Fluent Essays

Please read the instruction carefully. Combine the given and the Coty information you have inquired, try to complete the assignment 800 words in total Due in 1.5 days This pdf is named QRA related reading is not an accurate example, but just to help you understand the relevant mode of this assignment (as a consultant) and how QRA works.  The specifics are still subject to the details of assignment instruction and Coty. Instruction Assignment Background: My team is playing the role of Enterprise risk management consultants for Coty Inc. to help the company address and solve risks issues. Our team is going to meet with Cotys top executives and interview them. Before the interview, we need to let Coty understand our Qualitative risk assessment (QRA), and let the senior management understand the specific steps of the QRA model and how QRA can help Coty solve the risk problem. Requirement: The Qualitative risk assessment (QRA) steps have been given below , please carefully understand and combine the specific conditions of Coty, Explain steps of the QRA process. 800 words as total Important Noticed !!!!! · Please do not just list QRA, it must be combined with the current situation of Coty Inc. and try to explain each step of QRA one by one. · This is a role-playing assignment, as a consultant to provide advice and help to Coty Inc. Please write in the narrative tone of the consultant Qualitative risk assessment (QRA) steps overview 1. Identify participants 2. Send advance communication 3. Conduct qualitative risk assessment survey 4. Conduct consensus meeting Details Introduction of QRA Steps 1. Identify Participants · Members of C-suite (e.g., CEO, CFO, etc.) · Heads of major business segments and one of their direct reports · Executive risk owners (e.g., head of I/T, head of HR, head of legal, etc.) · A couple of independent directors · A couple of valued employees with long service 2. Send advance communication 0. Inputs needed from survey participants –Type of key risks (e.g., large impact to company value) –Number of key risks to provide (e.g., three to five) –Credible worst-case scenario for each key risk –Likelihood/severity scores for each key risk they identify and for those identified by  other participants b. ERM background –Describe framework; define risk by source and as deviation from baseline  strategic plan projection; etc. c. Risks to consider (e.g., those in Risk Categorization and Definition (RCD) tool) d. Definition of metrics –Typical Frequency-Severity Scoring Guide for Qualitative Risk Assessment –Clearly defining frequency and severity avoids sub- par results due to inconsistent scoring 3. Conduct qualitative risk assessment survey a. Reiterate key points in advance communication b. For each potential key risk, gather: –Description of risk –Credible worst-case scenario –Frequency score –Severity score c. Keep participant on track regarding identifying: –Only key risks, and –Risks defined by source d. Return to prior participants to gather their scores on risks identified subsequent to their interview 4. Conduct consensus meeting · Discuss any widely divergent views and arrive at a consensus · Select key risks from among the potential key risk data set produced ERMC 5900 PS Section H02 Fall 2021 Capstone Case Package: Company Overview and Simulated ERM Program for Coty, Inc. Company Overview Coty, Inc. (COTY) is an American multinational beauty company headquartered in Amsterdam, Netherlands. Founded in 1904 by Francois Coty in Paris, the company is one of the world’s largest beauty companies with an iconic portfolio of brands across fragrance, color cosmetics, and skin and body care. Following its recent transactions – both acquisition and divestiture - Coty is now positioned as the global leader in fragrances, with the #2 position in prestige fragrances in the U.S. and U.K., and the leader in Germany. It is also now ranked fourth globally in color cosmetics, with the #2 position in mass cosmetics in the U.S., #4 position in Germany, and the top position in the U.K. Their current continuing operations are broken down into three geographical segments: Americas, Europe/Middle East/Africa (“EMEA”), and Asia Pacific. Businesses across all three segments are focused in on prestige fragrances, prestige skin care, prestige cosmetics, mass color cosmetics, mass fragrances, mass skin care and body care products. They are supported by central marketing teams. Coty boasts 18 mass beauty and 21 prestige brands. Household brand names include Adidas, CoverGirl, Max Factor, Nautica, Stetson, 007 James Bond, Calvin Klein, Chloe, Gucci, Hugo Boss, Kylie Jenner, Lacoste, Lancaster, philosophy, Kim Kardashian West, and Tiffany & Co. Brands are promoted using a variety of channels including traditional media, in-store displays, digital and social media, collaborations, product placements and events. The company also leverages celebrity relationships and social influencers for product endorsements, and collaborates with retailers in cooperative advertising which frequently utilizes in-store activities designed to engage consumers. The company owns the trademark rights to 14 brands and licenses trademark rights to 25 other