The Board of Pacific Basin retains its strong belief in corporate governance and is committed to achieving and maintaining high standards of corporate governance consistent with the needs and requirements of the business, its stakeholders and the Corporate Governance Code (the "Code") of The Stock Exchange of Hong Kong Limited (the "Stock Exchange").
Throughout the year ended 31 December 2012, the Group has complied with all code provisions of the Code (effective from 1 April 2012) as set out in Appendix 14 of the Rules Governing the Listing of the Securities on the Stock Exchange (the "Listing Rules"), as well as the former Code on Corporate Governance Practices (effective until 31 March 2012). The Group continues to adopt the recommended best practices under the Code. However, there are certain areas where full implementation is not considered appropriate, namely:
- The announcement and publication of quarterly financial results - instead of publishing quarterly results, the Group provides a quarterly trading update to enable its shareholders to assess its performance, financial position and prospects as the Group believes a trading update gives its shareholders the key information to assess the development of its business on a quarterly basis; and
- Remuneration of members of the Company's senior management - these are shown on an aggregate basis instead of on an individual and named basis as disclosure is considered commercially sensitive.
THE BOARD OF DIRECTORS
Board Composition and Responsibilities
The Board of Directors is collectively responsible for promoting the success of the Company by directing and supervising its affairs. During the year, Mr. Mats H. Berglund joined the Board on 1 June 2012 as CEO and an Executive Director, replacing Mr. Klaus Nyborg who resigned on 15 March 2012. Additionally Mr. Chanakya Kocherla was appointed as an Executive Director on 25 June 2012.
As at the date of this Annual Report, the Board comprises six Executive Directors and four Independent Non-executive Directors ("INEDs"), which is in compliance with the new Listing Rule requirement that INEDs shall represent at least one-third of the Board.
The Executive Directors are required to devote all of their active or contracted business time to the business and affairs of the Group and are not permitted to engage in any other business which is in competition with that of the Group.
The four INEDs play a key role in protecting shareholders' interests. They bring a broad range of financial, regulatory and commercial experience and skills to the Board, which positively contribute to the effective strategic management of the Group through independent, constructive and informed comments.
The posts of Chairman and CEO are held by Mr. David M. Turnbull and Mr. Mats H. Berglund respectively and their roles and responsibilities are separate and are set out in writing.
The roles and responsibilities of each Board member are clearly set out and are available on the Company's website and their biographical details are set out in the "Directors and Senior Management" section of this Annual Report.
During the year ended 31 December 2012, the Company received confirmation from each Director that he has given sufficient time and attention to the affairs of the Company. Each Director has disclosed to the Company the number and nature of offices held in Hong Kong or overseas listed public companies or organisations and other significant commitments, as well as the identity of the public companies or organisations.In accordance with the Company's Bye-laws, at each annual general meeting one-third of the Directors for the time being (rounded up if the number is not a multiple of three) shall retire from office by rotation provided that every Director shall be subject to retirement at least once every three years. Please refer to the "Report of the Directors" section for the composition of the Board and Board Committees and the terms of appointment of each Director.
Independence of INEDs
Pursuant to the requirement of the Listing Rules, the Company has received written confirmation from all four INEDs of their independence from the Company. The Board considers each of them to be independent.
Directors' Continuous Professional Development
During the year, with the support of the Company Secretary, the Directors have participated in continuous professional development to develop and refresh their knowledge and skills. Newly appointed Directors received external induction training on relevant compliance and regulatory matters for directors of companies listed in Hong Kong and legal, corporate governance and best practice matters before their respective appointment became effective. All Directors received updates on the same matters, as well as updates on the industries and the markets the Group operates in and significant changes in financial accounting standards, all of which were presented at one of the Board meetings during the year. Relevant training courses and reading materials were also identified by the Company during the year and records of the training that the Directors received have been provided to the Company Secretary.
Board Evaluation
The Board has carried out a self-assessment to evaluate its own performance during the year with an aim of ensuring continuous improvement in its functioning which in turn would influence and impact the business. The first evaluation was carried out in October 2012 led by the Chairman. The evaluation concluded that the Board operated effectively and identified actions for further enhancement such as the need for succession planning for the Board.
