PricewaterhouseCoopers Page 1 Three Talks in One* Building Public Trust ValueReporting Enterprise Risk Management Energy Insurance Mutual Risk Managers Meeting Dr. Robert G. Eccles President, Advisory Capital Partners Senior Fellow, PricewaterhouseCoopers *connectedthinking 

PricewaterhouseCoopers Page 2 Building Public Trust

PricewaterhouseCoopers Page 3 Issues for Your Consideration  The crisis in accounting (Building Public Trust)  Pressure for greater transparency (The ValueReporting Revolution)  A new approach to risk management (Enterprise Risk Management)  Will provide a quick overview of each  Will provide supporting material for each topic

PricewaterhouseCoopers Page 4 The Crisis in Accounting  Wave of accounting scandals (and failed governance) in the U.S. several years ago  Now seeing something similar in Europe (e.g., Adecco, Ahold, Parmalat)  U.S. response was Sarbanes-Oxley -Litigation was rushed in a very political environment -Has added significant compliance costs -Assumes the existing financial reporting model  Focus on earnings and the Earnings Game  Regulatory filings rather than information used by management  Higher penalties on executives for malfeasance  Much tighter regulation of the accounting profession  Need to step back and take a broader view

PricewaterhouseCoopers Page 5 True Capital Market Reform Can Happen  Six key actions for restoring public trust and investor confidence: 1. Create principles-based global accounting standards 2. Develop additional industry-based performance information 3. Improve external reporting beyond regulatory requirements 4. Use the Internet to enhance performance reporting and analysis 5. Perform audits which present a “true and fair” view of the business 6. Strengthen all links in the Corporate Reporting Supply Chain

PricewaterhouseCoopers Page 6 Action #1 – Create Principles-based Global Accounting Standards  A global economy needs a global set of generally accepted accounting principles  Investors want to choose companies regardless of country  Companies want access to capital from all over the world  Global GAAP should be based on principles, not detailed rules  Get the “best of both worlds” between U.S. GAAP and International Financial Reporting Standards (IFRS)

PricewaterhouseCoopers Page 7  Company performance and future potential cannot be reduced to a single number (e.g., earnings or cash flow)  Global GAAP information must be supplemented with other financial (e.g., pro forma earnings) and nonfinancial information (e.g., customer retention)  A supplemental framework is needed  Each industry will develop standards within a Tier II framework Action #2 – Develop Additional Industry-based Performance Information

PricewaterhouseCoopers Page 8 Action #2 – Develop Additional Industry-based Performance Information An Example From Telecommunications And Pharmaceuticals

PricewaterhouseCoopers Page 9 Action #3 – Improve External Reporting Beyond Regulatory Requirements  Articulate the company’s “Holistic Story” -Strategy and plans -Targets and benchmarks -Actual and desired risk profile and risk management procedures -Internal control systems and compliance programs -Compliance policies and programs -Principles of corporate governance -Compensation policies and amounts -Other performance metrics, including company-specific ones -Commitments to other stakeholders

PricewaterhouseCoopers Page 10 The Corporate Reporting Transparency Framework

PricewaterhouseCoopers Page 11 Action #4 – Use the Internet to Enhance Performance Reporting and Analysis  Content and format are integrally linked -Information is still largely provided in a clumsy paper-based format -All this changes with Extensible Business Reporting Language (XBRL)  XBRL is a taxonomy for “tagging” information  Provides the context for explaining what the information means  XBRL enables obtaining information directly off the internet -Microsoft, Nasdaq and PricewaterhouseCoopers have developed an XBRL demonstration site   20 semi-conductor companies  5 years of data including income statement, balance sheet and footnotes.

PricewaterhouseCoopers Page 12 How XBRL Changes the Consumption of Corporate Reports Action #4 – Use the Internet to Enhance Performance Reporting and Analysis

PricewaterhouseCoopers Page 13 Action #5 – Perform Audits Which Present a “True and Fair” View of the Business  Today’s audit opinion is about the financial position of the company -Accounting and auditing standards vary by country -Historical financial statements are an incomplete picture -An “Expectations Gap” exists about what an audit opinion really means -The audit needs to stand for more -Issues around risk and liability will need to be addressed

PricewaterhouseCoopers Page 14 Action #6 – Strengthen all Links in the Corporate Reporting Supply Chain Every Group Must Take Responsibility for Improving our Markets

