*connectedthinking

1. Three Talks in One*Building Public TrustValueReportingEnterprise Risk ManagementEnergy Insurance Mutual Risk Managers MeetingDr. Robert G. EcclesPresident, Advisory Capital PartnersSenior Fellow, PricewaterhouseCoopers *connectedthinking PwC

2. Building Public Trust

3. Issues for Your Consideration • The crisis in accounting (Building Public Trust) • Pressure for greater transparency (The ValueReporting Revolution) • A new approach to risk management (Enterprise Risk Management) • Will provide a quick overview of each • Will provide supporting material for each topic

4. The Crisis in Accounting • Wave of accounting scandals (and failed governance) in the U.S. several years ago • Now seeing something similar in Europe (e.g., Adecco, Ahold, Parmalat) • U.S. response was Sarbanes-Oxley • Litigation was rushed in a very political environment • Has added significant compliance costs • Assumes the existing financial reporting model • Focus on earnings and the Earnings Game • Regulatory filings rather than information used by management • Higher penalties on executives for malfeasance • Much tighter regulation of the accounting profession • Need to step back and take a broader view

5. True Capital Market Reform Can Happen • Six key actions for restoring public trust and investor confidence: • Create principles-based global accounting standards • Develop additional industry-based performance information • Improve external reporting beyond regulatory requirements • Use the Internet to enhance performance reporting and analysis • Perform audits which present a “true and fair” view of the business • Strengthen all links in the Corporate Reporting Supply Chain

6. Action #1 – Create Principles-based Global Accounting Standards • A global economy needs a global set of generally accepted accounting principles • Investors want to choose companies regardless of country • Companies want access to capital from all over the world • Global GAAP should be based on principles, not detailed rules • Get the “best of both worlds” between U.S. GAAP and International Financial Reporting Standards (IFRS)

7. Action #2 – Develop Additional Industry-based Performance Information • Company performance and future potential cannot be reduced to a single number (e.g., earnings or cash flow) • Global GAAP information must be supplemented with other financial (e.g., pro forma earnings) and nonfinancial information (e.g., customer retention) • A supplemental framework is needed • Each industry will develop standards within a Tier II framework

8. Action #2 – Develop Additional Industry-based Performance Information An Example From Telecommunications And Pharmaceuticals

9. Articulate the company’s “Holistic Story” Strategy and plans Targets and benchmarks Actual and desired risk profile and risk management procedures Internal control systems and compliance programs Compliance policies and programs Principles of corporate governance Compensation policies and amounts Other performance metrics, including company-specific ones Commitments to other stakeholders Action #3 – Improve External Reporting Beyond Regulatory Requirements

10. The Corporate Reporting Transparency Framework

11. Action #4 – Use the Internet to Enhance Performance Reporting and Analysis • Content and format are integrally linked • Information is still largely provided in a clumsy paper-based format • All this changes with Extensible Business Reporting Language (XBRL) • XBRL is a taxonomy for “tagging” information • Provides the context for explaining what the information means • XBRL enables obtaining information directly off the internet • Microsoft, Nasdaq and PricewaterhouseCoopers have developed an XBRL demonstration site • www.nasdaq.com/xbrl • 20 semi-conductor companies • 5 years of data including income statement, balance sheet and footnotes.

12. Action #4 – Use the Internet to Enhance Performance Reporting and Analysis How XBRL Changes the Consumption of Corporate Reports

13. Action #5 – Perform Audits Which Present a “True and Fair” View of the Business • Today’s audit opinion is about the financial position of the company • Accounting and auditing standards vary by country • Historical financial statements are an incomplete picture • An “Expectations Gap” exists about what an audit opinion really means • The audit needs to stand for more • Issues around risk and liability will need to be addressed

14. Action #6 – Strengthen all Links in the Corporate Reporting Supply Chain Every Group Must Take Responsibility for Improving our Markets

15. Action #6 – Strengthen all Links in the Corporate Reporting Supply Chain The Need for Better Corporate Governance • Directors need to remember that they represent shareholders • Much of the current focus is on structural reforms • Equally important are issues of qualifications, process, resources and compensation • Legislation and regulation should be balanced with market forces

16. ValueReporting

17. Pressures for Greater Transparency • Roughly two-thirds of CEOs think their company’s shares are undervalued • Market sets price based on information • Companies are not reporting information they regard as useful in running the company • Analysts and investors agree that they are not getting this information • Audit Committees say they are not getting this information • ValueReporting is about greater transparency by companies • Financial and nonfinancial information • Tangible and intangible assets • Integrated perspective on risk and strategy • Market rather than regulatory driven • Benefits of greater transparency • More accurate stock price • Better managed company • A way to move beyond the Earnings Game

18. Why Is ValueReporting Important? Value Creation Value Preservation Value Realization InvestmentCommunity Companies A Better Managed Company Companies create sustainable economic value by developing, operationalizing and executing superior strategies which guide the company towards delivering valuable products and services. These strategies yield future cash flows greater than investment or economic profit. Companies preserve the value of the underlying business unit cash flows through effective management controls, risk and tax management. Companies ensure that investors realize the value created by the business units and the corporate center by managing and delivering upon market expectations.

