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Tackling the Corporate Governance Debacle & Institutionalising BUsiness Ethics-Mr. Mark Victor
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Tackling the Corporate Governance Debacle & Institutionalising BUsiness Ethics-Mr. Mark Victor

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The presentation is from Mr. Mark Victor , Director, Deloitte Consulting, South Africa, from the just concluded African Round Table & Conference on Corporate Sustainability and Responsibility ...

The presentation is from Mr. Mark Victor , Director, Deloitte Consulting, South Africa, from the just concluded African Round Table & Conference on Corporate Sustainability and Responsibility (AR-CSR™), which held in Tinapa Business Resort, Calabar, Cross River State between 20 to 21 June, 2013. Organised by ThistlePraxis Consulting Limited

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    Tackling the Corporate Governance Debacle & Institutionalising BUsiness Ethics-Mr. Mark Victor Tackling the Corporate Governance Debacle & Institutionalising BUsiness Ethics-Mr. Mark Victor Presentation Transcript

    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Tackling the Corporate Governance debacle & institutionalising Business Ethics Being a good corporate citizen Africa Round-Table & Conference on Corporate Sustainability and Responsibility!
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved.Deloitte2 Background
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. A history of governance scandals Deloitte3 Year Organisation Nature 1494 Medici Bank Owned by the Medici family, it ran up large debts due to the family's profligate spending, extravagant lifestyle, and failure to control the managers, their bank went insolvent. 1991 BCCI Fraud, money laundering and larceny. 1993 Carrian Group Accounting fraud. An auditor was murdered, an adviser committed suicide. The largest collapse in Hong Kong history. 1995 Barings Bank An employee in Singapore, Nick Leeson, traded futures, signed off on his own accounts and became increasingly indebted. The London directors were subsequently disqualified, as being unfit to run a company 1998 Long Term Capital Management After purporting to have discovered a scientific method of calculating derivative prices, LTCM lost $4.6bn in the first few months of 1998. 2000 Equitable Life Assurance Company The insurance company's directors unlawfully used money from people holding guaranteed annuity rate policies to subsidize people with current annuity rate policies. 2001 WorldCom After falling share prices, and a failed share buy back scheme, it was found that the directors had used fraudulent accounting methods to push up the stock price
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. A history of governance scandals Deloitte4 Year Organisation Nature 2002 Enron Directors and executives fraudulently concealed large losses in Enron's projects. A number were sentenced to prison 2002 Adelphia Communications Internal corruption. The Directors were sentenced to prison 2002 Arthur Anderson A US court convicted Andersen of obstruction of justice by shredding documents relating to Enron scandal. 2003 Parmalat The company's finance directors concealed large debts. 2008 Lehman Brothers Lehman Brothers' financial strategy in from 2003 was to invest heavily in mortgage debt, in markets which were being deregulated from consumer protection by the US government. Forced to file for bancrupcy. 2008 Royal Bank of Scotland Following the takeover of ABN-Amro, and the collapse of Lehman Bros, RBS found itself insolvent as the international credit market seized up. 58% of the shares were bought by the UK government. 2008 AIG $57 billion dollar exposure to sub-prime mortgage securities requiring a 24 month credit facility from the US Federal Reserve
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Emergence of Codes of governance • The collapse of the Maxwell publishing empire in the late 1980s was a direct catalyst for the publication of the Cadbury Report on Corporate Governance in the UK in 1992 • Cadbury report has resulted in a UK Corporate Governance Code for companies listed on the London Stock Exchange • Cadbury followed by Turnbull report providing guidance on standards of internal control for UK listed companies • The collapse of Enron and WorldCom in 2002 precipitated the enactment of the Sarbanes-Oxley Act (SOX) in the US later that year • King Code of Corporate Governance has followed international code development in South Africa • Emergence of various governance codes across Europe • Increased advent of governance principles embedded in company legislation and listing requirements • Nigeria Corporate Governance Index proposed in conjunction with the Nigerian Stock Exchange Deloitte5
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Why focus on governance? Deloitte6 Corporate failures led to questioning: Effectiveness of boards Accountability of directors Directors’ remuneration White collar crime Risk assessment and management processes Financial reporting Effectiveness of audits Which has resulted in: • Increasing transparency and accountability • Demands of “corporate citizenship” • Expectations of protection and growth of shareholder value
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved.Deloitte7 Global governance trends
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Transparency • Increased scrutiny • Increased pressure • Additional disclosures requested: • Risk oversight • Board composition • Executive pay • Diversity • And other topics • Survey: • 64% global respondents agreed that the level of interaction between shareholders and the board will increase over the next few years.
