CPS Credit Union Co-operative (ACT) Limited
For the year ended 30 June 2004

This statement outlines the main Corporate Governance practices that were in place throughout the financial year. These practices are dealt with under the following headings: Board of Directors and its Committees, Internal Control Framework, Business Risk Management, Ethical Standards and the Role of Members.

Board of Directors and its Committees

Role of the Board

The Board's primary role is the protection and enhancement of long-term member value.

To fulfill this role, the Board is responsible for the overall Corporate Governance of Community CPS including its strategic direction, establishing goals for management and monitoring the achievement of these goals.

Board Processes

To assist in the execution of its responsibilities, the Board has established three standing Committees:

• Executive
• Audit and Risk
• Corporate Governance.

These Committees have written mandates, which are reviewed at least annually. A detailed outline of the role of each Committee is provided in this Statement. The Board has also established a framework for the management of the Credit Union including a system of internal control, a business risk management process and the establishment of appropriate ethical standards.

The full Board currently holds twelve scheduled meetings each year, plus strategy meetings and any extraordinary meetings at such other times as may be necessary to address any specific significant matters that may arise.

The agenda for meetings is prepared by the Chief Executive in consultation with the Chairman. Standing items include the management report, financial reports, strategic matters, risk reports, governance and compliance issues. Submissions are circulated in advance. Executives are regularly involved in Board discussions and Directors have other opportunities for contact with a wider group of employees.

The Board conducts an annual review of its processes and committee structure to ensure that it is able to carry out its functions in the most effective manner.

Composition of the Board

The names of the Directors of the Credit Union in office at the date of this Statement are set out in the Directors' Report on pages 8 to 11 of this financial report. During the year, the Board completed a review of its own workings, including the development of a strategy for smooth succession of Directors. It also increased its numbers from six to eight, by filling two casual vacancies, in April 2004. The composition of the Board is determined using the following principles:

• the Board shall comprise of at least five Directors. This number may be increased where it is felt that expertise is required in specific areas, or when an outstanding candidate is identified. There are currently eight Directors. All Directors are non-executive.
• the Board should have enough Directors to serve on various committees or taskforces of the Board without making it difficult for them to fully discharge their responsibilities.
• the Board should comprise Directors with a broad range of expertise in business.
• where a casual vacancy arises, the Board may appoint a replacement Director to fill that casual vacancy. The term of the office for a Director appointed to fill a casual vacancy, ends at the end of the next AGM, after the Director's appointment.

The composition of the Board is reviewed on an annual basis by the Directors to ensure that it has the appropriate mix of expertise and experience. When a casual vacancy arises, or where it is considered that the Board would benefit from the services of a new Director with particular skills, the Board determines the selection criteria for the position based on the skills deemed necessary for the Board to best carry out its responsibilities. Potential candidates are identified by the Board. The Board then appoints the most suitable candidate. Casual vacancies are subject to approval at the next AGM, by members.

Conflict of Interest

In accordance with the Corporations Act 2001 and the Credit Union's Constitution, Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Credit Union. Where the Board considers that a significant conflict exists, the Director concerned is not present at the meeting whilst the item is considered. The Board has developed procedures to assist Directors to disclose potential conflicts of interest.

Details of Director related entity transactions with the Credit Union are set out in the notes to the financial statements.

Director Education

The Credit Union has a Professional Development requirement whereby each Director is required to undertake a minimum of thirty (30) hours professional development annually.

The Credit Union also has a process to educate new Directors about the nature of the business, current issues, the corporate strategy and the expectations of the Credit Union concerning performance of Directors. Directors also have the opportunity to visit facilities and meet with management to gain a better understanding of business operations.

Board Performance Appraisal

On an annual basis, the Board of Directors undertakes Board, Individual Director, Chairman and Chief Executive performance appraisals. The results of these appraisals are communicated to each of the participants.

Independent Professional Advice and Access to Credit Union Information

Each Director has the right of access to all relevant Credit Union information and to the Credit Union's executives and, subject to prior consultation with the Chairman, may seek independent professional advice at the Credit Union's expense. A copy of advice received by the Director is made available to all other members of the Board.

Executive Committee

The role of the Executive Committee is documented in a Charter which is approved by the Board.

The Committee consists of at least two non-executive Directors. The role of the Executive Committee covers a variety of matters including legislative and prudential standard compliance, monitoring and approving interest rate movements, capital expenditure approval, policy amendment, management staff contracts and personnel management policy.

The members of the Committee during the year were:

• Mr G J Green (Chairman)
• Mr A P Toohey

The Committee met nine times during the year.

Audit and Risk Committee

The role of the Audit and Risk Committee is documented in a Charter that is approved by the Board.

Membership of the Committee shall comprise of at least three non-executive Directors. The Chairman of the Board shall be an ex-officio member of the Committee. The primary roles of the Committee are to review and assess risk management issues, approve the Internal Audit Programme, review application of and compliance with prudential standards and other regulatory matters, provide input into Internal Auditor appointment and to review and assess the adequacy of financial controls within the Credit Union.

It also gives the Board additional assurance regarding the quality and reliability of financial information prepared for use by the Board in determining policies or for inclusion in financial reports. The Committee has authority to obtain such independent professional advice, as it considers necessary.

The members of the Audit and Risk Committee during the year were:

• Mr A P Toohey (Chairman)
• Mr L H Hickey
• Ms F H Raymond (member of Committee from May 2004)
• Mr W F Thomas

The Internal and External Auditors, the Chief Executive, the Chief Financial Officer and the Head of Risk and Audit, as well as other relevant staff, are invited to Audit and Risk Committee meetings at the discretion of the Committee. The Committee met seven times during the year.

