To achieve its strategic objectives, Oil Search believes it is essential for the Company to adopt and meet the highest standards of corporate governance across all its activities. It is also committed to support this by transparent and open reporting of its governance practices, so thatinvestors will be able to make informed investment decisions.
Oil Search has reported against the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations(the “CGC Recommendations”) each year since their first release in 2004.
Oil Search believes it followed all the CGC Recommendations during the twelve months ended 31 December 2012.
In reporting against the CGC Recommendations for 2012, Oil Search:
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 the Board and those delegated to management in a formal Board Charter. This charter defines the Board’s duties to facilitate accountability to the Company and its shareholders. (Recommendations 1.1 and 1.3)
The Board and Managing Director review the performance of senior executives on a regular basis.
The Managing Director conducts an annual performance review with senior executives. The performance of each senior executive during the year is assessed, having regard to a variety of individual 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)
Performance evaluations for all senior executives were carried out in the reporting period, in accordance with the process disclosed in the above paragraph. The Company also expects that during 2013, performance evaluations for all senior executives will be carried out in accordance with that process. (Recommendation 1.2 and 1.3)
Copies of the Board Charter and the Charters for each of the three Board Committees are available 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 contributes to the delivery of the Company’s strategic objectives. Accordingly, Oil Search has structured its Board so that it:
The Board has a Remuneration and Nominations Committee compromising four independent directors. The members of the Remuneration and Nominations Committee and their attendance at meetings of the Committee during 2012 are detailed in the Directors’ Report. (Recommendations 2.4 and 2.6)
The responsibilities of the Remuneration and Nominations Committee include 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 Company believes that its Board should consist of directors bringing an appropriately diverse mix of skills and experiences that are compatible with the Company’s operating activities, geographic focus and strategic direction. In particular, the overall mix of directors’ skills should cover the industry and countries in which Oil Search operates and address accounting, finance and legal matters. The Board has developed a skills matrix that records the mix of skills, experience and technical capabilities of existing directors and assists in identifying any deficiencies compared to the overall targeted mix of capabilities that have been defined for the Board. This gap analysis is used to support the process of preparing the recruitment brief given to the recruitment firm or firms selected to search for a prospective new director when a Board vacancy arises. (Recommendation 2.6) In the second half of 2011, the Board initiated a succession planning review, focusing on how the structure of the Company’s Board should evolve over the next few years, particularly in preparation for the business growth opportunities that will flow from completion of the construction phase of the PNG LNG Project. The review concluded that it was desirable to refresh the membership of the Board, provided suitable candidates could be identified and, accordingly, three new directors joined the Board during 2012.
The Oil Search Board operates a formal annual review process for the Board and individual directors. The process involves each director completing 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. The Chairman then meets with each director to review their responses to the questionnaire and to give the director the Chairman’s own views on how the director has performed during the year. This formal annual review process was conducted in 2012. (Recommendation 2.6)
New directors participate in an induction programme to assist them in understanding Oil Search’s strategic objectives, values and culture, financial performance, operations and risk management systems. The induction process also covers relevant administrative and procedural arrangements to promote the effective functioning of the Board.
A programme of continuing education is offered to all directors, including the practice of inviting external industry and subject specialists to present to the Board on matters of general relevance to the Company. In addition, Board members visit the Company’s operating facilities at least annually.
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, directors who are not members of management) can be 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 thematters detailed in paragraph 3.3 of the Board Charter. (Recommendations 2.1 and 2.6)
There is a procedure in place for directors to take independent professional advice. 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 nonexecutive directors of the Company. (Recommendation 2.6)
The period of office held by each director in office at the date of the 2012 Annual Report is specified 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. In addition, the selection and appointment policy and process for the selection and appointment of new directors is disclosed in the same section. (Recommendation 2.6)
Oil Search actively promotes ethical and responsible decision making.