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Risk Oversight • A continued focus area for the board • Risk management vs. risk oversight • Disclosure requirements • Risk committees • Who on the board is responsible? • Full board vs. committees
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Diversity • Increased focus on board gender diversity • Global trends: Norway (2006), France, Spain, Italy, Belgium, Netherlands, Malaysia, India • Why is this important now? • Quota implications
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Succession Planning • Oversight of an organization’s talent falls within the board’s responsibility • Succession planning is the responsibility of the board – regardless of the type of organization (public, private/ family business) • Executives: promote from within vs. external hire • Board qualifications: periodic assessment
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Technology • Board’s use of technology • Host of new tools/ applications are available • Can increase efficiency • Use of tablets and board portals • Ease of communication • Board’s oversight of technology risks • Discuss risks with management • Social media • IT strategy and investment • Global IT risks
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Sustainability • The next ‘megatrend’ • What does sustainability include? • Create business value by building reputation and enhancing employee morale The Board’s role • Sustainability reporting • Identify stakeholders concerns • Oversee implementation of practices • Incorporate in corporate strategy
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Tone at the top • The board to work with management on setting the tone • Articulate mission and vision • The board to oversee ethics program • Communicate and oversee non-compliance with organizational programs
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved.Deloitte15 Good governance
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Defining good governance Deloitte16 It regulates the exercise of power within a company in order to ensure that the company’s purpose is achieved – Sustainable shareholder value and ultimately business sustainability It is essentially about effective leadership characterised by the ethical values of responsibility, accountability, fairness and transparency It is also about:  Best business practice  Enhancing organisational performance and wellbeing  Adding shareholder and stakeholder value
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Defining good governance Deloitte17 “The system by which corporations are directed and controlled” “Corporate governance is all those structures, systems, processes, procedures, and controls within an organisation, at both board of directors level and within the management structures of the organisation, that are designed to ensure that this organisation achieves its business objectives. That it does so within sensible risk management parameters; and that it does so efficiently, effectively, ethically and equitably” “Corporate governance is concerned with holding the balance between economic goals and between individual and communal goals…the aim is to align as nearly as possible the interests of individuals, corporations and society.” Sir Adrian Cadbury Corporate Governance Overview, 1999 [World Bank Report]
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Core characteristics Deloitte18 Discipline universally accepted behaviour Transparency candid, accurate, timely information Independence no board/committee conflicts (of interest) Accountability by law/statute to company Responsibility to relevant stakeholders Fairness current & future interests Social responsibility not discriminatory or exploitive environmentally or personally
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Statutory duties of Directors Deloitte19 • Agent of the company o Represent the company, not individual shareholders, your constituency, etc. o Independence and objectivity o Avoid/manage conflicts of interest, else independent judgment impaired • Ensure organisation trades towards achieving objectives • Duty of good faith/loyalty • Duty of care and skill • Duty of attention • Statutory obligations In essence: • Drive, Strive, Survive and Thrive • The Buck Stops Here ! If management is about running a business properly, then … Governance is about ensuring the business is run properly
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Goal is to ensure that the company trades towards its strategic and business objectives, sustainably The Chairman • Manage/run the board • Independent non-executive director The Board • Agree + approve strategic direction • Review and monitor, oversight over executive management delivery against strategic and business plans • Accountable to the company, the shareholders, the stakeholders, the socio-economic community, for the health and wealth of the company The Chief Executive Officer • Manage/run the company, its operations, • Deliver against the strategic and business plans • Accountable to the board for performance, for health and wealth of the company Differentiating roles
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Governance process Deloitte21 • Setting board purpose, objectives, priorities and agendas • Boards own processes for monitoring: - progress in creating shareholder value - achieving financial and non-financial business objectives - integrity of internal control and management information systems - CEO and top management performance • Timeliness, relevance and quality of information to monitor • Effectiveness of meetings; debate and challenge, minutes and action • Ability to focus on processes and systems vs. transactions and details • Assessment of board performance • On-going development and updates
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Essential elements of a Code of Governance (King 3 example) Deloitte22 • Ethical leadership and corporate citizenship • Boards and directors • Audit committees • The governance of risk • The governance of information technology • Compliance with laws, rules, codes and standards • Internal audit • Governing stakeholder relationships • Integrated reporting and disclosure
