BP 2012 Annual Report Download - page 150

Corporate governance
BP Annual Report and Form 20-F 2012
148
Internal Control Revised Guidance
for Directors (Turnbull)
In discharging its responsibility for the company’s risk management and
internal control systems under the UK Corporate Governance Code, the
board, through its governance principles, requires the group chief
executive to operate with a comprehensive system of controls and
internal audit to identify and manage the risks that are material to BP. The
governance principles are reviewed periodically by the board and are
consistent with the requirements of the UK Corporate Governance Code
including principle C.2 (risk management and internal control).
The board has an established process by which the effectiveness of the
system of internal control (which includes the risk management system) is
reviewed as required by provision C.2.1 of the UK Corporate Governance
Code. This process enables the board and its committees to consider the
system of internal control being operated for managing significant risks,
including strategic, safety and operational and compliance and control
risks, throughout the year. Material joint ventures and associates have not
been dealt with as part of the group in this process.
As part of this process, the board and the audit, Gulf of Mexico and
safety, ethics and environment assurance committees requested,
received and reviewed reports from executive management, including
management of the business segments, divisions and functions, at their
regular meetings.
In considering the systems, the board noted that such systems are
designed to manage, rather than eliminate, the risk of failure to achieve
business objectives and can only provide reasonable, and not absolute,
assurance against material misstatement or loss.
During the year, the board through its committees regularly reviewed with
executive management processes whereby risks are identified, evaluated
and managed. These processes were in place for the year under review,
remain current at the date of this report and accord with the guidance on
the UK Corporate Governance Code provided by the Financial Reporting
Council. In December 2012, the board considered the group’s significant
risks within the context of the annual plan presented by the group chief
executive.
A joint meeting of the audit and safety, ethics and environment assurance
committees in January 2013 reviewed a report from the general auditor as
part of the board’s annual review of the risk management and internal
control systems. The report described the annual summary of internal
audit’s consideration of elements of BP’s system of internal control over
significant risks arising in the categories of strategic, safety and
operational and compliance and control and considered the control
environment for the group. The report also highlighted the results of audit
work conducted during the year and the remedial actions taken by
management in response to significant failings and weaknesses
identified.
During the year, these committees engaged with management, the
general auditor and other monitoring and assurance providers (such as the
group ethics and compliance officer, head of safety and operational risk
and the external auditor) on a regular basis to monitor the management of
risks. Significant incidents that occurred and management’s response to
them were considered by the appropriate committee and reported to the
board.
In the board’s view, the information it received was sufficient to enable it
to review the effectiveness of the company’s system of internal control in
accordance with the Internal Control Revised Guidance for Directors
(Turnbull).
Subject to determining any additional appropriate actions arising from
items still in process, the board is satisfied that, where significant failings
or weaknesses in internal controls were identified during the year,
appropriate remedial actions were taken or are being taken.
Corporate governance practices
In the US, BP ADSs are listed on the New York Stock Exchange (NYSE).
The significant differences between BP’s corporate governance practices
as a UK company and those required by NYSE listing standards for US
companies are listed as follows:
Independence
BP has adopted a robust set of board governance principles, which reflect
the UK Corporate Governance Code and its principles-based approach to
corporate governance. As such, the way in which BP makes
determinations of directors’ independence differs from the NYSE rules.
BP’s board governance principles require that all non-executive directors
be determined by the board to be ‘independent in character and
judgement and free from any business or other relationship which could
materially interfere with the exercise of their judgement’. The BP board
has determined that, in its judgement, all of the non-executive directors
are independent. In doing so, however, the board did not explicitly take
into consideration the independence requirements outlined in the NYSE’s
listing standards.
Committees
BP has a number of board committees that are broadly comparable in
purpose and composition to those required by NYSE rules for domestic
US companies. For instance, BP has a chairman’s (rather than executive)
committee, nomination (rather than nominating/corporate governance)
committee and remuneration (rather than compensation) committee. BP
also has an audit committee, which NYSE rules require for both US
companies and foreign private issuers. These committees are composed
solely of non-executive directors whom the board has determined to be
independent, in the manner described above.
The BP board governance principles prescribe the composition, main
tasks and requirements of each of the committees (see the board
committee reports on pages 120-126). BP has not, therefore, adopted
separate charters for each committee.
Under US securities law and the listing standards of the NYSE, BP is
required to have an audit committee that satisfies the requirements of
Rule 10A-3 under the Exchange Act and Section 303A.06 of the NYSE
Listed Company Manual. BP’s audit committee complies with these
requirements. The BP audit committee does not have direct responsibility
for the appointment, reappointment or removal of the independent
auditors – instead, it follows the UK Companies Act 2006 by making
recommendations to the board on these matters for it to put forward for
shareholder approval at the AGM.
One of the NYSE’s additional requirements for the audit committee states
that at least one member of the audit committee is to have ‘accounting or
related financial management expertise’. The board determined that
Brendan Nelson possessed such expertise and also possesses the
financial and audit committee experiences set forth in both the UK
Corporate Governance Code and SEC rules (see Audit committee report
on pages 120-122). Brendan Nelson is the audit committee financial
expert as defined in Item 16A of Form 20-F.
Shareholder approval of equity compensation plans
The NYSE rules for US companies require that shareholders must be
given the opportunity to vote on all equity-compensation plans and
material revisions to those plans. BP complies with UK requirements that
are similar to the NYSE rules. The board, however, does not explicitly take
into consideration the NYSE’s detailed definition of what are considered
‘material revisions’.
Code of ethics
The NYSE rules require that US companies adopt and disclose a code of
business conduct and ethics for directors, officers and employees. BP has
adopted a code of conduct, which applies to all employees, and has board
governance principles that address the conduct of directors. In addition
BP has adopted a code of ethics for senior financial officers as required by
the SEC. BP considers that these codes and policies address the matters
specified in the NYSE rules for US companies.