04 - 1110am - Risk Management - Fisher, Fritts, Hickerson, Richmond - Slides - Copy

7/30/2019 04 - 1110am - Risk Management - Fisher, Fritts, Hickerson, Richmond - Slides - Copy

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1

Bates Richmond, Director of Risk Management, Texas Instruments

JT Fisher, CFO, Austin Industries

Jeff Fritts, SVP, Willis Group

Moderator: Todd Hickerson

Risk Management

May 26, 2011


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Risk Management Overview

Risk Planning Risk Mitigation Loss Mitigation

Enterprise RiskManagement

Mapping Risk

The Cost of RiskProcess

Financing

Risk Control Operational

Separation

Segregation

Avoidance

Contractual

Claims Management

Secondary ImpactManagement

Feedback to RiskPlanning


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Risk Management Why?

Stuff Happens!


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What Is Risk Management?

Positive and Negative Outcomes

Typically Uninsurable

Sometimes Hedged

Negative Outcomes (almost always)

Often Insurable

Not Hedged

Speculative Pure

ERM

Management of risks that can takeyour company down


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COSO Risk Cube

Risk Strategy, risk appetite & risk tolerance

Differentiates risk and opportunities

Potential events might impact objectives

Evaluates cost/benefit of potential risk responses

Policies & Procedures

Communicates pertinent information that allowspeople to carry out their responsibilities

Ongoing monitoring and separate evaluations

ERM Components:

Corporate Tone: philosophy, integrity and ethics

EntityUnits:


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Who Does Risk Management

Highly Interdisciplinary

Chief Risk Officer/Risk Management/ER Manager

Operations

Supply Chain Management HR

Finance

Legal

Across Entities

Holding Co., Subsidiaries,Stakeholders

Cultural Aspect everyone can contribute


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The Risk Management Process

7

Identify Risks- Enterprise Risks- Operational Risks

Implement RiskMitigationStrategy

Monitor Risk

- Name risk owners- Risk owners

monitorand report on risk

Review

Effectiveness- Periodically-Internal Audit

Strategic

PlanningInitiatives

- Identify Risks

Assess Risks- Identify

- Evaluate- Prioritize

Define Risk

MitigationStrategy

- Avoid Reduce- Share Accept


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Role of US Corporate Boards1

Evolving legal developments make robust ERM oversight prudent

Revised NYSE listing standards require risk assessment and riskmanagement policies

SEC endorses COSO 1992 Internal Control Integrated Framework

to manage financial risk Rating Agencies more attuned to companys ERM system

Increasing number of directors acknowledge they must oversee businessrisk as part of strategy setting role

1 The Conference Board 2006 Report R-1390-06-RR


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Mercers Grouping of Causes

LawsuitsLawsuits that are not related to accountingpractices

Natural Disaster Act of God and other naturalphenomena

HAZARD

Accounting irregularities Misrepresentation of financialstatements and/or fraud

Cost overruns Higher than expected overhead or otheroperating costs, extraordinary charges, and/or heavyinvestment

Ineffective Management Poor operating decisions madeby executives within the company leading to an earningsshortfall

Supply chain issues Problems with the inventory anddelivery systems leading to revenue shortfalls or costoverruns

Foreign Macro-economic Changes in foreign interest rates and/orcurrency exchange rates which affects a companys earnings

High input commodity price Significant increase in commodity price ofa major input causing an earnings decrease

Interest rate fluctuation - Changes in interest rates negatively affectcompanys earnings

Competitive pressure Loss of revenue due to pricing and/or volumepressures from competitors

Customer demand shortfall Lower than expected industry-widedemand from customers

Customer pricing pressure Strong customers negotiate price discounts

Loss of key customer Loss or major reduction of business from keycustomers

Misaligned Products/Channels Product selection/design does notmeet customer requirements

M&A integration problems M&A activities viewed unsound byinvestors; cost savings and/or synergies from M&A not achieved

Regulatory problems Regulatory changes affect long-term earningspotential

R&D Delays Problems with research and development

Supplier ProblemsSuppliers oppose companys strategy

FINANCIAL

OPERATIONAL STRATEGIC

The implied causes behind the stock drops were grouped into four different areas: hazard, financial, operational, and strategic risks.


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Heat Map/Risk Map

1

Remote Unlikely Almost CertainLikelyPossibleInsignificant

Minor

Moderate

Major

Almost Certain

Catastrop

hic

Probability

Impact


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Responses to Risk Categories

HIGH

Declaration under SEC Form 8K required and likely warrantsimmediate calls to key stakeholders, an immediate press releaseand comments to reassure media and stakeholders thatManagement is aware of the situation and is taking appropriateaction.

Key stakeholders include analysts, investors, key businesspartners, employees, etc.

MEDIUM Declaration under SEC Form 8K required and likely merits a press

statement to be available to reporters upon request and possiblecalls to key stakeholders.

LOW Below SEC Form 8K filing requirement, but may merit a press

statement to be available to reporters and key stakeholders uponrequest

One company initially defined Risk Categories:


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ERM Definitions

Enterprise risk management is a process, effected by an entitysboard if directors, management and other personnel, applied in

strategy setting and across the enterprise, designed to identify

potential events that may affect the entity, and manage risk to be

within its risk appetite, to provide reasonable assurance

regarding the achievement of entity objectives.

COSO (2004)


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Enterprise Risk Management (ERM)

What is ERM, and what is it NOT?

ERM is: Managing the risks that can kill your company

ERM isnt: Managing all the sundry risks encountered in operating

your business

The amount of E risks already within your business describes your E-risk tolerance

What is the smallest $ size of risk event could cripple or kill your

organization? How many of risks of that size or larger already exist in your business

today?

a (sizes of those) x b (number of those) = your real risk tolerance


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Enterprise Risk Management (ERM)

How can an organization really benefit from ERMbeyond checkingthe box?

Clearly define the E risks

Get buy-in on definition from management & board

Inventory those within your business today

Utilize multiple sets of eyes looking for potential new E-risks on thehorizon,

Have a clear process for how/where to bring those to managementsattention

Define go/no go criteria & managements responsibilities for

reviewing, disposing, and periodically reporting to the board Do it

Examples


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Risk Mitigation (Pre-Loss)

Financing Risk Control Avoidance

Insurance

Hedge (currency,commodity)

Captive/Self-Funding

Buy-Outs

Supply ChainManagement

Safety

Customer/BusinessDiversification

Trading(commodity,

currency)

Training

Emergency/Contingency Planning

Outsourcing

DivestitureProduct or ServiceLimitations

DistributionPartners


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Risk Mitigation (Pre-Loss)

Physical Protection Contractual

Separation ofExposure Units

Segregation ofExposure Units

InterdependencyManagement

Transfer tocontractcounterparties(other thaninsurers)

Generally riskcarried by party

controlling the risk

Can be carried byparty mostcapable towithstand the risk


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Risk Control (Post-Loss)

Direct Loss Indirect Loss

EmergencyResponse

BusinessContinuityManagement

Brand Protection/Management

LitigationPrevention

InterdependencyManagement


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Feedback to RM Process-Identification

18

Identify Risks- Enterprise Risks- Operational Risks

Implement RiskMitigationStrategy

Monitor Risk

- Name risk owners- Risk owners

monitorand report on risk

Review

Effectiveness- Periodically-Internal Audit

Strategic

PlanningInitiatives

- Identify Risks

Assess Risks- Identify

- Evaluate- Prioritize

Define Risk

MitigationStrategy

- Avoid Reduce- Share Accept

04 - 1110am - Risk Management - Fisher, Fritts, Hickerson, Richmond - Slides - Copy

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