PricewaterhouseCoopers Page 15 Action #6 – Strengthen all Links in the Corporate Reporting Supply Chain The Need for Better Corporate Governance  Directors need to remember that they represent shareholders  Much of the current focus is on structural reforms  Equally important are issues of qualifications, process, resources and compensation  Legislation and regulation should be balanced with market forces

PricewaterhouseCoopers Page 16 ValueReporting

PricewaterhouseCoopers Page 17 Pressures for Greater Transparency  Roughly two-thirds of CEOs think their company’s shares are undervalued  Market sets price based on information -Companies are not reporting information they regard as useful in running the company -Analysts and investors agree that they are not getting this information -Audit Committees say they are not getting this information  ValueReporting is about greater transparency by companies -Financial and nonfinancial information -Tangible and intangible assets -Integrated perspective on risk and strategy -Market rather than regulatory driven  Benefits of greater transparency -More accurate stock price -Better managed company -A way to move beyond the Earnings Game

PricewaterhouseCoopers Companies create sustainable economic value by developing, operationalizing and executing superior strategies which guide the company towards delivering valuable products and services. These strategies yield future cash flows greater than investment or economic profit. Companies ensure that investors realize the value created by the business units and the corporate center by managing and delivering upon market expectations. Companies preserve the value of the underlying business unit cash flows through effective management controls, risk and tax management. Value Creation Value Preservation Value Realization Investment Community Companies A Better Managed Company Why Is ValueReporting Important?

PricewaterhouseCoopers Page 19 Performance Measures and the Utility Industry  Utility CFOs’ perceptions of whether the market properly values their company Source: 1999 PricewaterhouseCoopers Capital Markets Survey

PricewaterhouseCoopers Page 20 How Actively a Measure is Communicated Importance of a Measure Reporting Gap Information Gap Perception Gap Understanding Gap Quality of Information Quality Gap Communication gaps prevent market value from reflecting underlying value Management’s Valuation Investors/Analysts Market Value Value gap How Adequately a Measure is Communicated Importance of a Measure Performance Measures and the Utility Industry

PricewaterhouseCoopers Page 21 Performance Measures & the Utility Industry High ImportanceMedium Importance Low Importance CFOs’ Perceptions of the Relative Importance of Performance Measures Utility CFOs recognize that a broad range of financial and non-financial measures are useful for managing their companies Source: 1999 PricewaterhouseCoopers Capital Markets Survey 1.Regulatory environment and price controls 1.Quality of management 2.Cost reduction 3.Investment/acquisition strategy 4.Operating profit growth 5.Operating cash flow growth 6.Market growth 7.Strategic direction and focus - integrated v specialist player 8.Risk management processes 9.Margin improvements 10.Brand value/reputation 11.Environmental strategy, performance and cost 12.Geographic focus/exploiting changing markets 1.Market share/position 2.Revenue growth from new services/ geographies/customers 3.Extent of competition/ barriers to entry

PricewaterhouseCoopers Page 22 1.Brand value/reputation 2.Cost reduction 3.Extent of competition/ barriers to entry 4.Geographic focus/ exploiting changing markets 5.Investment/acquisition strategy 6.Margin improvements 7.Market growth 8.Market share/position 9.Operating cash flow growth 10.Operating profit growth 1.Cost reduction 2.Extent of competition/ barriers to entry 3.Geographic focus/ exploiting changing markets 4.Investment/acquisition strategy 5.Margin improvements 6.Market growth 7.Market share/position 8.Operating cash flow growth 9.Operating profit growth 10.Quality of management Measure ranked as top ten by investors and/or analysts but not by companies. These data are for general utility companies. Data are also available for generators, retailers and network companies. The Top Ten Performance Measures Utility Industry Perceptions of the Relative Importance of Performance Measures CompaniesInvestorsAnalysts 1.Regulatory environment and price controls 2.Quality of management 3.Cost reduction 4.Investment/acquisition strategy 5.Operating profit growth 6.Operating cash flow growth 7.Market growth 8.Strategic direction and focus - integrated v specialist player 9.Risk management processes 10.Margin improvements

