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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 three 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 the Sembcorp
Industries 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 in
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 management 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. The Group conducts periodic review of
the System of Financial Discipline to ensure its
relevance, effectiveness and compliance.
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’s financial results.
On a quarterly basis, business units’ operating
and finance heads are required to certify and report
the results of their self-review exercise to the Group.
This process serves to facilitate and ensure
consistency of accounting treatments adopted by
business units 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 business
units’ operating and finance heads to highlight any
transactions and / or events with material or potential
material financial impact to the Group.
Since 2005, Sembcorp has had a whistle-blowing
policy and procedure which provides 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 policy is subject to
review on a regular basis.
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 |
| g. |
Fraud 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 entering 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 for the operating
environment and expected cash flow of the Group.
Working capital requirements, which are maintained
within the credit facilities established, 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, and targets
to have a minimum of 50% of its loan portfolio in
fixed rate debts.
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
foreign exchange forward 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 from 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 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 Group
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 in terms of the breadth
and extent of coverage, and in some cases external
insurance is simply unavailable or 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 view 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 as a reinsurer in the
property damage and business interruption portion
of the Group’s global insurance programme.
Sembcorp Captive Insurance retains 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’s 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. This is 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 not
any 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 24, 2012. 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 sections.
In 2011, the Group established the Group Fraud
Risk Management Framework to formulate the
Group’s strategies and improve its existing antifraud
measures to manage the risks of fraud and
misconduct effectively. The framework was approved
by the Risk Committee and is in various stages of
implementation within the Group. |
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