The overall responsibilities of the Committee include:

• Reviewing and assessing risk management issues, including credit risk, operational risk, market risk and balance sheet risk issues;
• Reviewing application of and compliance with prudential standards and other government regulations;
• Reviewing and assessing the adequacy of financial controls within the Credit Union;
• Reviewing accounting policies adopted by the Credit Union;
• Making recommendations to the Board for the appointment of both Internal and External Auditors;
• Reviewing and assessing the Internal and External audit plans for, and reports on, the Credit Union, including specifically, any material issues that arise as a result of such audits;
• Reviewing Annual Financial Statements of the Credit Union; and
• Reviewing and recommending to the Board the annual budget. The review to include an assessment of the underlying Budget assumptions and framework in accordance with the principles outlined in the Board Strategic Plan.

Corporate Governance Committee

The role of the Corporate Governance Committee is documented in a Charter which is approved by the Board. The Committee consists of at least two non-executive Directors. The role of the Corporate Governance Committee is to promote sound corporate governance practices within the organisation, including the Credit Union Constitution, Director remuneration, Director evaluation, Board size/composition and Director professional development.

The members of the Committee during the year were:

• Mr C M Doogan (Chairman)
• Ms S A Chapman
• Mr G J Green
• Ms A M O'Donnell (member of Committee from May 2004)

The Committee met seven times during the year.

Internal Control Framework

The Board acknowledges that it is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors and irregularities. To assist in discharging this responsibility, the Board has instigated an internal control framework that can be described under the following headings:

• Financial Reporting - there is a comprehensive budgeting system with an annual budget approved by the Directors. Monthly actual results are reported against budget and revised forecasts for the year are prepared regularly and submitted to the Board for review.
• Quality and Integrity of Personnel - the Credit Union has a detailed policy and procedures manual. Written confirmation of compliance with policies is obtained from all operating units. Formal appraisals are conducted for all employees.
• Operating Unit Controls - financial controls and procedures including information system controls are detailed in procedure manuals. Operating units complete Monthly Compliance Questionnaires confirming compliance with these procedures and key areas of control.
• Functional Specialty Reporting - key areas subject to regular reporting to the Board include Risk Management, Credit Management and Legal and Insurance matters.
• Authorities and Delegations - the Credit Union has a detailed schedule of Authorities and Delegations covering all aspects of the Credit Union's operations.
• Capital Investment Appraisal - the Credit Union has clearly defined guidelines for capital expenditure. These include annual budgets, detailed appraisal through business case analysis, levels of delegated authority and due diligence requirements.
• No Fault Reporting Policy - a no-fault reporting policy exists to assist in the reporting of material issues, arising out of the organisation's operations.
• Key Performance Indicators - the Board regularly reviews a range of key performance indicators, which indicate how the Credit Union is progressing in a number of areas of its operations.

Internal Audit

The Internal Auditors assist the Board in ensuring compliance with these internal controls. The Audit and Risk Committee is responsible for approving the program of internal audit visits to be conducted each financial year and for the scope of the work to be performed. The Credit Union outsources its internal audit program to a firm of accountants, WalterTurnbull.

Business Risk Management

There are two risk Committees operating within the Credit Union at management level. These are:

• The Risk Management Committee, and
• The Credit Risk Committee.

The Board receives reports and minutes from these Committees at each Board meeting.

The Audit and Risk Committee also provides advice to the Board and reports on the status of business risks to the Credit Union through integrated risk management programs aimed at ensuring risks are identified, assessed and appropriately managed.

The Credit Union's risk management policies and procedures cover capital, liquidity, credit, market and operational risk.

Each business operational unit is responsible and accountable for implementing and managing the standards required by the programs. A Risk Executive and a Compliance Manager are employed by the Credit Union.

A succession plan is in place to ensure senior positions are filled by competent and knowledgeable people when retirements or resignations occur.

Practices are established such that:

• capital expenditure and revenue commitments above a certain amount are approved by the Board
• financial exposures are controlled
• occupational health and safety standards and management systems are monitored and reviewed to achieve high standards of performance and compliance with regulations
• business transactions are properly authorised and executed.

Ethical Standards

The Credit Union has a Staff Code of Conduct Manual and a Guidelines for Directors' Manual, both of which set out the relevant standards in accordance with which each Director, manager and employee of the Credit Union is expected to act.

The requirement to comply with these ethical standards is communicated to all Directors and employees. The Manuals deal with the following main areas:

• professional conduct
• dealing with customers and consumers
• dealing with suppliers
• dealing with advisors and regulators
• dealing with competitors
• dealing with the community
• dealing with other employees.

All Directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the Credit Union. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment.

Communication with Members

The Board aims to ensure that the members are informed of all major developments affecting the Credit Union's state of affairs. Information is communicated to members as follows:

• Annual Reports are available to all members who request them. The Board ensures that the Annual Report includes relevant information about the operations of the Credit Union during the year, changes in the state of affairs of the Credit Union and details of future developments, in addition to the other disclosures required by the Corporations Act 2001.
• all documents that are released publicly are made available on the Credit Union's Internet web site at www.cpsact.com.au.
• newsletters are distributed to members on a regular basis throughout the year. They provide information on governance and operational matters for the information of members.

The Board encourages full participation of members at the Annual General Meeting to ensure a high level of accountability and identification with the Credit Union's strategy and goals. Important issues are presented to the members as resolutions. To assist members in communicating issues to the Board, reply paid question cards are issued with the Annual Report.

The members are requested to vote on the appointment and aggregate remuneration of Directors. Copies of the Constitution are provided to each new member. It is also available to any member who requests it.

During the year, the Board completed a thorough review of the Constitution and recommended a number of changes to it, which were considered and approved at a Special General Meeting of members, held on 20 August 2004.