PricewaterhouseCoopers Page 23 Quality Gap Information, Reporting and Quality Gaps in the Utility Industry Companies AnalystsInvestors Information Gap # Companies Reporting Gap # # Gap exists when the difference is equal or greater than 20 percent. Performance Measures 1.Regulatory environment and price controls 2.Quality of management 3.Cost reduction 4.Investment/acquisition strategy 5.Operating profit growth 6.Operating cash flow growth 7.Market growth 8.Strategic direction and focus - integrated v specialist player 9.Risk management processes 10.Margin improvements 1.Regulatory environment and price controls 2.Quality of management 3.Cost reduction 4.Investment/acquisition strategy 5.Operating profit growth 6.Operating cash flow growth 7.Market growth 8.Strategic direction and focus - integrated v specialist player 9.Risk management processes 10.Margin improvements

PricewaterhouseCoopers Page 24 Enterprise Risk Management

PricewaterhouseCoopers Page 25 A New Approach to Risk Management  Enterprise risk management is a process, effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives  Committee of Sponsoring Organizations (COSO) initiated a project on enterprise risk management -Next “Big Thing” after Internal Controls – an Integrated Framework -Draft report has been put out for public exposure and comments received -Final report and application guidance will be published this summer  PricewaterhouseCoopers’ CEO Survey (1391 CEOs) -Basic processes in place -Much less progress on “full implementation” -Benefits are very real -Barriers are significant -Two main strategies exist for making real progress

PricewaterhouseCoopers Page 26 The Committee of Sponsoring Organizations Enterprise Risk Management Framework *The Committee of Sponsoring Organizations Enterprise Risk Management Framework -Forms the framework for Sarbanes-Oxley -Activities are considered at all levels of the organization COSO* ERM

PricewaterhouseCoopers Page 27 Which of the following processes does your organization have in place? Basic Processes of ERM

PricewaterhouseCoopers Page 28 To what extent do you agree or disagree with the following statement regarding regulatory compliance? Basic Processes of ERM — Compliance

PricewaterhouseCoopers Page 29 Elements of Full ERM Implementation To what extent do you agree or disagree with each of the following statements regarding risk management and ERM?

PricewaterhouseCoopers Page 30 To what extent do you agree or disagree with each of the following statements regarding risk management? Levels of Commitment

PricewaterhouseCoopers Page 31 Which of the following are key challenges that restrict your organization in identifying and managing enterprise-wide risks, and which is most challenging? Challenges To Implementation

PricewaterhouseCoopers Page 32 To which of the following groups do you periodically report your company’s enterprise-wide risk portfolio, and how often does this occur? Reporting Risk Profile

PricewaterhouseCoopers Page 33 Percentage reporting strong or considerable positive impact Benefits of ERM

PricewaterhouseCoopers Page 34 When would you expect your organization to have effective and efficient ERM in place? Is ERM in Place?

PricewaterhouseCoopers Page 35 When ERM is a CEO priority Percentage reporting strong or considerable positive impact Full ERM Implementation

PricewaterhouseCoopers Page 36 When ERM is a CEO priority Challenges

PricewaterhouseCoopers Page 37 When ERM is a CEO priority Percentage reporting strong or considerable positive impact Benefits of ERM

PricewaterhouseCoopers Page 38 When ERM is integrated in strategic planning Percentage reporting strong or considerable positive impact Full ERM Implementation

PricewaterhouseCoopers Page 39 When ERM is integrated in strategic planning Challenges

PricewaterhouseCoopers Page 40 When ERM is integrated in strategic planning Percentage reporting strong or considerable positive impact Benefits of ERM

PricewaterhouseCoopers Page 41 CEO priority advanced practitioners Percentage reporting strong or considerable positive impact Full ERM Implementation

PricewaterhouseCoopers Page 42 CEO priority advanced practitioners Percentage reporting strong or considerable positive impact Benefits of ERM

PricewaterhouseCoopers Page 43 Strategic planning advanced practitioners Percentage reporting strong or considerable positive impact Full ERM Implementation

PricewaterhouseCoopers Page 44 Strategic planning advanced practitioners Percentage reporting strong or considerable positive impact Benefits of ERM

PricewaterhouseCoopers Page 45 Action Items  Establish one or more industry-based consortia to establish Tier-Two Standards for non-GAAP information -Include all relevant members the Corporate Reporting Supply Chain -Will be adopted on a voluntary basis: let the market decide  Determine and implement optimal level of transparency -Do a company-specific “ValueReporting” Survey -Establish a process that involves senior management and the Board  Design and implement a process for enterprise risk management -Do a self-diagnosis based on questions in CEO survey -Read COSO report when it is published this summer  More information can be found at or from