18.11.2013 International business standard on transparency, Jelena Pesic

International standards/ practices on Corporate Transparency Jelena Pesic

www.pwc.com/mn

PwC

Scope: OECD principles of CG and PwC Integrated Reporting Framework

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Competitors

Macro-economicsRegulation

Risk

GovernanceRemuneration

Financial

OperationalSocial contribution

Environment

Business model

Dependencies

1. The financial and operating results of the company.

2. Company objectives

3. Major share ownership and voting rights

4. Remuneration policy for members of the board and key executives, and information about board members, including their qualifications, the selection process, other company directorships and whether they are regarded as independent by the board.

5. Related party transactions

7. Issues regarding employees and other stakeholders

8. Governance structures and policies, in particular, the content of any corporate governance code or policy and the process by which it is implemented

6. Foreseeable risk factors

PwC

External drivers

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Andrew Packman PwC UK

“In the wake of the global economic downturn, the need for economic and political stability has intensified the calls for greater transparency and a perceived need to strengthen accountability and good governance for both governments and business.”

Competitors


Risk


Financial


Environment

Business model

Dependencies

PwC

There are a range of transparency initiatives currently in force or being proposed at an international level

Just some key examples:

EU Directives on Transparency: The revised

Transparency Directive closes an existing gap in the notification requirements by requiring disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies. A second major change is the fact that the requirement to publish quarterly financial information was abolished. This aims at reducing the administrative burden and encouraging long term investment.

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Dodd-Frank Wall Street Reform and Consumer Protection Act: To promote the

financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Extractive Industries Transparency Initiative (EITI): coalition of governments, companies and civil society

groups, investors and international organisations . The EITI established a disclosure framework for companies to publish what they pay and for governments to disclose what they receive.

Measures to help improve corporate transparency and strengthen director disqualification laws have been outlined with

the publication of a discussion paper ‘Transparency and Trust’ by the Business Secretary Vince Cable, Member of

the Parliament

PwC

Government transparency

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Jan Sturesson PwC global leader, Government and Public Sector

“By introducing accrual accounting, governments demonstrate their desire to achieve greater transparency and accountability.”

The demand has never been stronger for governments to adopt sound and transparent accounting rules as part of their wider public finance management. It’s vital for governments and their stakeholders to understand the full economic impact of today’s decisions that affect financial performance, financial position, and cash flows. A broad range of stakeholders needs to know what all the liabilities are in the government balance sheet, including long-term debts and pension obligations.

Transitioning to an internationally recognised, accruals-based acounting framework is a challenge. It demands a clear vision and strong political commitment to strengthen public institutions, develop high quality standards and practices, enhance skills, and build capacity. Converting to accrual accounting standards based on IPSAS (International public sector accounting standards) usually involves a transformation project that extends well beyond the finance function and takes several years.

PwC

Anti-money laundering

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PwC

Example case studies

PwC standard

The PwC Anti Money Laundering Risk Management Standard applies preventive measures to cover both money laundering and terrorist financing. By implementing and complying with this standard, Member Firms can substantially reduce their risk of becoming involved in actual or potential money laundering activities.

Each territory has a Designated Individual Responsible for Anti Money Laundering in that Member Firm. Staff members are trained and are expected to report any suspicions related to potential money laundering activities to this individual. Even when there are no local or external reporting requirements, internal reporting will help to identify and address reputational risks to that firm and the network.

Example project we delivered in MN

Description: client problem, what we did, outcome.

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PwC

Strategy

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Clive Adamson Director of Supervision, Financial Conduct Agency

“An effective culture is one that supports a business model and business practices that have at their core the fair treatment of customers and behaviours that do not harm market integrity. This is very different from what we have today where...the focus has been on ensuring compliance with a set of rules rather than doing the right thing for customers”

Competitors


Risk


Financial


Environment

Business model

Dependencies

PwC

PwC Analysis of Codes of Conduct

Codes set out standards of behaviour and practices for organisations across the public and private sectors, typically underpinned by the organisations’ underlying values. Some codes are labelled Code of Ethics, Code of Business Practices, Code of Values, or Code of Behaviours, but the most common term has become Code of Conduct.

Key findings:

• While codes continue to have relevance and meaning for many businesses, this is not always the case. Some organisations still seem to approach their codes narrowly as a matter of compliance. They use them as a set of rules and regulations acting as a stick to deliver effective governance through command and control language.

• There is a growing shift from mainly rules-based policies to a values-based approach, and the emergence of a good practice which supports learning and decision making by providing practical tools.

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PwC

Key elements of good practice design

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Companies adopting the three good practice design

elements

PwC

How you can maximise the power of the Code

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2. Diagnose the ‘as is’ state towards ethical conduct.

3. Refresh the code to address key gaps. Make use of positive and empathic language to re-position ‘doing the right thing’ as a carrot rather than a stick.

4. Test or pilot the draft code with working groups.

5. Design and implement a plan to communicate the code to employees and to partners.

6. Develop approaches to reporting and assessment of the code’s impact on organisational behaviour, including the reporting of bad news and decisions on conflicting objectives.

