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| Sembcorp is fully committed to its robust system of internal controls and risk management. |
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The Group manages risk under an overall strategy
determined by the Board of Directors, supported
by the Board Risk Committee and the Internal
Audit department. Formed in August 2003 to assist
the Board of Directors, the Board Risk Committee,
comprising four directors, reviews and enhances the
effectiveness of the Group's risk management plans,
systems, processes and procedures. The Board Risk
Committee also reviews the Group-wide risk policies,
guidelines and limits as well as the risk exposure and
risk treatment plans.
The Group has established an Enterprise Risk
Management Framework to standardise the risk
management methodologies within the Group. In line
with Sembcorp's commitment to deliver sustainable
value to its shareholders, the objective of the Enterprise
Risk Management Framework is to provide guidance
to the operating units in implementing a comprehensive
and consistent approach to identifying and managing
the risks that they face. The Enterprise Risk Management
Framework applies to the action of all employees
of the Group and is implemented at each operating
unit. Within this framework, critical and major risks
of the Group and the operating units are identified
and assessed to determine the appropriate type of risk
treatment plans to be implemented and which are to
be monitored at the Group level as well as by each
strategic business unit (SBU).
The Enterprise Risk Management Framework sets
out a systematic and ongoing process for identifying,
evaluating, controlling and reporting risk, comprising
the following key elements:
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Identification and assessment of all risks. |
| • |
Formulation of risk management strategies. |
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Design and implementation of risk management and mitigation action plans. |
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Monitoring and reporting of risk management performance and risk exposure levels. |
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Continuous improvement of risk management and mitigation action plans and capabilities. |
These processes are put in place to manage and monitor the Group risk management activities on a regular and timely basis.
Since 2003, a systematic approach has been in
place for Sembcorp Industries and its subsidiaries and
associated companies, to ensure financial discipline
across the Group. We have set up a self-check, review
and certification process called the System of Financial
Discipline for all subsidiaries to confirm their commitment
to and compliance with a prudent financial discipline
framework. The process provides for management at
various levels in the SBUs to systematically review and
ensure compliance with the requirements of new
accounting standards and the treatment of transactions
and to ensure that acceptable accounting policies
are followed. It allows early identification in areas of
potential exposure that can be addressed to minimise
adverse impact to the Group as well as ensure the
adequacy of provisions made in the accounts.
SBUs' operating and finance heads are required
to review, report and ensure adequate provisioning
for project losses, asset impairment, significant long
outstanding debtors, significant inter-company
balances, contingent liabilities, fraud incidents and any transactions and/or events with material impact
or potential material impact on the SBU's financial
results. These financial impacts, if any, are reported on
a quarterly basis to Sembcorp Industries and accounted
for in the interim accounts of the respective SBU.
SBUs are also required to complete the review and
certification of financial discipline for revenue recognition,
cost recognition, profit or loss recognition, liabilities
recognition, assets recognition, consolidation and
internal controls.
Since 2005, Sembcorp Industries has had a whistle-blowing
policy and procedures, which provide employees
with well-defined and accessible channels within the
Group through which they may, in confidence, raise
concerns about possible improprieties in matters of
business activities, financial reporting or other matters
to the Audit Committee. This arrangement facilitates
independent investigation of such matters for
appropriate resolution.
The Sembcorp Group also has a Group Internal Audit
department, which focuses on providing an independent
resource and perspective to both the Board and the
Audit Committee on the processes and controls that
help to mitigate major risks.
The Group has identified the following types of risks:
| a. |
Financial risk |
| b. |
Operational risk |
| c. |
Investment risk |
| d. |
Compliance and legal risk |
| e. |
Interested person transaction risk |
| f. |
Human resource risk |
The Group's activities expose it to a variety of
financial risks, including changes in interest rates,
foreign exchange rates and commodity prices as well
as credit risk.
As part of Sembcorp's Enterprise Risk Management
Framework, the Group's treasury policies and financial
authority limits are documented, reviewed periodically
and communicated to the Group's entities. The policies
set out the parameters for management of Group
liquidity, counterparty risk, foreign exchange and
other transactions and financing.
The Group utilises various financial instruments to
manage exposures to interest rate, foreign exchange
and commodity price risks arising from operational,
financing and investment activities. The commodities
involved basically include fuel oil, coal and natural gas.
