal structures ƒ inadequate cost control ƒ Beware of autocrats or dictators – people who ƒ lack of/poor management succession planning operate alone or surround themselves with “yes- ƒ over reliance on a single customer/product men” ƒ price/margin competition ƒ Check for balance and complementary skills sets in ƒ fraud. the key management teams ƒ Recognise and respond to unplanned or How do we avoid this situation? inappropriate succession The prediction and prevention of corporate failure hinges ƒ Be alert to staff turnover that is too high - realise that on actively looking for and identifying early warning signs it is often the good people who are the first to “walk” that, if left unchecked, may cause an organisation to ƒ Be alert to staff turnover that is too low – every make vital mistakes. One critical error or too many business needs an ongoing injection of new ideas mistakes at the wrong time, can be terminal for any ƒ Don’t tolerate poor industrial relations business. ƒ Management that focuses on the past or is nostalgic There are a number of potential operational errors that for “the good old days” directors, audit committee members and other vigilant ƒ Advice from external advisers, the marketplace, corporate executives should always be on the lookout for customers, or employees that is ignored in order to put themselves in a proactive position to ƒ Be alert to management who are unable, or reluctant, safeguard the business. They range from management to take leave and internal structural issues, to financial awareness and simple, basic mistakes that could impact at any level. ƒ Unsustainable growth – there is an established Markets and products nexus between unduly high sustained growth rates ƒ Be aware of cyclical markets which may put and a substantially increased risk of failure. businesses under pressure ƒ Don’t put all your eggs in one basket by over relying What action can the board take if on a single customer or supplier there are signs the business is ƒ Recognise poor market research which will struggling? compromise the quality/relevance of your strategic planning and your knowledge of your customers The key to preventing business failure is for the board and management to identify the warning signs early and ƒ Monitor product quality to take corrective action as soon as possible. The board ƒ Consider the adequacy of marketing activity needs to be prepared to make the decision to quit a non- ƒ Challenge a lack of product development performing asset early, or to at least put controls in place ƒ Be alert to declining sales in a robust industry and/or to prevent further losses from being incurred. rising costs of production Management needs to be held accountable to the board Financial issues for the performance of the business, as many of the key factors resulting in business failure can be traced back to ƒ Focus on debtors paying outside trading terms and poor management decisions. However, this does not creditors and suppliers dealing with the business on absolve the board from its responsibilities. The board “cash only” terms supervises management and makes major decisions. ƒ Review cash flow/cash burn rate The board must be prepared to act and act quickly even ƒ Review business plans for realism, accuracy and if this means it is effectively admitting that it erred in one sensitivity or more of its decisions. ƒ Question inadequate or absent management reports, particularly management accounts When there are signs of difficulty, management and the board need to work together, agree the approach to ƒ Check the availability and adequacy of long term manage the situation and monitor progress. finance ƒ Review the adequacy/appropriateness of gearing If the board suspects that the business is struggling in levels one or more areas, it is often advisable to seek independent advice. This may in the first instance be the ƒ Ensure there is a good relationship with the organisation’s accountant, or for an independent company’s financiers, especially any secured lenders assessment, an external business advisory firm may be and that this is supported by frequent dialogue and engaged to review the non-performing areas of the good information flows business. In most countries, there are a number of ƒ Query excessive remuneration of management or different legal or informal options which can be explored directors for struggling organisations. Basic mistakes A review initiated by a proactive board, is preferable to a ƒ Big projects – approach these with caution as they review initiated by the organisation’s financiers as a may have the capacity to divert funds and result of covenants being breached or other concerns. management concentration with potentially disastrous consequences ƒ Inappropriate or poorly executed acquisitions - these can be very unhappy affairs that can bring down the acquirer 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 8: Companies in Australia 8.1 Board awareness As a director, you need to take proactive steps to understand the full range of legislation that applies to the organisation and to keep up to date with any relevant changes to the legislative framework. Being aware of the range of key regulatory and commercial issues will assist you to assess how well the organisation is managing its obligations and activities. This information sheet includes a brief, high level synopsis of a number of the regulatory issues and technology matters relevant particularly to the Australian market, which you should consider. Key matters for attention include: IT strategy IT systems are a core element of most businesses, and it ƒ ensuring IT systems effectively and efficiently enable is likely that they are a critical factor in determining the a business to reach its objectives success of your business. Whilst enabling competitive ƒ approving and monitoring