corporate governance a cfo’s perspective - about us -...

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Corporate Governance A CFO’s Perspective

Robert McFarlane EVP & Chief Financial Officer

June 3, 2005

http://fei.globalrecognition.com/applications/globalweb_fei_core_store_v1_5/store/index.asp

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IntroductionCorporate governance crisisLegislative responseImpact on TELUSTELUS corporate governance journeySOX 404 debate in US and Canada

Agenda

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About TELUSSuccessfully executing national growth strategy focused on data,IP & wireless from position of financial strength

1 Earnings before interest, taxes, depreciation & amortization, after restructuring & workforce reduction costs2 Recent 6 & 12 month average

Revenues $7.8BEBITDA1 $3.2BNet income $707MFree cash flow $1.4BEnterprise value $22B (~$15B equity)Listings TSX: (T, T.NV); NYSE: (TU)Daily Trading2 1.5 million sharesOperating segments wireless: TELUS Mobility

wireline: TELUS Communications

Strategic Intent: to unleash the power of the Internet to deliver the best solutions to Canadians at home, in the workplace and onthe move

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Structures, policies, processes, practices & behaviours toenable: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; and5. effective, competent and independent external and internal

assurance capabilities.

The above serve as checks and balances to the greed, executiveentitlement and questionable ethics which came to light in earlypart of this decade

Corporate governance defined

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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.

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

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

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Alleged governance deficienciesInadequate 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

X

X

X

Worldcom X X X X

Adelphia X X X

Qwest X X X X

Nortel X X

The governance deficiencies of these highly material corporate failures appear pervasive

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Telecom value destruction

Enterprise Value ($B)206

151

99

3117

6 930

0 0

Nortel MCI WorldCom

Qwest GlobalCrossing

Adelphia

June 2000 June 2002

US$459 billion destroyed in just 5 communication companies

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“. . . 24 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, 2002

Telecom meltdown and investor fear

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Media coverage no one wants!

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More media coverage no one wants!

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Legislative response

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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

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US responds:Sarbanes-Oxley Act - July 2002Resulting wave of proposed and final rules from US SECSOX 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 lawInvestor confidence rulesProposed rules, regulations and standards

What did the government/regulators do?

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Impact on TELUS

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TELUS yield spread analysis

May 2001 July 2002

TELUS C$ & US$ Note Yield Spread Analysis(May 2001 - July 2002)

0%

5%

10%

15%

20%

25%

30%C$ 7.5% 2006 US$ 7.5% 2007 US$ 8.0% 2011

Moody’s downgrade

Unprecedented rapid spread widening in mid-2002 after negative regulatory decision & downgrades

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Moody’s downgrades TELUS debt to Ba1despite meeting all rating agency commitments made in 2001 when rated BBB(mid) by 4 agenciesratios well within bank covenantsbar raised without warning 2 days before release of solid Q2 2002 results market believed the worst – bankruptcy possible, bad results or unreliable numbers

TELUS debt downgraded

Market developed deep suspicion of all telecom results

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Increased public disclosure to best-in-class levelsFinancial initiatives – debt buyback/equity issueContinued operational and financial performanceReduced leverageEnhancing corporate governance ahead of requirements

building off a good foundation

Regaining shareholder confidence

TELUS pursued disclosure excellence a element of comprehensive response program

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TELUS C$ & US$ Note Yield Spread Analysis(May 2001 - May 2005)

0%

5%

10%

15%

20%

25%

30%C$ 7.5% 2006 US$ 7.5% 2007 US$ 8.0% 2011

May 2001 July 2002 Current

TELUS yield spread analysis

Dramatic spread tightening reflects market’s improved view of TELUS credit

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$0

$20

$40

$60

$80

$100

$120

$140

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Relative equity price performance index

$125

MSCI World Telecom Index

$69

TELUS

Assumes $100 invested from April 30, 2001 to May 31, 2005

April 01 July 02 April 04 May 05

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TELUS corporate governance journey

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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

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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)

Management recommended, Audit Committee concurred, TELUS certify bare certificates quarterly as allowed under the Canadian Rules (2004)

TELUS continues with 404 readiness activities in 2005 to prepare for 2006 compliance

52-111 is out for comments

Canadian Rules for CEO/CFO Certification

“Bare” Certificates (2004) - omits references to disclosure and internal controls over financial reporting

Q1 2004

SOX 404

Proposed Canadian404 Equivalent

Fiscal year 2006(On March 2, 2005, SEC announced one year extension for Foreign Private Issuers)

Fiscal year 2006

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Sarbanes-Oxley matrix (1 of 5)

Requirements Effective Date of

RequirementsProvision #

Corporate Responsibility (Intent - Improve Management Accountability for Financial Reporting and Deter Fraud)

Civil Certification

Criminal Certification

Bans of Personal Loans to Executives

Internal Accounting Controls

Prohibition on Insider Trades During Pension Fund Blackout Periods

August 29, 2002

July 30, 2002

Fiscal year 2006

July 30, 2002

January 26, 2003

302

404

906

402

306(a)

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“Material Correcting Adjustments” in Financial Reports

