Dr Rovel Shackleford on Corporate Governance


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Corporate Governance presentation by Dr Rovel Shackleford

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Dr Rovel Shackleford on Corporate Governance

  2. 2. RISK <ul><li>The possibility of something going wrong which </li></ul><ul><li>will have unfortunate consequences, </li></ul><ul><li>will undermine the institution’s plans, or </li></ul><ul><li>will make it less likely that the institution’s objectives will be achieved. </li></ul>
  3. 3. CORPORATE GOVERNANCE <ul><li>Seeking to govern and manage the institution so as to achieve its corporate objectives, within an acceptable level of risk. </li></ul><ul><li>A fundamental responsibility of the governing body is to manage and control the risks of the organisation effectively. </li></ul>
  4. 4. FINANCIAL GOVERNANCE - 1 <ul><li>The governing body should strive to maintain the financial sustainability by monitoring and managing all the risks associated with the scheme, including in particular the demographic, financial and broader economic risks. </li></ul>
  5. 5. FINANCIAL GOVERNANCE - 2 <ul><li>Under the financial system adopted, the contribution level established and investment income should be sufficient to finance the benefits and services, and risk management should be applied in the assessment of the long-term sustainability of the scheme. </li></ul>
  6. 6. FINANCIAL GOVERNANCE STRUCTURES <ul><li>strong Board of Directors </li></ul><ul><li>powerful Audit Committee </li></ul><ul><li>internal and external audit processes </li></ul><ul><li>actuarial advice </li></ul><ul><li>transparency in public reporting </li></ul><ul><li>investment management expertise </li></ul><ul><li>good systems to monitor and control risk </li></ul>
  7. 7. ACTUARIAL REVIEWS <ul><li>regular periodic reviews </li></ul><ul><li>focus on long-term financial viability </li></ul><ul><li>actuary not subject to interference </li></ul><ul><li>reports made public </li></ul><ul><li>independent peer review for in-house actuary </li></ul><ul><li>compliance with best practice guidelines </li></ul><ul><li>channel for whistle-blowing </li></ul>
  8. 8. FINANCIAL GOVERNANCE - 3 <ul><li>A sound governance structure is essential for the effective investment of funds. The governance structure should ensure an appropriate division of operational and oversight responsibilities, and the suitability and accountability of those with such responsibilities. </li></ul>
  9. 9. GOVERNANCE OF INVESTMENT PROCESSES <ul><li>establish investment committee </li></ul><ul><li>ensure appropriate expertise is available… </li></ul><ul><li>… and use consultants and advisers </li></ul><ul><li>checks and balances to ensure propriety </li></ul><ul><li>effective accountability of the process </li></ul><ul><li>responsibilities and delegated authorities </li></ul><ul><li>monitoring of risk exposure </li></ul><ul><li>benchmarking and performance measurement </li></ul>
  10. 10. RISK MANAGEMENT <ul><li>The process of identifying, measuring, controlling and minimizing risks in a particular context, to a level commensurate with the “risk appetite” of the stakeholders. </li></ul>
  11. 11. Risk Management Process Identify the Risk Areas Assess the Risks Develop Risk Management Plan Implement Risk Mitigation Actions Re-evaluate Risks and Control actions Risk Management Cycle Risk Assessment Risk Mitigation
  12. 12. RISK MANAGEMENT PROCESS <ul><li>identify and describe risks </li></ul><ul><li>classify nature of risks </li></ul><ul><li>identify potential effects of risk </li></ul><ul><li>quantify risks and their effects, as to 1) likelihood and 2) impact </li></ul><ul><li>assess organisation’s ability to withstand risk </li></ul><ul><li>design treatment and control mechanisms </li></ul>