performance against the IT advantages and timely analysis, IT systems also strategy represent one of the larger costs for any business. ƒ review and approval of any major changes to Failure to properly align the IT resources to overall hardware, software development applications or business objectives and requirements can significantly acquisitions, projects, resource allocation, disaster impair operational and financial performance. recovery and emergency procedures and MIS policies and procedures. Given the importance of IT systems, all businesses should have an IT strategic plan to ensure the most The combination of a robust IT strategy and diligent effective and cost efficient processing is attained on an oversight will better enable your business to meet its ongoing basis. A good IT strategic plan includes both plans and objectives. short-range and long-range plans and should address, but not be limited to: E-Business ƒ forecasted changes in the business which would E-business, is continuing to change the way many impact processing requirements companies do business, and the related risks and ƒ anticipated changes in software applications, or even internal controls are of increasing importance to the replacement of applications due to obsolescence or board and the audit committee. costly ongoing maintenance E-Business encompasses: ƒ operating software changes and enhancements to ensure vendor maintenance agreements are not ƒ e-commerce - performing business transactions violated using internet technology ƒ hardware purchases anticipated due to cost benefit ƒ e-content - publishing content on internet web sites considerations, outgrowing the current hardware ƒ e-collaboration - sharing data and applications capacity, insufficient response time, or lack of between internet-based tools and users. adequate storage capacity. The complexity, challenge and change brought about by It is critical that every organisation has appropriate e-business create risks. Effectively managing these oversight of its IT systems. The size of the organisation risks, will, in many cases, have a major impact on will determine how this is best split between the board achieving business objectives and enhancing and management. shareholder value. Both the board and management must understand the various risks and review the company’s risk management policies and practices to director and which is not covered by any form of ensure they are appropriately addressed. professional indemnity or other insurance. Vigilance is clearly important but it must be balanced against your In addressing and managing the risks arising from other responsibilities. e-business, you should consider the following: The challenge for all chief executive officers and board ƒ customer privacy, confidence and loyalty members is to ensure: ƒ operational resilience ƒ the organisation has established systems for ƒ legal and regulatory issues monitoring and reporting compliance with all the ƒ taxation issues applicable state, territory and federal legislation on ƒ change processes these issues ƒ relationships with suppliers and business process ƒ they receive regular and comprehensive reports on optimisation. the organisation’s performance against its own standards and other appropriate indicators. Occupational Health and Safety, workers compensation and Superannuation environmental protection The provision of superannuation for employees is compulsory. However, the board should consider Occupational health and safety legislation is common in whether the organisation’s current superannuation many countries and impose upon employers a duty to arrangements provide the best fit with its overall provide a safe workplace and systems of work for all remuneration strategy. Superannuation is subject to employees and contractors. increased regulatory scrutiny and the board should Specific regulations and codes of practice, which support ensure legislative requirements are met in an effective local occupational health and safety legislation also vary manner. in coverage and implementation given the legislation has Some key factors which you should consider are: only emerged over the past 20 years. However, all have similar principles and requirements such as manual ƒ What industrial relations issues exist in relation to handling, dangerous goods, and hazardous substances. superannuation? ƒ If superannuation is outsourced, how is the Like occupational health and safety, the legislation arrangement and the performance of outsourced governing workers compensation also varies between providers monitored? the states and territories, with the main differences ƒ For a standalone fund, how does it achieve arising in the amount of compensation paid and who is economies of scale and provide a range of services deemed to be covered by the legislation. at a competitive cost? Environmental protection legislation is also managed ƒ Are there hidden employer costs associated with independently by the states and territories. The principal running the fund? requirement of all environmental legislation is to protect ƒ Are sufficient resources available to avoid the the environment and to prescribe penalties for those who reputation risk associated with a poorly managed in- contribute to the pollution or other destruction of the house fund? environment. The execution of the legislation varies with ƒ Is the benefit design appropriate for attracting and the jurisdiction, as do penalties and fines for breaches. retaining staff? A common feature of much of the legislation in this area ƒ Is the funding at a sufficient level to provide security is the personal liability that attaches to each individual of benefits? Under any scenario, a process should exist for identifying ƒ monitoring privacy compliance on an ongoing basis, who is an employee for Superannuation Guarantee and