7. Consider ways of embedding the code in day-to-day business, such as through HR linking to performance management, recruitment and hiring processes.

1. Agree board-level understanding of the purpose of the code.

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Resources and Relationships

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The ‘Trust and Transparency’ discussion paper, UK Government

“There are around 350 individuals who each hold more than 100 directorships in the UK, with cases of people holding up to 1,000”

Competitors


Risk


Financial


Environment

Business model

Dependencies

PwC

Board: some key challenges

Bribery and corruption

“The prevention of bribery and corruption presents a huge challenge for companies and their boards in today's environment. The issue is exacerbated in several ways -- materiality doesn't apply, so a crime could involve amounts that are immaterial to reported financial results. Gift-giving is also accepted as an inherent part of doing business in many local cultures. Another difficulty for companies is that they can be held responsible for the behavior of any third party they do business with, such as distributors, agents and resellers.” — Don Keller, Partner, Center for Board Governance

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CEO and board chair roles

Separating the board chair and CEO roles remains an ongoing debate in corporate governance with compelling arguments on both sides. The issue centers around whether a potential conflict of interest exists when the roles are combined and whether there is an appropriate balance of power between the CEO and the independent board members. As of 2012, 43% of S&P 500 boards currently separate the role.

PwC

Board: some key challenges

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Communicating the strengths of the Board

The investors want to know that the company’s board is properly composed and balanced, with skill sets that complement one another. They also want to know that a range of views will be expressed in the spirit of constructive challenge, and that the boardroom environment allows for this. We suggest showing how the board ‘fits together’, highlight:

• the balance of skills, experience and personal characteristics on the board;

• the diversity of the directors, which may increase the range of views expressed;

• the key aspects of the boardroom culture that the chairman encourages.

Assessing the Board effectiveness

How to use board evaluations effectively to increase understanding of the boards’ priorities in areas of underperformance. How to reconcile the reporting of board effectiveness with the company’s corporate performance and remuneration packages. We suggest that Boards pay attention to disclosure of this information.

The level of disclosure differs, from country to country. For example, according to Russian PwC survey of Board members in 2013, 20% of the boards bring in a third party when conducting their performance evaluation and only 64% disclose the evaluation results.

PwC


Corporate governance framework review and recommendations (Mongolia)

Our team performed a comprehensive review of the Client’s CG framework with the focus on the three categories of recommendations: to address non-compliance, develop to the best practice level, strengthen the position at the best practice level.

We addressed the following CG framework elements in the report:

• Board of Directors

• Effective and appropriate committee structures

• Executive management

• Transparency and disclosure

• Corporate citizenship

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Performance

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An investor’s view

‘Companies can either produce the annual report smartly, or they can produce it just because they have to. Those who do it smartly will positively impact their position in the capital market’

Competitors


Risk


Financial


Environment

Business model

Dependencies

PwC

Number of pieces=40

Big Picture Close-up pictures

(partial connectivity)

without big picture

Pieces of information without

connectivity

Number of pieces=40

Number of pieces=40

How is as important as what: joining the dots Same volume, different insight

PwC

PwC integrated reporting model and benchmarking

Based on a decade of research with over 3000 companies and investors globally across all sectors

Three overarching criteria:

• Content – does the report contain all the elements we would expect to see and focus on the key messages?

• Quality – the depth of information, for example quantified data, targets, benchmarks

• Linkage – demonstration of a consistent message and clear integration between the elements reported

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Competitors


Risk


Financial


Environment

Business model

Dependencies

PwC

Link market discussion to strategic choices

What is clear and what is not Headline findings – PwC European benchmarking 2012

25% Slide 19

Discuss future market trends

85%

PwC

Base reporting on strategic themes


25%

Slide 20

Include strategic priorities

94%

Embed sustainability in strategy

26%

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Align KPIs with remuneration


24%

Slide 21

Explicitly identify KPIs

86%

Some alignment of KPIs with strategy

36%

PwC

PwC’s 2013 mining industry investor survey

Extracting value: What do investment professionals need from mining company reporting?

Key findings of the survey include:

• Investment professionals following companies in the mining sector tell us they do value corporate reporting.

• They particularly want to hear about measures that populate their models and that move the market. Investors and analysts want not only to be able to access them easily, but also to have confidence in their reliability.

• Investment professionals link the quality of a company’s reporting with the quality of that company’s management. The better the reporting, the better they perceive the management team to be.

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PwC

The International Integrated Reporting Council (IIRC)

The IIRC brings together leaders from all the main international standard-setting and regulatory bodies with companies, investors and other key representatives to develop an internationally accepted integrated reporting framework.

• Financial and sustainability standard setters (IASB, FASB, GRI …)

• Securities and financial regulators (IOSCO, TSE and other stock exchanges, Financial Stability Board…)

• Investors (UN PRI, ICGN, asset owners and asset managers)

• Companies (WBCSD, UNGC, BSR, 82 pilot companies and others)

• Intergovernmental organisations (World Bank, UNCTAD)

• Accounting (IFAC, accounting firms, accounting bodies)

• Civil society and academia (A4S, WWF, Transparency International, WRI, Harvard, Uni. Sao Paolo, Uni NSW)

Slide 23

PwC

Video 1: Why does HSBC think the integrated reporting framework is important?

