BP 2013 Annual Report Download - page 114

BP Annual Report and Form 20-F 2013110
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, although the board has
reviewed the exposure the group has to risk within joint arrangements.
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, corporate activities 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 2013, 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 2014 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 the design and operation of elements of BP’s
system of internal control over significant risks arising in the categories of
strategic and commercial, 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 page 74). 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, re-appointment 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 page 74). Mr Nelson is the audit committee financial expert as defined
in Item 16A of Form 20-F.