Understanding risk and return. London School of Mines

Transcription

1 Understanding risk and return London School of Mines Craig Murray James Smither 08 June 2016

2 Workshop leader introductions Craig Murray Craig works in Risk Advisory within our London Risk Assurance practice where he is the Enterprise Risk Management (ERM) capability lead in our FTSE 250 and AIM markets. Craig has 15 years experience in Risk Management, Governance and Compliance, during which he has delivered projects in risk management, corporate governance, assurance and controls. Craig has completed work across a variety of sectors such as Mining, Oil &Gas, Utilities, Real Estate, Construction, Aerospace, Manufacturing, FMCG, financial services and retail. He has delivered projects in a variety of locations throughout Africa, Asia, the Americas and Europe. Prior to joining PwC, Craig was the ERM capability lead for the UK at Accenture and RSM Tenon/Baker Tilly. James Smither James is an experienced risk management professional with over fifteen years background in advisory and implementation roles across multiple sectors, with a particular focus on the extractive industries. In addition to risk management, his expertise includes stakeholder engagement and government relations, regulatory and compliance frameworks, business ethics, human rights due diligence and security. Prior to joining PwC s ERM team, James served as the Risk Manager for a global mining company with surface and underground operations across multiple commodities in all six continents. He has conducted assignments at mine sites and in mining financial centres in over fifty countries, including locations as diverse as Colombia, Madagascar, Kazakhstan and Indonesia. James has authored monographs, been interviewed by leading print and television media outlets and presented at leading industry events such as PDAC and the African Mining Indaba on subjects related to risk management and the extractives sector. Slide 2

3 Present context: uncertainty is the new normal? Anglo American chief warns mining groups set for more pain For Mining Chiefs, Doomsday Scenarios Could Become Reality Mining Collapse Cripples Africa's Dreams of Prosperity Capex collapse as mining investment boom unwinds Escalating social risk around Mining In a hole: Mining firms reel from another downward lurch in prices Smaller Mining Companies Hibernate to Survive Industry Slump Rio Tinto chief warns miners to prepare for extended downturn Worst Still Ahead for Mining Industry After Losing $1.4 Trillion Mining Companies Slash Jobs as Commodities Prices Slide Mine environmental risk grows with bankruptcies Slide 3

4 Five mega-trends Future context: a dramatically changing world Shift in global economic power Rapid urbanisation Technological breakthroughs Demographic and social change Climate change and resource scarcity presenting potentially transformative risks and opportunities to the Mining sector See more at: Slide 4

5 Making for a range of potential disruption scenarios Known reserves access and quality Future reserves availability / viability Mobile plant performance Land ownership Contractor performance Fixed plant performance Geology Permits and licences Ownership / expropriation Non-availability of key supply/ies Loss of infrastructure (power/roads/ict) Loss of access to water Production Sources of disruption Stakeholder Labour disruption Fiscal arrangements FX / immigration controls Loss of key skills Liquidity Theft / sabotage Partner dynamics Finance Security Political violence / civil unrest Compliance Disaster Terrorism Major safety incident Disease outbreak Environmental contamination Extreme weather Slide 5

6 Unmanaged risk destroys value The challenges created by this changing business environment have the potential to cause major erosions of shareholder value in both the short- and longer-term Demand shortfall Customer retention Integration problems Pricing pressure Regulation Exploration / R&D Industry or sector downturn JV or partner losses Macroeconomic Political issues Legal issues Terrorism Natural disasters 39% 28% Strategic Operational 19% 14% Hazard Financial Cost overrun Operating controls Poor capacity management Supply chain issues Employee issues incl. fraud Bribery and corruption Permits and licencing Commodity prices Debt and interest rates Poor financial management Asset losses Goodwill and amortisation Accounting problems Source: PwC research - reasons for falls in shareholder value, FTSE100 companies Slide 6

7 Share price vs. other companies Effective risk management protects value When a serious risk event does occur, experience highlights the divergence in outcomes between companies with and without effective risk management 20 Recoverers Management skills and response Stakeholder communication Time (250 days) Insurance alone is inadequate Plans need to be implemented Source: Knight / Pretty Non-recoverers Slide 7

