Risk Management for

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Presentation

• Risk Management for
• Competitive Advantage

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Presentation

• COSO

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COSO ERM Framework
Source Committee of Sponsoring Organizations of
the Treadway Commission www.coso.org. Used with
permission.
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Presentation

• Panasonic

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COSO and Panasonic

• Panasonic implemented COSO. It identified two
  categories of risks in its ERM program
• 800 Business Risks.
• 2100 Common Risks
• Total -- 2900

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Results of Business Risk Consolidation
External environment
- Business risks in the external environment,
operational processes, and internal environment -
Customers
Competitors
Business partners
Failures to respond to changing customer needs
Technical partners
Subcontractors
Suppliers
Increasing competition due to competitors'
products
Country-specific risks
Naturaldisasters
Falling market prices
Dependence on specific business partners
Inadequate business partner handling
Laws and regulations
Operational processes
RD
Marketing Sales
Manufacturing
Delayed production
Lack of differential technology
Failures of sales channel strategies
Delayedtechnologicaldevelopment
Failures of sales promotion
PL and quality issues
Internal environment
Cost increases (increasing inventory, soaring
material costs, declining yield)
Delayed collaboration due to insufficient linkage
between divisions
Internal infrastructure and organization
operations
Information
Insufficient manufacturing reforms and IT
innovations
Organization
Human resources
Staff allocation and development
Structural reform-related issues
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Business Structure
Business domain
Business Domain Companies and Group Companies
Segment
Global and Group Head Office
AVC
AVC Networks
Panasonic AVC Networks Company Panasonic
Communications Co., Ltd. Panasonic Mobile
Communications Co., Ltd. Panasonic Automotive
Systems Company Panasonic System Solutions
Company Panasonic Shikoku Electronics Co., Ltd.
Fixed-line communications
Mobile communications
Automotive electronics
Systems
Home appliances, household equipment, healthcare
systems
Home Appliances
Matsushita Home Appliances Company, Matsushita
Refrigeration Company Healthcare Business
Company Lighting Company Matsushita Ecology
Systems Co., Ltd.
Lighting
Environmental systems
Semiconductors
Semiconductor Company Matsushita Battery
Industrial Co., Ltd. Panasonic Electronic
Devices Co., Ltd. Motor Company Others
Components and Devices
Display devices
Head Office CISC Panasonic Design Company RD
divisions Sales division Overseas divisions
Batteries
Electronic components
Motors
FA, Corporate eNet Business Division
Solutions
Panasonic Factory Solutions Co., Ltd., and others
Matsushita Electric Works, Ltd., PanaHome
Corporation
MEW and PanaHome
Victor Company of Japan, Ltd.
JVC
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Group-wide Risk Management System for General
Control
(2) Establish a GG Risk Management Committee to
address the current problems
After the Committee's establishment
Establishing and improving Group-wide RM
system Instructing risk assessment
ltRoles of the Committeegt 1 Establishing and
improving Group-wide RM system 2 Conducting
Group-wide risk assessment 3 Reporting to the
President, and Board of Corporate Auditors 4
Studying possible measures to prepare for major
risks suggesting such measures to President and
Corporate Functional Divisions 5 Improving
Group-wide support systems against emergencies
GG RM Committee
Committee
Corporate Functional Division A
Domains
Support
Subsidiaries
Committee
Corporate Functional Division B
Corporate Regional Management Divisions
/ Regional HQs
Support
Corporate Functional Division C
Results of Group-wide risk assessment
Collecting risk information from across the Group
Secretariat
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Clarify Sections Responsible for Each Risk
(4) Information systems
1. Disasters and accidents
Shutdown or malfunction of information systems and communication networks General Affairs Group, Corporate Information Security Division
Unauthorized use of information systems General Affairs Group, Corporate Information Security Division
Inadequate security measures related to information systems General Affairs Group, Corporate Information Security Division
Earthquakes, typhoons, tsunamis, floods, and other natural disasters General Affairs Group, Overseas Security management Office
Fires, explosions, airplane crashes, terrorist attacks, and other major destructive or violent events General Affairs Group, Corporate Personnel Group, Overseas Security Management Office
2. Politics, economy, and society
(5) Environment
Wars, civil wars, conflicts, etc. General Affairs Group, Overseas Security Management Office
Corporate threats, abduction, and violent civil unrest General Affairs Group, Overseas Security Management Office
Environmental pollution Corporate Environmental Affairs Group
Waste treatment Corporate Environmental Affairs Group
Environmental regulations Corporate Environmental Affairs Group
(6) International relations
3. Operations
Violation of security export control Corporate Legal Affairs Division
Trade issues Corporate Legal Affairs Division
(1) Quality, CS, and intellectual property
PL and recall issues, other quality problems Corporate Quality Administration Division
Failure in complaint-handling Corporate CS Division
Intellectual property right infringements Corporate Intellectual Property Division
(7) Finance
Bad loans and business partner bankruptcy Corporate Accounting Group
Tax and accounting system changes Corporate Accounting Group
Exchange rate fluctuations Corporate Finance IR Group
Interest fluctuations Corporate Finance IR Group
Stock price fluctuations Corporate Finance IR Group
Impairment of long-term assets and deferred tax assets Corporate Accounting Group
(2) Sales and procurement
Violation of antitrust (competition laws) Corporate Legal Affairs Division
Bribery Corporate Legal Affairs Division
Violation of Subcontractors Act Corporate Procurement Division
Soaring raw material prices and unavailability Corporate Procurement Division
(8) Labor issues
(3) Information
Human rights issues, including sexual harassment Industrial Relations Group, Corporate Personnel Group, Overseas Security Management Office
Employment Corporate Personnel Group, Industrial Relations Group
Industrial accidents Industrial Relations Group
Health issues such as infectious diseases Industrial Relations Group, Overseas Security Management Office
Trade secret leakage Corporate Information Security Division
Private data leakage and violation of privacy Corporate Information Security Division
Information security incidents related to products and services Corporate Information Security Division
Insider trading General Affairs Group
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Presentation

