Presentation

1. Presentation • Risk Management for • Competitive Advantage

2. Presentation • COSO

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

4. Presentation • Panasonic

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

6. Results of Business Risk Consolidation External environment - Business risks in the external environment, operational processes, and internal environment - Business partners Customers Competitors Failures to respond to changing customer needs Technical partners Suppliers Subcontractors 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 R&D Manufacturing Marketing & Sales Delayed production Lack of differential technology Delayedtechnologicaldevelopment Failures of sales channel strategies 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 Insufficient manufacturing reforms and IT innovations Information Organization Human resources Staff allocation and development Structural reform-related issues

7. Business Structure Segment Business Domain Companies and Group Companies Business domain 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.* AVC Global and Group Head Office 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 Semiconductor Company Matsushita Battery Industrial Co., Ltd.* Panasonic Electronic Devices Co., Ltd.* Motor Company Others Semiconductors Components and Devices Display devices Head Office CISC Panasonic Design Company R&D divisions Sales division Overseas divisions Batteries Electronic components Motors Solutions Panasonic Factory Solutions Co., Ltd.*, and others FA, Corporate eNet Business Division Matsushita Electric Works, Ltd.*, PanaHome Corporation* MEW and PanaHome JVC Victor Company of Japan, Ltd.*

8. Group-wide Risk Management System for General Control (2) Establish a G&G Risk Management Committee to address the current problems After the Committee's establishment Establishing and improving Group-wide RM system Instructing risk assessment <Roles of the Committee> [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 G&G 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

9. Clarify Sections Responsible for Each Risk (4) Information systems 1. Disasters and accidents 2. Politics, economy, and society (5) Environment (6) International relations 3. Operations (1) Quality, CS, and intellectual property (7) Finance (2) Sales and procurement (8) Labor issues (3) Information

10. Presentation • Hurricane Andrew

11. 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.

12. Presentation • Ford and Palladium

13. 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.

14. Risk Management? • Ford’s 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.

15. 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.

16. 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.

17. 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

18. 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.

19. 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.

20. Align Risk with the Business Model Contribution #3. Align Risk Accountability. • With existing functional activities. • With business units. • With key initiatives.

21. Central Risk Management Contribution #4. Create a Central Risk Function. It: • Shouldoccupy a high position in an organizational hierarchy. • Should identify risks in a constant scanning process. • Shouldshare unaligned risks and opportunities.

22. Central Risk Management Contribution #4. Create a Central Risk Function. It: • Shouldoccupy a high position in an organizational hierarchy. • Should identify risks in a constant scanning process. • Shouldshare unaligned risks and opportunities. • Should not manage risk itself.

23. High Tech Platform Contribution #5. Create a Technology Platform. • Risk identification. • Risk understanding. • Collaboration.

24. Presentation • BP Oil Spill

25. 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.

26. 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?

27. 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.

28. 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.

29. 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."

30. 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?

31. 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.

32. 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.

33. 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.

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

35. 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.

36. Question • Did BP have the big picture in 2010?

37. 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

38. Was this Visible? High pressure well Rig needs overhaul Top Management Rushing to complete drilling Everybody not ready 41 miles from Louisiana wetlands

39. 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

40. 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.

41. Presentation • Global Tankships

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

43. 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.

44. 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.

45. 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.

46. 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?

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

48. 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.

49. 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.

50. 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.