The Board
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Board Committees
The Board has established Audit, Remuneration and Nomination Committees in accordance with the Code and all members of these three Board Committees are INEDs. The Board has also established an Executive Committee to streamline the decision-making process of the Company in certain circumstances. Decisions made by the Board and the Board Committees are based on detailed analysis prepared by the management which includes: (i) monthly performance analysis; (ii) periodic investment and divestment proposals relating to our vessels and equity interests; and (iii) periodic Board meetings to evaluate management strategic priorities. The terms of reference of these Board Committees were reviewed and changes adopted during the year and are available on the Company's website.
Board, Board Committee Meetings and Annual General Meeting in 2012
The Board has four regular meetings annually to discuss business strategy, operational issues and financial performance and it met in total on eight occasions during 2012. The attendance of each Director at the Board, its Committees' meetings and the AGM are set out below.
1 Representatives of the external auditor participated in every Audit Committee meeting held.
THE AUDIT COMMITTEE
Membership
Chairman: Patrick B. Paul
Members: All four INEDs
Main Responsibilities
| 1 | review the financial statements and oversee the financial reporting process to ensure the balance, transparency and integrity of published financial information; | |
| 2 | review the effectiveness of the Group's financial controls, internal control and risk management system; | |
| 3 | review the work of the Risk Management Committee; | |
| 4 | review the Group's process for monitoring compliance with the laws and regulations affecting financial reporting; | |
| 5 | supervise corporate governance; | |
| 6 | develop and review the Company's policies and practices on corporate governance and make recommendations to the Board; and | |
| 7 | review the independent audit process and the effectiveness of the internal audit functions. |
Work Done in 2012
The Audit Committee held four meetings during the year. Its work included the following:
- review and discussion of the external auditors' Audit Committee Report in respect of the 2011 full year audit and 2012 interim review;
- review of the 2011 annual report and annual results announcement and the 2012 interim report with a recommendation to the Board for approval;
- review of the confirmation of independence of all INEDs;
- recommendation to the Board for approving the proposed amendments to the Terms of References of the Board and Executive Committees;
- review of the Risk Management Committee reports and consideration of the Internal Audit requirements;
- review of the adequacy of the Group's marine related insurance covers;
- review of the whistleblowing policy with a recommendation to the Board for approval;
- review and consideration of the accounting treatment of certain finance leases;
- review of the shareholders communication policy with a recommendation to the Board for approval;
- review of the proposed amendments to the Terms of Reference of the Risk Management Committee with a recommendation to the Board for approval; and
- review and approval of management's recommendation on the legal structure of certain subsidiaries.
During the year, the Audit Committee met the external auditors once without the presence of management.
THE REMUNERATION COMMITTEE
Membership
Chairman: Robert C. Nicholson
Members: All four INEDs
Main Responsibilities
| 1 | recommendation to the Board on the Company's policy and structure for all Directors' and senior management's remuneration and desirability of performance-based remuneration and on the establishment of a formal and transparent procedure for developing remuneration policy; | |
| 2 | determination, through authority delegated from the Board, of the remuneration packages of the Executive Directors, senior management and certain higher paid employees; | |
| 3 | review and make recommendation to the Board on the terms of appointment for Directors when considered necessary; | |
| 4 | recommendation to the Board relating to Directors and senior management to ensure fair (and not excessive) compensation payments and appropriate arrangements after considering contractual entitlements, in the case of any loss or termination of office or appointment and dismissal or removal for misconduct; | |
| 5 | administration and oversight of the Company's LTIS and other equity or cash based schemes of the Company in place from time to time, and explicit review and approval of the granting of share awards to any staff members in the Group; | |
| 6 | approval of disclosure statements of the Company's policy and remuneration for Directors and senior management; and | |
| 7 | ensure that no Director is involved in deciding his own remuneration. The remuneration of Non-executive Directors is determined by the Chairman and CEO based on the responsibilities of each individual and a review of international market practice. |
Work Done in 2012
The Remuneration Committee met twice during the year. Its work included the following:
- assessment of the performance of Executive Directors, senior management and certain higher paid employees and approval of their year-end bonuses and annual salary adjustments for both 2011 and 2012;
- approval of the grant of share awards to Executive Directors and staff members; and
- approval of the remuneration packages for the newly appointed Executive Director and Chief Executive.
