Oil Search has an on-going commitment to a high standard of corporate governance.
Corporate governance is not a box ticking exercisem, it is a dynamic force that keeps evolving.
Oil Search acknowledges that there is no typical organisation and no single, readily identifiable model for corporate governance. At different times and stages in a company’s life, some governance structures may be better for the generation of wealth for investors than others. With this in mind, Oil Search has developed governance structures that best suit its current business and the needs of its stakeholders.
Oil Search endeavours to observe the spirit of good corporate governance by those means which are most appropriate to its business during particular periods.
Oil Search firmly believes that the more transparent companies are about their governance practices, the better placed investors will be to make informed investment decisions.
Oil Search followed all the Revised Corporate Governance Recommendations during the twelve months ended 31 December 2008, as described below.
In reporting against the Revised Corporate Governance Recommendations, Oil Search has:
Oil Search’s internal systems and procedures are designed to enable the Board to provide strategic guidance for the Company and effective management oversight.
Oil Search has formalised and defined the functions reserved for Board accountability and those delegated to management in a formal Board Charter. This Charter defines Board accountability to facilitate accountability to the Company and its shareholders. The Board Charter was in force for all of 2008. (Recommendation 1.1)
The Board and the Managing Director review the performance of senior managers on a regular basis. The Managing Director usually conducts an face to face annual performance review with most senior managers. The senior manager’s performance during the year is assessed, having regard to a variety of personal and corporate key performance indicators and stretch targets. The Board also assesses the performance of the Managing Director. The Chairman meets with the Managing Director and gives him feedback on that assessment. (Recommendation 1.2)
A performance evaluation for some senior managers was carried out in the 2008 reporting period, in accordance with the process disclosed in the previous paragraph. The Company expects that a performance evaluation for all senior managers will be carried out in accordance with that process during 2009. (Recommendation 1.3)
Copies of the Board Charter and the Charters for each of the three Board Committees are posted on Oil Search’s website in the Corporate Governance section. (Recommendation 1.3)
Oil Search recognises that an effective Board facilitates the efficient discharge of the duties imposed by law on directors and adds value in the context of Oil Search’s evolving circumstances. Accordingly, Oil Search has structured its Board so that it:
The Board has a Remuneration and Nominations Committee. The responsibilities of the Remuneration and Nominations Committee include responsibility for the identification of suitable candidates for appointment to the Board, in the event of a need to recruit a new director. (Recommendation 2.4)
The Oil Search Board has a formal annual review process for the Board and individual directors. In particular, each director is asked to complete a detailed questionnaire covering the performance of the Board as a whole, the performance of the three Board committees, the individual director’s own performance and the performance of the Chairman. Each director is also asked to state whether he or she supports the re-election of those directors who are due to retire at the next annual meeting. During early 2009, the Chairman met with each director to review the director’s responses to the questionnaire and to give the director the Chairman’s own views on how the director had performed during 2008. (Recommendation 2.5)
The skills, experience and relevant expertise of each director in office at the date of the annual report is detailed in the Directors Report. Prior to their appointment to the Board, directors are required to provide the Chairman with details of their other commitments to make sure that, following their appointment, directors will have sufficient time to carry out their Oil Search duties. (Recommendation 2.6)
Each Oil Search director (other than the Managing Director, Peter Botten and Executive Director, Gerea Aopi) is considered by the Board to be an independent director. The independence of directors is assessed regularly. For the avoidance of doubt, only non-executive directors (that is, a director who is not a member of management) is considered independent. The Board takes account of all circumstances relevant to a director in determining whether the director is free from any external interest or any business or other relationship which could, or could reasonably be perceived to materially interfere with the director's ability to act in the best interests of the Company. In determining materiality, the Board has regard, among other things, to the matters detailed in paragraph 3.3 of the Board Charter. (Recommendation 2.6)
There is a procedure in place for directors to take independent professional advice at the Company’s expense. In particular, a director may obtain independent professional advice, if this is reasonably required to assist the director in the proper exercise of the powers and discharge of the duties of a director of the Company. The costs of such independent professional advice are borne by the Company, provided that before engaging the independent professional adviser, the director obtains the approval of the Chairman, or, if the director is the Chairman, the approval of a majority of the non-executive directors of the Company. (Recommendation 2.6)
The period of office held by each director in office at the date of the 2008 Annual Report is specified in the Directors’ Report. (Recommendation 2.6)
The members of the Remuneration and Nominations Committee and their attendance at meetings of the Committee during 2008 are detailed in the Directors Report. (Recommendation 2.6)
Oil Search’s Constitution and the Charter of the Remuneration and Nominations Committee are available on Oil Search’s website in the Corporate Governance section. (Recommendation 2.6)
Reflecting its support for the Revised Corporate Governance Recommendations Oil Search made the following changes in 2008:
Oil Search actively promotes ethical and responsible decision making.
