RISKS, OPPORTUNITIES AND TRENDS IN CORPORATE GOVERNANCE

Roman Zyla

Senior Corporate Governance Officer

IFC Corporate Governance Group

Dakar, Senegal

October 2014

Overview

2

• Africa Rising but still risky

• Scandals in our markets

• Opportunities from within:

• Building better boards

• Focus on controls

• Some trends we are seeing

• Conclusion

‘AFRICA RISING’

• 10 years of uninterrupted growth

• 7/10 top growth markets.

• $80B expected in 2014/15

…yet massive challenges remain

• Ebola

• Migration

• Disenfranchised youth

• Skills gap

• Regulatory vacuum

Biggest business threat to any market … uncertainty

3 Footer

Board of Directors

Average age: 68 (two board members over 80)

# of women: 1# of bankers: 21director is a theatre

producer1 director also on

board of Red Cross3 new members since

turn of the centuryOthers all appointed

in 1994 (at time of IPO)

Chair of the Board, CEO, and Chair of the Risk and finance committee – all the same person

The other member of the 2 person risk committee is 80 years old

What’s wrong with this

picture?

4

Would you invest??

Uncertain..?

Scandals in our markets

SCANDALS IN OUR MARKETS

Africa Bank – lowest % of non executives – and only 3 have banking experience – and a CEO too forceful for the bank’s good.

Africa Portland Cement (Kenya) – procurement and financial flaws – boardroom breach of CG 15% loss of value of the company

CMC (Kenya)- Management and directors signed misleading financial statements - non execs barred from corporate seats

Centum (Kenya)– failed to report profit warning – then dropped 84% annual profit. Company under receivership owing to CG issues and poor strategy

Air Mauritius (Mauritius) - hedging kerosene contracts, audit fraud

Mauritius “false” corporate directors” - 6 directors heading more than 3000 companies.

Ethiopia faced a spate of prosecutions of corporate executives for undertaking banking business in the market.

5 Footer

Semper aliquid novi Africa affert-Pliny the Elder-

Perpetuates sense of uncertainty in African

companies

OPPORTUNITIES

6 Footer

II. Structure & Functioning of Boards of Directors• Roles & Responsibilities (vis-à-vis mgmt)• Composition & Structure, incl. committees • Independence & Skills • Remuneration & Evaluation

I. Commitment to Good CG• Dedicated CG officer• Written code of CG • Board committee on CG

IV. Transparency & Disclosure

• Financial reporting• Information disclosure

V. Treatment of Minority Shareholders• Shareholders’ meetings & Share voting • Representation & Fair treatment • Access to information

III. Control Environment• Internal Audit Functions• Internal Control Systems• Risk Management

Key functions of the Board

• Monitoring effectiveness of the company’s governance

• Monitoring and managing potential conflicts of interest

• Overseeing disclosure and communications

• Reviewing and guiding corporate strategy and risk policy

• Ensuring the integrity of the firm’s accounting and financial reporting systems, including the independent audit and that appropriate controls are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

OECD Corporate Governance Principles Section VI

Footer7

Opportunities from within

Board & Management Roles in Risk Governance

8

Implement

Monitor

Propose

(adjustments)

Review

Approve

Policies, high level limits and stress

tests

Executing and monitoring

transactions

Business Operations

Senior management, risk management

Board/board committee

Board

Audit/Risk committee

Senior management

Opportunities from within

Good Practices to Implement:

1. Understand the evolution of "risk thinking" at the company

2. Establish a clear definition of what "risk" means at the company

3. Know the line between risk oversight and risk

4. Consider re-thinking the chief risk officer role and skill set

5. Monitor the company-wide risk culture

6. Avoid the trap of false precision

7. Get out of the weeds by taking a deep dive

8. Regularly review--and test--crisis management plans

* NACD 8 Recommendations

9

Mitigate risk, eliminate

uncertainty

Opportunities from within

Improved Board Composition and Selection

Crisis revealed need for greater independence, quality and diversity:• Increased role for audit, compensation & nomination, and risk committees and related technical

issues• Higher legal liabilities and scrutiny• Need for greater diversity to tap talent and avoid group think

Push towards audit committees and independent members started in 2003: • Enron, Worldcom, Parmalat, etc.

Regulators, investors and boards themselves are re-emphasizing and expanding these requirements:• Independent members from 1/3 to majority on boards and on committees • Non-executive chair • Board evaluations, board profiles, and search firms for board members• Limits on brokers voting with management • Formal minority representation on boards• Targets for women on boards • Mandatory quotas• Comply or Explain

10

TREND

Gender Diversity

11

• UK names and shames companies with no female board members

• Of all FTSE 100 companies female representation accounts for 8.4%

• Fortune 500 companies with the highest representation of women board directors attained significantly higher financial performance* Companies with highest % of women on boards outperform companies with lowest/no % of women on boards:

• Return on equity: 53%• Return on sales: 42% • Return on invested capital: 66%

* Catalyst.org/the Bottom line: corporate performance and women’s representations on Boards

TREND

Would it have happened if it was Leman Sisters?