“Rapid and Current”Disclosure of Financial Information

Off-Balance Sheet Transactions

Code of Ethics

Pro-Forma Disclosure

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

401(a)

Enhanced Financial Disclosures

(Intent - Improve Financial Reporting, Transparency & Set Ethical Expectations)

409

401(b)

401(a)

406

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Audit Committees

Disclosure of Audit Committee Financial Expert

Pre-Approval and Disclosure of Audit and Non-Auditing Services

Improper Influence on Conduct of Audits

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 201

301

303

407

202, 201

Audit Committees (Intent - Strengthen BOD Oversight and Governance Effectiveness and Improve Independent Assurance)

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Audit Reports to Audit Committees

Audit Partner Rotation

Conflicts of Interests



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206

203

Auditors (Intent - Improve Auditor Independence and Objectivity)


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Whistleblower protection

Professional Responsibility Rules for Attorneys

Document Destruction

Officer and Director Bars From Serving

Forfeiture of Certain Bonuses and Profits

July 30, 2002

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)

802, 1102

Enhanced Remedies and Miscellaneous

(Intent – Provide Means for Proactive Reporting of Fraud and Ethical/Accounting Issues)

1105

307

304

1107, 806

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Separation of the roles of CEO and Board Chair Large majority of unrelated Board DirectorsIn-Camera meetings of the Board and its committeesBoard committees comprised solely of non-management directorsInternal audit department reports jointly to Audit Committee and CFOAudit Committee meetings held at least quarterlyAudit Committee meetings include external and internal auditors without management presentEstablished centralized risk management function in fall 2000

TELUS before SOX – solid foundation

Good corporate governance base made enhancements easier

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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. 2003 for fiscal 2002)

Established process to enable Audit Committee pre-approval of all audit, audit-related and non-audit services (Q1 2003)

TELUS responds to SOX (1 of 2)

TELUS embraced SOX and responded quickly

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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)

TELUS responds to SOX (2 of 2)

Approach emphasized company control environments

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TELUS Ethics Policy updated annually (2002 – 2004)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

TELUS builds on culture of strong ethics (1 of 2)

Tone is effectively set across all levels of organization

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Implemented Financial Management Course for operational decision makers across company (Fall 2003) Internally developed course covers:

good financial reporting and disclosure expectations, practices and requirementsethics and internal control principles accounting and operational policies SOX requirementsbasic financial acumen to better understand and manage financial analysis and budgeting

TELUS builds on culture of strong ethics (2 of 2)

By end of 2005 expect over 2,000 employees to voluntarily attend

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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.”

July 2004

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e.ComReport Watch

Excellence in investor communicationsRanked 9th globally by Corporate Essentials, “Annual Report of Annual Reports”

1st in Canada; 2nd in North America1st 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 CanadaIR website ranked 3rd among global telcos by IR Web Report

Member of Dow Jones Sustainability Index, only North American telco

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SOX 404 debate in US and Canada

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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 auditto improve investor confidence

US 2004 experience:

granular versus risk-based approach / transactional v. company-level approachBenefits obtained but at excessive cost

The next step – SOX 404

Benefits obtained but at excessive cost

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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

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!

Recent SOX 404 clarification

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SOX 404 at TELUS

Approach is to de-risk 2006 by being substantially ready in 2005

KERRY

Various 404 readiness activities underway for 2 years:2003 – initial scoping and planning prior to issuance of final rules in

June 2003

2004 – 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

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“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 16 2005, 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 2005

Praise of SOX 404

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“I have the impression that we have reached the stagewhere [the corporate governance] process can sometimestake precedence over common sense.”

Paul Desmarais Jr., Power Corp. of Canada chairmanMay 11, 2005, The Globe and Mail

“…this "tick the box" type of regulation will have theperverse effect of causing external auditors and boards ofdirectors to become excessively reliant on process – andless on the exercise of common sense and goodjudgment”

Dominic D'Alessandro, Manulife Financial Corp. CEOMay 10, 2005, The National Post

Criticism of SOX

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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 certificationusing the regulatory requirement as a catalyst for improving disclosure as well as operational effectiveness & efficiencyDriving an ROI on the compliance investment with a “SOX Smart” approach Clarify auditor specifications upfront Adequate internal expertise critical

My perspective for CFOs on SOX 404

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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

My perspective for CFOs on ethics

Poor ethics at top will create problems regardless of measures taken

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52-111 TELUS Comment Letter Highlights:

TELUS is generally supportive of need for 52-111

Canada recommendation closely parallels Section 404, North American standard is advisable

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

My perspective on 52-111 to Cdn Regulators (1 of 2)

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Base 52-111 application and testing on risk and not a quantitative-only approachEnsure Venture Exchange companies report on overall corporate governance, ethics guidelines and financial reporting oversightClearly define “management”

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 limitationsShift back Canadian dates by one year other than for SEC foreign private issuers

My perspective on 52-111 to Cdn Regulators (2 of 2)

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Crisis is real and is not “US only”Embrace need for comprehensive governance changeEthics at the top are criticalTELUS advocates a top down “SOX smart” approach = proactive, balanced risk-based approachNo single checklist can provide good governanceNew 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

Summary

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questions?

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