Oil Search has a Code of Conduct. The Code of Conduct was reviewed in 2008, with a number of changes being made, particularly regarding trading in Oil Search securities. Among other things, the Code of Conduct details the Company’s requirements regarding monetary payments and gifts offered by third parties to Oil Search personnel. The Code of Conduct also governs workplace behaviour inside Oil Search. The Code of Conduct is available on Oil Search’s website in the corporate governance section. (Recommendation 3.1)
Under Oil Search’s Securities Dealing Policy introduced in May 2007, no employee is permitted to deal in Oil Search securities, except during prescribed trading windows. Subject to Board confirmation, those trading windows will generally be the period of 4 weeks following the release of the yearly and half yearly results and the period of 4 weeks following the annual meeting. The Company recognises that Oil Search personnel should not have an unfair advantage over other investors in trading in Oil Search securities. (Recommendation 3.2)
The Code of Conduct and the Securities Dealing Policy are available on Oil Search’s website in the Corporate Governance section. (Recommendation 3.3)
Reflecting its support for the Corporate Governance Recommendations, Oil Search made the following changes in 2008:
Oil Search recognises the importance of being able to independently verify and safeguard the integrity of the Company’s financial reporting and has a structure in place to achieve this. This structure includes:
The Board has an Audit Committee. (Recommendation 4.1)
The Audit Committee consists of:
The Audit Committee has a formal charter that details its role and responsibilities, composition, structure and membership requirements. (Recommendation 4.3)
The members of the Audit Committee, their qualifications and their attendance at meetings of the Committee during 2008, are detailed in the Directors’ Report in the 2008 Annual Report. (Recommendation 4.4)
The meetings of the Audit Committee held during 2008 are detailed in the Directors’ Report in the 2008 Annual Report. (Recommendation 4.4) The external auditors attended all Audit Committee meetings in 2008. The external auditors held discussions at each meeting with the Committee members and without management present.
Oil Search’s policy is to appoint an internationally recognised external audit firm with an office in Port Moresby. The Audit Committee reviews the performance of the external auditor and the rotational plan for external audit partners. The Committee recommends the tendering and selection of the external auditor to the Board.
Deloitte Touche Tohmatsu was appointed the Company’s auditors in May 2002. The Audit Committee reviews the performance of the external auditor and the rotational plan for external audit partners. The Committee recommends the tendering and selection of the external auditor to the Board. The external audit was tendered in March 2009 with the appointment of the successful tenderer to take immediate effect following shareholder approval at the 2009 Annual Meeting.
An internal auditing process is carried out by Oil Search’s Assurance and Compliance Manager, with assistance from external consulting firms, including KPMG.
The Audit Committee Charter is available on Oil Search’s website in the corporate governance section. (Recommendation 4.4) .
Oil Search practises timely and balanced disclosure of all material matters concerning the Company.
All investors are given equal and timely access to material information concerning Oil Search’s financial situation, performance, ownership and governance.
Oil Search puts considerable effort into ensuring that its announcements are factual and presented in a clear and balanced way.
There is an External Communication and Disclosure Standard in place, designed to ensure compliance with the continuous disclosure requirements of the ASX Listing Rules and to ensure accountability at a senior management level for that compliance.
A copy of the External Communication and Disclosure Standard is available on Oil Search’s website in the Corporate Governance section.
Oil Search respects the rights of all shareholders irrespective of the size of their interests in the Company and facilitates the effective exercise of those rights in any way it reasonably can.
Oil Search empowers its shareholders by:
Oil Search has designed a communication policy for promoting effective communication with shareholders and encouraging their participation at general meetings. (Recommendation 6.1)
Oil Search’s Annual Meeting is held in Port Moresby because Oil Search is incorporated in Papua New Guinea. The meeting is also webcast to shareholders outside Papua New Guinea. Oil Search’s Constitution requires the Chairman of the Annual Meeting to allow a reasonable time for shareholders at the meeting to question, discuss and comment on the management of the Company.