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PwC

12 reporting tips

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1. Have a backbone – strategy

2. Back to basics – business models

3. The big picture – external drivers

4. Tell the whole tax story – it’s more than just numbers

5. Cash is still king – cash and debt

6. Survival of the fittest – sustainability

7. Bottom up – segments

8. Flash in the pan – underlying performance

9. Not the kitchen sink – principal risks

10. What gets measured gets done – KPIs and remuneration

11. Cracking the code – corporate governance

12. Joining the dots – integrated picture

PwC

12 reporting tips

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Tip Description

1. Have a backbone – strategy

Use your objectives and strategy to underpin your reporting and to provide the context for your activities and performance. Strategic statements set in isolation from the rest of your reporting can appear as hollow statements of intent.

2. Back to basics – business models

Explain your key capabilities and the key resources and relationships you depend on to create and sustain value. Consider both your key inputs/outputs as well as your own activities, and demonstrate how your business model interacts with other key elements of reporting – for example, strategy, risks and KPIs.

3. The big picture – external drivers

Put your results in the context of market trends. Provide management’s perspective on the competitive landscape and macro environment to allow the reader to evaluate your strategic choices and actions along with the quality and sustainability of performance.

PwC

12 reporting tips

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Tip Description

4. Tell the whole tax story – it’s more than just numbers

Provide clear information for stakeholders on how tax impacts your business, looking more broadly at tax strategy, risk management and the wider impact of tax as well as detailed tax performance in the tax note. Communicate in a simple and straightforward way to help readers of your report understand your tax affairs.

5. Cash is still king – cash and debt

Explain how you make money, generate cash and are funded. Competition for capital is fiercer than ever before so consider including detailed disclosure about your operating cash flow strategy and performance and consolidating your debt disclosure. Provide real granularity into your debt maturity schedule and reconciliation of free cash flow to movements in net debt.

6. Survival of the fittest – sustainability

Demonstrate an understanding of the material sustainability risks and opportunities relevant to your organisation and your key stakeholders and how they are integrated into your core corporate strategy. Take a short-, medium- and longer-term perspective, and consider the impact of your business across your entire value chain when considering materiality.

PwC

12 reporting tips

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Tip Description

7. Bottom up – segments

Challenge whether the segment analysis is not just compliant but also makes visible the different dynamics inherent within the business. Consider including a few additional line items such as working capital, operating cash flow and capital employed for each segment.

8. Flash in the pan – underlying performance

Explain what is driving financial performance – is growth sustainable or not? Consider using bridge charts to help investors understand what is driving revenue profit and growth. Embrace non-GAAP measures to support your messaging but ensure they are clearly identifiable, consistently defined and reconciled to your GAAP numbers where appropriate.

9. Not the kitchen sink – principal risks

Highlight principal risks, not all risks. How might they derail your strategy? How are they managed? How has the risk profile changed during the year and what is the sensitivity of underlying performance to changes in these risks?

PwC

12 reporting tips

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Tip Description

10. What gets measured gets done – KPIs and remuneration

Identify key financial and operational KPIs used to assess progress against strategic priorities. Explain clearly how management are incentivised, highlighting the link between strategy, KPIs and the remuneration package.

11. Cracking the code – corporate governance

Go beyond compliance and bring governance reporting to life by demonstrating the activities of the board, the skills and experiences each board member brings to the table and how they interact. Focus on what makes your company distinctive and set the tone from the top.

12. Joining the dots – integrated picture

Avoid silos and present a clear, coherent and integrated picture of how your strategy, governance, performance and prospects lead to long-term value creation. Consider how: the description of your business model links to your discussion of external drivers and strategy; strategy aligns with your KPIs and remuneration; and risks relate to the narrative elsewhere.

PwC


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A major commercial bank in Mongolia

Development of the Environment and Sustainability (E&C) policy

Assistance in developing the bank’s E&S Policy, procedures and tools, such that it complies with Mongolian environmental and social laws, international best practices and the bank’s lenders’ requirements.

PwC Mongolia together with PwC Netherlands performed an initial needs assessment to assess the current state E&S framework at the bank.

We organized and ran a working group (composed of representatives of different relevant departments, including corporate lending, international banking and risk management) in order to share our common understanding of the Bank’s E&S risk profile and E&S risk appetite. We jointly worked on the preparation of the policies and procedures regarding the environmental and social risks with the Bank E&S officers.

We delivered training on ESMS best practices, international standards, current issues and furthermore identifying and assessing E&S risks, bank’s policies on E&S risks assessment and using the assessment toolkit.

We evaluated implementation of the E&S policies and procedures including determining whether E&S risk assessment procedures were implemented in line with the E&S policies;

We assessed whether account managers and risk analysts have sufficient knowledge of the E&S policies and defined areas for improvement to facilitate further implementation of the E&S risk assessment procedures.

PwC

Video 2: What stays inside the company?

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