19. Utility CFOs’ perceptions of whether the market properly values their company Performance Measures and the Utility Industry Source: 1999 PricewaterhouseCoopers Capital Markets Survey

20. Performance Measures and the Utility Industry Communication gaps prevent market value from reflecting underlying value Management’s Valuation Value gap Investors/Analysts Market Value Quality of Information Quality Gap Understanding Gap Importance of a Measure Importance of a Measure Information Gap Reporting Gap How Adequately a Measure is Communicated Perception Gap How Actively a Measure is Communicated

21. Performance Measures & the Utility Industry Utility CFOs recognize that a broad range of financial and non-financial measures are useful for managing their companies CFOs’ Perceptions of the Relative Importance of Performance Measures High Importance Medium Importance Low Importance 1. Regulatory environment and price controls • Quality of management • Cost reduction • Investment/acquisition strategy • Operating profit growth • Operating cash flow growth • Market growth • Strategic direction and focus - integrated v specialist player • Risk management processes • Margin improvements • Brand value/reputation • Environmental strategy, performance and cost • Geographic focus/exploiting changing markets • Market share/position • Revenue growth from new services/ geographies/customers • Extent of competition/ barriers to entry Source: 1999 PricewaterhouseCoopers Capital Markets Survey

22. Measure ranked as top ten by investors and/or analysts but not by companies. These data are for general utility companies. Data are also available for generators, retailers and network companies. The Top Ten Performance Measures Utility Industry Perceptions of the Relative Importance of Performance Measures Companies Investors Analysts • Regulatory environment and price controls • Quality of management • Cost reduction • Investment/acquisition strategy • Operating profit growth • Operating cash flow growth • Market growth • Strategic direction and focus - integrated v specialist player • Risk management processes • Margin improvements • Brand value/reputation • Cost reduction • Extent of competition/ barriers to entry • Geographic focus/ exploiting changing markets • Investment/acquisition strategy • Margin improvements • Market growth • Market share/position • Operating cash flow growth • Operating profit growth • Cost reduction • Extent of competition/ barriers to entry • Geographic focus/ exploiting changing markets • Investment/acquisition strategy • Margin improvements • Market growth • Market share/position • Operating cash flow growth • Operating profit growth • Quality of management

23. Information, Reporting and Quality Gaps in the Utility Industry Performance Measures Information Gap # Reporting Gap# Companies Analysts Investors Companies • Regulatory environment and price controls • Quality of management • Cost reduction • Investment/acquisition strategy • Operating profit growth • Operating cash flow growth • Market growth • Strategic direction and focus - integrated v specialist player • Risk management processes • Margin improvements • Regulatory environment and price controls • Quality of management • Cost reduction • Investment/acquisition strategy • Operating profit growth • Operating cash flow growth • Market growth • Strategic direction and focus - integrated v specialist player • Risk management processes • Margin improvements # Gap exists when the difference is equal or greater than 20 percent. Quality Gap

24. Enterprise Risk Management

25. A New Approach to Risk Management • Enterprise risk management is a process, effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives • Committee of Sponsoring Organizations (COSO) initiated a project on enterprise risk management • Next “Big Thing” after Internal Controls – an Integrated Framework • Draft report has been put out for public exposure and comments received • Final report and application guidance will be published this summer • PricewaterhouseCoopers’ CEO Survey (1391 CEOs) • Basic processes in place • Much less progress on “full implementation” • Benefits are very real • Barriers are significant • Two main strategies exist for making real progress

26. COSO* ERM The Committee of Sponsoring Organizations Enterprise Risk Management Framework * The Committee of Sponsoring Organizations Enterprise Risk Management Framework • Forms the framework for Sarbanes-Oxley • Activities are considered at all levels of the organization

27. Basic Processes of ERM Which of the following processes does your organization have in place?

28. Basic Processes of ERM — Compliance To what extent do you agree or disagree with the following statement regarding regulatory compliance?

29. Elements of Full ERM Implementation To what extent do you agree or disagree with each of the following statements regarding risk management and ERM?

30. Levels of Commitment To what extent do you agree or disagree with each of the following statements regarding risk management?

31. Challenges To Implementation Which of the following are key challenges that restrict your organization in identifying and managing enterprise-wide risks, and which is most challenging?

32. Reporting Risk Profile To which of the following groups do you periodically report your company’s enterprise-wide risk portfolio, and how often does this occur?

33. Benefits of ERM Percentage reporting strong or considerable positive impact

34. Is ERM in Place? When would you expect your organization to have effective and efficient ERM in place?

35. Full ERM Implementation When ERM is a CEO priority Percentage reporting strong or considerable positive impact

36. Challenges When ERM is a CEO priority

37. Benefits of ERM When ERM is a CEO priorityPercentage reporting strong or considerable positive impact

38. Full ERM Implementation When ERM is integrated in strategic planningPercentage reporting strong or considerable positive impact

39. Challenges When ERM is integrated in strategic planning

40. Benefits of ERM When ERM is integrated in strategic planningPercentage reporting strong or considerable positive impact

41. Full ERM Implementation CEO priority advanced practitioners Percentage reporting strong or considerable positive impact

42. Benefits of ERM CEO priority advanced practitionersPercentage reporting strong or considerable positive impact

43. Full ERM Implementation Strategic planning advanced practitioners Percentage reporting strong or considerable positive impact

44. Benefits of ERM Strategic planning advanced practitioners Percentage reporting strong or considerable positive impact

45. Action Items • Establish one or more industry-based consortia to establish Tier-Two Standards for non-GAAP information • Include all relevant members the Corporate Reporting Supply Chain • Will be adopted on a voluntary basis: let the market decide • Determine and implement optimal level of transparency • Do a company-specific “ValueReporting” Survey • Establish a process that involves senior management and the Board • Design and implement a process for enterprise risk management • Do a self-diagnosis based on questions in CEO survey • Read COSO report when it is published this summer • More information can be found at www.pwc.com or from robert.eccles@advisorycapital.com