Oil Search has a Code of Conduct which is supported by a training module and periodic monitoring of compliance. The Code was reviewed and updated in 2012. Among matters addressed, the Code of Conduct details the Company’s requirements regarding monetary payments and gifts offered by third parties to Oil Search personnel. (Recommendation 3.1)
Oil Search is committed to promoting diversity across the Company at all levels, including at Board level, as an engaged and diverse workforce will contribute to improved operating performance and the delivery of strategic objectives. In particular, as a Papua New Guinean company, Oil Search is focused on training and developing its PNG citizen employees so that they are equipped to assume leadership positions across the Company. The Company has established measurable objectives to increase the diversity mix of both the workforce and the Board. (Recommendation 3.2)
The Company’s achievements in 2012 in promoting gender and other forms of diversity and the objectives set by the Board in support of the implementation of the Diversity Policy are set out on page 47 of the 2012 Annual Report. (Recommendation 3.3)
Key measures of diversity across the Oil Search organisation, including the proportion of women employees in total, women in senior management positions and women on the Board are summarised on page 47 of the 2012 Annual Report and set out in more detail in the 2012 Sustainability Report. (Recommendation 3.4)
The Code of Conduct and the Diversity Policy are available are available on Oil Search’s website in the corporate governance section. (Recommendation 3.5)
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)
At all times during 2012, the Audit Committee consisted of:
The Audit Committee has a formal charter that details its role and responsibilities, composition, structure and membership requirements. (Recommendations 4.3 and 4.4)
The members of the Audit Committee, their qualifications and their attendance at meetings of the Committee held during 2012 are detailed in the Directors’ Report. (Recommendation 4.4)
The number of meetings of the Audit Committee held during 2012 is detailed in the Directors’ Report. (Recommendation 4.4)
The external auditors attended all Audit Committee meetings in 2012. 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 expertise in the resources sector. Deloitte Touche Tohmatsu was appointed the Company’s auditor 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 to a range of qualified international audit firms, with Deloitte Touche Tohmatsu successful in resecuring the role. The re-appointment of Deloitte Touche Tohmatsu was approved at the 2012 Annual Meeting. (Recommendation 4.4)
Deloitte Touche Tohmatsu’s professional requirements mandate that each lead audit partner rotates from his or her client after five years of service. That policy is followed for the Oil Search assignment and a partner rotation occurred in 2011. (Recommendation 4.4)
Internal auditing processes are carried out by Oil Search’s Assurance and Compliance function, with assistance from external consulting firms as required.
The Audit Committee Charter is available on Oil Search’s website in the corporate governance section. (Recommendation 4.4)
Oil Search promotes timely and balanced disclosure of all material matters concerning the Company. Oil Search has mechanisms designed to ensure compliance with the ASX Listing Rule requirements, such that:
Oil Search has written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior manager level for that compliance. (Recommendation 5.1)
Although not required by the PNG regulatory framework, but reflecting the Company’s commitment to maintaining good governance practice, Oil Search has elected to include a Remuneration Report within the Directors’ Report. The 2012 Remuneration Report complies with section 300A of the Australian Corporations Act 2001 (Cth) and has been audited by Deloitte Touche Tohmatsu.
Oil Search’s Public Disclosure and External Communications Policy is available on Oil Search’s website in the corporate governance section. The Policy was reviewed and updated in 2012. (Recommendation 5.2)
Oil Search’s Public Disclosure and External Communications Policy is designed to promote effective communication with shareholders, through the provision of readily accessible, balanced and understandable information about the Company, and to encourage their participation at general meetings. (Recommendation 6.1)
As a company incorporated in Papua New Guinea, Oil Search’s Annual Meetings are held in Port Moresby. The meeting is 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. A representative of the external auditor attends Oil Search’s Annual Meeting. The representative is available at the meeting to answer shareholder questions about the audit and the Auditor’s Report.
When the Company holds major investor briefings such as the half and full year results presentations, electronic facilities such as webcasting and teleconferencing are utilised to facilitate wide participation.
Oil Search's website is regularly updated so as to give all shareholders ready access to balanced and easily understood information about the Company and its business activities.
Oil Search liaises closely with a range of relevant institutions. Shareholder queries are answered promptly, comprehensively and courteously.
Oil Search’s Public Disclosure and External Communications Policy is available on Oil Search’s website in the corporate governance section. Oil Search’s website details how investors may contact the Company’s investor relations team. In addition, the website contains contact details for the Company’s external share registry, including a general enquiry line, fax number and email details. (Recommendation 6.2)
Oil Search recognises that risk management is a fundamental component of managing the oil and gas business and the Company has in place an extensive system of risk oversight, management, reporting and internal control and compliance monitoring.