  13. 13. 4 T’s of RISK MANAGEMENT <ul><li>Tolerate - risk is acceptable, can be monitored, and it would not be cost-effective to take additional control measures </li></ul><ul><li>Transform – control the risk by modifying its nature to make it safer or more intrinsically manageable </li></ul><ul><li>Terminate – eliminate the risk through control actions </li></ul><ul><li>Transfer – contractually shift the risk from the subject organisation to another party </li></ul>
  14. 14. GOVERNANCE OF RISK MANAGEMENT <ul><li>regular preoccupation of governing body </li></ul><ul><li>senior executive with accountability… </li></ul><ul><li>… e.g. Chief Risk Officer </li></ul><ul><li>identified responsibilities for managing risks </li></ul><ul><li>external risk reviews of risks of organisation… </li></ul><ul><li>… and effectiveness of risk management </li></ul><ul><li>special focussed studies of particular risks </li></ul>
  15. 15. CATEGORISATION OF RISKS <ul><li>Categories of risk for a institutions </li></ul><ul><li>operational risk </li></ul><ul><li>liquidity risk </li></ul><ul><li>liability risk </li></ul><ul><li>economic risk </li></ul><ul><li>investment risk </li></ul><ul><li>catastrophe risk </li></ul><ul><li>political risk </li></ul>
  16. 16. OPERATIONAL RISK <ul><li>computer failure or hacking </li></ul><ul><li>contribution compliance and transmission </li></ul><ul><li>allocation of contributions to individual accounts </li></ul><ul><li>mistakes in record-keeping </li></ul><ul><li>fraud or misappropriation of assets </li></ul><ul><li>inaccurate expense allocation </li></ul><ul><li>staffing problems </li></ul><ul><li>poor risk management </li></ul><ul><li>failure to implement legislation correctly </li></ul>
  17. 17. LIQUIDITY RISK <ul><li>adequate cash-flow to pay benefits </li></ul><ul><li>seasonal fluctuations </li></ul><ul><li>statistical variations </li></ul><ul><li>economic cycles </li></ul><ul><li>demographic developments </li></ul><ul><li>late implementation of contribution increases </li></ul><ul><li>non-marketability of assets </li></ul>
  18. 18. LIABILITY RISK <ul><li>longevity </li></ul><ul><li>demographic imbalance </li></ul><ul><li>inflation </li></ul><ul><li>incapacity/disability experience </li></ul><ul><li>unemployment </li></ul><ul><li>expense levels </li></ul><ul><li>legislative or regulatory changes </li></ul><ul><li>trends or fluctuations in experience </li></ul>
  19. 19. LIABILITY RISK <ul><li>demographic ageing </li></ul><ul><li>medical expense inflation </li></ul><ul><li>new demands service delivery </li></ul><ul><li>obsolescence of technology </li></ul><ul><li>moral hazard </li></ul>
  20. 20. ECONOMIC RISK <ul><li>economic cycles </li></ul><ul><li>inflation </li></ul><ul><li>employment levels </li></ul><ul><li>economic downturn </li></ul>
  21. 21. INVESTMENT RISK <ul><li>failure to deliver expected return </li></ul><ul><li>poor strategic decisions </li></ul><ul><li>poor individual investments </li></ul><ul><li>counterparty/credit risk </li></ul><ul><li>inadequate diversification </li></ul><ul><li>mismatch of assets/liabilities </li></ul><ul><li>market fluctuations </li></ul>
  22. 22. CATASTROPHE RISK <ul><li>earthquake of volcanic eruption </li></ul><ul><li>windstorm or flooding </li></ul><ul><li>operational failure </li></ul><ul><li>high claims </li></ul><ul><li>loss of income </li></ul>
  23. 23. POLITICAL RISK <ul><li>structural changes </li></ul><ul><li>over-generous promises </li></ul><ul><li>inadequate attention to risks </li></ul><ul><li>reneging on promises </li></ul><ul><li>political interference - in management - in investment decision-making </li></ul>
  24. 24. SUMMARY <ul><li>risk management is a key component of governance </li></ul><ul><li>responsibility for risk management should be at a very senior level </li></ul><ul><li>monitoring and managing risk should be at the heart of the management of the organisation </li></ul><ul><li>risk evaluation ought to be carried out regularly, with public reporting </li></ul>