ECRI Conference Millani (FINAL).pptx

Qualita've Risk Assessment: An Investor’s Perspec/ve Engineering & Construc/on Risk Ins/tute (ECRI) June 5, 2014 Agenda 1 2 3 4 5 6 7 What do investors mean by qualita've risks Business impacts: Why is it important to investors? Drivers of ESG Integra'on in investment process Focus on the Governance Case Ques'ons investors ask Sugges'ons on how to prepare Conclusions & ques'ons Millani Perspectives
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What do investors mean by qualita've risks? Millani Perspectives
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ECONOMIC
Economic
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Social
GOVERNANCE
Governance
Environment
NT
ENVIRONME
Qualita've Risk Analysis: Developments from the 20th to the 21st Century Traditional Model
New Model
Management Management & Culture Governance & Reputa/on Opera/ons Opera/ons & Compe//ve Advantage Social-­‐
Geopoli/cal Finance & Ethics Environment Finance Economy World Economy & Structural Changes Millani Perspectives
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Business impacts: Why is it important to investors? Millani Perspectives
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Many drivers of business value are intangible assets, which are not captured effec'vely in tradi'onal financial measures Cons/tuents of intangible assets •  Leadership & Governance •  Communica'on & Transparency •  Brand Equity/Reputa'on •  Human Capital •  Workplace Organiza'on & Culture •  Innova'on 100% 80% 60% 40% 20% 0% 83% 68% 17% 32% 32% 20% 19% 68% 80% 81% 1975 1985 1995 2005 2009 Intangible assets Tangible assets Components of S&P 500 market value
Source: Low & Kalafut, “Invisible Advantage: How Intangibles are Driving
Business Performance,” 2002
Source: Ocean Tomo, “Ocean Tomo’s Intangible Asset Market Value
Study,” 2010
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Extra-­‐financial factors directly influence value crea'on of companies Margin improvement Value crea/on levers Pricing power Cost savings Employee recruitment and reten/on Profits Market share Total shareholder returns The poten/al impact of sustainability efforts •  A stronger brand and greater pricing power
•  Greater operational efficiencies
•  More efficient use of resources
•  Supply chain optimization
•  Lower costs and taxes
•  Enhanced ability to attract, retain and
motivate employees
•  Greater employee productivity
•  Improved customer loyalty; lower rate of
churn
Revenue growth New market entry •  Enhanced ability to enter new markets
•  More potential sources of revenue
Free cash flow Valua/on mul/ple Risk premiums •  Lower market, balance sheet, and operational
risks
•  Lower cost of capital
•  Greater access to capital, financing and
insurance
Source: The Sustainability Initiative 2009 Survey, BCG and MIT Sloan Management Review, interviews with thought leaders
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Drivers of qualita've risk analysis in the investment process Millani Perspectives
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Increase of regula'ons by governments and stock exchanges on extra-­‐financial informa'on disclosure Millani Perspectives
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Investors are becoming more and more proac've in seeking disclosure of the extra-­‐
financial data Climate
change
Water
Forests
772
signatories
$87 billion
530
signatories
184
signatories
$57 billion
$13 billion
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Bloomberg’s extra-­‐financial informa'on Environmental, Social and Governance (ESG) data Millani Perspectives
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SETTING the TONE 1.  We will incorporate ESG issues into investment analysis and decisionmaking processes
2.  We will be active owners and incorporate ESG issues into our ownership
policies and practices
3.  We will seek appropriate disclosure on ESG issues by the entities in
which we invest
4.  We will promote acceptance and implementation of the Principles within the
investment industry
5.  We will work together to enhance our effectiveness in implementing
the Principles
6.  We will each report on our activities and progress towards implementing the
Principles
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Beeer results for porfolio managers with extra-­‐financial engagements Millani Perspectives
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Focus on the Governance Case ''Poor governance ul'mately will set the stage for corrup'on and failure'' -­‐anonymous Millani Perspectives
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Example: GlaxoSmithKline Glaxo Begins Investigation on Alleged
Improper Conduct in Iraq
2014-04-07 08:52:46.765 GMT
April 7 (Bloomberg) -- GlaxoSmithKline Plc is investigating
allegations of improper conduct in Iraq, nine months after
China began probing the U.K.’s largest drugmaker’s local
operations for corruption.