brands from third parties. All licensing agreements are exclusive to Coty and run from 2 to 10 years in length. All licensing agreements are renewable, subject to either minimum royalty payment from Coty, minimum sales levels achieved, or the approval of the licensor. Coty sells its products in approximately 130 countries employing a multi-channel distribution strategy. Mass beauty brands are primarily sold through hypermarkets, supermarkets, drug stores and pharmacies, mid-tier department stores, traditional food and drug retailers, and dedicated e-commerce retailers. The prestige products are primarily sold through prestige retailers, including perfumeries, department stores, e-retailers, direct-to-consumer websites and duty-free shops. In addition, Coty sells products through third-party distributors and is expanding its e-commerce and direct to consumer platforms due to COVID-19. https://en.wikipedia.org/wiki/United_States https://en.wikipedia.org/wiki/Multinational_corporation Coty lost about $201 million on more than $4.6 billion of net sales revenue in fiscal year 2021 (Coty’s fiscal year runs from July 1 through June 30). However, this was a significant improvement over the 2019 and 2020 fiscal years, which showed Coty recording losses of $3.7 billion and $1.0 billion respectively. Coty produced a $2 million operating profit for 4Q21 due to increasing sales momentum and significant cost reductions from restructuring operations. The balance sheet at June 30, 2021 showed $3.1 billion in shareholder GAAP equity and $5.4 billion in long-term debt, resulting in a 1.76 financial leverage ratio. This ratio was 2.44 at June 30, 2020. Coty strengthened their balance sheet during fiscal year 2021 by selling a majority stake in its Professional and Retail Hair business to KKR. The sale generated about $2.5 billion in cash for Coty, most of which was used to redeem debt. S&P and Moody’s rate Coty’s debt at B- and Caa1 respectively, which are speculative grade ratings. S&P maintains a negative outlook on its rating due to ongoing restructuring costs and pandemic headwinds. Moody’s outlook is stable, although they express similar concerns. Coty’s stock price is currently about $9 - $10 per share, with a market capitalization of about $7.5 billion. Coty employs about 11,430 workers worldwide as of June 30, 2021, a 43\% reduction from June 30, 2018. The company’s financial struggles in recent years have driven a series of restructurings and associated layoffs. Restructuring costs have totaled $227 million over the past three fiscal years. The company’s international business footprint is significant, with roughly 60\% of net revenues derived from the EMEA and Asia Pacific segments. While the company’s strategy emphasizes leveraging its presence in existing key markets, they are prioritizing expansion in China on luxury and select consumer beauty brands. The company’s roots trace back to 1904 when Francois Coty “accidentally” broke a bottle of his first fragrance, La Rose Jacqueminot, on the sales floor of a Parisian department store while attempting to convince the manager to carry his brand. The intoxicating scent filled the room, attracting passing shoppers who quickly emptied him of his supply. Continued success with additional fragrances in the following years resulted in Coty establishing a Perfume City in the suburbs of Paris during the early 1910s to handle administration and fragrance production; the site was an early business supporter of female employees and offered benefits including child care. During that same period the company first expanded internationally to New York, Moscow and London. Coty’s attention to detail in all aspects of product design and manufacturing was revolutionary in consumer products at that time. Further success with additional beauty products including face and body powders led to expansion in the 1920’s into Germany, Spain, Italy, and Switzerland. Coty moved the company’s headquarters to New York and took the company public in 1925 as Coty, Inc. After Francois Coty passed away in 1934, his family maintained control of Coty, Inc. until the 1960’s. By that time, it had established itself as the largest player in fragrances and a key player in the lipstick market in the U.S. Revenues grew rapidly during most of that time although profitability was frequently low. Much of the bottom line struggles were attributed to high advertising costs and emerging competitors such as Revlon. The top line and brand success led to Coty, Inc. being acquired by biopharmaceuticals giant Pfizer, Inc. in 1963 for $26 million. Pfizer’s initial stewardship of Coty resulted in a revitalization in product development. Between 1965 and 1974, Coty successfully introduced several new products to market including Imprevu perfume, Coty Originals and Dina Merrill makeup products, Bacchus men’s aftershave lotion and cologne, Styx, Sweet Earth, and Wild Musk fragrances, and Equatone beauty treatment line. The unit struggled for profitability during this time and Pfizer was gauging outside interest in selling the business. Coty’s results improved during the 1980’s despite continuing intense competition. Notable contributors were the introduction