Describe the links between corporate governance risk management and internal control

Home > Risk > What is the relationship between Governance, ERM, and Internal Control?

I have a number of files available for download from my Profile and one is this diagram: https://www.box.net/shared/me48udpnxi. I worked on it with Professor Andrew Chambers.

I admit to being influenced by the South African King Code III of corporate governance. I see governance as broadly covering how the organization is directed and managed, and that includes the consideration and management of risk (ERM). Controls are used to ensure risk responses are as they should be. The second page shows the various types of risk, and how they act across governance, risk, and controls.

Some risk practitioners believe that ERM includes Governance. I am not in that number, because I believe that setting strategies, optimizing performance, and providing related oversight are in Governance and not in ERM. Some aspects of Governance can be considered part of ERM, but not all.

There are certain aspects of Governance that could be considered part of a system of internal control. COSO talks about the Control Environment later, which includes the operation of the board and internal audit. To the extent that they are required to ensure stuff happens the way it should (my lay definition of internal control), that’s OK.

So, everything inter-relates and the borders on the Venn diagram are fuzzy rather than precise. Nevertheless, I think this captures the broad sense of the relationship.

Agree? Comments?

The establishment of an effective corporate governance and internal control system is essential for sustainable growth and long-term improvements in corporate value, and accordingly the Company works to strengthen such structures.

Corporate Governance

A mechanism of corporate governance that enables management to make prompt and sound management decisions under appropriate and effective supervision is indispensable to the BIPROGY Group’s continuous growth and increase in medium-to-long-term corporate value. The Company shall create, maintain, and ceaselessly improve this mechanism.

Furthermore, BIPROGY believes that a company’s raison d’etre lies in its ability to contribute to society. Based on this belief, the Company stipulates as part of its corporate philosophy, “Listen sincerely to our stakeholders to improve our corporate value” in order to create relationships of trust with all stakeholders, and shall proceed with its business activities in accordance with this principle.

Corporate Governance Structure

BIPROGY has determined that an audit system that includes supervision by the Board of Directors that includes outside directors and auditing by outside auditors is effective for monitoring management, and thus has adopted an Audit & Supervisory Board structure.

Given the decision-making speed required in light of the changing market environment, the Company aims to make decisions that combine a broader perspective with objectivity and transparency as well as to ensure the effectiveness of supervisory functions related to the execution of duties. It will accomplish this by utilizing internal directors who are well-versed in the state of the Company and its industry and appointing persons with extensive business experience and expertise as outside directors.

Corporate Governance Structure (As of June 28, 2021)

• Nomination and Remuneration Committee

  An advisory committee to the Board of Directors that deliberates and reports on matters pertaining to personnel and remuneration of our executives. Two of the four committee members are independent outside directors, and one of them serves as chairperson. The attendance of the independent outside director and the agreement of all members, including the independent outside director, are required when making resolutions.

• Executive Council

  The Executive Council is a decision-making body for deciding important matters of business execution. Members include corporate officers who concurrently serve as directors, and meetings are held weekly, in principle.

• Various Other Committees

  Deliberate on Individual Management Issues Related to Directors’ Execution of Duties from a Practical Point of View

  • R&D/Investment Committee

    Deliberates on the advisability of plans for businesses, products and services based on the Group’s priority areas, and decides whether to invest in such plans. Also evaluates actual results versus forecasts for such plans and requests a review as necessary.

  • Project Review Committee

    Determines the business risks and appropriate countermeasures for important development and service businesses, and decides whether to implement such countermeasures. Also evaluates actual results versus forecasts for such projects and requests a review as necessary.

  • Information System Investment Committee

    Deliberates on the advisability of cost, effectiveness, applied technologies and other matters for the Group’s own system development and operation and decides whether to invest in such systems. Also evaluates actual results versus forecasts for such plans and requests a review as necessary.

  • Sustainability Committee

    Formulates measures and policies on achieving group SDGs, determines the appropriateness of overall business activities from an ESG perspective, comprehensively determines action promotion and evaluations, and requests a review as necessary.

  • Environmental Contribution Committee

    Manages and monitors investigations of environmental contribution-related policies as well as the design and implementation of mechanisms to promote environmental contributions.

  • Social Committee

    Considers policies on social fields, designs mechanisms to promote a response to challenges in "social" area and supervises the status of implementation, as well as instructs to correct the issues of concern, etc.

  • Compliance Committee

    Oversees compliance programs such as Group compliance education and internal reporting.

  • Risk Management Committee/Business Continuity Project

    Handles various risks that exert a material impact on Group management and ensures business continuity.

  • Information Security Committee

    Formulates strategies for overall Group security and personal information protection, and considers and promotes various measures based on those strategies.

  • Life Science Research Ethics Committee

    Examines the validity of research on people within the Company reviewed by an independent organization from an ethical and scientific perspective, and requests a review as necessary.

Size and Diversity of the Board of Directors and the Audit & Supervisory Board

• The Company maintains an appropriate number of members that can effectively and efficiently exercise the functions of the Board of Directors.

