CONFIDENTIAL AND PROPRIETARY THE INSTITUTE OF COMPANY SECRETARIES OF INDIA THE INSTITUTE OF COST ACCOUNTANTS OF INDIA Half day Seminar on Enterprise Risk Management Presented by: D. Sundaram Vice Chairman & Managing Director, TVS Capital Funds Limited March 7, 2015

SOME BACKGROUND CONCEPTS AND THOUGHTS RISK vs UNCERTAINTY o Variation in outcome around an expectation versus o Doubts about ability to know / absence of information Sources of risk / exposure to risk Pure risk / speculative risk Insurable risk What do you know (A) vs what you do not know (B) o (A) – Degree of impact o (B) – Black Swan 1

RISK AND UNCERTAINTY 2 ? Uncertainty (Randomness) Risk Management Oxymoron? Can’t Do Anything Can Do Something Know Don’t Know

SOME BACKGROUND CONCEPTS AND THOUGHTS… Contd Enterprise risk o Means looking at all risks to Balance Sheet or the ongoing concern of an organization o Reputation Risk ? Strategic Risk Management o Leveraging opportunities vs mitigating risks o Performance gap vs Opportunity gap Targeting Behavioral risks key to improve loss control o E.g. Safety and Security Every manager to have risk management thinking Risk Management Framework is only an enabler o Safety Health Environment o Policies Compliance o Control Assurance (Internal Audits) o Operating Control Assessment o Risk Management Framework 3

RISK AND UNCERTAINITY ARE INTEGRAL PART OF LIFE 4 Adventure without Risk is

RISK AND UNCERTAINITY ARE INTEGRAL PART OF LIFE 5 Adventure without Risk is Disneyland (Dong Coupland, Canadian Author)

6 A ship in harbor is safe but is not what ships are built for

7 Warren Buffet on RISK Don’t Measure the Depth of the river with both feet Risk comes from not knowing what you are doing.

8 VUCA VOLATILITY UNCERTAINTY COMPLEXITY AMBIGUITY Nature is never a straight Line = spirals everywhere

THE SPIRAL IS CENTRAL TO LIFE – THE STRAIGHT LINE DOES NOT WORK QUITE OFTEN 9 A B A B

ORGANIZATIONAL (ENTERPRISE) RISK MANAGEMENT 10 Overall Mission and Purpose Risk / Uncertainty Assessment Risk Mitigation and Control Risk Financing Program Admin Building Blocks

RISK ASSESSMENT 11 Role of Organizational Management to indentify, not to externalize to a “risk manager” Identification (RISK SOURCES) Analysis Measurement

RISK SOURCES 12 Physical Social Political Legal Economic Operational Cognitive HAZARDS Environmental conditions that elevate likelihood and/or severity EXPOSURE PERILS / OPPORTUNITIES Actual causes of loss or gain

WIDE SCOPE OF CORPORATE RISK EXPOSURE 13 Economic Policies Demand Conditions New Product Introductions Consumer Taste Competitive Structure Sales and distribution Marketing approaches Commodity prices Energy prices Technology development Process Improvements Logic systems Input supply lines Hazards Natural catastrophes Terrorist events Financial market prices Inflation rate CORPORATION

PROCESSES / WAYS FOR IDENTIFICATION 14 Environmental Scan Financial / Legal Documentation COCA: Contracts, Obligations, Commitments, Agreements Onsite inspections Interviews Statistical Analysis Benchmarking ALERT VIGILANT INSIGHTFUL PROACTIVE MANAGEMENT

RISK ANALYSIS 15 Source Risk / Hazard Factor Exposure Consequence Outcome Perils / Opportunities Judgment Decisions Actions

RISK MEASUREMENT 16 Be aware of Direct & Indirect Costs and Consequences Learn to separate important from unimportant Likelihood / Severity

MEASUREMENT: RISK MATRIX 17 High Low High Medium SEVERITY LIKELIHOOD

18 ASSESSING THE MATERIALITY OF RISK Pg 115, CFO: Architect Of The Corporation’s Future, Wiley/PriceWaterhouse

RISK ASSESSMENT PROCESS 19 Physical Environment Social Environment Political Environment Legal Environment Economic Environment Operational Environment Cognitive Environment Physical Assets Financial Assets Human Assets Legal Assets Moral Assets HAZARDS/RISKFACTORSHAZARDS/RISKFACTORS PERILS/OPPORTUNITIESPERILS/OPPORTUNITIES OUTCOMESOUTCOMES CONSEQUENCESCONSEQUENCES The Risk Field

RISK MITIGATION (CONTROL) MEASURES AND PROCESSES  AVOIDANCE  TRANSFER / DISTRIBUTION  REDUCTION  PREVENTION  NEUTRALISATION 20 Prevent Eliminate Reduce

RISK MITIGATION (CONTROL) REDUCTION  INCREASE IN KNOWLEDGE AND INFO REDUCES THE RISK IMPROVED INFORMATION  Barriers and Counter measures 21

RISK MITIGATION (CONTROL) PREVENTION  Eliminate likelihood of loss occurring E.g. Location of facilities Legal screening of contracts Concurrent Audit IPR registration Policies / Procedures 22

RISK MITIGATION (CONTROL) NEURALISATION Measures to reduce effects of risk to near zero by arranging to offset one risk with another action. e.g. Helpers 3P Sourcing for IR reasons BCP Succession Planning 23

ASSET EXPLOSURES TO RISK Physical Assets Property AssetType Cause of LossNatural Hazard Behavioural Type of LossDirect Indirect Financial Assets Human Assets. Key man risk Reputation Asset. 24

REPUTATION ASSET Context : Societal Themes / Pressures Investigative reporting Threats of litigation Global Standards Political / Special Interest Groups - Neglect of warning signals - Poor implementation of Processes / Procedures / Policies - Many instances PastRecent Sara LeeTOYOTA RECALL NikeB.P Coca ColaSatyam 25

Short Title: Risk Definition: Current Safeguards: New/Improved Safeguards Needed: Actions Required: Action Responsible Deadline 20XX SiA Ref. Assessment of: Impact? Likelihood? Level of Acceptability? With the implementation of the above actions, when will the level of risk become acceptable? Other Notes: SAMPLE RISK MITIGATION TEMPLATE

Focusing on the upside “Enterprise is about being prepared to go for it - its about having a real passion for what you’re doing and wanting to win. It’s about being courageous and taking risks. Accepting that when you take risks you can make mistakes, but that these can provide a rich learning opportunity” - Niall Fitzgerald -Ex Unilever Chairman

INFORMATION – A POWERFUL INPUT TO RISK MANAGEMENT Transparency of information Provided by an unbiased source Tells you what you are going in for Facilitates mid- course correction Helps guage `stop loss’ limit Helps keep exposure within the organisation `risk appetite’ Distils learnings from past experiences

29 A Quote  “Trying to enclose risk is a bit like trying to embrace water – it seeps into just about everything.. Pervasiveness is daunting, yet most risk can be channeled and directed in less threatening ways.  Those that pose little hazard can be mopped up and disposed, those that present serious danger can be dammed up and contained, and others with thought and ingenuity can be captured and transformed into new sources of value”

In conclusion : “ It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change……” Charles Darwin

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