of the highly successful Stetson (1981) and Lady Stetson (1986) fragrance collections, and marketing innovation through the company’s point of purchase Image Awareness (1984) and Ingenious Solutions (1985) sales campaigns. Coty ranked first in mass-market mens fragrance sales in 1991, with a 22.6\% share, and first in womens, with a 16.4\% share, and total sales of about $280 million. In 1992, Coty was sold by Pfizer to Joh. A. Benckiser (now known as JAB Holding Company). The acquisition made strategic sense for JAB, which had another beauty subsidiary (Quintessence) and an international distribution network. The following year Peter Harf, chairman and CEO of JAB since 1988, was named Cotys CEO and the business was merged into Quintessence, which was famous for its Jovan brand musk oil. In 1996, Lancaster Group was made a division of Cody. Lancaster had been previously acquired by JAB in 1990 from SmithKlineBeecham and consisted of the cosmetics brand of that name and an Isabella Rossellini line, and a number of designer and prestige fragrances, including Davidoff, Jil Sander, and VivienneWestwood. The beefed up Coty portion of JAB boasted $1.5 billion in revenues. The remainder of the 1990’s saw the Lancaster division acquire Yue-Sai, the leading Chinese cosmetics brand and Rimmel, a London-based cosmetics brand, while Coty introduced The Healing Garden and Minitherapy for Feet herbal aromatherapy fragrance lines, Adidas Moves men’s fragrance, Jovan body splash, and Dulce Vanilla fragrance, and Isabella Rossellini launched a new cosmetics collection called Manifesto. During the 2000s, the company focused on marketing celebrity-endorsed fragrances, including David Beckham, Céline Dion, Jennifer Lopez, Mary-Kate and Ashley Olsen, Sarah Jessica Parker, and Shania Twain. Coty supplemented this strategy with purchasing additional licenses for Calvin Klein, Cerruti, Chloé, Lagerfeld, and Vera Wang from Unilever in 2005, entering into license agreements with Balenciaga in 2008 and Bottega Veneta in 2009, and adding the Sally Hansen and NYC New York Color brands through the acquisition of DLI Holding Corp. The last decade witnessed Coty once again becoming a publicly traded company. The 2013 initial public offering (IPO) raised $1 billion from investors, making it the largest consumer goods IPO at that time. The company has continued to grow primarily by acquisition. Transactions included the acquisition of nail polish maker OPI Products, https://en.wikipedia.org/wiki/Celine_Dion https://en.wikipedia.org/wiki/Mary-Kate_and_Ashley_Olsen https://en.wikipedia.org/wiki/Mary-Kate_and_Ashley_Olsen https://en.wikipedia.org/wiki/Sarah_Jessica_Parker https://en.wikipedia.org/wiki/Shania_Twain https://en.wikipedia.org/wiki/Cerruti https://en.wikipedia.org/wiki/Vera_Wang https://en.wikipedia.org/wiki/Vera_Wang https://en.wikipedia.org/wiki/Balenciaga https://en.wikipedia.org/wiki/Bottega_Veneta skin care brand philosophy, French cosmetics company Bourjois, Hypermarcas beauty and personal care business, and digital marketing technology agency Beamly. The company also acquired 41 beauty brands called “Galleria” from Proctor and Gamble, which include Clairol, CoverGirl, Gucci, Hugo Boss, Max Factor, and Wella. Coty also acquired a majority stake in the peer to peer digital beauty company Younique. It is worth noting that a majority stake of Galleria was subsequently sold to KKR in November 2020 and the majority stake in Younique was subsequently sold back to the original owner in August 2019. More recent high profile transactions include Coty’s purchase of a $600 million stake in Kylie Cosmetics, owned by media personality and model Kylie Jenner, and a $200 million stake in KKW Beauty, owned by Kim Kardashian West, Kylie Jenner’s sister. The plethora of acquisitions has strained Coty’s financial resources; this has been exacerbated by the impacts of COVID-19. As a result, Coty announced in 2019 a restructuring plan which included targets for reducing the cost base. Efforts in FY21 resulted in savings of over $330 million, exceeding the Companys initial plan for the year by over $100 million. Coty remains on track to generate roughly $600 million of savings by FY23, and is in the process of identifying additional savings opportunities beyond that time frame. At the same time, Coty now expects one-time cash costs associated with the cost savings program to come in approximately $100 million less than the original target. Coty has also incorporated sustainable business practices into its corporate goals. The company entered into a long-term partnership with the international advocacy group Global Citizen to tackle prejudice and discrimination based on gender, sexual orientation, disability, or ethnicity, and to promote self-expression. Coty has also joined other beauty companies to launch the Responsible Beauty Initiative to encourage sustainability within the industry, and signed the United Nations Global Compact, a UN initiative to encourage businesses to adopt sustainable and socially responsible policies. During the past year, Coty announced its partnership with Lanzatech, becoming the first company in the fragrance industry to introduce sustainable ethanol