Corporate Governance A CFO s Perspective

Transcription

1 Corporate Governance A CFO s Perspective Robert McFarlane EVP & Chief Financial Officer June 3,

2 Agenda Introduction Corporate governance crisis Legislative response Impact on TELUS TELUS corporate governance journey SOX 404 debate in US and Canada 2

3 About TELUS Successfully executing national growth strategy focused on data, IP & wireless from position of financial strength Revenues $7.8B EBITDA 1 $3.2B Net income $707M Free cash flow $1.4B Enterprise value $22B (~$15B equity) Listings TSX: (T, T.NV); NYSE: (TU) Daily Trading million shares Operating segments wireless: TELUS Mobility wireline: TELUS Communications 1 Earnings before interest, taxes, depreciation & amortization, after restructuring & workforce reduction costs 2 Recent 6 & 12 month average 3 Strategic Intent: to unleash the power of the Internet to deliver the best solutions to Canadians at home, in the workplace and on the move

4 Corporate governance defined Structures, policies, processes, practices & behaviours to enable: 1. an organizational culture which fosters and promotes ethical conduct; 2. engaged, effective and independent BOD oversight and governance of management on behalf of the shareholders; 3. appropriate corporate BOD and management accountability to stakeholders; 4. strong internal controls over financial reporting; and 5. effective, competent and independent external and internal assurance capabilities. The above serve as checks and balances to the greed, executive entitlement and questionable ethics which came to light in early part of this decade 4

5 Crisis? What Crisis? Circa 2005: Do we really have to incur all of these governance regulations and is it really worth all the cost and effort? Regulation can t ensure good behaviour so why burden the good guys with excessive regulation? Canada is different, so don t impose an American solution to a problem we don t have in Canada. 5

6 Why does corporate governance matter? Accounting irregularities surface Massive fraud uncovered at Enron, Worldcom, Adelphia, etc. Investor confidence severely shaken Prevailing system of accounting and securities regulation exploited for insider fraudulent gain 6

7 Why does corporate governance matter? Not just a US problem Hollinger, Nortel now and infamous past (BreX) Investor flight to safety; telecoms not considered safe 7

8 Alleged governance deficiencies Inadequate BOD oversight / governance Fraud at the top Deficient internal controls over financial reporting Questionable ethical culture (i.e. ends justifying means) Compromised, deficient or non-existent assurance capabilities Enron X X X X X Worldcom X X X X Adelphia X X X Qwest X X X X X X X Nortel X X 8 The governance deficiencies of these highly material corporate failures appear pervasive

9 Telecom value destruction Enterprise Value ($B) June 2000 June Nortel MCI World Com Qwest Global Crossing Adelphia 9 US$459 billion destroyed in just 5 communication companies

10 Telecom meltdown and investor fear of the nation's 29 top telecommunications companies that have not yet filed for bankruptcy are at risk of doing so in coming months. Only a few companies - among them Verizon, Cisco Systems, SBC and BellSouth - are relatively free from the risk of toppling into insolvency... - June 18,

11 11 Media coverage no one wants!

12 12 More media coverage no one wants!

13 13 Legislative response

14 The US Sarbanes-Oxley Act of 2002 (SOX) Sarbanes-Oxley Act (SOX) was signed into law, by President George W. Bush in July 2002 after WorldCom incident in June, 2002 It has been referred to as: the most significant change to corporate governance laws since the 1930s SOX was drafted and signed into law in just under six weeks 14

15 What did the government/regulators do? US responds: Sarbanes-Oxley Act - July 2002 Resulting wave of proposed and final rules from US SEC SOX 302/906, CEO/CFO Certification (302=civil / 906=criminal) Establishment of PCAOB (Public Company Accounting Oversight Board) PCAOB begins to issue proposed and final standards (and continuing FAQs and interpretive guidance) Canada responds: Canada establishes CPAB (Canadian Public Accountability Board) Bill 198 sweeping change to Ontario Securities law Investor confidence rules Proposed rules, regulations and standards 15

16 16 Impact on TELUS

17 TELUS yield spread analysis TELUS C$ & US$ Note Yield Spread Analysis (May July 2002) 30% C$ 7.5% 2006 US$ 7.5% 2007 US$ 8.0% % 20% Moody s downgrade 15% 10% 5% 0% May 2001 July Unprecedented rapid spread widening in mid-2002 after negative regulatory decision & downgrades