reassessing its responsibilities as the business purposes and at what level contributions should be changes. made. In addition, you should be aware that a number of Australian states have specific public sector privacy Privacy legislation in place and Victoria has specific privacy In recent years, society has recognised the increasing requirements applying to both the public and private importance of protecting one’s privacy. In Australia, the sectors in the Public Health Records Act 2001. Clearly, Privacy Amendment (Private Sector) Act 2000 (the Act) where these apply to your organisation, you will also came into effect regulating the manner in which need to understand the requirements of this legislation. personally identifiable information is collected, stored, used and disclosed. Industry codes Industry codes form an important part of the regulatory Individuals now have the right to know what information environment and tend to deal with consumer and small is collected about them, what it will be used for, who it business protection issues not covered by legislation. will be shared with, as well as having the right to access information held on them by any large organisation. Codes are voluntary and must be adopted by an organisation in order to bind that organisation. Codes If your company is incorporated in Australia, it must have: tend to prescribe certain standards of behaviour and ƒ appointed a person to be responsible and practice for organisations in their dealings with accountable for privacy compliance within your customers. They usually cover: organisation ƒ disclosure ƒ developed and publicised a privacy statement ƒ principles of conduct ƒ ensured it has the appropriate policies and ƒ privacy procedures in place to meet the requirements of the legislation ƒ dispute resolution. ƒ ensured all staff dealing with personal information Compliance with codes is unenforceable at law although are aware of the privacy legislation, and how the industry regulators have roles to play in their company is addressing its responsibilities. administration. For example, the Australian Securities and Investments Commission (ASIC) monitors On an ongoing basis, you should ensure the organisation compliance by financial services organisations with is: codes, and issues public reports on its findings. ƒ only collecting personal information if it is necessary for its business activities Membership of industry codes tends to be voluntary ƒ communicating with the individuals it has contact with although some industry associations require all members to let them know who it is, how it collects personal of the association to adopt their code. You should information and what it will do with it ensure you are aware of any industry codes which your organisation may have or should have adopted and what ƒ using and disclosing personal information in the responsibilities these involve. manner the individual has consented to at the time of collection ƒ allowing individuals to access and correct their personal information nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 8: Companies in Australia 8.2 ASX Corporate Governance Council: Principles and recommendations If your company is listed on the Australian Stock Exchange, the ASX Corporate Governance Council Principles of Good Corporate Governance and Best Practice Recommendations are applicable to you. The ASX Corporate Governance Council was Recommendation 2.4 The board should establish a nomination committee. established on 15 August 2002 for the purpose of developing and delivering an ‘industry-wide, supportable Recommendation 2.5 Provide the information indicated in Guide to reporting and supported framework for corporate governance on Principle 2. which could provide a practical guide for listed 3 Promote ethical and responsible decision-making companies, their investors, the wider market and the Actively promote ethical and responsible decision- Australian community’. making. The Council released a set of 28 Best Practice Recommendation 3.1 Establish a code of conduct to guide the directors, the Recommendations relating to 10 key principles of good chief executive officer (or equivalent), the chief corporate governance in March 2003. Commentary and financial officer (or equivalent) and any other key guidance is provided for each recommendation. The executives as to: recommendations are not mandatory, however 3.1.1 the practices necessary to maintain confidence companies are required to adopt an ‘if not, why not’ in the company's integrity approach and provide explanations for any departures 3.1.2 the responsibility and accountability of from the recommendations. individuals for reporting and investigating reports of unethical practices. The 10 principles and 28 Recommendation 3.2 Disclose the policy concerning trading in company recommendations securities by directors, officers and employees. A company should: Recommendation 3.3 1 Lay solid foundations for management and Provide the information indicated in Guide to reporting oversight on Principle 3. Recognise and publish the respective roles and 4 Safeguard integrity in financial reporting responsibilities of board and management. Have a structure to independently verify and Recommendation 1.1 safeguard the integrity of the company's financial Formalise and disclose the functions reserved to the reporting. board and those delegated to management. Recommendation 4.1 2 Structure the board to add value Require the chief executive officer (or equivalent) and Have a board of an effective composition, size and the chief financial officer (or equivalent) to state in commitment to adequately discharge its writing to the board that the company's financial responsibilities and duties. reports present a true and fair view, in all material respects, of the company's financial condition and Recommendation 2.1 operational results and are in accordance with A majority of the board should be independent relevant accounting standards. directors. Recommendation 4.2 Recommendation 2.2 The board should establish an audit committee. The chairperson should be an independent director. Recommendation 4.3 Recommendation 2.3 Structure the audit committee so that it consists of: The roles of chairperson and chief executive officer ƒ only non-executive directors should not be exercised by the same individual. ƒ a majority of independent directors ƒ an independent chairperson, who is not efficiently and effectively in all material chairperson of the board respects. ƒ at least three members. Recommendation 7.3 Recommendation 4.4 Provide the information indicated in Guide to reporting The audit committee should have a formal operating on Principle 7. charter. 