into its fragrance products with the goal of having the majority of its fragrance portfolio using carbon-captured ethanol by 2023. On the cosmetics side, Coty has been leading with clean, vegan and cruelty-free formulations across brands such as CoverGirl, Sally Hansen, and Kylie Cosmetics. This has solidified Coty as the #2 player in clean cosmetics, as tracked by U.S. Nielsen. While Coty has a strong track record as a good corporate citizen, an impressive list of household names in beauty and positive brand recognition, it has also dealt with some public controversy. In summer 2020, then-CEO Pierre Laubies stepped down after Forbes disclosed that Kylie Jenner gave the magazine false financial information about her Kylie Cosmetics product line. https://en.wikipedia.org/wiki/Global_Citizen_(website) https://en.wikipedia.org/wiki/United_Nations_Global_Compact https://en.wikipedia.org/wiki/United_Nations_Global_Compact https://en.wikipedia.org/wiki/United_Nations https://en.wikipedia.org/wiki/Corporate_social_responsibility https://en.wikipedia.org/wiki/Corporate_social_responsibility In a related matter, Seed Beauty co-founders John and Laura Nelson, which manufacture Kylie Cosmetics and KKW Beauty, filed lawsuits against Coty, Kylie Cosmetics, and KKW Beauty to prevent the misappropriation of trade secrets. The suits allege that Kylie Cosmetics knowingly shared Seed Beauty’s trade secrets and Coty knowingly accepted them. Seed Beauty won a temporary injunction against KKW Beauty. Both suits have since been settled out of court and the actions dropped. The company is also involved in multiple class action shareholder lawsuits alleging breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets by certain current and former officers and directors of the Company. The class actions allege violations of the U.S. securities laws in connection with the P&G beauty brands acquisition and the Kylie Brands transaction. The cases remain unresolved as of this date. Description of Simulated Enterprise Risk Management (ERM) Program Coty’s (fictional) ERM program was formally initiated in 2010 in response to the Securities and Exchange Commission (SEC) requirements that boards of public companies have oversight responsibility of companies’ ERM programs. While Coty’s Board oversees risk, management is responsible for assessing and managing risk on a day-to-day basis. Certain departments, such as treasury, legal and internal audit, compliance, and individuals within other departments, focus on specific risks associated with different aspects of the business, from regulatory, environmental and financial risks to commercial and strategic risks. Senior members of management responsible for risk management report regularly to the Board or its committees as appropriate. The company decided to build its ERM program by leveraging and combining three existing risk management programs already well established within the Finance function and reporting to the SVP of Finance. These programs are: 1) Traditional Risk Management – Charged with coordinating the management of many of the company’s operational risk exposures. Responsibilities include:  Leading negotiations and managing all insurance programs including, but not limited to: Property & Casualty, Directors & Officers, Fiduciary, Employment Practices, Employed Lawyers, Cyber and Marine Transportation.  Promoting collaboration through relationship building with external and internal partners globally including Legal, Finance, Human Resources, Operations, Procurement, Insurance Brokers, Consultants and Insurers.  Coordinating and managing all loss control inspections for manufacturing sites and distribution centers globally.  Supporting and approving all engineering/fire protection improvements.  Analyzing and allocating worldwide risk management costs to business units; managing the risk management budget and all premium liability audits.  Reviewing leases, licenses and other legal contracts in conjunction with the legal department; recommending acceptable insurance and liability language to eliminate or minimize risk.  Identifying trends to prevent or mitigate potential future losses.  Directing the administration of serious, complex litigated and non-litigated liability claims globally with legal, R&D and other business units.  Quantifying reserves and providing settlement authority to claims managers.  Governing all workers’ compensation and automobile liability staff in the mandatory administration of claim processing.  Overseeing due diligence projects on mergers & acquisitions; managing the integration of acquired entities.  Managing corporate travel risk policies and procedures.  