18 TELUS debt downgraded Moody s downgrades TELUS debt to Ba1 despite meeting all rating agency commitments made in 2001 when rated BBB(mid) by 4 agencies ratios well within bank covenants bar raised without warning 2 days before release of solid Q results market believed the worst bankruptcy possible, bad results or unreliable numbers 18 Market developed deep suspicion of all telecom results

19 Regaining shareholder confidence Increased public disclosure to best-in-class levels Financial initiatives debt buyback/equity issue Continued operational and financial performance Reduced leverage Enhancing corporate governance ahead of requirements building off a good foundation 19 TELUS pursued disclosure excellence a element of comprehensive response program

20 TELUS yield spread analysis TELUS C$ & US$ Note Yield Spread Analysis (May May 2005) 30% C$ 7.5% 2006 US$ 7.5% 2007 US$ 8.0% % 20% 15% 10% 5% 0% May 2001 July 2002 Current 20 Dramatic spread tightening reflects market s improved view of TELUS credit

21 $140 $120 Relative equity price performance index TELUS $125 $100 $80 $60 MSCI World Telecom Index $69 $40 $20 $0 April 01 July 02 April 04 May Assumes $100 invested from April 30, 2001 to May 31, 2005

22 22 TELUS corporate governance journey

23 Why SOX applies to TELUS? Canadian Company listed on TSX and has a class of shares listed on NYSE Registered with US SEC to sell both debt and equity in US Considered to be a Foreign Private Issuer TELUS publicly supported the need for SOX TELUS publicly supported Canada s proposed equivalents 23

24 How SOX applies to TELUS? Annual Quarterly Comments SOX CEO/CFO (302 and 906) Certify upon filing of 40-F with SEC (2003) Optional, But Not Required Of Foreign Private Issuers who file on the 40-F Management recommended, Audit Committee concurred, TELUS not voluntarily certify quarterly in US (2004) Canadian Rules for CEO/CFO Certification Bare Certificates (2004) - omits references to disclosure and internal controls over financial reporting Q Management recommended, Audit Committee concurred, TELUS certify bare certificates quarterly as allowed under the Canadian Rules (2004) SOX 404 Fiscal year 2006 (On March 2, 2005, SEC announced one year extension for Foreign Private Issuers) TELUS continues with 404 readiness activities in 2005 to prepare for 2006 compliance Proposed Canadian 404 Equivalent Fiscal year is out for comments 24

25 Sarbanes-Oxley matrix (1 of 5) Requirements Effective Date of Requirements Provision # Corporate Responsibility (Intent - Improve Management Accountability for Financial Reporting and Deter Fraud) Civil Certification Criminal Certification Internal Accounting Controls Bans of Personal Loans to Executives Prohibition on Insider Trades During Pension Fund Blackout Periods August 29, 2002 July 30, 2002 Fiscal year 2006 July 30, 2002 January 26, (a) 25

26 Sarbanes-Oxley matrix (2 of 5) Requirements Effective Date of Requirements Provision # Enhanced Financial Disclosures (Intent - Improve Financial Reporting, Transparency & Set Ethical Expectations) Rapid and Current Disclosure of Financial Information Off-Balance Sheet Transactions Pro-Forma Disclosure Code of Ethics Material Correcting Adjustments in Financial Reports Not specified in Act; TBD by Commission rules January 26, 2003 January 26, 2003 January 26, 2003 When Company s auditor becomes registered with the PCAOB (a) 401(b) (a) 26

27 Sarbanes-Oxley matrix (3 of 5) Requirements Effective Date of Requirements Provision # Audit Committees (Intent - Strengthen BOD Oversight and Governance Effectiveness and Improve Independent Assurance) Audit Committees Disclosure of Audit Committee Financial Expert Improper Influence on Conduct of Audits Pre-Approval and Disclosure of Audit and Non-Auditing Services April 26, 2003 January 26, 2003 April 26, 2003 Section 201: When Company s auditor becomes registered with the PCAOB Section 202: Unclear, probably contemporaneous with Section ,

