Governance

The study analyzed governance of several major corporations against OECD governance principles (www.oecd.org/daf/corporateaffairs/principles/text). The study found overarching issues centered on improved risk management, remuneration, transparency, stakeholder engagement and board responsibility. The report pointed out challenges and weaknesses with corporate governance programs, including a more in depth discussion on risk and risk management and controls - subjects I feel are relevant to many types of organizations within the cotton industry. Some of those challenges are highlighted below.

Report highlights:

Board practices: Ensuring independence and competence of board of director members can be challenging. It should be board policy to identify the best skill set of the board and its members. The roles and responsibilities of various board members should be clearly stated and understood and each member's remuneration should be linked to specific performance objectives.

Remuneration and incentive systems: The link between compensation and performance is often very weak. This is in part due to managers having too much influence over the terms of performance-based remuneration without adequate transparency and independent judgment by the board or others.

Shareholder rights: Stakeholders could do more to ensure corporate governance is optimized in the company they have invested. Shareholder resolutions tend to be reactive rather than proactive, the latter of which could encourage a more collaborative response. The rate of shareholder voting is very low in most corporations. There may be ways a corporation can inspire more voting or provide other options on how shareholders can engage with the corporation on governance and other important matters.

Risk management: The study cites failure of risk management systems was one of the greatest shocks from the financial crisis. In many cases boards were ignorant of the risks their company faced. It notes that effective implementation of risk management requires an enterprise-wide (and, I suspect, possibly industry-wide) approach. Risks should not be assessed on the basis of individual raw materials or business units and a risk management system should consist of the following five components:

1.     A control environment: this is needed as a foundation for effective internal controls

2.     Risk identification: one must have a system to identify risks

3.     Control activities: controls can be preventive or detective

4.     Information and communication: these elements connect all internal controls together

5.     Monitoring: ensure that risk management tools and controls are understood and used properly by all necessary levels of the company

Routine risk assessments should be conducted and disclosed in a transparent and understandable fashion. Identified risks should be assessed in terms of the enterprise's appetite for risk as well as its risk management systems - no enterprise should be taking on risks beyond their means or that they don't have a manner in which to respond.

Other aspects of a risk management program should include:

• Aligning business strategies with risks to ensure proper  risk management in the business context.
• Clearly articulated definitions of risks.
• Responses to risks should incorporate input from key departments and stakeholders (e.g. regulators, guardians, customers).

Risk management, in particular, will be increasingly important to all members of the cotton industry as climate change, trade sanctions and other factors threaten the consistent supply of cotton needed to meet increasing demands. All industry members -from brands to spinners - should be aware of their risks and then develop systems to manage them.

Question

Is there value in having industry associations help individual actors understand the need to identify and manage their risks in an effort to reduce overall risk to the industry?