THE NOMINATION COMMITTEE
Membership
Chairman: Robert C. Nicholson
Members: All four INEDs
Main Responsibilities
| 1 | review the structure, size and composition (including the skills, knowledge and experience) of the Board at least annually and make recommendation on any proposed changes to the Board to complement the Group's corporate strategy; | |
| 2 | report to the Board on compliance with Hong Kong Stock Exchange's board composition rules and guidelines from time to time; | |
| 3 | identify individuals suitably qualified to become Board members and select or make recommendation to the Board on the selection of individuals nominated for directorships; | |
| 4 | assess the independence of the Company's Independent Non-executive Directors; and | |
| 5 | make recommendations to the Board on the appointment or re-appointment of Directors and succession planning for Directors, in particular the Chairman and the Chief Executive based on an evaluation of scope and responsibility of the position and the advice from external recruitment consultants if considered appropriate. |
Work Done in 2012
The Nomination Committee met twice during the year. Its work included the following:
- acceptance of the resignation of Mr. Klaus Nyborg as CEO;
- approval of the appointment of Mr. Mats H. Berglund as CEO and an Executive Director of the Company;
- approval of the appointment of Mr. Chanakya Kocherla as an Executive Director of the Company;
- assessment of the independence of each INED; and
- consideration of the adequacy of the number of INEDs by reference to the Stock Exchange regulations.
THE EXECUTIVE COMMITTEE
Membership
Chairman: Mats H. Berglund (since 1 June 2012)
Members: All six Executive Directors
Main Responsibilities
| 1 | identify and execute transactions within the parameters approved by the Board; | |
| 2 | identify and execute the sale and purchase of vessels; | |
| 3 | identify and execute transactions for long-term inward charters; | |
| 4 | set cargo cover levels which are within the normal course of the business of the Group; | |
| 5 | dentify and execute transactions for non-vessel marine fixed assets exceeding US$5,000,000; | |
| 6 | make decisions over loans and guarantees; and | |
| 7 | exercise the Company's general mandate to repurchase Shares in accordance with the parameters set by the Board and the limits approved by the shareholders. |
Work Done in 2012
The Executive Committee considered a range of business matters based on detailed analysis submitted by management including the following:
- acquisition of a number of vessels that did not require announcement under the Listing Rules;
- approval of a five-year Handysize cargo contract extension opportunity;
- approval of a number of freight contracts;
- approval of an announcement on the conversion price adjustment in respect of the Group's 1.75% coupon Convertible Bonds due 2016;
- adoption of the revised Terms of Reference of the Executive Committee;
- approval of a long-term charter of a newbuilding and reviewed specification changes for four owned newbuildings;
- approval of the entry into of a number of supplemental agreements to loan facilities made to the Group;
- approval of a share purchase agreement for the disposal of an interest in a joint venture;
- approval of the agreements and documentations relating to issue convertible bonds due 2018; and
- approval of certain routine and administrative announcements.
RISK MANAGEMENT & INTERNAL CONTROLS
Framework
The Board has the overall responsibility for the Group's system of internal controls and the assessment and management of risks. The Audit Committee takes the lead role in assessing the internal controls through reviewing the work of the Group's Risk Management Committee ("RMC") which is also responsible for managing the internal audit function.
The RMC, with the assistance of appropriate staff from various departments, conducts an annual cycle of regular meetings with division heads and managers from the headquarters and regional offices so as to keep abreast of issues and new risks that are embedded in the business and operations. This forms the basis of devising the range of internal control reviews to be carried out during each year and evaluating and recommending updated controls. The work ensures that division heads and managers are provided with feedback following the assessment of the risks and controls of their respective areas. Staff are well informed of new guidelines and company policies via the Company's intranet.
The Group has in place a internal control framework that is consistent with the COSO (the Committee of Sponsoring Organisations of the Treadway Commission) framework which has the following five components:
- Control Environment
Defined organisational structures are established. Authority to operate various business functions is delegated to respective management within limits set by head office management or the Executive Directors. The Board meets on a regular basis to discuss and agree business strategies, plans and budgets prepared by individual business units. The performance of the Group is reported to the Board on a monthly basis. - Risk Assessment
The Group identifies, assesses and ranks the risks that are most relevant to the Group's success according to their likelihood, financial consequence and reputational impact. - Control Activities
Policies and procedures are set for each business function which includes approvals, authorisation, verification, recommendations, performance reviews, asset security and segregation of duties. - Information and Communication
The Group documents operational procedures of all business units. The risks identified and their respective control procedures are documented in risk registers by the RMC and reviewed by the Audit Committee at least annually. - Monitoring
The Group adopts a control and risk self-assessment methodology, continuously monitoring its business risks by way of internal review and communication of key control procedures to employees.
