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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 Board Risk Committee,
which now comprises three directors, reviews
and enhances the effectiveness of the Group’s
risk management plans, systems, processes and
procedures. The Board Risk Committee regularly
reviews group-wide risk policies, guidelines and
limits as well as significant risk exposures in foreign
exchange, commodities, major investment projects
and their risk mitigation 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:
• Identification and assessment of all risks
• Formulation of risk management strategies
• Design and implementation of risk management
and mitigation action plans
• Monitoring and reporting of risk management
performance and risk
exposure levels; and
• Continuous improvement of risk management
and mitigation action plans
and capabilities
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 reviews
of the System of Financial Discipline to ensure its
relevance, effectiveness and compliance.
The System of Financial Discipline is a
comprehensive self-review exercise by management
at various levels to ensure that transactions are in
compliance with Singapore accounting standards
and that 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 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 Internal Audit department assists the
Audit Committee in promoting a sound system
of internal controls and good corporate governance
across the Group. Our internal auditors perform
periodic audits to assess the effectiveness and
efficiency of the Group’s internal control system
in addressing financial, operational and compliance
risks, as well as its information technology controls
and risk management system using a risk-based
methodology. For more information on the
company’s independent internal audit function,
please refer to the relevant section in the Corporate Governance chapter of this
annual report.
Our risk management efforts are focused on
the following risks:
a.
b.
c.
d.
e.
f.
g.
h.
i.
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Financial and counterparty / credit risk
Operational risk
Investment and commercial risk
Compliance and legal risk
Interested person transaction risk
Human resource risk
Fraud risk
Crisis risk
Information technology risk
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a. Financial and counterparty / credit 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 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 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.
Liquidity risk
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.
Interest rate risk
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.
Foreign exchange risk
The Group operates globally and is exposed to
foreign currency exchange rate movements,
primarily for the US dollar, pound sterling, euro,
Australian dollar, Indian rupee 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.
Commodity risk
The Group endeavours to incorporate pricing
formulae for oil, natural gas and raw material costs
such that these costs may be passed on to and be borne by its customers and, in accordance with its
risk management policy, hedges the residual risks
arising from price fluctuations. The Group hedges
against fluctuations in commodity prices that affect
revenue and cost 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.
Counterparty / credit risk
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 performed 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.
b. Operational risk
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 processes 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.
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.
During the year, the Group also established a
global insurance programme for property damage,
business interruption and public liability for its
water operations in the UK, South Africa and the
Americas, under the advice of established global
insurance broker and risk adviser Willis. This
enables the Group to provide more dedicated
and focused insurance for our portfolio of global
water operations.
c. Investment and commercial risk
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 political risks, market risks, operating risks,
environmental risks and foreign exchange risks.
In 2012, the Group also formalised a Country
Investment Limit framework to provide better clarity
and guidance for country investment decisions
based on prevailing country ratings and the Group’s
strategic intent. 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.
d. Compliance and legal risk
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.
e. Interested person transaction risk
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 25, 2013. 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.
f. Human resource risk
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 people development may
be found in the Corporate Governance and Sustainability sections.
g. Fraud risk
The Group has established the Group Fraud Risk
Management Framework to manage the risks
of fraud and misconduct. In 2011, as part of
its ongoing framework review and continuous
improvement process, the Group has enhanced
its Fraud Risk Management Framework by
updating its strategies and improving its existing
anti-fraud measures to manage the risks of fraud
and misconduct more effectively. In 2012, all major
businesses within the Group have undergone
fraud awareness training as part of the Group’s
Fraud Risk Management Framework. In addition,
all major businesses have put in place fraud
control plans to guide them in fraud management.
The Group Fraud Risk Management Framework,
together with the various anti-fraud initiatives,
will be reviewed on a regular basis.
h. Crisis risk
As the Group grows its presence globally and
expands its operations into overseas markets
and the municipal sector, it becomes increasingly
important for the Group to continuously review its crisis management framework and maintain
a robust and effective framework that is relevant
to the current business environment. This will
enable us to safeguard the company’s image and
reputation as well as prevent or minimise the loss
of assets and disruption to business operations.
In 2012, the Group enhanced its Group Crisis
Management Framework to formulate and update
its strategies with regard to crisis management
and to improve existing crisis management,
communication and emergency response protocols
across the various business entities. The Group
also addresses crisis and emergency events through
the implementation of appropriate prevention,
preparedness, response and recovery programmes.
i. Information technology risk
The Group has maintained an uncompromising
stand on information availability, control and
governance, as well as data security. Over the years,
the Group has adopted a multi-pronged approach
to effectively manage our information risks. Up-to-date
information security policies are implemented
and enforced group-wide. High availability and
resilience are built into all critical information
systems. The corporate information technology (IT)
systems and infrastructures are constantly
monitored to proactively identify and mitigate
risks. IT disaster recovery exercises are carried
out regularly to ensure uptime business recovery
objectives are met. At the staff level, regular
information security awareness programmes are
put in place to educate employees of the prevailing
risks when handling corporate data. Finally, to
ensure effective IT risk management, external
security consultants are engaged annually to
review and enhance our IT risk posture.
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