1. Risk Management
May 26, 2011
Bates Richmond, Director of Risk Management, Texas Instruments
JT Fisher, CFO, Austin Industries
Jeff Fritts, SVP, Willis Group
Moderator: Todd Hickerson

2. Risk Management Overview
Risk Planning
Risk Mitigation
Loss Mitigation
Enterprise Risk Management
Mapping Risk
The Cost of Risk Process
Financing
Risk Control
Operational
Separation
Segregation
Avoidance
Contractual
Claims Management
Secondary Impact Management
Feedback to Risk Planning

3. Risk Management – Why?
Stuff Happens!

4. What Is “Risk Management”?
Speculative
Pure
Positive and Negative Outcomes
Typically Uninsurable
Sometimes Hedged
Negative Outcomes (almost always)
Often Insurable
Not Hedged
ERM
Management of risks that can take your company down

5. COSO Risk Cube ERM Objectives: ERM Components:
Corporate Tone: philosophy, integrity and ethics
Risk Strategy, risk appetite & risk tolerance
Differentiates risk and opportunities
Entity Units:
Potential events might impact objectives
Evaluates cost/benefit of potential risk responses
Policies & Procedures
Communicates pertinent information that allows people to carry out their responsibilities
Ongoing monitoring and separate evaluations

6. 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

7. The Risk Management Process
Identify Risks - Enterprise Risks - Operational Risks
Review Effectiveness - Periodically -Internal Audit
Strategic Planning Initiatives - Identify Risks
Assess Risks - Identify
- Evaluate
Prioritize
Define Risk Mitigation Strategy
- Avoid – Reduce
- Share – Accept
Monitor Risk - Name risk owners - Risk owners monitor and report on risk
Implement Risk Mitigation Strategy 7

8. Role of US Corporate Boards1
Evolving legal developments make robust ERM oversight prudent
Revised NYSE listing standards require risk assessment and risk management policies
SEC endorses COSO 1992 Internal Control – Integrated Framework to manage financial risk
Rating Agencies more attuned to company’s ERM system
Increasing number of directors acknowledge they must oversee business risk as part of strategy setting role
1 The Conference Board 2006 Report R RR

9. Mercer’s Grouping of Causes
The implied causes behind the stock drops were grouped into four different areas: hazard, financial, operational, and strategic risks.
Lawsuits – Lawsuits that are not related to accounting practices
Natural Disaster – Act of God and other natural phenomena
HAZARD
Accounting irregularities – Misrepresentation of financial statements and/or fraud
Cost overruns – Higher than expected overhead or other operating costs, extraordinary charges, and/or heavy investment
Ineffective Management – Poor operating decisions made by executives within the company leading to an earnings shortfall
Supply chain issues – Problems with the inventory and delivery systems leading to revenue shortfalls or cost overruns
Foreign Macro-economic – Changes in foreign interest rates and/or currency exchange rates which affects a company’s earnings
High input commodity price – Significant increase in commodity price of a major input causing an earnings decrease
Interest rate fluctuation - Changes in interest rates negatively affect company’s earnings
Competitive pressure – Loss of revenue due to pricing and/or volume pressures from competitors
Customer demand shortfall – Lower than expected industry-wide demand from customers
Customer pricing pressure – Strong customers negotiate price discounts
Loss of key customer – Loss or major reduction of business from key customers
Misaligned Products/Channels – Product selection/design does not meet customer requirements
M&A integration problems – M&A activities viewed unsound by investors; cost savings and/or synergies from M&A not achieved
Regulatory problems – Regulatory changes affect long-term earnings potential
R&D Delays – Problems with research and development
Supplier Problems – Suppliers oppose company’s strategy
FINANCIAL
OPERATIONAL
STRATEGIC

10. Heat Map/Risk Map Impact Probability Catastrophic Major Moderate Minor
Insignificant
Remote
Unlikely
Possible
Likely
Almost Certain
Almost Certain
Probability 10

11. Responses to Risk Categories
One company initially defined Risk Categories:
HIGH
Declaration under SEC Form 8K required and likely warrants immediate calls to key stakeholders, an immediate press release and comments to reassure media and stakeholders that Management is aware of the situation and is taking appropriate action.
Key stakeholders include analysts, investors, key business partners, employees, etc.
MEDIUM
Declaration under SEC Form 8K required and likely merits a press statement to be available to reporters upon request and possible calls to key stakeholders.
LOW
Below SEC Form 8K filing requirement, but may merit a press statement to be available to reporters and key stakeholders upon request

12. ERM Definitions COSO (2004)
Enterprise risk management is a process, effected by an entity’s board 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.

13. Enterprise Risk Management (ERM)
What is ERM, and what is it NOT?
ERM is: Managing the risks that can kill your company
ERM isn’t: 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

14. Enterprise Risk Management (ERM)
How can an organization really benefit from ERM – beyond “checking the 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 the horizon,
Have a clear process for how/where to bring those to management’s attention
Define “go/no go” criteria & management’s responsibilities for reviewing, disposing, and periodically reporting to the board
Do it
Examples…

15. Risk Mitigation (Pre-Loss)
Financing
Risk Control
Avoidance
Insurance
Hedge (currency, commodity)
Captive/Self-Funding
Buy-Outs
Supply Chain Management
Safety
Customer/Business Diversification
Trading (commodity, currency)
Training
Emergency/Contingency Planning
Outsourcing
Divestiture
Product or Service Limitations
Distribution Partners

16. Risk Mitigation (Pre-Loss)
Physical Protection
Contractual
Separation of Exposure Units
Segregation of Exposure Units
Interdependency Management
Transfer to contract counterparties (other than insurers)
Generally risk carried by party controlling the risk
Can be carried by party most capable to withstand the risk

17. Risk Control (Post-Loss)
Direct Loss
Indirect Loss
Emergency Response
Business Continuity Management
Brand Protection/ Management
Litigation Prevention
Interdependency Management

18. Feedback to RM Process-Identification
Identify Risks - Enterprise Risks - Operational Risks
Review Effectiveness - Periodically -Internal Audit
Strategic Planning Initiatives - Identify Risks
Assess Risks - Identify
- Evaluate
Prioritize
Define Risk Mitigation Strategy
- Avoid – Reduce
- Share – Accept
Monitor Risk - Name risk owners - Risk owners monitor and report on risk
Implement Risk Mitigation Strategy 18