Governance - Xstrata

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Risk management and internal control General The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board annually reviews the effectiveness of the Group’s risk management and internal control systems which cover all material controls including financial, operational and compliance controls and compliance with Turnbull Guidance. In so doing, the Board relies on reviews undertaken by the Audit Committee (supported by the business unit audit committees). An ongoing process has been established for identifying, evaluating and managing the significant risks faced by the Group. This process has been in place throughout the year under review and up to the date of the approval of the annual report and financial statements. The Audit Committee reviews this process and the effectiveness of the system of internal control by considering the regular reports from management on key risks, mitigating actions and internal controls, management representations and assertions, and the reports on risk management and internal control from internal audit, the external auditors and other assurance providers such as sustainable development management. The principal aim of the risk management and internal control systems is the management of business risks that are significant to the fulfilment of the Group’s strategic objectives, with a view to enhancing the value of the shareholders’ investment and safeguarding of assets. The internal control systems have been designed to manage rather than eliminate the risk of failure to achieve business objectives and provide reasonable but not absolute assurance against material misstatement or loss. The directors confirm that they have reviewed the effectiveness of the risk management and internal control systems. This review excludes associates of the Group as Xstrata management does not have the ability to dictate or modify the internal controls of these entities. Control environment The key elements and procedures that have been established to provide an effective risk management and internal control system are as follows: (i) Organisational structure There is a well-defined organisational structure, with clear operating procedures, lines of responsibility and delegated authority. The way the Group conducts its business, expectations of management and key accountabilities are embodied in the Group’s policies, its Statement of Business Principles and Board level authority limits. The Group operates a decentralised management model. The Board sets overall policy, and appropriate authority to implement that policy is delegated to the Xstrata Alloys, Coal, Copper, Nickel and Zinc businesses and supporting functions. The business units have responsibility for implementing business plans within the budgets approved by the Board in accordance with authorisation levels. The business units are responsible for profitability to the level of earnings before interest and taxation (EBIT). Business unit boards meet regularly and either the Group Chief Executive or Chief Financial Officer attend as representatives of head office. www.xstrata.com | 113 Group policies are established by head office management for application across the whole Group. (ii) Risk identification and evaluation The Board considers effective risk management as essential to the achievement of the Group’s objectives and has implemented a structured and comprehensive system across the Group. The Group Risk Management Policy is published on the Xstrata website at www.xstrata.com/policies. The Xstrata approach to risk management is value-driven and has the stated objective of ensuring ‘an environment where we can confidently grow shareholder value through developing and protecting our people, our assets, our environment and our reputation’. The process is thorough and robust and is an essential element of the Group’s approach to business planning. The head office and each business unit carry out a comprehensive annual risk review and update their risk registers accordingly. Objectives in the business plan are aligned with risks, and a summary of the key risks, related internal controls, accountabilities and further mitigating actions that are planned is appended to the business plan that is reviewed and approved by the Executive Committee and is reviewed by the Board. Progress against plans, significant changes in the business risk profile and actions taken to address controls and mitigate risks are reported at each business unit audit committee and Xstrata plc Audit Committee meeting, as well as to the Executive Committee and the Board, as and when necessary. The output of the process has been reviewed by the Group and business unit audit committees, and accords with the Turnbull Guidance. (iii) Information and financial reporting systems The Group’s comprehensive planning and financial reporting procedures include detailed operational budgets for the year ahead and a plan for the following two years. The Board reviews and approves the resulting three-year budget and plan. Plans and budgets are prepared on the basis of consistent economic assumptions determined by the Group finance function. Performance is monitored and relevant action taken throughout the year through the monthly reporting of key performance indicators, updated forecasts for current and subsequent two years together with information on the key risk areas. Comprehensive monthly management reports for each business unit and on a Group consolidated basis, including updated forecasts for the year, are prepared and presented to the Executive Committee by the Group Controller. Detailed consolidated management accounts, together with an executive summary from the Chief Executive, are circulated monthly to all directors. (iv) Investment appraisal A budgetary process and authorisation levels regulate capital expenditure. For expenditure beyond specified levels, detailed written proposals are submitted to the business unit Chief Executives or executive committee, or to the Group Chief Executive, Executive Committee or Board, in accordance with Board delegated authority limits. Calculations of net present value (NPV), internal rates of Overview Strategy Performance Governance Financials