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Delegation of authority Deloitte23 • Governance framework needs to that inform roles, responsibilities, behaviours, and decisions carried out on behalf of all corporate stakeholders to obtain a target level of performance • Delegation of Authorities (DoA) provide role clarity to the organization and improve the decision-making process through more explicit authorities delegated to the business units from the Regions and Corporate Inform Decision-Making to Achieve Business Objectives Delegation of Authority Roles & Responsibilities Corporate Governance People Strategy Culture Audit Risk Management Performance Management Compliance Code of Ethics Core Values Risk Management Model & framework Mission & Strategy Statement Policies & Procedures Governance Training
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. An integrated governance model Deloitte24 AssuranceControl Governance Risk Management • Effective use of technology. • Identifying and monitoring critical controls. • Establishing controls culture. • Establishing a balance between cost and control. • Compliance frameworks e.g. Anti-bribery and corruption control. • Change management . • Assessing board effectiveness. • Assessing governance structure and effectiveness. • Regulatoryoverburden. • Governance over decision making. • Integrated risk and governance. • Effective delegation and control within the organisation and across the value chain. • King III Report on Corporate Governance. • Multiple assurance providers and assurance mapping. • Balance between riskbased auditing and assurance over core business processes. • Auditing decisions. • Auditing control culture and behaviours. • Auditing incentives. • Use of technology. • Providing assurance over the extended enterprise e.g. contracts / relationships. • Defining riskappetite. • Improving the alignment between risk and management decision making on both an operational and strategic level. • Linking risk and remuneration. • Enhancing risk information. • Scenario planning. • Defining and establishing a riskculture. • Defining a relevant and complete risk universe.
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Defining iGRC Deloitte25 Risk Management The effect of uncertainty on business objectives; risk management is the coordinated activities to direct and control an organization to recognize opportunities while managing negative events. Governance The culture, policies, processes, laws, and institutions that define the structure by which organizations are directed and managed. Compliance Adherence to policies, plans, procedures, laws, regulations, contracts, or other requirements.
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Three lines of defence Deloitte26
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Risk Intelligence Deloitte27 The RiskIntelligentEnterprise Nine PrinciplesforBuilding a RiskIntelligentEnterprise Governing Bodies Responsibility Roles & Responsibilities Common Definition of Risk Common Risk Framework Common Risk Infrastructure Executive Management Responsibility Objective Assurance and Monitoring Business Unit Responsibility Support of Pervasive Functions
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Risk Intelligence Deloitte28 Board of Directors Executive Management Business Units / Subsidiaries and Supporting Functions Risk Infrastructure and Management Risk Ownership Technology Technology Board of directors Enterprise risk group Executive management Internal audit Risk management Business units & Subsidiaries Support functions R Risk Universe External Environment Internal Environment Partner Relationships Risk Identification Risk Quantification Risk Analysis Risk Management Risk Monitoring Communication Level1Level2
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Combined assurance Deloitte29 “Combined assurance is integrating and aligning assurance processes in a company to maximise risk and governance oversight and control efficiencies, and optimise overall assurance to the audit and risk committee, considering the company’s risk appetite.” Assurance should be provided on three levels: management (1st line of defence), internal assurance providers (2nd Line of defence) and external assurance providers (3rd line of defence)
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved.Deloitte30 Ethics
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Defining ethics Deloitte31 “the standards of behaviour, which indicate how the individual should act, based on moral values and norms. They involve the ability to distinguish between right and wrong and the commitment to do what is right.” “A system of moral principles” “The rules of conduct recognized in respect to a particular class of human actions or a particular group, culture, etc.: medical ethics; religious ethics”
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Purpose Deloitte32 • To serve as a fundamental guide to for ethical behaviour within the organisation and in interactions with stakeholders. • Integrity is viewed as critical to all behaviour – outweighing the wishes of customers, revenue growth, economic advantage, and instructions form higher authority. • Driven by an organisations values Equity Integrity Spirit of Partnership Excellence Caring
    • 33 “The world is a dangerous place to live not because of people who are evil… but because of people who don’t do anything about it.” Albert Einstein
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Business implications • Code of Ethics/Conduct • Programmes to encourage ethical behaviour • Communication to remind staff e.g. Newsletters, memos, emails • Workshops and training • Ethics Champions – Department • Conflicts of Interest Policy • Gifts Policy
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Duties and Responsibilities Conflicts of Interest Confidential Information Corporate Opportunities Corporate Image Corporate Assets Act with care and skill Business Courtesies, Bribery Report Dishonest and Irregular Activities Compliance Equity Relationships With other Employees Relationships with Suppliers Relationship with Society
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Ethics Management Deloitte36 Forms of capital Business model Creating and sustaining value Directors of companies are obliged to promote the best interest of the company – this includes the collective best interest of shareholders, as well as the interest of among others, the community, employees, customers and suppliers.