Oil Search conducts an annual review of its risk management policies and standards. These reviews cover the process for reporting on the identification, assessment and management of material business risks, including Board and committee reviews of material business risk reports prepared by management. Oil Search has policies and standards in place covering the oversight and management of material business risks arising within the oil and gas environment. These policies and standards are based on management of the hazards and exposures 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 these policies. (Recommendation 7.1)
The Board requires management to design and implement a risk management and internal control system, to manage the Company’s material business risks. During 2012 management regularly reported to the Board on those material business risks. (Recommendations 7.2 and Recommendation 7.4)
In developing its risk management systems, Oil Search has considered its legal obligations and its responsibilities to various interest groups. Oil Search recognises that many groups, including shareholders, employees, customers, suppliers, creditors, consumers, landowners, government authorities and the broader community, both locally and internationally, have a legitimate interest in the Company’s risk management policies and procedures. Oil Search takes account of the potential impacts and consequences for all stakeholders when assessing risk exposures.
Oil Search’s risk management framework is based on the International Standard for Risk Management (ISO 31000). Aspects of other internationally developed risk frameworks, such as the “Enterprise Risk Management Model”, developed by the Committee of Sponsoring Organisations of the Treadway Commission, have been incorporated as appropriate.
Oil Search has identified its material business risks and actively manages those risks. All material business risks that arise in the course of the Company’s activities have clearly defined management ownership and accountability for reporting to the Board.
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 a Finance and Risk Management Committee responsible for monitoring the risk management system. While the Finance and Risk Management Committee assists the Board to 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 committee meetings as an ex officio member. The members of the Finance and Risk Committee, their qualifications and attendance at meetings of the Committee during 2012 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 conducts annual risk reviews based on a plan agreed with management and the Audit Committee and the Finance and Risk 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 and report to Audit Committee meetings. The Audit Committee reviews the performance of the Assurance and Compliance Manager and approves his/her appointment and termination.
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 and internal control, which supports the implementation of the Board’s policies. In addition, senior managers are required to confirm to the Managing Director and to the Chief Financial Officer in writing that key Company policies and standards have been operating effectively throughout the year, including the operation of risk management processes, mitigation opportunities and contingency plans. The Managing Director and Chief Financial Officer provided an unqualified statement regarding risk management and internal compliance and control systems to the Board for 2012.
The Board requires the Managing Director and the Chief Financial Officer to provide a declaration that is consistent with section 295A of the Australian Corporations Act 2001 (Cth). The Board received this declaration from the Managing Director and the Chief Financial Officer in 2012. In addition, as noted above, the Board also received reports from management during 2012 regarding the management of material business risks. (Recommendations 7.3 and 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)
Oil Search’s policy is to ensure that the level and composition of remuneration for all employees is competitive and reasonable and that the relationship between remuneration and corporate and individual performance is clearly defined.
Oil Search has established a Remuneration and Nominations Committee. (Recommendation 8.1)
At all times during 2012, the Remuneration and Nominations Committee consisted of:
Oil Search clearly distinguishes the structure of non-executive director remuneration from that of executive director and senior executive remuneration. Oil Search’s policy in relation to remuneration is detailed in the Remuneration Report. (Recommendation 8.3)
The payment of any equity based remuneration is made in accordance with plans approved by shareholders. Oil Search has a Long Term Incentive Plan that allows the Board the flexibility to grant employees Performance Rights, Share Appreciation Rights, Share Options and Restricted Shares. 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 given to the level of fees paid to directors of similar companies. Non-executive directors are not currently entitled to retirement benefits, other than statutory superannuation. (Recommendations 8.3 and 8.4)
Remuneration packages of senior executives include both short term and long term performance-based components. Rights granted under the Performance Rights Plan to senior executives 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. Further details of the terms and conditions of short term and long term incentive plans are set out in the Remuneration Report.
The members of the Remuneration and Nominations Committee, their qualifications and attendance at meetings of the Committee during 2012 are detailed in the Directors’ Report. (Recommendation 8.4)
The Remuneration and Nominations Committee’s charter is available on Oil Search’s website in the corporate governance section. (Recommendation 8.4)
Oil Search’s Share Trading Policy expressly prohibits employees entering into transactions in financial products which limit the economic risk of participating in unvested entitlements under equity based remuneration schemes. The Share Trading Policy is available on Oil Search’s website in the corporate governance section. (Recommendation 8.4)