• Hurricane Andrew

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Situation

• In 1992, Hurricane Andrew caused significant
  losses to Allstate, State Farm, and other
  insurance companies. At the time
• Florida insurance law did not handle flood and
  wind damage properly.
• Insurance companies lobbied for and received
  changes in the law.
• The changes were in place in 2004 and 2005.

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Presentation

• Ford and Palladium

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Situation

• In the 1990s, Ford Motor Corp. recognized an
  exposure to price fluctuations in the rare metal
  palladium.
• Palladium was an important component in catalytic
  converters.
• Ford implemented a financial risk management
  strategy.
• It hedged the exposure by signing long-term
  contracts to purchase Palladium at stable prices.

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Risk Management?

• Fords Research and Development department
  recognized the same risk.
• It redesigned catalytic converters requiring
  minimal palladium.
• In 2001, the price per ounce of palladium dropped
  from 1,500 to 400.
• Ford took a 1 billion financial loss on the
  long-term supply contracts.

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Risk Management Tier 1

• Risk management as a 2-tier structure
• Daily operations
• Risk managed by unit heads.
• Oversight is provided by internal audit,
  compliance, finance.
• Broader than the use of financial instruments.

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Risk Management Tier 2

• The second tier has a longer-term perspective.
  Higher-level executives seek to understand the
  implications of big risks and opportunities in
• Products.
• Markets.
• Customers.
• Competitors.

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Contributions of ERM

• ERM contributions are
• 1. Upside of Risk
• 2. Risk Owners
• 3. Alignment with Business Model
• 4. Central Risk Function
• 5. High-tech Platform

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Risk as Loss or Opportunity

• Contribution 1. Recognize Upside of Risk.
• Companies invest capital and accept risks because
  risk has an upside.
• Failure to take a risk is a risk itself.
• Thus, risk danger plus opportunity.