28 Sarbanes-Oxley matrix (4 of 5) Requirements Effective Date of Requirements Provision # Auditors (Intent - Improve Auditor Independence and Objectivity) Audit Reports to Audit Committees Audit Partner Rotation Conflicts of Interests When Company s auditor becomes registered with the PCAOB When Company s auditor becomes registered with the PCAOB When Company s auditor becomes registered with the PCAOB

29 Sarbanes-Oxley matrix (5 of 5) Requirements Effective Date of Requirements Provision # Enhanced Remedies and Miscellaneous (Intent Provide Means for Proactive Reporting of Fraud and Ethical/Accounting Issues) Officer and Director Bars From Serving July 30, Forfeiture of Certain Bonuses and Profits Professional Responsibility Rules for Attorneys Whistleblower protection Document Destruction July 30, 2002 January 26, 2003 July 30, 2002 July 30, 2002 (except provisions regarding retention of auditor work papers which will be effective not later than January 26, 2003) , ,

30 TELUS before SOX solid foundation Separation of the roles of CEO and Board Chair Large majority of unrelated Board Directors In-Camera meetings of the Board and its committees Board committees comprised solely of non-management directors Internal audit department reports jointly to Audit Committee and CFO Audit Committee meetings held at least quarterly Audit Committee meetings include external and internal auditors without management present Established centralized risk management function in fall Good corporate governance base made enhancements easier

31 TELUS responds to SOX (1 of 2) Implemented changes to relocation and stock option practices to comply with SOX prohibition on loans to Directors and Officers (Aug. 2002) Implemented a cascading certification process to enable CEO/CFO certification under SOX 302/906 (Feb for fiscal 2002) Established process to enable Audit Committee preapproval of all audit, audit-related and non-audit services (Q1 2003) 31 TELUS embraced SOX and responded quickly

32 TELUS responds to SOX (2 of 2) Established TELUS Disclosure Policy (Oct. 2003) Implemented process to evaluate members financial expertise and being deemed Audit Committee financial experts (Q1 2003) Established SOX 404 readiness team prior to final rules being issued (first half of 2003) Implemented and continued to enhance annual enterprise risk and control assessment process utilizing COSO 22 internal control framework (2002, 2003, 2004) 32 Approach emphasized company control environments

33 TELUS builds on culture of strong ethics (1 of 2) TELUS Ethics Policy updated annually ( ) expanded to include Board members (Feb. 2003) TELUS annual e.ethics training (and certification) is required of all TELUS Team members process is e.enabled and e.measured TELUS Ethics hotline implemented for whistle blowers and for ethics questions (Jan. 2003) team members encouraged to call with inquiries ask first! Audit Committee receives quarterly reports of ethics inquiries, complaints, breaches and resolutions 33 Tone is effectively set across all levels of organization

34 TELUS builds on culture of strong ethics (2 of 2) Implemented Financial Management Course for operational decision makers across company (Fall 2003) Internally developed course covers: good financial reporting and disclosure expectations, practices and requirements ethics and internal control principles accounting and operational policies SOX requirements basic financial acumen to better understand and manage financial analysis and budgeting 34 By end of 2005 expect over 2,000 employees to voluntarily attend

35 Excellence in corporate governance TELUS has strong corporate governance practices, in our view, described in unusually detailed and specific public disclosure by the company. We are impressed with board and director evaluation procedures; the requirement, and well-defined role, for a non-executive chair; what we believe is vigorous CEO evaluation by the compensation committee and the board; and clear performance metrics in executive compensation. 35 July 2004

36 Excellence in investor communications Ranked 9th globally by Corporate Essentials, Annual Report of Annual Reports 1st in Canada; 2nd in North America 1st in world for strategy, objectives & outlook 10 years of disclosure excellence in corporate reporting awards by Canadian Institute of Chartered Accountants 2003 annual report rated best in Canada IR website ranked 3rd among global telcos by IR Web Report Member of Dow Jones Sustainability Index, only North American telco e.com Report Watch 36

37 37 SOX 404 debate in US and Canada

38 The next step SOX 404 What was it meant to do? reinforce the accountability of management to establish and maintain a strong system of internal control over financial reporting reinforce expectation that auditors can evaluate and opine on these controls as part of their external audit to improve investor confidence US 2004 experience: granular versus risk-based approach / transactional v. company-level approach Benefits obtained but at excessive cost 38 Benefits obtained but at excessive cost