8 Encourage enhanced performance Recommendation 4.5 Fairly review and actively encourage enhanced board Provide the information indicated in Guide to reporting and management effectiveness. on Principle 4. Recommendation 8.1 5 Make timely and balanced disclosure Disclose the process for performance evaluation of Promote timely and balanced disclosure of all material the board, its committees and individual directors, and matters concerning the company. key executives. Recommendation 5.1 9 Remunerate fairly and responsibly Establish written policies and procedures designed to Ensure that the level and composition of remuneration ensure compliance with ASX Listing Rule disclosure is sufficient and reasonable and that its relationship to requirements and to ensure accountability at a senior corporate and individual performance is defined. management level for that compliance. Recommendation 9.1 Recommendation 5.2 Provide disclosure in relation to the company's Provide the information indicated in Guide to reporting remuneration policies to enable investors to on Principle 5. understand: 6 Respect the rights of shareholders (i) the costs and benefits of those policies and Respect the rights of shareholders and facilitate the (ii) the link between remuneration paid to directors effective exercise of those rights. and key executives and corporate performance. Recommendation 6.1 Recommendation 9.2 Design and disclose a communications strategy to The board should establish a remuneration promote effective communication with shareholders committee. and encourage effective participation at general meetings. Recommendation 9.3 Clearly distinguish the structure of non-executive Recommendation 6.2 directors' remuneration from that of executives. Request the external auditor to attend the annual general meeting and be available to answer Recommendation 9.4 shareholder questions about the audit. Ensure that payment of equity-based executive remuneration is made in accordance with thresholds 7 Recognise and manage risk set in plans approved by shareholders. Establish a sound system of risk oversight and Recommendation 9.5 management and internal control. Provide the information indicated in Guide to reporting Recommendation 7.1 on Principle 9. The board or appropriate board committee should 10 Recognise the legitimate interests of stakeholders establish policies on risk oversight and management. Recognise legal and other obligations to all legitimate Recommendation 7.2 stakeholders. The chief executive officer (or equivalent) and the chief financial officer (or equivalent) should state to Recommendation 10.1 the board in writing that: Establish and disclose a code of conduct to guide compliance with legal and other obligations to 7.2.1 the statement given in accordance with best legitimate stakeholders. practice recommendation 4.1 (the integrity of financial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board 7.2.2 the company's risk management and internal compliance and control system is operating 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved CORPORATE GOVERNANCE TOOLKIT 8: Companies in Australia 8.3 ASX Corporate Governance Council: Disclosures If your company is listed on the Australian Stock Exchange, the ASX Corporate Governance Council Principles of Good Corporate Governance and Best Practice Recommendations are applicable to you. These, and the Listing Rules, require certain disclosures in relation to the principles. The ASX Corporate Governance Council circumstances of a company, it has the flexibility not to recommendations are not mandatory, they are follow it. Companies are required, through the Listing guidelines that are designed to “produce an efficiency, Rules, to disclose in their annual reports the extent of quality or integrity outcome’. As a result, the ASX has compliance with and explain any departures from the employed an ‘if not, why not’ approach. Companies best practice recommendations. are encouraged to adopt the recommendations as best In addition, the following disclosures are practice, however where it is believed that a recommended by the ASX: recommendation is inappropriate to the particular Document Recommendation Place of publication Board Charter or summary thereof 1.1 Website Statement of matters reserved for the board 1.1 Website Statement of Delegated Authority to Management 1.1 Website Formal Letter of Director's Appointment (Non- 1.1 Not required to be published to the executive) public, but recommended to be given to new directors. Disclosure of interests affecting 'independence' 2.1 Annual report Nomination Committee Charter or summary thereof 2.4 Website Description of the procedure for the selection and 2.4 Website appointment of new directors to the board Nomination Committee's policy for ensuring that the 2.4 Website appointment of directors is designed to produce an effective board Directors’ details 2.5 Annual report Directors’ Code of Conduct or summary thereof 3.1 Website Securities trading