Transactions such as foreign exchange forwards, interest
rate swaps, commodities swaps, purchase of options
and contracts for differences are used, as appropriate,
to manage these risks. It is the Group's overall Treasury
Policy that transactions for speculative purposes are
strictly not allowed. Transactions are allowed only for
hedging purposes based on the underlying business
and operating requirements. Exposures to foreign
currency risks are also hedged naturally where possible.
The financial authority limits seek to limit and
mitigate operational risk by setting out the threshold
of approvals required for the entry into contractual
obligations and investments.
Interest rate risk
The Sembcorp Group's policy is to maintain an
efficient and optimal interest cost structure using a mix
of fixed and variable rate debts and long-term and
short-term borrowings. The Group enters into interest
rate swaps to minimise its interest rate risk. A minimum
of 50% of the Group's loan portfolio having fixed
interest rates is targeted for the Group.
Foreign exchange risk
The Group operates globally and is exposed to
foreign currency exchange rate movements, primarily
for the US dollar, British pound, euro, Australian dollar
and Chinese yuan. Such risks are either hedged by
forward foreign exchange contracts in respect of actual
or forecasted net currency exposures or hedged naturally
by a sale or purchase of a matching asset or liability of the same currency and amount. No speculative foreign
exchange transactions are allowed.
Commodity risk
The Group hedges against fluctuations in commodity
prices that affect revenue and cost. Exposures are
managed via swaps, purchase of options, contracts for
differences and fixed price and forward contracts.
Contracts for differences are entered into with
appropriate counterparties to hedge against adverse
price movements on the sale of electricity. Exposure
to price fluctuations arising on the purchase of fuel is
managed via fuel oil swaps, where the price of fuel is
indexed to a benchmark fuel price index, for example
Singapore High Sulphur Fuel Oil (HSFO) 180-CST.
For precious metal commodities, such as gold,
exposures to fluctuations in price are hedged through the
use of forward contracts or purchase of options that
fix the purchases at an agreed price. The quantum of
commitment is based on actual or forecasted requirements.
Credit risk
The Sembcorp Group monitors its exposure to
credit risk arising from sales to trade customers on
an ongoing basis, and credit evaluations are done on
customers who require credit.
The Group only deals with pre-approved non-trade
customers and financial institutions with a good
credit rating and imposes a cap on the amount to be
transacted with any of these counterparties so as to
reduce its concentration risk. To minimise the Group's
counterparty risk, the Group enters into transactions
only with creditworthy institutions.
At balance sheet date, there were no significant
concentrations of credit risk. The maximum exposure
to credit risk is the carrying amount of each financial
asset, including derivative financial instruments, in the
balance sheet.
Working capital management
The Sembcorp Group manages its working capital
requirements with the view to balance the cost of
funding and an optimal level of liquidity appropriate to
the operating environment and expected cash flow of
the Group. Working capital requirements are maintained
within the credit facilities established and are adequate
and available to the Group to meet its obligations.
Operational risk, which is inherent in all business
activities, is the risk of potential financial loss and/or
business instability arising from failures in internal controls,
operational processes or the systems that support them.
It is recognised that operational risk can never be
entirely eliminated and that the cost of minimising it
may outweigh the potential benefits. Accordingly, the
Group manages operational risk by focusing on risk
management and incident management. The Group
has also put in place operating manuals, standard
operating procedures, delegation of authority guidelines
and a regular reporting framework, which encompasses
operational and financial reporting. The framework
provides for management at various levels in the SBUs
to systematically review and ensure compliance with the
requirements of new accounting standards and the
treatment of transactions and ensures that acceptable
accounting policies are followed. It allows early
identification in areas of potential exposure, which can
be addressed to minimise adverse impact to the Group
as well as ensuring the adequacy of provisions made in
the accounts. To reinforce the implementation of the
Group's risk strategy by the operating units, independent
checks on risk issues are undertaken by the Internal
Audit function. Where appropriate, this is supported
by risk transfer mechanisms such as insurance.
Insurance
It is not practicable to insure every insurable risk
event to the fullest extent as the insurance market
may lack the capacity, both as to breadth and extent
of coverage, and in some cases external insurance is
simply unavailable or is not available at an economic
price. The Group regularly reviews both the type and
amount of insurance coverage that it buys, bearing in
mind the availability of such cover, its price and the
likelihood and magnitude of the risks involved.
During the year, the Group arranged a global
insurance programme for property damage, business
interruption and public liability for its operations
in Singapore and the UK under the advice of Marsh
(Singapore) and maintained insurance levels deemed
appropriate in the light of the cost of cover and risk
profiles of the businesses.