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Risk Ownership

• Contribution 2. Identify Risk Owners.
• Assign each risk to a single owner.
• Assign sub-risks to co-owners in a hierarchical
  structure.
• Assign ownership of risks that cross
  organizational lines to a committee or other
  coordinating unit.

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Align Risk with the Business Model

• Contribution 3. Align Risk Accountability.
• With existing functional activities.
• With business units.
• With key initiatives.

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Central Risk Management

• Contribution 4. Create a Central Risk Function.
  It
• Should occupy a high position in an
  organizational hierarchy.
• Should identify risks in a constant scanning
  process.
• Should share unaligned risks and opportunities.

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Central Risk Management

• Contribution 4. Create a Central Risk Function.
  It
• Should occupy a high position in an
  organizational hierarchy.
• Should identify risks in a constant scanning
  process.
• Should share unaligned risks and opportunities.
• Should not manage risk itself.

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High Tech Platform

• Contribution 5. Create a Technology Platform.
• Risk identification.
• Risk understanding.
• Collaboration.

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Presentation

• BP Oil Spill

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The BP Crisis, an Extreme Event

• Day 1. (April 20, 2010)
• Transocean is preparing to move the Deepwater
  Horizon
• Leased to the BP Group.
• Finished drilling a high pressure well for BP.
• Explosion creates an out-of-control sea-floor oil
  gusher.
• The oil rig sinks.

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In Fairness to BP

• Horizon Deepwater was a very successful rig until
  April 20, 2010
• Seven-year safety record.
• Drilling some of the deepest wells in the world.
• Never fail or mostly working?
• Should BP have known?

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Mostly Working in Normal Times

• 2005 Texas City Refinery explosion.
• 15 deaths.
• 180 injuries.
• Cause Hydrocarbon overflow. Maintenance was cut
  as a cost-saving measure.
• 2009 post-disaster inspection findings
• 270 unfixed safety violations.
• 439 new violations.

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Mostly Working

• At the BP Texas City refinery in
• 2006. Worker crushed between a pipe stack and
  mechanical lift.
• 2007. Worker electrocuted.
• 2008. Worker killed by a 500-pound piece of
  metal.
• In the North Sea in good weather
• 2009. BP helicopter ferrying workers from BP oil
  platform crashed killing all 16 on board.

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Mostly Not Working

• From 2007 to 2010, (Occupational Safety and
  Health Administration) OSHA reported
• 851 willful safety violations by U.S. oil
  refiners.
• 829 by BP.
• February 2010. OSHA reported that BP has a
  serious, systemic safety problem in their
  company."

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Information not Shared

• On the Horizon Deepwater, workers were surveyed
  prior to the oil spill
• Concerned about safety practices.
• Feared reprisals if they reported problems.
• Unreliable equipment.
• Run it, break it, fix it.
• Did BP have access to the information?

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Failure to Collaborate

• On the Horizon Deepwater, Transocean did a
  112-page equipment assessment report
• Unsafe conditions and practices.
• Rig had never been in dry dock.
• Blowout preventer rams and fail-safe valves not
  inspected.
• 26 components and systems in bad or poor
  condition.

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Lacey Resignation

• Kevin Lacey was a drilling engineer who had
  implemented a rigorous drilling safety program at
  Chevron.
• He was hired by BP in 2007 senior vice president
  for drilling operations.
• He tried to improve and standardize the BP
  drilling policies and practices.
• He resigned in 2009 believing BP was not
  committed to improving safety in offshore
  drilling.

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Ready to Respond?

• Slow progress.
• It was one thing to be surprised.
• It is another thing to not be ready to respond.
• The crisis was attacked in stages.
• Close blowout preventer valves.
• Add a containment dome.
• Pump in heavy fluids
• Pump in mud and cement.

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Outcome

• Day 86. July 15, 2010 Gusher was capped after
  releasing 5 million barrels of oil.