• The Company has appointed nine directors with diverse and extensive careers and knowledge, including 4 independent outside directors (two of whom are women), accounting for more than one-third of the board.

• The Audit & Supervisory Board is composed of a majority of independent outside auditors, including two female outside auditors, one of whom is a lawyer.

• The attendance rate of outside directors at Board of Directors meetings was 100%(in FY2020).
  The attendance rate of outside Audit & Supervisory Board members at Board of Directors and Audit & Supervisory Board meetings was 100% (in FY2020).
  (the Board of Directors met 12 times and the Audit & Supervisory Board met 16 times in FY2020).

*BIPROGY has five directors and four Audit & Supervisory Board members from outside the Company. From FY2017, one director and one Audit & Supervisory Board member who serve concurrently as officers of a principal shareholder are no longer designated as outside officers, although they meet the legal requirements for outside officers, due to not meeting the Company’s independent criteria.

Evaluation of Effectiveness of the Board of Directors

To continuously improve corporate value, BIPROGY considers it important for the Board of Directors to enhance governance by fully deploying its functions. Every year since FY2016, the Company has analyzed and evaluated the effectiveness of the Board of Directors in the previous fiscal year and worked to improve its functionality.

In FY2020, the Company set and implemented actions for items pointed out in the FY2019 evaluation of the effectiveness of the Board of Directors, including overhauling executives remuneration system, increasing outside directors, discussing lively at the Nomination and Remuneration Committee and securing time for sharing information and discussing about key business management issues.

In FY2021, the Company has begun initiatives that include providing information to outside officers more sufficiently and speedily, discussing lively about themes related to the essential challenges of the Company in light of maximizing the monitoring function of the Board of Directors and strengthening the independence of the Nomination and Remuneration Committee.

• Evaluation Results (summary)

  With regard to the evaluation items, all received positive evaluations generally. Also, we confirmed that lively discussions were held from a variety of viewpoints and that improvements have been made year by year through the effectiveness evaluation. On the other hand, the following items were needed to be further considered.

  1. It is necessary to make further detailed follow-up reports for agendas submitted at the board as well as to ensure sufficient time for deliberations by providing information beforehand, in order to enable more lively discussions at the board meetings.

  2. In order to implement a management policy, it is critical to develop practical growth strategies and put them into practical methods, familiarize all our officers and employees with them, and appropriately develop human resources. The board needs to discuss on and monitor progress situations of these items.

• Actions taken in the Fiscal Year 2020 and evaluation results of them

  1. Drastically revise the remuneration system so that executives’ remuneration functions as a healthy incentive for sustainable growth of the group.
     The board of directors reviewed the remuneration system for executives. The board increased the proportion of business performance-based bonuses. Furthermore, the board decided to newly grant the Restricted Stock Remuneration that is linked to medium-to long-term business performance including ESG initiatives, in addition to bonus linked to a short-term performance.

  2. Increase the number of outside directors by nominating candidates pursuant to the selection criteria and procedures for outside directors.
     The board increased independent outside directors by selecting candidates pursuant to the selection criteria and procedures for outside directors. The board will continue to nominate suitable candidates and consider further increase in independent outside directors in the future in light of the Company’s growth strategies.

  3. Reconfirm roles and operation of the Nomination and Remuneration Committee, help the committee deepen deliberations and have the committee report on the contents of the deliberations to the board of directors timely and sufficiently.
     Contents of discussions at the Nomination and Remuneration Committee were reported on to by outside directors and shared timely and precisely with the board. The board will continue to review the structure of the committee in order to improve the transparency of the committee and enable lively discussions and detailed reports.

  4. Secure time for sharing information and discussing with outside directors/auditors in order to deepen their understandings about key business management issues such as mid- to long-term directions and strategies for our Group.
     The board of directors made progress, as exemplified by discussions on management policies and management strategies at and outside of the board meetings．The board will continue to make sincere discussions on medium- to long-term critical management issues in the future.

• Actions for the Fiscal Year 2021

  We will implement the actions below in the fiscal year 2021 in order to strengthen further the governance system of the Company on the basis of the evaluation results above.

  1. Endeavor to enhance provision of information on trends in industries and markets as well as technologies and innovations, and provide information about agenda for the board meetings more speedily, in order to help outside directors and auditors deepen their understandings of our Group.

  2. Enable lively and active discussions on themes related to the essential challenges of the Company such as growth strategies, sustainability, and culture reforms stipulated in the Vision 2030 and the Management Policy (2021-2023), in light of maximizing the monitoring function of the board.

  3. Form a majority of the Nomination and Remuneration Committee with outside directors in order to strengthen the independence of the committee.

The Company regards a succession plan for its senior management including the CEO as another priority item for ensuring transparent candidate selection and planned development of management. To ensure the transparency of the selection process, the Nomination and Remuneration Committee, which includes an independent outside director, deliberates and reports to the Board of Directors.