“These allegations relate to a small number of
individuals,” the London-based company said in an emailed statement. “However, we are investigating whether
there has been any improper conduct. We have zero
tolerance for unethical or illegal behavior.”
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Example: GlaxoSmithKline And then another….. Apr 14, 2014, 11:41am EDT Updated: Apr 14, 2014, 1:10pm EDT
GSK facing new bribery allegations in Poland
John George
Senior ReporterPhiladelphia Business Journal
Email | Twitter | Google+
The BBC is reporting Monday that London-based GlaxoSmithKline
is under investigation in Poland for allegedly bribing doctors to
promote the use of the company’s asthma drug Seretide.
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GlaxoSmithKline 1)  13 juin 2013: Reports emerge that GSK is inves'ga'ng allega'ons that staff bribed doctors with lavish gils to prescribe drugs. GSK issues a statement to say it has found no evidence to support them aler a detailed inves'ga'on. 27 juin 2013: Police raid Glaxo’s China headquarters in Shanghai and seize documents 2) 7 avril 2014 : GSK probes allega'ons over Iraq bribery 3) 14 avril 2014 : GSK faces bribery allega'ons in Poland Canadian Court Rules That it Does Not Have Jurisdic/on Over a Foreign Na/onal Under Canada’s Corrup/on of Foreign Public Officials Act: Friday, May 9, 2014
Jus'ce Nordheimer found that there is nothing in the charging provision in the CFPOA, sec'on 3, that expressly makes foreign na'onals subject to it, despite the fact that sec'on 3 prohibits "every person" from giving or offering, directly or indirectly, a benefit of any kind to a foreign public official with the ul'mate purpose of obtaining or retaining a business advantage. Jus'ce Nordheimer found that the use of the phrase "every person" does not capture foreign na'onals in the circumstances of this case. Millani Perspectives
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Goldman Sachs says: Governance analysis and ESG (Sustainability) more
broadly are increasingly becoming mainstream
The overall alpha signals from our governance factor testing and global and
domestic ESG returns work continues to provide us with confidence that
governance analysis can improve investment returns irrespective of
whether investors are pursuing broader ESG considerations or not.
For those incorporating ESG as part of a mainstream investment process, it
reinforces our view that corporate governance should be a cornerstone of
any ESG analysis.
In Australia the recent passing of the "Corporations Amendment (Improving
Accountability on Director and Executive Remuneration) Bill `` 22 June 2011) will
aid in increasing the level of attention on remuneration and governance issues
more broadly.
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The Costs Millani Perspectives
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Report of the Special Representa've of the Secretary-­‐General on the issue of human rights and transna'onal corpora'ons and other business enterprises: John Ruggie From the outset, the Special Representative has maintained that the widening
gaps between the scope and impact of economic forces and actors, and the
capacity of societies to manage their adverse consequences, were
unsustainable. These governance gaps, he has observed, « provide the
permissive environment for wrongful acts by companies of all kinds without
adequate sanctioning or reparation ».
Financial Times reports that the Special Representative « has won
unprecedented backing across the battle lines from both business and
pressure groups for his proposals for tougher international standards for
business ».