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Missing Elements

• BP Oil lacked two important components of
  financial risk management
• No central process to identify financial risks
  that cannot be transferred with financial
  instruments.
• No collaborative system for bringing such risks
  to the attention of management.

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Question

• Did BP have the big picture in 2010?

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Was this Visible?
Safety Practices in Texas

Cost Cutting
Board of Directors
OSHA Violations
Kevin Lacy Resignation
Maintenance of Oil Rig itself
Concerns of Rig Workers
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Was this Visible?
High pressure well

Rig needs overhaul
Top Management
Rushing to complete drilling
Everybody not ready
41 miles from Louisiana wetlands
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Interrelationship of Risk

• Linkages.
• leads to
  creating
• 
  while
• for a big loss
  when

Poor maintenance of oil rig
Cost Cutting
Unsafe practices
41 miles from Louisiana wetlands
Rushing to complete drilling
Everybody is not ready
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Lesson Learned

• A broader view of risk management recognizes.
• We cannot predict extreme events.
• We can look for the big picture.
• We can avoid some situations.
• We can prepare for others.

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Presentation

• Global Tankships

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Financial Role in Crisis

• Sometimes the finance function has a role in risk
  management that can be critical to success.

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Overview

• Global Tankships is a worldwide operator of
  general purchase and medium-range product
  tankers
• Size of Fleet. 65 vessels.
• Cargoes. Hydrocarbon liquids ranging from crude
  oil to refined petroleum products.
• Voyage Routes. Worldwide.
• Headquarters. Netherlands.

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Business Model

• The company creates value as follows
• Reliability. Known as one of the safety and most
  modern tanker operators.
• Efficiency. Recognized for rapid loading and
  discharge and speedy port turnaround.
• Cost. Although has higher charter and contract of
  affreightment rates, excellent operations make it
  highly competitive saving money for cargo owners.

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Situation

• To be consistent with its business model, the
  company has decided to create its own crisis
  management team. The team would
• Personnel. Recommend the members of the team.
• Plan. Create a crisis plan to be approved by the
  CEO.
• Respond. Take charge in the event of an oil
  spill, collision at sea, or other incident.

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Question

• Assume the company picked a team leader who
  wanted a total of six people on the Global
  Petroleum team. Who would you recommend by title
  to be part of the team?

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Answer

• The company decided that the team would consist
  of
• Team Leader
• Systems Specialist
• Finance Specialist
• Petroleum Engineer
• Logistics Specialist
• Public Relations Manager

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Situation

• A Global Petroleum Company refined-products
  tanker was rounding the coast of Scotland at the
  height of the summer vacation season. It ran
  aground in a storm on rocks close to a small
  resort town with 300 year-round residents and one
  40-room hotel. Within 24 hours a crisis team
  arrived to contain the oil spill, which was
  growing by the hour.
• This story comes from U.S. Coast Guard files.

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Crisis Management Efforts

• Within 12 to 36 hours after the spill, the
  following events occurred
• Tugs from London arrived with oil containment
  equipment.
• 150 personnel arrived to undertake the cleanup of
  oil. They would work shifts of 12 hours on and 12
  hours off.
• The team leader learned that cleanup workers
  would be needed at the spill for 3-4 weeks.

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Investigating Housing and Subsistence

• The crisis team determined the following
• Few local residents were willing to provide
  sleeping accommodations for workers.
• The hotel was booked solid with summer
  vacationers. The owner was not willing to
  displace them for workers.
• The nearest town with hotels was 120 kilometers
  (75 miles).
• Adequate food supplies would be shipped via truck
  in time to feed workers.

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Question

• Describe the alternatives available to the team
  leader to solve the housing problem for the
  cleanup workers.

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Answer (1)

• Possibilities include
• Negotiate with the hotel.
• Negotiate with homeowners.
• Bring in tents.
• Bring in a small cruise ship.
• Bus workers in from hotels in the other town.