39 Recent SOX 404 clarification SEC and PCAOB on May 16 issued further clarifications: the SEC is trying to address impact on registrants reasonable assurance is goal not absolute assurance use a top-down, risk-based approach to scope down the effort and focus on higher risk processes that have a material impact on financials, with less work and testing on low risk processes PCAOB: directed auditors to same risk based, reasonable assurance approach recommended by SEC 39 Management and auditor interpretations on required process assessment and testing is yet to be seen. How much it will really impact amount of work and drive a SOX SMART approach is still uncertain!

40 SOX 404 at TELUS KERRY Various 404 readiness activities underway for 2 years: 2003 initial scoping and planning prior to issuance of final rules in June SOX 404 action team to prepare for end of 2005 compliance date 2005 SOX 404 team recalibrated to prepare for new year-end 2006 compliance date approach is to de-risk for 2006 by being SOX ready in 2005 use the learnings from the US to avoid the same mistakes and exchange viewpoints with External Audit internal team of 11 created; budget now $5M 40 Approach is to de-risk 2006 by being substantially ready in 2005

41 Praise of SOX 404 I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has. The act importantly reinforced the principle that shareholders own our corporations and that corporate managers should be working on behalf of shareholders. U.S. Federal Reserve Board chairman Alan Greenspan, May , The Globe and Mail We perceive that companies are strengthening their accounting controls and investing in the infrastructure needed to support quality financial reporting. Moody s Investors Service, April

42 Criticism of SOX I have the impression that we have reached the stage where [the corporate governance] process can sometimes take precedence over common sense. Paul Desmarais Jr., Power Corp. of Canada chairman May 11, 2005, The Globe and Mail this "tick the box" type of regulation will have the perverse effect of causing external auditors and boards of directors to become excessively reliant on process and less on the exercise of common sense and good judgment Dominic D'Alessandro, Manulife Financial Corp. CEO May 10, 2005, The National Post 42

43 43 My perspective for CFOs on SOX 404 Embrace the necessity for change Complaining about governance implementation costs or problems is not fulfilling CFO leadership role Rather effective leadership entails: becoming an advocate for championing the value of successfully completing internal control certification using the regulatory requirement as a catalyst for improving disclosure as well as operational effectiveness & efficiency Driving an ROI on the compliance investment with a SOX Smart approach Clarify auditor specifications upfront Adequate internal expertise critical

44 My perspective for CFOs on ethics CFOs must accept their critical responsibility to ensure an ethical and well controlled workplace Ethical behaviour can t be legislated or assured but can be promoted Tangible initiatives can promote ethical behaviour: mandatory course requirement in business schools train employees via ethics policy Promote ask first, act later mentality implement appropriate decision making and control processes 44 Poor ethics at top will create problems regardless of measures taken

45 My perspective on to Cdn Regulators (1 of 2) TELUS Comment Letter Highlights: TELUS is generally supportive of need for Canada recommendation closely parallels Section 404, North American standard is advisable 45 However, guidance and learning from the SOX 404 experience can avoid inefficiencies To improve cost effectiveness, TELUS feels more reliance should be placed on company level controls, higher risk areas and a focus on an ethical environment Regulation required that promotes ethical environment that starts with effective internal control at the top

46 My perspective on to Cdn Regulators (2 of 2) Base application and testing on risk and not a quantitative-only approach Ensure Venture Exchange companies report on overall corporate governance, ethics guidelines and financial reporting oversight Clearly define management 46 CEO, CFO or those performing similar functions Make the standard equitable to US (COSO), Canadian (CoCo) and England / Wales (Turnbull) Require disclosure, action plans to deal with any limitations Shift back Canadian dates by one year other than for SEC foreign private issuers

47 Summary Crisis is real and is not US only Embrace need for comprehensive governance change Ethics at the top are critical TELUS advocates a top down SOX smart approach = proactive, balanced risk-based approach No single checklist can provide good governance New guidance is taking us in the right direction in Canada and needs our leadership With appropriate executive leadership, the governance challenge the capital market has faced in recent years can be effectively met in a manner that adds shareholder value 47

48 48 questions?