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The Group manages risk under an overall strategy
determined by the board of directors, supported by
the board-level Risk Committee and Audit Committee.
Formed in August 2003 to assist the board of directors,
the Risk Committee, which now comprises four
directors, reviews and enhances the effectiveness of
the Group’s risk management plans, systems, processes
and procedures. The Risk Committee also reviews
Group-wide risk policies, guidelines and limits as well
as significant risk exposure and their risk treatment
plans. Since April 2005, the Sembcorp Marine Risk
Committee has assumed responsibility for oversight
of the Marine business’ risk management activities
and practices.
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 actions 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 operating unit.
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 |
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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; and |
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Continuous improvement of risk management and mitigation action plans and capabilities |
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These processes are put in place to manage and
monitor the Group’s risk management activities on
a regular and timely basis.
To ensure financial discipline across the Group, we
have implemented a self-check, review and certification
process since 2003 called the ’System of Financial
Discipline’ for all subsidiaries, joint ventures and associates,
to confirm their commitment to and compliance with
a prudent financial discipline framework.
At the business unit level, the process involves a
comprehensive self-review exercise by management
at various levels to ensure that transactions are
in compliance with the accounting standards and
acceptable accounting policies and that the internal
controls in place are adequate. The System of Financial
Discipline also sets out a structured approach to
identifying and facilitating the continued assessment
of key risk areas with financial implications, such as
provisioning for project losses, asset impairment,
significant long outstanding debts, fraud incidents
and any transactions and events with material impact
or potential material impact on the business unit (BU)’s
financial results.
On a quarterly basis, BUs’ operating and finance
heads are required to certify and report the results
of their self-review exercise to Sembcorp Industries.
This process serves to facilitate oversight over
accounting treatments adopted by BUs and allows
early identification of areas of potential exposure that
can be addressed to minimise adverse impact to the
Group. The reporting also serves as a periodic platform
for all BUs’ operating and finance heads to highlight
any transactions and / or events with material or
potential material financial impact to the Group.
Since 2005, Sembcorp Industries has had a
whistle-blowing policy and procedure 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 Group also has a Group Internal Audit
department, which assists the Audit Committee to
ensure the maintenance of a sound system of internal
controls for the company. Our internal auditors
perform this function by monitoring key controls
and procedures and ensuring their effectiveness,
undertaking investigations as directed by the Audit
Committee and conducting a programme of internal
audits. For more information on the company’s
independent internal audit function, please click here.
Our risk management efforts are focused on the following risks:
| a. |
Financial and counterparty / credit 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 liquidity risk, interest rate
risk, foreign exchange risk, commodity risk and
counterparty / credit risk.
To manage these risks, the Group’s Treasury
Policies and Financial Authority Limits are reviewed
periodically and communicated to the Group’s entities.
The policies set out the parameters for management of
the Group’s liquidity, counterparty, foreign exchange
and other transactions risk exposures.
The Group utilises approved financial instruments
to manage exposure 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. Under the Group’s
overall Treasury Policies, transactions for speculative
purposes are strictly not allowed. Transactions are
allowed only for hedging purposes based on the
underlying business and operating requirements.
Exposure to foreign currency risks is 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.
The Group manages its working capital
requirements with a view to balancing the risk of
non-availability of funding, 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.
The 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. The Group’s target
is for a minimum of 50% of its loan portfolio to have
fixed interest rate.
The Group operates globally and is exposed to
foreign currency exchange rate movements, primarily
for the US dollar, pound sterling, euro, Australian
dollar and renminbi. Such risks are either hedged
by forward foreign exchange contracts in respect of
actual or forecasted net currency exposure or hedged
naturally by a sale or purchase of a matching asset or
liability of the same currency and amount. The Group
does not engage in any form of proprietary trading.
The Group hedges against fluctuations in
commodity prices that affect revenue and cost. Exposure is managed via swaps, purchase of options,
contracts for differences 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
the 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.
The Group monitors its exposure to credit risk
arising from sales to trade customers and default risks
from suppliers and contractors on an ongoing basis.
Credit evaluations are done on these counterparties
from time to time. The Group generally deals with
pre-approved customers, suppliers, contractors and
financial institutions with good credit rating. On a
case by case basis, the Group will require additional
securities when dealing with counterparties of lower
credit standing.
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. This allows for early identification
of areas of potential exposure which can be addressed
to minimise adverse impact to the Group. Independent
checks on the operating units’ internal controls and
risk management process are undertaken by the Internal Audit department to ensure their effectiveness
and adequacy. Where appropriate, this is supported
by risk transfer mechanisms such as 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 economical
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 renewed its global
insurance programme for property damage, business
interruption and public liability for its Utilities
operations in Singapore and the UK under the advice
of established global insurance broker and risk adviser
Marsh (Singapore) and maintained insurance levels
deemed appropriate in the light of the cost of cover
and risk profiles of the businesses.
The Group’s wholly-owned captive insurance
subsidiary, Sembcorp Captive Insurance, which is
advised and managed by Marsh Management Services,
also 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 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, meet the relevant
hurdle rates of return and take into account all other
relevant risk factors, such as market risks, operating
risks, environmental risks and foreign exchange
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, 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 the Group’s 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) |
| • |
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 Sembcorp Industries’ logo and other related logos, brand names and products); and |
| • |
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 interested persons (namely
its controlling shareholders, Group President & CEO,
directors and their respective associates), the Group is
guided by and complies with the provisions of Chapter
9 of the SGX-ST 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 21, 2011. 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 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 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 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’s
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 on Sembcorp’s human resource management
may be found in the Corporate Governance and Sustainability of this
annual report. |
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