In this plan, integrity is the basis of the seven core competencies listed in the table below that have been set as important qualifications required of CEOs including foresight and insight. The Committee believes that the degree to which each requirement is displayed may vary depending on the business environment (periods of change or continuity/ growth). The seven core competencies consist of the following three categories on the basis of integrity.

• Our Ability to Create New Value

  Foresight refers to the ability to foresee the future of our Group, promote a vision with great aspirations and make a commitment to the future. Insight refers to the ability to understand global trends and changes, identify Japanese and worldwide economic swings, and perceive essential value in everything. Determination refers to the ability to decide on a direction with unwavering conviction despite unpredictable conditions and with an awareness of the risks involved.

• Our Ability to Improve

  Innovation refers to the power to improve, leaving precedent and custom behind to ambitiously carve out a new path undeterred by difficulties. Passion refers to the ability to gain the cooperation, trust and encouragement from those around you while passionately engaging in all endeavors and communicating extensively. This also refers to such attributes as a high sensitivity toward information and receiving capabilities, as well as the ability to convey objectives in the direction of realizing dreams, goals to be achieved, and solving problems.

• Staying Power

  Execution refers to the ability to steadfastly stay the course to achieve results by setting lofty goals companies should strive for and displaying leadership. Diversity & Inclusion refers to the ability to interact with wide array of people whether inside or outside the Company, recognizing the values of people with various standpoints without stereotyping and pigeonholing them. This also refers to the ability to build proactive relationships based on an understanding of ideas from various corporate and cultural perspectives.

Furthermore, In FY2018, the Company launched the Management Leader Program for managers to enhance the pool of candidates for senior management, including the CEO. The program includes sessions with experts from inside and outside the Company, evaluations with reference to the seven competencies, and challenging assignments.

Remuneration of Directors and Audit & Supervisory Board Members

Remuneration for executive directors consists of: (a) fixed remuneration(monthly remuneration), (b) bonus linked to a short-term performance, and (c) restricted stock remuneration linked to medium- to long-term performance. The ratio of (a):(b):(c) is set at 4:4:2.

The above ratio assumes that 100% of the short-term performance profit target is achieved in the final year of the evaluation period for (c) stock remuneration and 100% of each condition of stock remuneration is achieved.
Non-executive directors, such as outside directors, are paid a fixed monthly salary only, without taking business performance into account.

The Company has established the Nomination and Remuneration Committee as an advisory committee to the Board of Directors. The Committee is composed of four directors including two independent outside directors.

The Nomination and Remuneration Committee is delegated to decide contents of remunerations for each director in order to reflect objective and fair opinions outside of the Company.

Total Remuneration in FY2020 for Directors and Audit & Supervisory Board Members with Subtotals for Each Type of Remuneration and Numbers of Recipients

*1. One non-executive director is not eligible to receive stock options or bonuses.
*2. Outside directors and Audit & Supervisory Board members are not eligible to receive stock options or bonuses.
Note1. Figures shown in millions of yen have been rounded down to the nearest million.
Note2. The amount of remuneration shown above includes the amount paid to two directors and one Audit & Supervisory Board member who retired at the conclusion of the 76th Ordinary General Meeting of Shareholders held on June 25, 2020.

Initiatives to Enhance Corporate Governance

In order to express its basic stance, the BIPROGY Group ceaselessly improves on initiatives for enhancing corporate governance as a mechanism for implementing transparent, fair, prompt, and decisive decision making.

Internal Control System

Our Group has strived to establish, operate, and continuously improve its internal control system as follows in order to achieve the aims of internal control: improving the effectiveness and efficiency of business, ensuring the reliability of financial reports, compliance with laws and regulations on business activities, and preservation of Company assets.

Improving the Effectiveness and Efficiency of Business

The Group has established a mid-term management plan and specific management targets, and it strives to develop systems that will improve operational effectiveness and efficiency.

Ensuring the Reliability of Financial Reports

The Company's management and employees have conducted themselves in compliance with the basic policy for appropriate financial reporting established by the Group set forth for ensuring the reliability of financial reporting.

Compliance with Laws and Regulations on Business Activities

In recognition of compliance as one of the most critical issues to the execution of business operation, the Group has established the BIPROGY Group Charter of Corporate Behavior, the Group Compliance Basic Regulations, and the BIPROGY Group Code of Conduct, based on which all of the Group's employees act ethically in compliance with laws and regulations, social norms, and in-house regulations.

Preservation of company Assets (Risk Management)

The Group is faced with various kinds of risk in connection with its operating business activities. The Company has developed a common risk classification system for the Group to share and centralize the management of risks throughout the entire Group. Furthermore, it has developed preventive measures and countermeasures against the occurrence of risk events in order to safeguard its assets.

Accordingly, the Company has established a Risk Management Committee and Business Continuity Project chaired by the chief risk management officer (CRMO) to unify, lead, and manage risk management across the entire Group.

What is the link between risk management and corporate governance?

How is governance process related to risk management and internal control?

What is the relationship between internal control and corporate governance?

Why are internal controls and risk management important in corporate governance?