Canadian Insurance Accountants Association

Transcription

1 Canadian Insurance Accountants Association Corporate Governance Rising Expectations Presented By: Sandeep Dhiman May 20, 2015

2 Agenda 1. Current Corporate Governance Environment 2. Hot Topics a) Regulatory environment b) Board composition c) Shareholder activism d) Role of the Board e) Board reporting f) Board and management interaction 3. Industry response Appendix: A. Speaker profile B. Corporate governance publications

3 What is Corporate Governance? A set of relationships between a company s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. - Organization for Economic Corporation and Development (OECD) 3

4 The 2015 corporate governance environment A combination of increased regulatory activity and shareholder pressure is changing the way Boards approach their oversight role What is hot 1) An active regulatory environment 2) Board composition 3) Rise in shareholder activism 4) Role of Board in oversight of risks Shifting Responsibilities & Overseeing technology and cybersecurity 5) Board Reporting 6) Board and Management interaction 4

5 1. An active regulatory environment Regulators around the world have started to review and revise their expectations around corporate governance OECD Principles for Corporate Governance BCBS Principles for Enhancement OSFI s guidelines of Corporate Governance Basis for effective Corporate Governance - Promote transparent markets, comply with law The Rights of Shareholders - Protect shareholder rights The Equitable treatment of Shareholders - Minority stakeholders and foreign ownership The role of stakeholders in Corporate Governance - Cooperation with stakeholders Disclosure and Transparency - Timely and accurate disclosure The Responsibilities of the Board - Strategic guidance and effective monitoring Board Practices Overall responsibility for bank, including strategy Senior Management Must ensure enterprise practices are consistent with board approved policies Risk management and internal controls Robust ERM must include adequate reporting to the board Compensation FSB Principles for Sound Compensation Practices Complex or opaque corporate structures Board must strive to reduce complexity Disclosure and transparency Effective tool for implementing good Corporate Governance Role of the Board Approval and review of the senior management strategy Enhancing effectiveness, oversight, and guidance Interfacing with internal controls, senior management and oversight functions Risk Governance The Risk Appetite Framework must be Board approved Establish a dedicated Board Risk committee CRO as a direct report Role of the Audit Committee Appoint the external auditor Actively review the audit results with senior management 5

6 1. An active regulatory environment A U.S. perspective US regulatory environment is always more active and has repercussions for the rest of the world. Set out below are select examples of heightened expectations from US regulators Dodd Frank SEC Rules under Dodd-Frank 398 Finalized 58% Not yet proposed 24% Key completed aspects Say on pay - 1/2011 New whistleblower program - 5/2011 Disclosure of rationale for separation or combination of CEO and chair roles - 12/2009 Independence for comp committees - 6/2013 More enforcement actions ($4.2B penalties, 755 EAs) Increased Whistleblower activity (3,600 tips received, 9 awards granted up to $30M) Key SEC Initiatives Broken windows strategy Repeal of Neither admit nor deny Operation Broken Gate Use of Big Data 6

7 1. An active regulatory environment Evolving focus of the Board 37% of financial services directors say they increased time spent on risks embedded in compensation plans 1. 1 Trends shaping governance and the board of the future s 2014 Annual Corporate Directors Survey. 7

8 2. Board Composition Diversity, Role of Chair, Skills The scrutiny is increasing around Board Composition and there is ever greater focus on diversity, tenure and director independence. For example - in recent years, a growing number of companies have chosen to separate the roles of CEO and board Chair In addition, as the role of the Board is to provide oversight of the financial statements, strategy, and operational execution most directors feel that financial expertise is the key attribute/ skill required on the board Is your Board considering/discussing any of the following? Importance of skills on the Board 8

9 3. Rise in Shareholder Activism Shareholder activism has become more pervasive. Boards are more frequently faced with having to respond to activists and a significant percentage of directors say they are having board discussions about potential situations in advance of being approached Activist investors now control more than $100 billion in assets under management. The total number of actual proxy contests increased over the last two years and exempt solicitations nearly doubled 2 29% of directors say their board interacted with activists and held extensive board discussions about activism last year 2 Trends shaping governance and the board of the future s 2014 Annual Corporate Directors Survey. 9