114 | Governance Corporate Governance report continued return (IRR) and return on capital employed (ROCE), and sustainable development assessments are carried out as part of the process. Procedures are also in place for the early involvement of an independent engineer to review and provide independent assurance on major capital projects. Economic assumptions used reflect the latest forward prices where possible for the short and medium term, and centrally agreed long-term assumptions. Reviews are carried out after the project is complete, and for some projects during the construction period, to monitor progress against plan; major overruns and non-conformance to sustainable development goals are investigated. Commercial, legal, financial and sustainable development due diligence work, using outside consultants, is undertaken in respect of acquisitions as appropriate. (v) Treasury Committee A Treasury Committee operates as a sub-committee of Xstrata (Schweiz) AG Exco. Its membership consists of the Chief Executive, Chief Financial Officer, Group Treasurer and Group Controller. The Committee recommends Group policy, relating to all aspects of funding, management of interest rate and foreign exchange exposures, which is submitted to the Group Board for approval and it co-ordinates relationships with banks, rating agencies and other financial institutions. The Committee monitors all significant treasury activities undertaken by Group companies and ensures compliance with Group policy. (vi) Internal audit Internal audit is an important element of the overall process by which the Executive Committee and the Board seek the assurance they require that risks are properly identified, evaluated, managed and controlled. Risk-based internal audit plans, prepared on an annual basis, are approved by the Audit Committee and timely reports on achievement of the plans and findings are presented to the business unit audit committees. The Group-wide internal audit function is supplemented by outsourced service providers when the required expertise is not available in-house. This is particularly relevant as the Company moves into a phase of higher capital spend with an increased focus on project assurance which has necessitated the establishment of an embedded process of independent engineers working with the internal audit team on major project management reviews. (vii) Bribery/fraud management and whistleblowing There is a formal Group policy on bribery, fraud and corruption, including reporting and investigation arrangements and, in line with best practice, including whistleblowing procedures. There are independently operated confidential hotlines in various countries in which the Group operates, through which employees and contractors or any other parties can report any breach of Xstrata’s Business Principles and Group policies including the Global Policy on Bribery, Fraud and Corruption. The contact details are published in the Statement of Business Principles which are found on www.xstrata.com/sustainability/policies/businessprinciples. A global Code of Conduct was developed in 2010 and is being launched across the Group in March 2011 to provide additional guidance to employees, contractors and associated persons on putting the Business Principles into practice. (viii) Further initiatives The Group is committed to the ongoing review and improvement of its policies, systems and processes. Reports on sustainable development matters and the results emanating from the established assurance programmes are produced and reviewed by the Sustainable Development Committee and by the Executive Committee. The Group also has a control self assessment process in place through which the business units are required to sign off a Letter of Representation covering a wide range of topics at both the half-year and year-end, which are presented to the business unit audit committees. Relations with shareholders Dialogue with shareholders The Board places considerable importance on effective communication with shareholders. The Chief Executive and Chief Financial Officer, assisted by the Executive General Manager of Group Strategy and Corporate Affairs, maintain regular dialogue with and give briefings throughout the year to analysts and institutional investors, and are involved in a structured programme of investor and analyst site visits. Presentations are given by the Chief Executive and Chief Financial Officer after Xstrata’s preliminary announcements of the year-end results, at the half-year and in the event of a major transaction or corporate event. Care is taken to ensure that any price-sensitive information is released to all shareholders, institutional and private, at the same time, in accordance with the FSA’s Disclosure and Transparency Rules and the SIX Swiss Exchange requirements. The Senior Independent Director was available to shareholders to hear any concerns that contact with the Group Chairman, Chief Executive or Chief Financial Officer failed to resolve or for which such contact was inappropriate. All shareholders can obtain access to the annual reports and other current information about Xstrata through its website at www.xstrata.com. The operating and financial reviews on pages 50 to 95 include a detailed report on the business and future developments. Constructive use of the Annual General Meeting All directors normally attend Xstrata’s AGM and shareholders are invited to ask questions during the meeting and to meet directors after the formal proceedings have ended. At the time of the listing in March 2002, shareholders in the former Xstrata AG were informed that the Company would offer shareholders the opportunity to attend general meetings in Switzerland where the head office resides, even though the Company was incorporated and has its registered office in England. Given this history and the number of shares still held in or through Switzerland, the Board continues to consider it is appropriate for the AGM to be held in Zug, Switzerland. A live and archived webcast of the AGM is also provided via Xstrata’s website. The Board uses the AGM to communicate with institutional and private investors and welcomes their participation. At the AGM on 5 May 2010, the Chairman and the Chairmen of the Audit, Remuneration, Nominations and Health, Safety, Environment and Community Committees were present to answer questions. Details of the resolutions to be proposed
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Governance - Xstrata

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