Corporate Governance & Managing Reputation Risk

1. Corporate Governance & Managing Reputation Risk Mike Okereke Chairman, The Management School London President, BEEC International Nigeria Chairman, Mike Okereke Consulting Ltd. Mike Okereke Consulting Ltd 1

2. Agenda What is Corporate Governance? Corporate Governance Code in Nigeria Global Corporate Governance Code – The British Case Study What is Good Risk Management Enterprise – wide risk Best Practice in Risk Management Public Relations Implication of Poor Risk Management Conclusion 2

3. What is Corporate Governance? Corporate Governance is the rigorous supervision of the management of a company or organisation. Corporate governance ensures that organisations are run competently, with integrity and with due regard for the interests of all stakeholders. 3

4. What is Corporate Governance? Cont. Good governance is a mixture of - Regulation - Structure - Best Practice - Board Competency 4

5. Organisational Scrutiny Corporate governance has come under increasingly intense scrutiny. USA ENRON, the 7th largest American Company in terms of capitalisation suddenly collapsed. Reason – fraud scandal involving one of the world’s leading auditors. After ENRON came more scandals from USA. 5

6. ITALY Then came the collapse of PAMALAT in Italy 6

7. BRITAIN Widely accepted as the leader in corporate governance had its share of the problem. Some large companies had shareholders protest on unjustified payouts to directors. A major oil company admitted that it misled the stock market about its reserves. 7

8. NIGERIA In Nigeria there are some celebrated bad governance case studies: A major multinational food company admitted that it sent a false financial report to the market. The Security & Exchange Commission found the company guilty of producing misleading financial report. The chairman and board were black listed and sacked. 8

9. NIGERIA cont. A major multinational soap company also admitted that it sent a false financial report to the Stock Exchange. Central Bank of Nigeria sent five Bank Chief Executives & their director packing over corporate governance issues. 9

10. Corporate Governance Code in Nigeria The view is held that weak corporate governance has been responsible for some recent corporate failures in Nigeria. To improve corporate governance and ensure highest standard of transparency and accountability. The Security & Exchange in September 2008 inaugurated a National Committee for the Review of the 2003 code of corporate governance for the public companies in Nigeria 10

11. Highlight of the Code Duties of the Board The board is accountable and responsible for the performance and affairs of the company. The board should define the company’s strategic direction & goal, ensure that human & financial resources are effectively deployed towards attaining those goals. The principal objective of the board is to ensure that company is properly managed. 11

12. Highlight of the Code Duties of the Board The board has the responsibility to oversee the effective performance of the management in order to protect and enhance shareholder value and to meet the company’s obligation to its employees and other stakeholders. The board should ensure that the company carries on its business in accordance with its articles & memorandum of association and in conformity with the law of the country. 12

13. Highlight of the Code Duties of the Board The board must observe the highest ethical standard. The board shall define the framework for delegation of authority. The board shall identify risk and monitor risks in the management systems. 13

14. Highlight of the Code Duties of the Board The board shall be responsible for succession planning, the appointment, training & remuneration and replacement of board members. Overseeing the effectiveness and adequacy of internal control. Overseeing communication policy. 14

15. Highlight of the Code Duties of the Board Ensuring the integrity of financial reports. Ensuring that ethical standard are maintained. Ensuring compliance with the law of Nigeria 15

16. Structure of the Board The board should reflect the size of business. Membership of the board should not be less than five (5) and should not exceed 15. The board should have a mix of executive and non executive directors. The board should be independent of management to enable it carry out its oversight functions in an objective and effective manner. 16

17. Structure of the Board For all public companies with listed securities, the position of the chairman and chief executive officer shall be separated and held by different individuals. The aim is to avoid the concentration of powers in one individual. 17

18. BRITAINThe combined code Board Responsibility for Business Success Every company should be headed by an effective board which is collectively responsible for the success of the company. Chairman & Chief Executive: There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility of running the company’s business. 18

19. BRITAINThe combined code 3. Board Balance and Independence- The board should include a balance of executive directors and independent non executive such that no individual or small group of individuals can dominate the boards decision making. Appointment to the Board- There should be formal rigorous and transparent procedure for appointment of new directors to the board. Directors Performance Evaluation- A board should undertake a formal rigorous annual evaluation of its own performance and that of its committees and individual director. Re-Election of Directors- All directors should be submitted for re-election at regular intervals. 19