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Ethics management framework Deloitte37
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Business drivers for ethics • Corporate Governance & Companies Act including potential personal liability for directors and executives • Mandate of Social & Ethics Committee • Global financial crisis resulting in increased public scrutiny • Corporate scandals (e.g. News Corporation) • Legislation (i.e. UK Bribery Act) • Social media and increased connectivity • Integrated Reporting (i.e. increased transparency and accountability) • Big data, enriched business intelligence and advanced analytics • Changing profile of consumers (i.e. millennial generation) • Internal audit standards (i.e. evaluation of effectiveness of the organisation's ethics-related objectives, programs, and activities) Deloitte38
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Ethics management Deloitte39
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Elements of ethics management Deloitte40 Element Description Organisational Arrangements and Culture • Positioning of the Social and Ethics Committee • Embedded, integrated, empowered, capacitated arrangements throughout the organisation • Board knowledge and effectiveness • Tone at the top • Linkage of ethics with organisational values (“the way we do things”) Risk Intelligence • Identification of general and specific ethics risks present in business model • Assistance in obtaining “buy-in” • Pro-active vs. reactive approach Values, Standards, Policies and Procedures • Social and Ethics Committee Charter/ strategy • Code of Ethics & values • Documentation hierarchy • Universal ethics principles • Ethics KPI’s Awareness and Training • Positioning of Ethics theory, practice and dilemmas • Implementing, maintaining and reinforcing of codes and policies • Targeted intervention • On-going Financial Crime Awareness and Training Monitoring • Ethics performance monitoring • Compliance function and programmes • Dealing with issues • Case management • Escalation policies / arrangements • Internal Audit Function Reporting • Formal and informal feedback on actual ethics performance • Fulfilling obligations in terms of the Prevention and Combatting of Corrupt Activities Act • UK Bribery Act / Foreign Corrupt Practices Act / PFMA / MFMA (where applicable) • Companies Act requirements Assuring Ethical Performance • Designing and implementing a combined assurance model on ethics performance
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Code of conduct A Code of Conduct is a key vehicle for: • reducing the risk and associated costs of fraud, conflicts of interest and other ethical lapses; • helping introduce new employees to the organization’s standards; • attracting and retaining high-calibre employees and business partners; • setting the boundaries of acceptable behaviour; • providing employees and others subject to the Code with comfort that they will not inadvertently stray offside; • informing contractors, suppliers and others doing business with the organization of its expectations regarding acceptable behaviour; • providing the basis for sanctions against those that deviate from the Code; and • fulfilling the regulatory obligations of public companies. Key questions: 1. What are the objectives of a Code of Conduct? 2. What is the Code’s relationship to the organization’s mission, vision, values and culture? 3. Who are the champions of the Code? 4. Who develops, administers and maintains the Code? 5. What is the process for developing the Code? 6. What is the process for the periodic review and revision of the Code? 7. Is the Code at the right level for the organization? 8. Is the content and tone of the Code appropriate for the organization? 9. How has the organization determined its actual ethical risks? 10. How does the Code apply to foreign operations? Deloitte41
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Critical considerations • Is there a common set of beliefs, values and practices? • Does the management team understand the elements of an ethical culture and reinforce this culture? • Is the culture evaluated on a regular basis? • At what level is ethics embedded – Board, Executive, Managers, Workers • Does the culture inform strategy and decision making? • How effectively is the culture communicated across the organisation and accessible to employees? • Is there an understanding that a good ethical culture is good business? • Does the Governance framework support the ethical framework? • Are there established reputational values, hypernorms (e.g. honesty) and ethical decision making criteria? • Have important issues requiring cultural guidance been identified, including stakeholder analysis, environmental scanning, ethical risk assessment and ranking? • Are compliance issues monitored and resolved? • Is there independent assessment of the effectiveness of the key processes? Deloitte42
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved. Evaluating the tone at the top • Analyze Hotline activity ‒ Extent to which number and nature of known incidents of wrong doing impacts on compliance with policies ‒ Does management dismiss minor violations as unimportant ‒ Is there adequate protection of whistle-blowers • Employee surveys ‒ Whether senior management “walks the talk” on integrity and ethics • Tone of management communications • Board discussions • Social media reputation assessment • Facility visits • Exit interviews • Customer complaints Deloitte43
    • ©2010 Deloitte Touche Tohmatsu Limited. All rights reserved.