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Governance Principles of a Equity Risk Manager • 
Governance is the exercise of authority, direc'on and control of an organiza'on to ensure that its purpose is achieved • 
Components of Governance : Accountability, Transparency, Predictability and Par/cipa/on • 
Good governance prac'ces are important for effec've organiza'onal performance and sound financial growth of a corpora'on (the board directs and protects) • 
Good boards focus on strategic planning and set the tone for the corporate culture (which is reflected in share prices?) Millani Perspectives
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Sugges'ons on how to iden'fy governance risks •  Methodical scoring and comparison by a third party ra'ngs (i.e. Globe and Mail Board Games or other services) •  Pra'cal judgement assessment based on experience or tes'monials from past and present directors •  Investor/Analyst Inves'ga'on-­‐ Asking the tough ques'ons •  Does the company have structural elements in place for good governance: i.e. stakeholder panel and/or invovlement with an industry associa'on? Millani Perspectives
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Board Composi'on •  Lack of Independence •  Combined CEO and Chairman •  Directors sit together on mul'ple boards •  Lack of Diversity •  No board evalua'on system •  No disclosure on succession planning •  No educa'on programs for directors Millani Perspectives
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Compensa'on •  No share ownership •  Poor disclosure on bonus, targets, benchmarking, hurdles •  No disclosure of link between total compensa'on and financial and non-­‐financial performance Millani Perspectives
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Shareholder Rights •  No individual vote for directors •  No majority vo'ng •  No shareholder advisory vote on execu've compensa'on •  Poor disclosure on proxy vo'ng results •  Excessive stock op'ons dilu'on Millani Perspectives
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Disclosure •  Poor director biographies -­‐ no'ng specific skills •  Poor director aeendance record •  No informa'on on compensa'on consultant being used •  No re'rement policy for directors Millani Perspectives
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Lessons learned from 30 years at the board table PAUL TELLIER 1. 
The domina/ng role of a strong CEO. On most subjects to be discussed, the CEO is usually the most knowledgeable. He also has the advantage of controlling, to a large extent, the informa'on flowing to the board. The chair and all directors share the responsibility to ensure that the CEO does not control the agenda. 2. 
Too much focus on projects may be to the detriment of discussing the broad strategy and neglec/ng risk management. Directors should leave the day-­‐to-­‐day management of the enterprise to the execu'ves. Directors should instead consider where the corpora'on should be in the next five years and focus on how to get there 3. 
Directors should not limit themselves to the boardroom. They should take every opportunity to get to understand the underlying reali'es of the company they oversee.
“Boards of directors play an important role in
guiding business – but we need to get better at our
jobs. Much is at stake.”
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William (Bill) George's Seven Cardinal Sins of the Board of Directors •  Informa'on asymmetry for an independent director puts him/
her at a disadvantage •  Lack of in-­‐camera sessions •  Lack of chemistry among directors •  Lack of candid discussion and prepara'on of poten'al candidates in succession planning •  Lack of trust between directors especially in 'mes of crises. •  Lack of agreement on direc'on, leadership, and strategy between chairperson and ceo. •  Ex-­‐ceo becomes chairperson Millani Perspectives
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Ques'ons investors ask Millani Perspectives
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Ques'ons to expect Investors to ask Ques/ons : 1. 
Does the board have a high degree of involvement in the strategic planning of the company ? 2. 
Does the board set the mission of the organiza'on ? 3. 
Does the board have a rela/onship with key stakeholders ? 4. 
Does the board provide an ins'tu'onalized accountability structure for management ? 5. 
What are the core values of the organiza'on set by the board ? 6. 
What is the board's sense of purpose beyond just making a profit ? 7. 
What is the due diligence and care that the board is pre-­‐occupied with ? 8. 
What are the board's plans for safe guarding the organiza/on ? 9. 