10 4. Role of the Board Who s got what risk? While boards frequently assign certain high-level risk oversight responsibilities to a specific committee, other risks are often overseen by the whole board. Clarity about the allocation of responsibilities is essential to ensure coverage and understanding Over the last three years, directors have become more comfortable with the allocation of specific responsibility for overseeing major risks between the board and its committees In 2014, 84% said there was a clear allocation of responsibility, up from 80% in 2013 and 63% in However, of those directors who say there is a clear allocation of responsibility this year, 55% still think it can be improved. The larger the company, the more likely a director is to believe there is a clear allocation of responsibilities for risk oversight 3 3 Trends shaping governance and the board of the future s 2014 Annual Corporate Directors Survey. 10

11 4. Role of the Board Overseeing Technology and Cybersecurity High profile data breaches and the increased complexity of directors oversight roles is contributing to a new governance and control need within the enterprise Nearly half of directors have not discussed the company s crisis response plan in the event of a cybersecurity breach and 67% have not discussed cybersecurity insurance coverage Almost two-thirds of directors want at least some increased focus on IT risks and cybersecurity 4. 4 Trends shaping governance and the board of the future s 2014 Annual Corporate Directors Survey. 11

12 5. Board Reporting As the board becomes more aware of its responsibilities, and more involved in the operation of the enterprise, the board is demanding more information from senior management How satisfied are you with the information you receive? 5 Board reporting has come under sharp focus both in terms of quality and adequacy More and more regulations are now focusing on effectiveness of reporting e.g. Risk Data Aggregation and Risk Reporting 5 Trends Shaping Governance and the board of the future 2014 Annual Corporate Directors Survey 12

13 6. Board and Management Interaction Strategy, operations, the mitigation of risk, competitive analysis have traditionally been considered primarily management responsibility, however as the role of the Board evolves - the lines of responsibilities have started to blur The nature of the interaction between the Board and Senior Management is becoming more fluid and less bound by structured/ scheduled meetings. Many Senior Management roles (beyond that of the CEO) are now reporting directly to the Board (e.g. Chief Risk Officer, Chief Compliance Officer etc.) Specifically the key changes in Board responsibilities include: o o o Defining and setting overall strategy Defining and expressing the Risk Appetite Statement Monitoring the progress of the institution against the defined strategy and Risk Appetite Statememt 13

14 6. Board and Management Interaction - Strategy Indicate if you believe your board should change the amount of time it spends on the following 6 Boards of the financial service institutions are focused on strategic planning more than ever 6 Trends Shaping Governance and the board of the future 2014 Annual Corporate Directors Survey 14

15 6. Board and Management Interaction Risk Appetite Statement As the risk oversight landscape becomes increasingly complex directors are less comfortable with their understanding of their company s risk appetite However, boards now say they have a much better understanding of the communication response plan in the event of a crisis substantial improvements from 2012 In your opinion, how well does your board understand: It may be possible that directors commitment to enhanced board effectiveness and increased scrutiny of performance have led to greater selfawareness about areas of improvement 7. 7 Trends Shaping Governance and the board of the future 2014 Annual Corporate Directors Survey 15

16 How is the industry responding? Industry participants are responding along the following spectrum: Wait and See Approach Cautious but Progressive Approach Proactive Approach Current Governance Practices Impact Assessment Independent Board and Committees are established Oversight functions exist with clear line of reporting to the Board Independent Chief Risk Officer position may not exist Reliance on externally available information Limited internal impact assessment No formal strategy in place Limited regulatory engagement or proactive response In compliance with 2003 OSFI corporate governance guidelines Oversight functions exist with clear line of reporting to the Board Chief Risk Officer reports directly to the CEO and has access to the Risk Committee of the Board Active participation in the regulatory process Impact self-assessment of regulations underway Consideration of changes to existing governance infrastructure e.g. committee frameworks, documentation etc Strong governance practices in place well beyond the expectations of the 2003 OSFI corporate governance guidelines Board approved Risk Appetite Framework in place Business strategy is well-defined, looking to get out ahead of the market curve to identify and implement any changes/ enhancements that need to be made Holistic approach to corporate governance guideline by assessing impact across the organization Next Steps No formal initiatives identified / launched Initiated key projects to tackle specific issues e.g. Enhancement of mandates Third party reviews initiated for Corporate Governance practices and effectiveness of oversight functions to identify potential gaps Key projects underway to enhance and establish new corporate governance practices and infrastructure 16