8 Shareholders are turning the spotlight on governance Investors increasingly recognise that risk management is a critical issue for the Board What issues should boards focus on? Q. Please rank the relative importance you believe boards should place on the following areas: What skills do investors want their board members to have? Q. How important are adding the following director skills and attributes to the composition of corporate boards? Source: Through the investor lens: perspectives on risk & governance (PwC s Investor Survey, 2014) Slide 8

9 and are expecting executive leadership to respond Q: To what extent are you (for CEOs) making changes or do you think that companies should be making changes (for investment professionals) in the following areas in response to changing stakeholder expectations? CEOs Investment professionals 4% 44% 49% How they define and manage risks 9% 40% 49% 11% 51% 35% How they measure success and what they hold themselves accountable for 10% 39% 46% 5% 39% 51% How they use technology to assess and deliver on wider stakeholder expectations 9% 40% 45% 14% 49% 31% Environmental impact 13% 47% 36% 15% 45% 30% Non-statutory financial information (e.g. EBITDA forecasts) 18% 42% 35% 24% 44% 31% Non-financial indicators (e.g. brand) 14% 49% 32% 18% 51% 23% Traditional financial statements 21% 45% 29% 18% 5% 44% 48% 49% 23% How they minimise social and environmental impacts of their supply chain How they develop new ethical products and services 14% 15% 51% 28% 51% 26% 9% 57% 33% Workforce rights and wellbeing 18% 55% 23% 12% 51% 34% How and who they partner with 18% 53% 22% 34% 44% 18% How they manage tax affairs 26% 48% 21% No change at all Some change Significant change Source: PwC investor survey 2016 Slide 9

10 The Board is listening We have seen a step change in the Board s focus on risk in mining companies, but this focus remains challenged by how to add real value in practice. How can we practically define, articulate and integrate our risk appetite? Have we identified and fully assessed all of our principal, and emerging risks? How do we maintain holistic oversight over all risk categories? Does our risk function have the right skills and is it able to challenge at all levels? What does a robust system of risk management look like and how do we compare with our peers? How do we promote necessary behaviours and measure whether the right culture is in place? How will we disclose principal risks to investors and wider stakeholders in a more meaningful way? Are we continuously monitoring the effectiveness of key controls over all principal risks? How resilient are we as a business and how do we integrate resilience into business as usual? How are we managing joint venture, outsourcing and supply chain risk? Are we treating organisational culture as our biggest asset and possible risk? Have we integrated risk management into our strategic planning processes? Slide 10

11 To summarise: risk management is not a nice-to-have The challenges created by the volatile business environment have put risk management at the top of the agenda for many organisations External Internal Business complexity and the changing global business environment is increasing risk for all mining companies Risk is changing faster than our capacity to manage it - interpreting and managing new areas of risk requires a new set of skills Stakeholder scrutiny of the sector has never been greater as unmanaged risk continues to destroy shareholder value Regulation globally is placing greater emphasis on managing risk and developing a risk conscious culture The search for growth is fuelling a more aggressive but considered risk taking philosophy Risk resilience has become a pre-requisite for success and competitive survival The Board has recognised that risk functionality is at the core of the business and is critical for sustainable growth There is high demand for the right risk skills but there is a shortage in the market beyond compliance Implementing risk management successfully continues to challenge the most mature functions in practice Slide 11

12 Towards the risk function of the future. The role of the risk function and the Head of Risk is evolving fast. New thinking is needed to ensure it is best placed to become the Board s trusted eyes and ears over the rapidly changing business environment surrounding the mining sector So where are we heading? Risk management skills must be treated as a future pre-requisite skill of the Board and leadership The glass ceiling needs to be removed - the risk function should report directly to the CEO with an unfettered line to the Chairman The Board and the Risk Function need to establish an effective working relationship Effectiveness of the risk function must be reviewed by the Audit Committee annually Stepping up in this way demands new reward structures for the Head of Risk, but a new set of KPIs is likewise needed to measure performance The skills required to run an effective risk function are broad and becoming broader strategic challenge, leadership, forward thinking and creativity are a pre-requisite Formal talent development programs must be introduced to enhance the quality of the future risk management function Execution of the risk functions primary role will require new tools, techniques and advisor relationships - as a result, improved access to capital will be needed Slide 12

13 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, PwC refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PwC