policy or summary thereof 3.2 Website Audit Committee Charter 4.4 Website Audit Committee member details 4.5 Annual report Information on procedures for the selection and 4.5 Website appointment of the external auditor and for the rotation of external audit engagement partners Continuous Disclosure Policy and Procedures or 5.1 Website summary thereof Policy on shareholder communication or a 6.1 Website description thereof Risk Management Policy and Internal Compliance 7.1 Website and Control System Document Recommendation Place of publication Description of Risk Management Policy and Internal 7.3 Website Compliance and Control System Description of whether a performance evaluation for 8.1 Annual report the board and its members has taken place in the reporting period and how it was conducted Description of performance evaluation process of the 8.1 Website board, its committees and individual directors and key executives Description of Executives Remuneration Policy 9.1 Annual report Remuneration Committee Charter or summary 9.2 Website thereof Description of Non-Executives Remuneration Policy 9.3 Annual report Remuneration Committee member details 9.5 Annual report Corporate Code of Conduct or summary thereof 10.1 Website 2nd EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. Copyright PricewaterhouseCoopers. All rights reserved nd CORPORATE GOVERNANCE TOOLKIT – 2 EDITION 8: Regulatory awareness 8.4 CLERP 9 disclosures If your company is incorporated in Australia, the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act 2004 (CLERP 9) is applicable to you. CLERP 9 includes a number of disclosure amendments to the Corporations Act 2001. These are summarised below. Summary of CLERP 9 Disclosure Requirements Effective time of Applicable Requirements/Issues Timing application entities Directors’ report Statement by directors that the Board has Financial years 2005 Annual Listed entities received a declaration from the CEO/CFO commencing on or after Report under section 295A on the financial records 1 July 2004. and financial statements. If additional ‘true and fair’ information is Financial years 2005 Annual All entities included in the financial report, the directors’ commencing on or after Report preparing financial report must set out the reasons for including 1 July 2004. reports the information, and its location in the financial report. Listed companies must include information on Financial years 2005 Annual Listed entities the operations, financial position and business commencing on or after Report strategies and prospects. 1 July 2004. The name of each officer of the company who All reports prepared after 2004 Annual All entities was a former partner or director of the entity’s the commencement of Report preparing financial current audit firm or audit company the CLERP 9 Act. reports Listed entities must include qualifications and Financial years 2005 Annual Listed entities experience of each person who is a company commencing on or after Report secretary of the company at the year end. 1 July 2004. Where an auditor is relying on a declaration Financial years 2007 Annual Listed entities from ASIC modifying auditor rotation commencing on or after Report requirements, a copy of that notice. 1 July 2006. Disclosure of non-audit services by auditors. Financial years 2005 Annual Listed entities commencing on or after Report 1 July 2004. Details of directorships of other listed Financial years 2005 Annual Listed entities companies held by each director in 3 years commencing on or after Report prior to end of the financial year to which the 1 July 2004. report relates. A copy of the auditor’s independence Financial years 2005 Annual All entities declaration under section 307C. commencing on or after Report preparing financial 1 July 2004. reports Summary of CLERP 9 Disclosure Requirements Effective time of Applicable Requirements/Issues Timing application entities The ‘Remuneration Report’ within the directors’ report Shareholder approval is required where the Agreements entered into 2005 Annual Listed entities value of the benefit given in connection with on or after 1 July 2004. Report the retirement from office, when added to the value of all other payments (if any) already made or payable in connection with the person’s retirement of office, exceeds the greater of: x The person’s average remuneration for the last 3 years multiplied by the time (in years) the person has held an office in relation to the company (capped at 7 years); and x The person’s remuneration for the last 12 months. Discussion on board policy in relation to the Financial years 2005 Annual Listed entities remuneration of directors, secretaries and commencing on or after Report senior managers. 1 July 2004. Discussion of the relationship between the Financial years 2005 Annual Listed entities remuneration policy and the company’s commencing on or after Report performance, including details of the 1 July 2004. performance for the last 4 financial years. Details of performance conditions that apply Financial years 2005 Annual Listed entities to any element of remuneration. commencing on or after Report 1 July 2004. Details of remuneration of each director and Financial years 2005 Annual Listed entities each of the 5 named company executives commencing on or after Report (and in certain instances, group executives) 1 July 2004. receiving the highest annual remuneration. Explanation of reasons for directors or Financial years 2005 Annual Listed entities executives receiving securities not subject to commencing on or after Report performance conditions as part of 1 July 2004. remuneration. For each of the directors and named Financial years 2005 Annual Listed entities executives: commencing on or after Report 1 July 2004. ƒ Explanation of remuneration that is related to performance ƒ Value of any options that form part of remuneration taking into account those granted, exercised and lapsed ƒ Aggregate values, and percentage of remuneration, of options ƒ If the person is employed under a contract: duration, notice, and termination payment details. Summary of CLERP 9 Disclosure Requirements Effective time of Applicable Requirements/Issues Timing application entities Annual General Meetings Notices of meetings can be distributed Notices given after 30 30 September All entities electronically September 2004. 