The Risk Management Committee
Membership
Chairman: Mats H. Berglund
Members: CFO, Company Secretary, Director-Treasury, Risk Manager
Main Responsibilities
| 1 | strengthen the Group's risk management culture; | |
| 2 | actively identify and review significant risks of the Group through an annual review with division heads; | |
| 3 | review and recommend appropriate internal controls and policies; | |
| 4 | develop an internal audit plan; and | |
| 5 | manage the annual review and testing of internal controls. |
Work Done in 2012
The Risk Management Committee met quarterly during the year. Its work included the following:- assessment and review of risks for the Group;
- review of the results of internal control testing;
- report to the Audit Committee twice on annual risk assessment and internal control review and testing;
- review of the composition of Risk Management Committee and its terms of reference;
- Coordination and preparation for the compliance of the Code that became effective in 2012; and
- Communication of company policies to staff such as guidelines on hospitality and contracting authority limits.
The system of internal controls is designed to provide reasonable, but not absolute, assurance against human error, material misstatement, losses, damages and fraud.
Annual Assessment
Activities, procedures, existing controls and new controls to be implemented are documented in the risk registers. The existence and effectiveness of the existing control procedures are tested with a frequency determined by reference to the risk ranking of each individual risk area. All control procedures of significant risks are tested annually and others are reviewed annually.
The criteria for assessing the effectiveness of internal controls are based on whether the documented control processes have operated throughout the period being reviewed, and identifying whether there are any control weaknesses. The Risk Manager, on behalf of the RMC, coordinates the annual testing of control procedures in respect of all significant Group risks with findings reported to the RMC and the Audit Committee. This work is carried out by the Risk Manager with the assistance of appropriate staff from various departments who test the controls of functions other than their own.
Internal Control System Effectiveness
The activities of the RMC are reviewed at least twice a year by the Audit Committee who continuously assesses the internal audit requirements as the Group develops. The internal controls' system is designed for the identification and management of risks that are significant to the fulfillment of the Group's business objectives. The Audit Committee reviews the findings and the opinion of the RMC on the effectiveness of the Group's system of internal control and reports to the Board annually.
In respect of the year ended 31 December 2012, the Board has reviewed the internal control systems of the Group and no significant areas of concern were identified.
STAKEHOLDER SURVEYS
We conducted customer and investor surveys during the year which generated feedback that we are acting on to further enhance the quality of our service and our investor relations and corporate governance practices.
DISCLOSURE OF INSIDE INFORMATION
With respect to the procedures and internal controls for the handling and dissemination of inside information:
- the Group is fully aware of its obligations under the Listing Rules;
- the Group conducts its affairs with close regard to the "Guide on Disclosure of Price-sensitive Information" issued by the Stock Exchange in 2002 and subsequently the "Guidelines on Disclosure of Inside Information" published by the Securities and Future Commission in June 2012;
- through channels such as financial reporting, public announcements and its website, the Group has implemented and disclosed its policy on fair disclosure by pursuing broad, non-exclusive distribution of information to the public;
- the Group has included in its Code of Conduct a strict prohibition on the unauthorised use of confidential or inside information; and
- the Group has established and implemented procedures for responding to external enquiries about the Group's affairs, so that only the CEO, Chief Operating Officer, Chief Financial Officer and Corporate Communication & Investor Relations Officers are authorised to communicate with parties outside the Group.
DIRECTORS' SECURITIES TRANSACTIONS
The Board of Directors has adopted the Model Code for Securities Transactions by Directors of Listed Issuers, as set out in Appendix 10 of the Listing Rules (the "Model Code").
The Board confirms that, having made specific enquiry, the Directors have complied in full with the required standards set out in the Model Code and its code of conduct regarding Directors' securities transactions during the year.
SENIOR MANAGEMENT AND STAFF SECURITIES TRANSACTIONS
The Company has adopted rules for senior managers and those staff who are more likely to be in possession of unpublished inside information or other relevant information in relation to the Group based on the Model Code for Securities Transactions by Directors (the "Dealing Rules"). These senior managers and staff have been individually notified and provided with a copy of the Dealing Rules.
No incident of non-compliance by these senior managers and staff was noted by or reported to the Company during the year.
DIRECTORS AND SENIOR MANAGEMENT - REMUNERATION AND SHARE OWNERSHIP
Details of the remuneration and share ownership of the Directors and senior management are contained in the "Remuneration Report" and "Report of the Directors" sections of this Annual Report.
