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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.

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Presentation on theme: "1 Bates Richmond, Director of Risk Management, Texas Instruments JT Fisher, CFO, Austin Industries Jeff Fritts, SVP, Willis Group Moderator: Todd Hickerson."— Presentation transcript:

1 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

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

3 Risk Management – Why? Stuff Happens!

4 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 take your company down

5 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 allows people to carry out their responsibilities Ongoing monitoring and separate evaluations ERM Components: Corporate Tone: philosophy, integrity and ethics ERM Objectives: Entity Units:

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

8 Role of US Corporate Boards 1  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 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 The implied causes behind the stock drops were grouped into four different areas: hazard, financial, operational, and strategic risks.

10 Heat Map/Risk Map 10 RemoteUnlikelyAlmost CertainLikelyPossible Insignificant Minor Moderate Major Almost Certain Catastrophic Probability Impact

11 Responses to 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 One company initially defined Risk Categories:

12 ERM Definitions 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. COSO (2004)

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 Insurance Hedge (currency, commodity) Captive/Self- Funding Buy-Outs Supply Chain Management Safety Customer/Business Diversification Trading (commodity, currency) Training Emergency/Conting ency Planning Supply Chain Management Safety Customer/Business Diversification Trading (commodity, currency) Training Emergency/Conting ency Planning Outsourcing Divestiture Product or Service Limitations Distribution Partners 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 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 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 Emergency Response Business Continuity Management Brand Protection/ Management Litigation Prevention Interdependency Management Brand Protection/ Management Litigation Prevention Interdependency Management

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


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