GE 2012 Annual Report Download - page 41

management’s discussion and analsis
GE 2012 ANNUAL REPORT 39
principally from the benefit attributable to the high tax basis in
the entity sold in the Business Property disposition ($0.3 billion),
increased benefits from low taxed global operations ($0.3 billion)
and the absence of the 2011 high-taxed disposition of Garanti
Bank ($0.1 billion). Partially offsetting the decrease in tax expense
was the absence in 2012 of the 2011 benefit from resolution of
the 2006-2007 Internal Revenue Service (IRS) audit ($0.2 billion),
which is reported in the caption “All other—net” in the effective
tax rate reconciliation in Note 14, and from higher pre-tax income
in 2012 than in 2011, which increased pre-tax income $0.3 billion
and increased the expense ($0.1 billion).
The GECC effective tax rate was 11.8% in 2011, compared
with (45.8)% in 2010. Comparing a tax benefit to pre-tax income
resulted in a negative tax rate in 2010. The GECC tax expense of
$0.9 billion in 2011 increased by $1.9 billion from a $1.0 billion
benefit in 2010. The higher 2011 tax expense resulted principally
from higher pre-tax income in 2011 than in 2010 of $5.5 billion,
which increased the tax expense ($1.9 billion). Also increasing the
expense was a benefit from resolution of the 2006-2007 Internal
Revenue Service (IRS) audit ($0.2 billion) that was less than the
benefit from resolution of the 2003-2005 IRS audit ($0.3 billion),
both of which are reported in the caption “All other—net” in the
effective tax rate reconciliation in Note 14.
Global Risk Management
A disciplined approach to risk is important in a diversified organi-
zation like ours in order to ensure that we are executing
according to our strategic objectives and that we only accept risk
for which we are adequately compensated. We evaluate risk at
the individual transaction level, and evaluate aggregated risk at
the customer, industry, geographic and collateral-type levels,
where appropriate.
Risk assessment and risk management are the responsibility
of management. The GE Board of Directors (Board) has oversight
for risk management with a focus on the most significant risks
facing the Company, including strategic, operational, financial and
legal and compliance risks. At the end of each year, management
and the Board jointly develop a list of major risks that GE plans to
prioritize in the next year. Throughout the year, the Board and the
committees to which it has delegated responsibility dedicate a
portion of their meetings to review and discuss specific risk top-
ics in greater detail. Strategic, operational and reputational risks
are presented and discussed in the context of the CEO’s report
on operations to the Board at regularly scheduled Board meet-
ings and at presentations to the Board and its committees by the
vice chairmen, Chief Risk Officer (CRO), general counsel and other
employees. The Board has delegated responsibility for the over-
sight of specific risks to Board committees as follows:
Þ The Risk Committee of the GE Board (GE Risk Committee)
oversees GE’s risk management of key risks, including stra-
tegic, operational (including product risk), financial (including
credit, liquidity and exposure to broad market risk) and repu-
tational risks, and the guidelines, policies and processes for
monitoring and mitigating such risks. The GE Risk Committee
also oversees risks related to GE Capital and jointly meets
with the GECC Board of Directors (GECC Board) at least four
times a year.
Þ The Audit Committee oversees GE’s and GE Capital’s policies
and processes relating to the financial statements, the finan-
cial reporting process, compliance and auditing. The Audit
Committee monitors ongoing compliance issues and matters,
and also semi-annually conducts an assessment of compli-
ance issues and programs. The Audit Committee jointly meets
with the GECC Board once a year.
Þ The Public Responsibilities Committee oversees risk manage-
ment related to GE’s public policy initiatives, the environment
and similar matters, and monitors the Company’s environ-
mental, health and safety compliance.
Þ The Management Development and Compensation
Committee oversees the risk management associated with
management resources, structure, succession planning,
management development and selection processes, and
includes a review of incentive compensation arrangements to
confirm that incentive pay does not encourage unnecessary
risk taking and to review and discuss, at least annually, the
relationship between risk management policies and practices,
corporate strategy and senior executive compensation.
Þ The Nominating and Corporate Governance Committee over-
sees risk related to the Company’s governance structure and
processes and risks arising from related-person transactions.
The GE Board’s risk oversight process builds upon management’s
risk assessment and mitigation processes, which include stan-
dardized reviews of long-term strategic and operational planning;
executive development and evaluation; code of conduct compli-
ance under the Company’s The Spirit & The Letter; regulatory
compliance; health, safety and environmental compliance; finan-
cial reporting and controllership; and information technology and
security. GE’s CRO is responsible for overseeing and coordinating
risk assessment and mitigation on an enterprise-wide basis. The
CRO leads the Corporate Risk Function and is responsible for
the identification of key business risks, providing for appropriate
management of these risks within GE Board guidelines, and
enforcement through policies and procedures. Management has
two committees to further assist it in assessing and mitigating
risk. The Corporate Risk Committee (CRC) meets at least four
times per year, is chaired by the CRO and comprises the Chairman
and CEO, vice chairmen, general counsel and other senior level
business and functional leaders. It has principal responsibility for
evaluating and addressing risks escalated to the CRO and
Corporate Risk Function. The Policy Compliance Review Board
met 16 times in 2012, is chaired by the Company’s general coun-
sel and includes the Chief Financial Officer and other senior level
functional leaders. It has principal responsibility for monitoring
compliance matters across the Company.