20. BRITAINThe combined code 7. Remuneration The level & make up of remuneration should be sufficient to attract, retain & motivate directors of quality. There should be a formal & transparent procedure for developing policy on executive remuneration and for fixing the remuneration package of directors. 20

21. BRITAINThe combined code Accountability and Audit Financial Reporting: The board must present a balanced and understandable assessment of the company’s position & prospects. Internal Control: The board should maintain a good system of internal control to safeguard shareholders’ investment and the company’s assets. Audit Committee: The board should established formal and transparent arrangement for answering how they should apply the financial reporting principles and for maintaining an appropriate relationship with the company’s auditors. 21

22. BRITAINThe combined code 9. Relationship with Shareholders Dialogue with Institutional Shareholders: There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has a responsibility of ensuring that a satisfactory dialogue with shareholders take place. Constructive use of AGM: The board should use the AGM to communicate with investors and to encourage their participation. 22

23. What is good Risk Management ? Effective risk management is about taking risk responsibly. It is an excellent strategy for mitigating or preventing a possible crisis 23

24. Enterprise-wide Risks Enterprise wide risks can be group under • Internal Risks • People Risk • Process Risk • System Risk 24

25. Enterprise-wide Risks contd. 25

26. External Risks FINANCIAL RISK NON FINANCIAL RISK Credit Risk Political Risk · · Market Risk Competitors Risk · · Liquidity Risk Socio Economic Risk · · External Fraud · External Risks can be group into two namely: Financial Risk Non Financial Risk 26

27. Best Practice in Risk Management A well management company should have a risk management policy and procedure. It is the responsibility of the Board of Directors to set up the policy. A well managed company acknowledges that risk are a fact of any enterprise life. 27

28. Best Practice in Risk Management contd. The company is expected to be entrepreneurial by taking risk but must think through what could go wrong before taking the risk. It then develops strategies to cope and contingency plans. Prioritizing its effort in favour of those events that are likely to cause most damage or lead to greater losses. 28

29. Best Practice in Risk Management contd. • The process is complex and for good result, it must be comprehensive focusing not just on financial risk but those that related to: • The market • Credit • Liquidity • Technology • Legal 29

30. Best Practice in Risk Management contd. • Health & Safety • Reputation • Environment • Business probity issues 30

31. Organizational Risk Management Risk Management is about: Effective use of resource through improved process efficiency The establishment of a sound system of internal control The sharing of knowledge and good practice The leveraging of technology to collect and analyze internal & external data. 31

32. Organizational Risk Management Setting Policy & Procedure Audit & Review Risk Assessment Risk Treatment Risk Treatment Evaluation Source: IOD Corporate Governance 32

33. Public Relations Implication for Poor Risk Management Poor management of risk can have negative impact on the achievement of business objective and shareholder value. DIRECT LOSSES – it could generate Business crisis Business closure Project failures Litigation cost 33

34. Public Relations Implication for Poor Risk Management Irrecoverable assets or fund Unexpected staff cost Regulatory damages Loss of market Physical damage Theft Interruption in supply chain Break in business continuity 34

35. Public Relations Implication for Poor Risk Management INDIRECT LOSSES Brand value erosion Reputation damage Loss of market share Loss of key staff Loss of key customer Increase insurance cost 35

36. Crisis Management Poor Risk Management generate crisis 36

37. Corporate Governance & Corporate Reputation Corporate governance has come under increasingly intense scrutiny. Corporate governance and wrong doing impacts on the organization’s reputation. When companies fail, it has several public relations implications such as: Business closure. Company failure. 37

38. Corporate Governance & Corporate Reputation Business crisis Project failure Litigation cost Break in business continuity Loss of market share Brand value erosion Reputation damage Loss of key staff Loss of customers Increased insurance cost Creditors lose their money Individual lose their saving People lose their pension 38

39. Conclusion Good corporate governance ensures that companies are run completely and honestly and with due regard for the interest of the stakeholders. 39