New Internal Control Definition

• A process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives.

• Operating objectives

• Reporting objectives

• Compliance objectives

COSO – Integrated Framework, May 2013

12

TREND

Tax Avoidance/Minimization Strategies that affect Corporate Governance

ICGN / OECD Viewpoint Relevant questions for investors:Investors have a stake in the evolving ‘responsible tax’ debate in at least four respects: 1. As owners of companies that in turn pay

tax, investors have a vested interest in any activity affecting profitability;

2. reputational and commercial risks arising from aggressive tax avoidance can form part of the battery of risks investors should monitor and question when necessary;

3. corporation tax can be seen as a ‘levy on the profit a company earns for its shareholders’, therefore it should be viewed as a tax on shareholders; and

4. from a broader societal perspective, the tax base of a country is fundamental to the country’s ability to provide infrastructure, legal protections and social services that help to build and develop an economy and support its citizens.

1. What is the nature of the board’s oversight of company tax policy? Is this discussed at the overall board meetings or in specific committees?

2. Does the board discuss company tax policies directly with the accounting firm providing tax services?

3. Does the board recognize that tax policy that may be perceived as overly aggressive may carry reputational risks? If so, does the board think in terms of a “risk appetite” for reputational risks that may related to tax policy?

4. How does the board satisfy itself that a company’s approach to tax may be appropriate or inappropriate?

5. Does the company have an articulated policy on its approach to corporate tax? Is this policy public and do company disclosures provide evidence as to how this policy is overseen and controlled?

13

TREND

COOInternal Audit

Board of Directors

CFO

ExternalAuditor

TechnologyCommittee Audit

Committee

OtherCommittees

CEO

CIO

IT Controls and Board Technology Committee

COBIT 5: Framework for IT Internal ControlsBoard Level Technology Committee• COBIT 5 (Control Objectives for

Information and Related Technology), as published by ISACA in 2012, provides comprehensive framework to assist enterprises in the governance and management of IT.

• Recognizes the expanded role of IT as an integral part of the business.

• Used as the basis for the framework for managing operational and information risk in the context of Basel.

14

TREND

Changes in Audit Reporting – IAASB Exposure Draft

1.Opinion/Basis for Opinion

2.Key Audit Matters3.Going Concern4.Responsibilities of

Those Charged with Governance

5.Auditor’s Responsibilities

6.Report on Legal and Regulatory Requirements

Reporting on Audited Financial Statements: Proposed New and Revised InternationalStandards on Auditing (ISAs)

July 2013Exposure Draft

TREND

Emergence of Stewardship Codes

16

Since 2004 OECD has called for institutional investors to disclose• Governance and voting policies • How conflicts of interest are managed

Institutional investors assets rebounded since 2008• Global Mutual Funds (2013): 30 trillion USD • Global Pensions (2012): 34 trillion USD• Private equity, hedge funds, sovereign wealth and exchange traded funds ~13 trillion USD

Since 2008, calls for more active and effective ownership by funds has intensified

• UK Stewardship Code, 270+ asset managers signatories covering great majority of assets under management

• EU UCITS Directive, requiring development of policies on voting and conflicts across EU• US regulators & investors encourage engagement by asset managers: 64% engaging more• Stronger legal and regulatory requirements to encourage fund engagement (including

voting) in Chile, India, Malaysia, and other emerging markets• New stewardship code in Japan (130+ investors), voluntary codes in France, Italy, South

Africa and elsewhere

TREND

ESG Agenda

17

• Various initiatives serving diverse audiences, issues and interests!

• Emphasis has shifted from natural resources industries to strongly embrace the financial sector and private sector more broadly

• Financial crisis highlighted vulnerability of society to deep systemic economic shocks with its impact on development and jobs

• Closely linked to corporate reputation - an important economic asset, value of which ranges from 20% to 90% of a company's total market value.

• IFC- generated Equator Principles remains an important benchmark for major banks along with IFC’s Performance Standards as a development tool for emerging markets

A company’s reputation and bottom line are vulnerable:

Important to investors and consumers!

TREND

• Africa has come a great distance and is expected to go a long way yet.

• There are challenges and these lead to uncertainty.

• Identify the potential risks – what is it that creates and perpetuates the uncertainty?

• Determine how to mitigate/eliminate the risks

• Focus internally – corporate governance offers up a proven and recognizable way to limit uncertainty

Look at the new trends in CG and get ahead of the curve

Risks, Opportunities, Trends: Getting Africa ahead of the curve

18 Footer

Conclusions

Thank you!

19