Who Should You Trust? Ben Arnold, BHP Billiton & Alistair Purt, PwC Who should you trust? Introductions Ben has over 15 years’ risk and governance experience Alistair has over 16 years’ risk and internal audit experience in the Resources Industry. in the Oil & Gas Industry. Ben is the Superintendent of Standards, Risk and Alistair is a Director of Risk Assurance at PwC. He has held Change for BHP Billiton. He has held management and management and supervisory positions at BG Group (FTSE supervisory positions at KBR (Global EPC contractor) 20 Upstream Oil and Gas), KBR (Global EPC contractor) and and the Office of Auditor General. Centrica (FTSE 100 Utilities). Qualifications Qualifications • Fellow of the Governance Institute (FGIA) • Associated Chartered Accountant (ACA) • Certified Internal Auditor (CIA) • Fellow of The ICAEW • Chartered Accountant (CA) • BA / MA Oxford University • Certified Risk Management Assurance (CRMA) • Certified Fraud Examiner (CFE) • Bachelor of Commerce (BComm)
Trust…? Trust is an integral Contractors element of all business relationships. JV partners Suppliers Transparency Like it or not, third Confidence Margin & cashflow parties hold the key Reputation to your reputation Performance and success. Outsource Agents So who do you need Alliances Distributors to trust and why? Warning Signs The news is littered with examples of broken promises: contaminated food chains, poor labour hire practices, oil spills, the illegal dumping of toxic waste, human rights violations and over billing. Every broken promise represents a fractured relationship and the possibility of a trust irreparably damaged . It’s at such moments that competitors can press their advantage. • Safety incidents / events • High TRIF (recordable injuries) • Significant audit findings • Missed KPIs • Disrupted service Perform formanc ance • Poor Third Party governance • High people turnover • Poor culture / tone at the top • Reduced capacity & capability • Data leaks Inform ormat ation ion • Bad press • Regulatory breach
TSKJ Case Study Background • TSKJ was a joint venture formed by the U.S.’s M.W. Kellogg Co. (later became KBR), France’s Technip, Japan’s JGC, and Italy’s Snamprogetti. • The joint venture company won four contracts worth more than US$6 billion between 1995 and 2004 to design and build liquefied natural gas facilities on Bonny Island, Nigeria. None of the participants had a majority stake in the joint venture. • TSKJ reportedly used agents to bribe Nigerian government officials. • The DOJ and U.S. Securities and Exchange Commission (SEC) declared that each joint venture partner had culpable knowledge because senior executives from each company, including some who were serving on the TSKJ steering committee, participated in meetings in which the bribery was discussed. Implications / Consequences • Together, the four multinational corporations and the Japanese trading company paid a combined US$1.7 billion in civil and criminal sanctions for the decade-long bribery scheme. These include: Snamprogetti and its parent company ENI = US$365 million o Technip = $338 million o Consortium leader KBR and its former parent Halliburton paid US$579 million. o • Nonfinancial impacts in this case included reputational damage and criminal charges against current and past joint venture parent employees. • In addition, KBR’s FCPA violations impacted successor liability after Halliburton acquired KBR in 1998. These were based on book and record violations and Halliburton’s lack of post -acquisition vigilance. On the financial side, the FCPA and U.K. Bribery Act investigations also affected share price & capitalization. Deepwater Horizon Case Study Background • The Deepwater Horizon oil spill in the Gulf of Mexico began on 20 April 2010 when a failure of the cement barrier in the production casing led to a blowout. • The subsequent investigation by the US Government’s Bureau of Ocean Energy Management (BOEMRE) and the US Coastguard found that “loss of life at the Macondo site on April 20, 2010, and the subsequent pollution of the Gulf of Mexico through the summer of 2010 were the result of poor risk management, last ‐ minute changes to plans, failure to observe and respond to critical indicators, inadequate well control response, and insufficient emergency response training. ” • It also found that, in some cases, BP’s contractors, who are jointly and severally liable for non-compliance, had violated a number of federal regulations. Implications / Consequences • As a consequence of the Deepwater Horizon blowout, 11 lives were lost. • At least 6 BP employees have been charged with criminal offences relating to the incident. • As of February 2013, criminal and civil settlements and payments to a trust fund had cost the company $42.2 bn 1 . The cost to Transocean (BP’s main contractor) is expected to be in the region of US$ 1.5 bn 2 . 1. “Report Regarding the Causes of the April 20 2010 Macondo Well Blowout”, The Bureau of Ocean Energy Management Regulation and Enforcement (BOEMRE). 2. “Transocean to Pay $1.4 Billion to Settle Oil Spill Claims”, Bloomberg 4 January 2013.
Horse Meat Scandal Case Study Background • The 2013 horse meat scandal was a scandal in Europe; foods advertised as containing beef were found to contain undeclared or improperly declared horse meat – as much as 100% of the meat content in some cases. • A smaller number of products also contained other undeclared meats, such as pork. • The issue came to light on 15 January 2013, when it was reported that horse DNA had been discovered in frozen beefburgers sold in several Irish and British supermarkets. Implications / Consequences • Tesco’s reputation was hit particularly badly - $500m share price drop. • There were complex supply chains in place – one involved 8 separate vendors and traders across 5 European countries. • The supermarkets lacked visibility across the supply chain and did not have suitable controls to verify the end product. • A UK House of Commons Report found “The evidence suggests a complex network of companies trading in and mislabelling beef or beef products which is fraudulent and illegal ”. Trust Framework 4. Improve 1. Plan Identification and action Determine which third of issues identified, both parties you need and how for individual third parties these should be structured and for your overarching to derive maximum management framework. benefit to your organisation. 2. Execute 3. Monitor The reporting and End to end management of assurance mechanisms third parties to ensure you used to monitor the are collaboratively working success of third party towards the achievement of shared objectives. arrangements.
Plan With a vast range of ‘partnership’ structures and operations across a number of industries, your implementation of an effective governance process can be challenging. Effective risk management within your trust relationships will depend on the nature of the relationship including level of influence, ownership / management control and your partners’ appetite for control monitoring and risk management. Questions for Consideration Leading Practices • Do you need to engage a third party or does your organisation already have capabilities to Clear vision and strategy for service perform the service in-house? delivery requirements • Have you performed appropriate due diligence Design a consistent third party prior to third party engagement? governance structure • Have you prioritised and ranked your trust Development of risk stratification relationships according to risk? model • Have you selected the right third party relationship (e.g. alliance, joint venture, Thorough due diligence procedures contract)? (including cultural alignment) • Will the third party effectively represent your Risk based standard contract organisation and align with your culture? template structure Execute Following the planning phase, it is vital to enable end to end management of third parties. This will help ensure you are collaboratively working towards the achievement of shared objectives. Questions for Consideration Leading Practices • Are performance metrics established and monitored? Risk based execution model • Do you have strategies and technology to obtain the necessary data for control information and Technology and work-flow support monitoring needs? Training of key personnel • Do you have clear stakeholder and role (including anti-trust requirements) definition for all aspects of the contract lifecycle? Defined process for contract changes and dispute resolution • Do all relevant personnel have the correct knowledge, skills and experience? Performance is based on KPIs that • Will the provision of information between link to agreed objectives partners align with anti-trust requirements?
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