1We see things…..differently

Emerging trends and change pressures in Corporate Governance Mark Wallace | Executive Director

CIMA | April 2015

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Q&A

3Source: Principled Performance – Open Compliance and Ethics Group (OCEG)

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Corporate Governance has existed as long as companies have existed.

More governance changes occurring in the last decade than

in a generation. Demanding

stakeholders

Increased volume and complexity of

risks

High costs e.g. of poor decisions

Lousy economy

Visible corporate failures and white

collar crime

Regulatory and investor appetite

for broad and deep change

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Ethics and Integrity Risks Materialize

- individual companies

Massive Interrelated and Systemic Risks Materialize

– systemic failure, involved banking, broad

intervention

2002 2008 2014

Government Failure ‘Sovereign Debt Crisis’ – national governance

failure

All Ordinaries

Harmonisation of financial reporting

Shareholder activism and ‘social

consciousness’

A market for CG services – advisory

and ratings

IT and Internet to promote and improve CG

OECD Principles of Corporate

Governance

MAJORINFLUENCES

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Source: Global Risks reports 2007-2015, World Economic Forum.

7We see things…..differently

What are the pressures where Corporate Governance change is happening the most?

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Greater Director and Advisor Independence

Better Board Composition and Diversity

Risk Governance

Compensation Governance

Greater Shareholder Accountability

A Focus on Strategy and Value Creation Focus

Digital Literacy and Information Technology GovernanceBoard Performance Audits (and Disclosure)

Tone at the Top – and Now in the Middle

Boardroom Dynamics

Proxy Access

Sustainability

Bribery and Corruption

Climate ChangeSuccession Planning

Investor Scrutiny of ESG

Board Renewal and Auditor Rotation

Fostering Innovation

Transparency

Stakeholder Relations and Activism

Social Media and Social Business

Big DataPrivacy Principles

Misconduct ResistanceCyber Security and Resilience

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Targeting directors’ risk oversight obligations.

Onerous risk coverage requirements needing oversight.

Challenge – bringing hard skills and soft skills together.

• Directors with risk expertise.

• Must have board-approved and clearly articulated risk appetite statement, risk management strategy and overall business strategy.

• Measure risk capabilities and set targets.

• Known limitations should cascade throughout and back up to the board, with ease. (Reporting and Culture)

"What marks out a good board is its

activism in embedding a strong risk culture

throughout the institution. Behaviours, not

structure.“ Dr Laker, ABCC

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Rapid technology advancement has created opportunity and risk.

Profound technological ignorance by many Boards.

Deficient internal controls breaching duty of care - APP, “Internet of Things”, cloud, BYOD, social media, cyber security, resilience, etc.

Boards should be IT literate.

Agree on the standards and direct management to have an action plan, covering crown jewels; assuming penetration; and including internal controls over behaviour and human error.

Steering Committee for IT enabled investments.

Scenario testing, mock attacks, and expert assurance should be board-reported. (Management resistance is a red flag for any board)

Source: PwC, Global Directors Survey 2014

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Regulators are moving towards prescribed competency matrixes; and even their own interviews.

Activists are searching director backgrounds and track record.

Regulators are legislating board renewal, competency and diversification.

Global trends e.g. gender.

Clear understanding of needs – skills, experience, knowledge.

Competency, diversity and behaviour matrices established by the nominating committee; and be independently designed and validated.

Diversity commitment and human capital development strategy.

Periodic director, committee and auditor performance evaluation (independent assurance).

Tenure limits, caps on directorships and succession plan.

Source: AICD, Board Diversity

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Held responsible for events at deep levels within and even outside the organisation.

Distraction, assets put at risk, and reputation damage can be significant.

“Tone in the middle,” culture, and imprudent risk-taking.

Middle Managers disproportionately affect employees

Cannot be last to know.

Embedding ethical leaderships in middle management.

Whistle-blowing capabilities.

Audit controls over culture and reputation.

Amnesty to ensure bad news rises.

Explicit and monitored thresholds for the board-approved risk appetite.

Line of sight that compensation is not driving bad behaviour.

Senior management who are blockers, 'empire builders' or are not transparent should be floagged.

Invest in organisational change management.

13We see things…..differently

What’s the outlook for Corporate Governance moving forward?

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Source: Global Risks reports 2007-2015, World Economic Forum.

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Boards and management teams are less than half way through digesting all of the past decade’s reforms…and there are more to come.

The fastest cars have the best brakes and good steering as well.

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