17 Appendix

18 Appendix A Speaker Profile Sandeep Dhiman Director Consulting Lead Operational Risk, Regulatory Compliance and Governance sandeep.dhiman@ca.pwc.com Sandeep is a Director in our Financial Service Consulting practice and leads Canada s Governance, Operational Risk and Compliance practice areas. Sandeep has over 13 years of experience working with global financial institutions on a broad range of issues including Corporate Governance, risk management Target Operating Models, data management and regulatory compliance. Specialities: Corporate g Governance Enterprise Risk Management Regulatory Compliance Target Operating Model Profile: Sandeep regularly leads consulting engagements across a broad range of issues including operating effectiveness, data governance, corporate governance, management of technological and operational risks and controls, designing functional models for banks and insurers. Large part of Sandeep s time is spent working with clients to ensure that the practices deployed within their organizations are in line with current and emerging regulatory expectations and leading industry practices. Sandeep regularly speaks at a variety of industry conferences such as Operational Risk Forum Canada, client events and interacts with Canadian and Global banks, regulators on current and emerging issues within financial services industry. 18

19 Appendix B Publications and resources A Snapshot Available online at Directors and IT What works best (Full and Abridged version). This two-part comprehensive guide was developed to help directors bridge the "IT confidence gap." Part 1 outlines a structured and efficient six-step oversight process to help directors determine and execute their approach to IT oversight. Part 2 provides background information, potential rewards and risks, and board considerations for selected IT topics. Board effectiveness What works best, 2 nd edition. This book shows directors how they can effectively carry out their various responsibilities from overseeing strategy to setting CEO compensation. It includes insights from their peers and professionals Annual corporate directors survey (ACDS). In the summer of 2014, 863 public company directors responded to our survey. Of those directors, 70% serve on the boards of companies with more than $1 billion in annual revenue, and participants represented nearly two dozen industries. The 2014 Annual corporate directors survey observed trends that are shaping corporate governance, and which we believe will impact the board of the future. Audit committee effectiveness What works best, 4 th edition. Demands and expectations on the audit committee keep increasing, and its role in the capital markets is vital. This 4 th edition helps audit committee members carry out their role effectively and efficiently. BoardroomDirect. Our monthly e-newsletter delivers s latest board level insights directly to your inbox. Each edition features an in-depth perspective on one major issue, as well as information on other important governance topics. Download the latest edition at Director dialogue with shareholders What you need to consider. This book, jointly written by s Center for Board Governance and Weil Gotshal & Manges, describes the changing communications environment, provides a framework for boards to use as they consider whether to take part in communications with investors, and addresses how Regulations Fair Disclosure affects communications. 19

20 Appendix C Publications and resources A Snapshot Available online at Board Center App. 's App delivers corporate governance insights directly to your ipad. The App is regularly updated with topics that spur discussion in board-rooms, including executive compensation, financial reporting, risk management and more. Download at Audit Committee Excellence Series (ACES). The series provides practical and actionable insights, perspectives and ideas to help audit committees maximize committee performance. While targeted to directors serving on audit committees, it is also beneficial to others working with audit committees including CFOs, CAOs, general counsels, and internal auditors. BoardroomDirect. Our monthly e-newsletter delivers s latest board level insights directly to your inbox. Each edition features an in-depth perspective on one major issue, as well as information on other important governance topics. Download the latest edition at Governance for companies going public What works best and Going Public? Five Governance Factors to Focus On. These companion publications describes key governance decisions that companies need to make before and after an initial public offering and helps companies understand what is behind some of the key governance decisions they face. The quarter close Directors edition. This quarterly publication is designed to keep directors informed about the latest accounting and financial reporting issues. The Directors edition is a shortened version of The Quarter Close a publication designed for CFOs and Controllers. ProxyPulse. A special publication from s Center for Board Governance and Broadridge Financial Solutions, provides fact based reporting on voting trends and results as the proxy season unfolds. Its purpose is to provide insights to directors and company officers on the governance issues that matter most. The data is derived as Broadridge processes over 12,000 public company annual shareholder meetings. It provides a means for you to benchmark your results. 20

21 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.