BP Annual Report and Form 20-F 2011 - Company Reporting

Corporate governanceBoard oversightOccurs periodically at board levelResults in allocation andoversight over group risksExecutive and functional oversightOccurs periodically atexecutive and function levelsResults in governanceover group risksBusiness risk managementOccurs periodically atbusiness and function levelsResults in risk reportsDay to day risk managementOccurs atoperations and functionsResults in risk dataRisk management in BP is a ‘top-down’ and ‘bottom-up’ process. The‘bottom-up’ process starts at the day-to-day level with businesses andfunctions identifying and managing their risks using existing companystandards and practices, e.g. OMS. The most significant risks are organizedinto common categories – strategic risks, safety and operational risks andcompliance and controls risks – so they can be reported up the line in astandardized form.During the year a review of BP’s risk management system wasinitiated which has built on our current system of risk management. Usingthe findings of this review, BP has started to implement enhancementsto drive consistency and clarity in how risks are reported and understoodin all levels of our organization from operations to the board. SeeOur management of risk on page 42 for further discussion of the riskmanagement system and 2011 review.Within BP’s risk management system, functions set standards,provide guidance and provide a view of group risks in their functional areaof expertise, independent of line management. Certain functions alsodeliver assurance that the activities to manage the risks are working asintended in the businesses.Group risks are allocated to one of the committees establishedby the group chief executive for management and monitoring.These executive level committees are sub-committees of our seniormanagement team and their role includes setting policy, making decisionsand overseeing the management of risks and performance. The executivecommittees are:• Group operations risk committee (GORC) for risks of a safety,environment or operations nature.• Group financial risk committee (GFRC) for finance and trading risks.• Group disclosure committee (GDC) for financial reporting risks.• Group people committee (GPC) for people risks.• Resource commitments meeting (RCM) for risks related to investmentdecisions.At the group level, risk is examined by the board to apply a ‘top-down’perspective. The group risks identified as requiring particular oversight inthe coming year are selected for discussion with the board. These are thenallocated for review by the board or one of its committees. A commonagenda for the review is established to enable the board or committee todiscuss risk in a consistent manner with executive management.The board examines group risks both on a periodic basis and as partof its review of the annual plan. The board also conducts an annual reviewof the risk management and internal control systems as required by the UKCorporate Governance Code. During the year there is flexibility to changewhich risks have been identified as requiring particular oversight and whichhave been allocated to the board and its committees, in the event there areany changes to the internal or external environments or events arising.Following its review of the 2012 annual plan, the risks describedabove have been allocated for review by the board and its committees asfollows:• The board has been allocated several strategic and safety and operationalgroup risks, including risks associated with the macroeconomic outlook,the delivery of the 10-point plan, the group’s exposure to Russia, crisismanagement, reputational impact and the recruitment and developmentof staff.• The audit committee has been allocated a number of compliance andcontrol and safety and operational risks, including risks associated withtreasury and trading activities, compliance with applicable laws andregulations and security threats against our digital infrastructure.• The safety, ethics and environment assurance committee has beenallocated several safety and operational and strategic risks, includingrisks associated with conducting our operations through joint venturesor associates and through contracting and sub-contracting arrangementswhere BP may not have full operational control. Other safety andoperational risks the committee have been allocated include the health,safety and environmental risks of incidents associated with the drilling ofwells, operation of facilities and transportation of hydrocarbons.• The Gulf of Mexico committee has been allocated a number of strategicrisks, including risks associated with the extent and timing of costs andliabilities relating to the incident and the possible impact on our licenceto operate.Board activities during 20112011 was another active year for the board, which met 15 times. Theboard’s focus remained on the incident in the Gulf of Mexico – both tounderstand what happened and how the company can apply the lessonslearned. Within the board and its committees, debate and assurancehas been ongoing with management on key aspects such as the impacton the group’s reputation, accounting treatment and provisioning,implementation of the recommendations of the Bly Report and the legaland communication strategy for litigation arising from the incident. Thechallenge has remained for the board to ensure that it devoted enoughtime to the ongoing business of the company whilst holding theseimportant discussions. Periodic meetings throughout the year of the nonexecutivedirectors comprising the chairman’s committee, together withliaison between the chairman and the chairs of the board committees,have assisted in managing this challenge. Areas discussed by the boardincluded the following:StrategyThe board is engaged at the early stages of discussion on strategy and theannual plan in order to provide constructive challenge. During the year twoday-long meetings were held for strategic discussions. After the February2011 update to the market the board continued to develop the company’sstrategy with respect to milestones and deliverables, resulting in a furthermarket update in October on the company’s ”10-point-plan”. Over theyear, the board considered key strategic elements, including biofuels,Canadian heavy oil and the company’s disposal programme. The board alsospent considerable time discussing strategic opportunities and implicationsof the strategic alliance that had been proposed with Rosneft and the newrelationship with Reliance.Corporate governanceBP Annual Report and Form 20-F 2011 123