GRC

Source: Anthony Tarantino, Governance, Risk, and Compliance Handbook, Wiley, 2008.

title

GRC

author

Bernard Szlachta (NobleProg Ltd)

GRC ⌘

• Governance
• Risk
• Compliance
• Distinction is sometimes blurred

Governance ⌘

• Governance - Latin: steering
• "Addresses the processes systems and control by which organizations operate"
• Applies to all organizations: public and private
• "Includes the exercise of legal and regulatory authority and the user of institutional resources to manage organizations"
• Area of Economics: separation of ownership and control (board directors, owners, managers, employees, suppliers, customers, regulators and communities"

Corporate governance ⌘

• "Processes by which an organization defends the interests of the stakeholders"
• Refers to the relationship between those who govern and those who are governed.
• In politics: relationship between the government and citizens
• GAP: Present State, Desired State, Plan to get there

Short Chronology ⌘

• 500 BC 孔子, Analects
• 31 BC Rome (shareholding)
• 1600 East India Company (Court of Directors, separation of ownership and control)
• 1844 UK, Joint Stock Company Act
• 1930 Bank of International Settlement
• 1933 US, The Securities Act (regulation over securities markets, registration disclosure, SEC)
• 1984 G10, BIS creates the Basel Committee
• 1977 US, Foreign Currupt Practices Act (FCPA, prevation of bribery of foreign officials)
• 1985 US, EU, COSO
• 1988 G10, Basel accord (minimal requirements)
• 1990 UK, Polly Peck, CCI, Maxwell
• 1992 UK, Cadbury Committee published first code on corporate governance
• 1999 G10, Basel II
• 2001 US, Encrom
• 2002 US, SOX
• 2004 US, COSO II (ERM)
• 2011 Global banks are required to be live under Basel II

Commonly Accepted Principles of Corporate Governance ⌘

• Rights and Fair Treatment of Shareholders
• Rules and Responsibilities of the Board of Directors
• Ethical and Professional Behaviour
• Financial Transparency and Disclosure
• Internal Controls

Models of Corporate Governance ⌘

Anglo-American Model

• priority to shareholder interests
• powerful CEO
• board provides overachieving stewardship

The coordinated Model

• prevalent in Europe and Japan
• "gives priority to the interest of managers employees, customers, suppliers and the community in general"
• slower growth in profits, more control over ethics and morality

Family-Owned Company Model

• Asia, Latin America, also (Span, France, Italy)
• Transparency is not welcomed

Agency vs Stewardship ⌘

Agency theory

• separation of Board Chair (Chairman) and CEO
• Greater monitoring and sanctioning of management

Stewardship

• Shared incumbency of the roles
• More independence in decision making, faster reaction to changes

Risk ⌘

Risk

"Possibility of loss or injury created by an activity or by a person"

• doesn't have to be bad
• opportunies can come from a risk

Risk Management

"seeks to identify, assess and measure risk and then develop countermeasers to mitigate and minimize its impact"

Basel II major areas of operational risk ⌘

1. Internal fraud
2. External fraud
3. Employment practices
4. Clients, products and business processes
5. Damage to physical assets
6. Business disruptions and system failures
7. Execution, delivery, and process management

COSO and ERM ⌘

COSO

Committee of Sponsoring Organizations

• In 2004, COSO published update to 1992 risk management framwork, AKA 'Enterprise Risk Management (ERM)

Compliance and Internal Controls

Compliance

acting in accordance with established laws, regulations, protocols, standards and specifications.

Internal Controls

• terms used in finacial reporting
• COSO specified internal controls approach
• SOX section 404

Globalization ⌘

• GDP
• GDP PPP

IFRS vs GAAP ⌘

GAAP

Generally Accepted Accounting Principles

Mostly in the US

IFRS

International Financial Reporting Standard

Harmonization ⌘

• Equivalnce (standards)
  • GAAP, IFRS
• Reciprocity
• Transparency

Basel II ⌘

Aplies to Large Banks

• over 250 billion in consolidated assets or
• 10 billion in foreign exposure

Smaller companies can be "punished" for non compliance by rating agencies

World Bank six categories of governance ⌘

1. Voice and accountability
2. Political stability and absence of violence
3. Government effectiveness
4. Regulatory quality
5. Rule of law
6. Control of corruption

http://en.wikipedia.org/wiki/Worldwide_Governance_Indicators