The Oil Search website is regularly updated so as to give all shareholders ready access to balanced and easy to understand information about the Company and its business.
Oil Search liaises closely with a range of relevant institutions, including the Australian Shareholders Association. Shareholder queries are answered promptly, comprehensively and courteously.
A representative of the external auditors attends Oil Search’s Annual Meeting. The representative is available at the Meeting to answer shareholder questions about the audit and the auditors’ report.
Oil Search’s website details how investors may contact its investor relations team electronically. In addition, the website contains contact details for our external share registry, including a general enquiry line, fax number and email details. (Recommendation 6.2) .
Oil Search recognises that risk management is an integral part of the oil and gas business and has in place an extensive system of risk oversight, management and internal control.
In 2008, Oil Search conducted a thorough review of its risk management policies. This review covered the following:
Oil Search has policies and standards in place covering the oversight and management of material business risks. These policies and standards are based upon management of the risks inherent in Oil Search’s business activities. Oil Search’s risk profile incorporates the following areas of exposure:
Oil Search has developed standards and management processes in support of the policies covering each of these areas. Oil Search’s website contains a summary of those policies, standards and processes. (Recommendation 7.1)
In developing its risk management policies, Oil Search has carefully considered its legal obligations and its responsibilities to various interest groups. Oil Search recognizes that many groups, including shareholders, employees, customers, suppliers, creditors, consumers, landowners, government authorities and the broader community in which the Company operates, have a legitimate interest in the Company’s risk management policies. Oil Search takes account of those separate interests as appropriate. Oil Search’s principal concern, however, is its shareholders.
Oil Search’s risk management framework is based on the internationally accepted “Enterprise Risk Management (ERM) Model” for assessing and managing risk, developed by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). Oil Search also follows the Australian/New Zealand Standard for Risk Management (AS/ANZ 4360:2004).
The Board is responsible for reviewing the Company’s policies on risk oversight and management. In doing so, the Board satisfies itself that management has developed and implemented a sound system of risk management and internal control.
Oil Search has identified its material business risks and is actively managing those risks. All material business risks that arise in the course of the Company’s business have clearly defined management ownership and accountability to the Board.
Oil Search has a Finance and Risk Committee responsible for monitoring the risk management system. Whilst the Finance and Risk Committee assists the Board fulfil its risk oversight obligations, ultimate responsibility for risk oversight and risk management rests with the full Board.
Minutes of all Board committees are reviewed by the full Board. The Chairman of the Board attends all committee meetings as an ex officio member. Board members are also invited to attend senior management meetings to observe the risk management process in action. The members of the Finance and Risk Committee, their qualifications and attendance at meetings of the Committee during 2008 are detailed in the Directors’ Report.
Oil Search has a full time Assurance and Compliance Manager with responsibility for managing the internal audit function. As part of his duties, the Assurance and Compliance Manager provides independent assurance on the adequacy and effectiveness of the Company's risk management framework and the completeness and accuracy of risk reporting by management. The Assurance and Compliance Manager each year conducts risk reviews based on a plan agreed with management and the Audit Committee. The Assurance and Compliance Manager has access to all members of the management team and the right to seek information and explanations from any staff member or contractor.
The Assurance and Compliance Manager is independent of the external auditor and meets privately with the Chairman of the Audit Committee. The Assurance and Compliance Manager is also invited to attend Audit Committee meetings. The Audit Committee reviews the performance of the Assurance and Compliance Manager and approves his/her appointment and termination.
The Board requires management to design and implement a risk management and internal control system to manage the Company’s material business risks. Management reports to the Board on those material business risks. (Recommendation 7.2/Recommendation 7.4)
The Managing Director and Chief Financial Officer are both required to state in writing to the Board that the integrity of the Company’s financial statements is based on a sound system of risk management as well as internal compliance and control which implements the Board’s policies.
In addition, senior managers are required to report to the Managing Director and to the Chief Financial Officer in writing concerning material business risks and liabilities that are within the particular senior manager’s area of responsibility.