AUDITORS' REMUNERATION
Remuneration paid to the Group's external auditors, for services provided for the year ended 31 December 2012 is as follows:
OUR SHAREHOLDERS
As at 31 December 2012, Pacific Basin had 454 registered shareholders of whom 390 or 85.90% have their registered addresses in Hong Kong.
SHAREHOLDERS MEETING
During the year, the Company held one general meeting with shareholders, namely the Annual General Meeting, at the Conrad Hotel, Hong Kong on 19 April 2012 and the following resolutions, all voted on by polls, were passed and approved:
- receipt and adoption of the audited financial statements and the Reports of the Directors and Auditors for the year ended 31 December 2011;
- declaration of final dividend of 5 HK cents per share for the year ended 31 December 2011;
- re-election of Directors;
- fixing of the remuneration of the Directors by the Board;
- re-appointment of Messrs. PricewaterhouseCoopers as auditors for the year ended 31 December 2012 and authorising the Board to fix their remuneration;
- general mandate to issue shares;
- general mandate to repurchase shares;
- renewal of the 2% annual cap to issue shares under the Long Term Incentive Scheme; and
- amendments to and adoption of the Company's new Bye-laws.
AMENDMENTS TO BYE-LAWS OF THE COMPANY
At the 2012 Annual General Meeting, special resolutions were passed by shareholders to amend the Company's Bye-laws in order to reflect (i) the amendments made to the Listing Rules and the Code contained in Appendix 14 of the Listing Rules which came into effect during the course of 2012; (ii) the amendments made to the Companies Act since the Company's Bye-laws were last amended in 2009; and (iii) certain housekeeping and administrative amendments.
SHAREHOLDERS' RIGHTS
Should shareholders wish to call a special general meeting, it must be convened according to the Company's Bye-laws, which state in summary:
- Shareholders holding not less than one-tenth of the paid up capital of the Company can, in writing to the Board or the Secretary of the Company, request a special general meeting to be called by the Board so as to carry out any business specified in such request.
- The signed written request, which should specify the purpose of the meeting, should be delivered to the Company's registered office in Hong Kong. The meeting will be held within two months after receiving the request. If the Board fails to start convening such meeting within twenty-one days of receiving the request, the shareholders themselves may do so in accordance with the provisions of Section 74(3) of the Companies Act 1981 of Bermuda.
Shareholders who have any questions for the Board may send an e-mail or letter to:
Company Secretary
Pacific Basin Shipping (HK) Ltd.
7th Floor, Hutchison House
10 Harcourt Road
Central, Hong Kong
E-mail: companysecretary@pacificbasin.com
SHAREHOLDERS COMMUNICATION POLICY
The Company has established a Shareholders Communication Policy with the objectives of enabling its shareholders exercise their rights in an informed manner and to allow the Shareholders and the investment community to engage actively with the Company. The Board of Directors has the responsibility to review the Policy regularly to ensure its effectiveness. Details of the Policy can be found on the Company's website.
PUBLIC FLOAT
As at the date of this Annual Report, based on information that is publicly available to the Company and within the knowledge of the Directors, approximately 98% of the Company's total issued share capital is held by the public.
MARKET CAPITALISATION
FINANCIAL CALENDAR FOR 2013
| Planned Date | |
| 28 February | 2012 annual results announcement |
| 15 March | 2012 Annual Report |
| 18 April | 1Q trading activities update |
| 19 April | 2013 Annual General Meeting |
| 23 April | Last day of dealings in shares with entitlement to 2012 final dividend |
| 24 April | Ex-dividend date |
| 25 April 4.30pm HK time | Deadline for lodging transfers for entitlement to 2012 final dividend |
| 26-30 April | Book closure period (both business days inclusive) |
| 30 April | 2012 final dividend record date |
| 8 May | 2012 final dividend payment date |
| 1 August | 2013 interim results announcement |
| 13 August | Last day of dealings in shares with entitlement to 2013 interim dividend |
| 14 August | Ex-dividend date |
| 15 August 4.30pm HK time | Deadline for lodging transfers for entitlement to 2013 interim dividend |
| 15-16 August | Book closure period (both business days inclusive) |
| 16 August | 2013 interim dividend record date |
| 28 August | 2013 interim dividend payment date |
| 18 October | 3Q trading activities update |