The Group has also established a wholly-owned
captive insurance subsidiary, Sembcorp Captive Insurance
(Captive), which is advised and managed by Marsh
Management Services. Captive essentially participates
in the property damage and business interruption
portion of the Group's global insurance programme as a
reinsurer, retaining a maximum exposure of S$2.5 million
for each and every loss with an annual maximum
of S$5 million in aggregate in excess of the existing
retentions of the business entities within the Group.
The Sembcorp Group's capital investment decision
process is guided by investment parameters instituted
on a Group-wide basis. All investments are subject to
rigorous scrutiny to ensure that they are in line with the
Group's strategic business focus, meeting the relevant
hurdle rates of return, and all other relevant risk
factors, such as operating currency and liquidity risks.
In addition, the Board requires that each major
investment proposal submitted to the Board for decision
is accompanied by a comprehensive risk assessment
and Management's proposed mitigation strategies.
The Group's operations are subject to regulation
and future changes in regulation that may adversely
affect results, particularly in the areas of corporate law,
competition law, taxation policy, consumer protection
and environmental law. The responsibility of compliance
with applicable laws and regulations lies with the
respective operating business heads, and oversight of
the discharge of their responsibilities is provided by
Sembcorp's Group Legal Department.
Legal risk is the risk that the business activities of
the Group may have unintended or unexpected legal
consequences. This includes risks arising from:
| • |
Actual or potential violation of laws or regulations (which may attract a civil or criminal fine or penalty). |
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Inadequate documentation, legal or regulatory incapacity, insufficient authority of a counterparty and uncertainty about the validity or enforceability of a contract in a counterparty insolvency. |
| • |
Failure to protect the Group's property (including its interests in its premises and its intellectual property, such as the Sembcorp Industries' logo and other related logos, brand names and products). |
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The possibility of civil claims (including acts or other events that may lead to litigation or other disputes). |
The Group identifies and manages legal risk through effective use of its internal and external legal advisers. Sembcorp's internal legal department assists in identifying, monitoring and providing the support necessary to identify and manage legal risks across the Group.
In respect of transactions entered into by the
Group, its subsidiaries and associated companies
that are "entities at risk" with its Interested Persons
(namely its controlling shareholders, Chief Executive
Officer, Directors and their respective associates), the
Group is guided by and complies with the provisions
of Chapter 9 of the Singapore Exchange Securities
Trading Limited's Listing Manual, to ensure that such
interested person transactions (IPTs) are entered into
on an arm's length basis and on normal commercial
terms, which are generally no more favourable than
those extended to unrelated third parties.
The Group has internal control procedures to ensure
that transactions carried out with interested persons
comply with the provisions of Chapter 9 and Sembcorp
Industries' Shareholders' Mandate. This Mandate is
renewed on an annual basis and will be updated at
the extraordinary general meeting to be convened on
April 25, 2008. These internal control procedures are
intended to ensure that IPTs are conducted at arm's
length and on normal commercial terms that are not
prejudicial to the interests of minority shareholders.
The Sembcorp Group maintains a register of all IPTs, recording the basis on which they are entered
into, including quotations obtained to support
such basis. The Group's annual internal audit plan
incorporates a review of all IPTs for the relevant
financial year.
The Audit Committee periodically reviews Group
Internal Audit's IPT Reports to ascertain that the
guidelines and procedures on IPTs have been complied
with. The review includes the examination of the nature
of the IPTs and relevant supporting documents or other
such information deemed necessary by the Audit
Committee. If a member of the Audit Committee has an
interest in an IPT, he or she abstains from participating
in the review and approval process of that IPT.
In order to develop, support and market the
products and services offered by the Sembcorp Group
and to grow our businesses internationally, it is
necessary to hire and retain skilled and professional
employees with the relevant expertise. The
implementation of the Group's strategic business plans
could be undermined by failure to recruit or retain
competent key personnel, the unexpected loss of
such key senior employees or failure in the Company's
succession planning.
In this respect, the Sembcorp Group places great
emphasis on establishing comprehensive human
resource policies for the recruitment, compensation
and development of staff. This ensures that the
Group's human assets, its skilled workforce and
competent senior management, are nurtured
and retained, so that the Group's competitive
edge is preserved. The Board Executive Resource
& Compensation Committee has oversight of
the Group's remuneration policies and oversees
management, development and succession plans for
key Management positions. Further details on the
Executive Resource & Compensation Committee as
well as Sembcorp's human resources management
may be found in the Corporate Governance and Human Resources & Employee Welfare sections. |
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