How is the board dealing with the current issues of sustainable stewardship and human resources ? 10.  How does the board contribute to performance monitoring? 11.  What is the board doing with regards to community rela'ons and challenges ? 12.  What is the role of the board in the risk management program ? 13.  How is the board facilita'ng stakeholder input for strategic planning ? Millani Perspectives
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Where to begin? Suggestions on how to prepare
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Internal •  An'-­‐Corrup'on Policy •  Materiality Assessments •  Stakeholders Engagement (Panels) Millani Perspectives
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An/-­‐Corrup/on Policy Public commitment to an'-­‐corrup'on and respect of law • • • • Applies to all employees, contractors, suppliers, agents, JV, etc. Due diligence: business partners and countries Defining appropriate/inappropriate • gils, hospitality, travel expenses • poli'cal contribu'ons • charitable dona'ons Forbid facilita'on payments Millani Perspectives
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An/-­‐Corrup/on Policy Disclosure UN Global Compact An'-­‐Corrup'on Guidance • % of employees that received training • employees dismissed for non-­‐compliance • number of complaints filed per total employees • Business partnership terminated or forgone • ... Millani Perspectives
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An/-­‐Corrup/on Policy Management •  Governance: board oversight, dedicated compliance staff •  Training for employees and board members •  Variable execu've compensa'on, claw backs •  Communica'on channels i.e.: Compliance Consulta'on Centre, Hotline managed by third party, An'-­‐Corrup'on Manual •  Third party assessment Millani Perspectives
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Materiality Assessments Stakeholder Analysis Environment /Government/NGO/Regulators Employees/Suppliers Shareholders/Debtholders Management/Board/ Stakeholders panel Trade–Industry Associa/ons Community/Clients Millani Perspectives
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Materiality Assessment is a risk management strategy for both protec'ng and crea'ng value Deloitte’s Sustainable Enterprise
Value Map (SEVM)
Mitigating risk
!Protecting value
Seizing opportunities
! Creating value
E
N
V
I
R
O
N
M
E
N
T
A
L
&
S
O
C
I
A
L
V
A
L
U
E
Inputs
ECONOMIC VALUE
Revenue
growth
Sales
volume
Operating
margin
Price realization
Selling,
general
& admin.
Cost of
goods sold
Asset
efficiency
Buildings &
offices
Inventory
Expectations
Receivables
& payables
Company
strengths
External
factors
Sustainable/ethical
Sustainable/ethical
Sourcing
sourcing
Employment
Employment practices
practices
Operations
Environmental
Environmental
footprint
footprint
Outputs
(Products &
services)
Management
Customer
care
Customer
care
Product
Product stewardship
stewardship
Impact
Impact onon
communities
communities
Reporting &
Reporting and
communications
communications
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Stakeholder Panels About 10-­‐15 people meet 1-­‐4 'mes per year • 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
Investors (equity and debt) Community leaders (na'onal, regional and local) NGO’s (environment, social, governance) Consultants (environment, social, governance) Customers Suppliers Human Resources Professional Company Opera'ons (corporate, field, union) Trade Associa'on Representa'ves Independent facilitator (sustainability expert) Government Representa've Millani Perspectives
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External •  Trade – Industry Associa'ons •  Repor'ng Millani Perspectives
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Towards Sustainable Mining (TSM) Performance Indicators Communi/es & People Aboriginal and Community Crisis Management Planning Outreach Environmental Footprint Safety and Health Tailings Management Energy Efficiency Energy Use and Biodiversity Conserva'on Greenhouse Gas (GHG) Management Emissions Management Community of interest (COI) iden'fica'on Crisis management preparedness Policy, commitment and accountability Tailings management policy and commitment Corporate biodiversity conserva'on policy accountability and communica'ons Energy use and GHG emissions management systems Effec've COI engagement and dialogue Review Planning, implementa'on and opera'on Tailings management system Facility-­‐level biodiversity conserva'on planning and implementa'on Energy use and GHG emissions repor'ng systems COI response mechanism Training Training, behavior and culture Assigned accountability and responsibility for tailings management Monitoring and repor'ng Annual tailings management review Performance Opera'on, maintenance and surveillance (OMS) manual Repor'ng Millani Perspectives
Biodiversity conserva'on Energy and GHG emissions repor'ng performance targets 42
Example of TSM results - "
What does the board need to know?
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Repor'ng New repor'ng standards guiding extra-­‐financial factors management and improve companies performance Millani Perspectives
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Integrated Repor'ng (<IR>), at the crossroads of financial and extra-­‐financial repor'ng “An integrated report is a concise communica'on about how an organiza'on’s strategy, governance, performance and prospects, in the context of its external environment, lead to the crea'on of value in the short, medium and long term.” •  The International Integrated Reporting Council
(IIRC) published the final framework of <IR> in
December 2013
•  Pilot program with more than 100 global
companies and 35 investors organizations
•  Canadian companies leading the way:
–  Teck Resources
–  Vancity
–  Potash Corp.
–  Port of Vancouver
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Conclusion The Future is Here Be Prepared Millani Perspectives
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For more details, please contact me at: Milla Craig Principal Millani Perspec'ves 514 531 2183 [email protected] Millani Perspectives
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