2004 Notice of meeting must include information Financial years 2005 AGM Listed entities about the remuneration report resolution. commencing on or after 1 July 2004. A notice of meeting must be worded and Notices given after 30 30 September All entities presented in a clear, concise and effective September 2004. 2004 manner. ASIC is empowered to make regulations that Notices given after 30 30 September All entities specify certain information need not be September 2004. 2004 included in a notice of meeting. A member can appoint a body corporate as Applies on and from 1 1 July 2004 All entities well as an individual as their proxy. July 2004. ASIC is empowered to make regulations that Applies on and from 1 1 July 2004 All entities prescribe methods for electronic verification July 2004. for proxies. Resolution put to shareholders that the Financial years 2005 AGM Listed entities remuneration report be adopted. commencing on or after 1 July 2004. The chair of a meeting must allow members Financial years 2005 AGM Listed entities as a whole a reasonable opportunity to ask commencing on or after questions about or comment on the 1 July 2004. remuneration report. Members can submit questions to the auditor Financial years 2005 AGM Listed entities concerning the auditor’s report or the conduct commencing on or after of the audit. 1 July 2004. Company must make auditor’s list of Financial years 2005 AGM Listed entities questions available at AGM. commencing on or after 1 July 2004. Lead auditor or a suitable representative must Financial years 2005 AGM Listed entities attend an audited body’s AGM commencing on or after 1 July 2004. Chair of an AGM must allow the members as Financial years 2005 AGM Listed entities a whole a reasonable opportunity to ask commencing on or after questions of the auditor. 1 July 2004. Annual reports can be distributed Financial years 2005 AGM All entities electronically. commencing on or after preparing financial 1 July 2004. reports Continuous disclosure reforms A person involved in a listed entity’s Contravention occurring 1 July 2004. Listed entities contravention of the continuous disclosure on or after 1 July 2004. provisions can be personally responsible for the contravention. Summary of CLERP 9 Disclosure Requirements Effective time of Applicable Requirements/Issues Timing application entities ASIC can issue ‘infringement notices’ where it Contravention occurring 1 July 2004. Disclosing entities has reasonable grounds to believe that a on or after 1 July 2004. disclosing entity has contravened the continuous disclosure provisions (section 674(2) or 675(2)). Audit Reforms The company cannot employ a member of an Time of departure 1 July 2004. All entities requiring audit firm, or director of an audit company occurring on or after 1 audit who was a professional member of that audit July 2004. team as an officer until 2 years from the date of ceasing to be with the audit firm or company. The company cannot employ a lead or review Time of departure 1 July 2004. All entities requiring auditor as an officer until 2 years from the occurring on or after 1 audit date of ceasing to be with the audit firm or July 2004. company. A company is restricted from employing more Time of employment 1 July 2004. All entities requiring than one former audit firm partner or audit commencing on or after audit company director as officer of the company. 1 July 2004. Requires rotation of a person who plays a Financial year 1 July 2006. Listed entities significant role in an audit for 5 years, or in 5 commencing on or after out of 7 years. 1 July 2006. Register of information about relevant interests Listed companies are required to keep a Information about 1 January 2005. Listed entities register of information about relevant interests relevant interests received by the company after issuing a received by a listed notice under section 672A or received after company on or after 1 ASIC issues a section 672C notice. January 2005. Presentation of prospectuses and other disclosure documents Information in prospectuses and other Disclosure documents 1 July 2004. Listed entities disclosure documents in respect of securities lodged with ASIC on or must be ‘worded and presented in a clear, after 1 July 2004. concise and effective manner’. Whistleblowing provisions protecting employees who report contraventions Provides protection for officers, employees All disclosures made on 1 July 2004. All entities and contractors of a company who report or after 1 July 2004, contraventions or suspected contraventions of including any disclosure the Corporations legislation to AISC, the of information about company’s auditor, a director or other circumstances that arose authorised persons. before that day. nd 2 EDITION . Dated: April 2005 Corporate governance is consistently evolving to reflect the current corporate, economic and legal environment. This information sheet provides generic guidance on corporate governance practices. There will be specific legal and regulatory requirements in each country which are relevant to individual organisations. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. No person should undertake or refrain from any action based on the information in this publication without seeking advice from their professional advisers. 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