The Board requires the Managing Director and the Chief Financial Officer to provide a declaration in accordance with section 295A of the Australian Corporations Act. The Board received this declaration from the Managing Director and the Chief Financial Officer in 2008. In addition, as noted above, the Board also received a report in 2008 from management regarding material business risks. (Recommendation 7.3/Recommendation 7.4)
A summary of the Company’s policies on risk oversight and management is available on Oil Search’s website in the corporate governance section. (Recommendation 7.4)
Reflecting its support for the Revised Corporate Governance Recommendations. Oil Search made the following changes in 2008:
Oil Search believes that directors and senior management must be equipped with the knowledge they need to discharge their responsibilities effectively and that individual and collective performance should be regularly and fairly reviewed.
Directors and all employees have access to continuing education to update and enhance their skills and knowledge.
Each director is expected to undertake relevant training or continuing education each year. Oil Search will meet the cost of such training and education provided that directors obtain the Chairman’s prior approval.
The Board Charter guarantees all directors reasonable access to the Group Secretary and to the Company’s other senior managers at all times. This is generally for information purposes only and directors are not encouraged to participate in the day to day management of the Company. Management supplies the Board with information in a form, timeframe and quality that enables the Board to discharge its duties effectively. Directors are entitled to and sometimes do request additional information if they consider that the information supplied by management is insufficient to support informed decision making.
Oil Search’s policy is that the level and composition of remuneration for all employees is competitive and reasonable. The relationship between remuneration and corporate and individual performance is clear.
Oil Search has a Remuneration and Nominations Committee. (Recommendation 8.1)
Oil Search clearly distinguishes the structure of non-executive director remuneration from that of executive remuneration. Oil Search’s policy in relation to remuneration is detailed in the Remuneration Report in the 2008 Annual Report. (Recommendation 8.2)
The payment of equity based remuneration is in accordance with plans approved by shareholders. Oil Search has an employee share option plan and a performance rights plan. Non-executive Directors do not participate in these plans.
Within the aggregate amount approved by shareholders, the fees of the Chairman and non-executive directors are set at levels in line with the responsibilities of those directors and the time spent by those directors in discharging their duties. In setting fees, regard is also had to the level of fees paid to directors of similar companies.
Remuneration packages of senior managers include long term performance based components. Rights granted under the Performance Rights Plan to senior managers are linked to the long term return to shareholders from investing in Oil Search. Performance Rights only vest following satisfaction of performance hurdles that are designed to maximise shareholder wealth.
The members of the Remuneration and Nominations Committee, their qualifications and attendance at meetings of the Committee during 2007 are detailed in the Directors Report. (Recommendation 8.3)
Currently, there is no separate retirement benefits plan for Oil Search’s non-executive directors. Effective 31 May 2004, the Board discontinued the retirement plan then in force for non-executive directors. Those directors participating in the retirement plan. prior to its discontinuation, could elect to have their accumulated retirement benefits paid out in advance of them ceasing to be directors of Oil Search or, alternatively, to have those benefits paid out on the date they cease to be directors. All bar one of the directors elected to be paid out in advance of them ceasing to be directors. One director elected to have part of his accumulated retirement benefits paid out in advance and elected to have the other part paid out when he ceases to be a director. (Recommendation 8.3)
The Remuneration and Nominations Committee’s charter is available on Oil Search’s website in the Corporate Governance section. (Recommendation 8.3)
Oil Search’s Securities Dealing Policy was amended in 2008, so that it now expressly prohibits employees entering into transactions in financial products (“Transactions in Associated Products”) which limit the economic risk of participating in unvested entitlements under equity based remuneration schemes. (Recommendation 8.3)
Reflecting its support for the Revised Corporate Governance Recommendations, Oil Search made the following changes in 2008:
Oil Search recognises that it has obligations to all legitimate stakeholders including shareholders, employees, contractors and the community as a whole.
Oil Search acknowledges that it can create value by better managing and working more closely with all its stakeholders. Oil Search has demonstrated its commitment to appropriate corporate practices by adopting the Code of Conduct. As noted above, the Code of Conduct guides Oil Search Personnel in complying with their legal and other obligations to legitimate stakeholders.
Good corporate governance depends on a company’s policies, standards and procedures being continually reviewed and updated. What is good governance this year may not necessarily be good governance next year.
Oil Search will use its best endeavours to maintain and improve upon the high standards of governance that it achieved in 2008 and meet additional requirements that may arise.
Oil Search wants all its shareholders and other stakeholders to have confidence it its corporate governance practices.
With this in mind, Oil Search continued to provide increased disclosure in 2008 so that investors are able to invest in the most transparent environment possible.