Serving as a consultative resource on insurance and loss prevention 2) Financial Risk Management – Led by the Corporate Treasurer, this program is charged with assessing financial risks and implementing risk mitigation tools and techniques. This covers:  Foreign Currency Exchange Risk Management – Coty operates in multiple functional currencies and therefore has exposure to the impact of foreign currency fluctuations created by exposures that primarily relate to receivables, inventory purchases and sales, payables and intercompany loans. The Company uses derivatives to manage the earnings and cash flow volatility arising from foreign currency exchange rate fluctuations. In July 2021, the Company entered into foreign exchange forward contracts to hedge up to 80\% of its euro denominated external debt as part of managements strategy to minimize the impact of currency movements on those debt instruments. Exchange gains or losses are also partially offset through the use of qualified derivatives under hedge accounting, for which accumulated gains or losses are recorded in Accumulated Other Comprehensive Income (AOCI) until the underlying transaction occurs at which time the gain or loss is reclassified into the respective account in the Consolidated Statements of Operations.  Interest Rate Risk Management - Coty is exposed to interest rate risk primarily due to the Company’s debt, which is affected by changes in the general level of the interest rates in the U.S. and Europe. The Company periodically enters into interest rate swap agreements to manage this risk. These agreements are designated as cash flow hedges and, accordingly, results in the application of hedge accounting. The effective changes in fair value of these agreements are recorded in AOCI, net of tax, and ineffective portions are recorded in current- period earnings. Amounts in AOCI are subsequently reclassified to earnings as interest expense when the hedged transactions are settled. Management expects that both at the inception and on an ongoing basis, the hedging relationship between any designated interest rate hedges and underlying variable rate debt will be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company will discontinue hedge accounting with respect to that derivative prospectively. The corresponding gain or loss position of the ineffective hedge recorded to AOCI is then reclassified to current-period earnings.  Derivatives Risk Management and Hedging Activities – Coty uses derivatives to manage foreign currency exchange fluctuations and interest rate volatility resulting from Coty’s global operations. Natural offsets are used to the fullest extent possible in order to identify net exposures. Established policies and procedures are employed to manage these net exposures using a variety of financial instruments. Derivative financial instruments are never used for trading or speculative purposes.  Credit Risk Management - Coty minimizes credit exposure to counterparties by entering into derivative contracts with counterparties that have an “A” credit rating or higher. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any counterparty is limited to the fair value of contracts in net asset positions. 3) Financial Reporting Risk Management - Led by Coty’s Controller, this involves the review of annual audited financial statements and quarterly financial statements. This includes, as needed, a review of analyses prepared setting forth significant issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements, and a review of the effect of regulatory and accounting initiatives, as well as off-balance sheet structures. Includes review of the quality and adequacy of the Company’s internal controls, including any material weaknesses or significant deficiencies and significant changes. This includes (a) the reliability of financial reporting; (b) compliance with applicable codes, policies, laws, and regulations; and (c) preservation of the Company’s assets. This also includes any significant matters and regulatory concerns, including any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. In addition, the Traditional Risk Management team, under the purview of the SVP of Finance, receives quarterly risk updates from the following corporate areas of the company: a) Information Security and Privacy, b) Supply Chain Management, c) Legal and Compliance, d) Human Resources, e) Sustainability, and f) Transformation. Most reporting is customized to the nature of the activities, processes, and risks associated with each corporate area (this also applies to the three risk management programs in Finance described above). However, in a modest attempt to capture some consistency across the company, a representative of each corporate area must also update a risk register template with that area’s list of risks and corresponding assessments. For each risk identified, the following information must be included:  Risk identification number – If this is a new risk, Risk Management will assign one  Risk description – Brief summary of the risk  Process – What business process (e.g. supply chain) does the risk affect?  Step – What step in the business process (e.g. product transport) does the risk affect?  Impact description – What will happen if the risk is not mitigated or eliminated?  Impact level – Rating from 0 (low) to 10 (high)  Timing – When will the impact take place – Rating from 0 (many years into the future) to 10 (almost immediately)  Priority level – Product of Impact and Timing ratings – ranges from 0 (lowest) to 100 (highest)  Description of existing control(s) and mitigation(s)  Description of possible addition control(s) and mitigation(s)  Risk owner The results are compiled from all of the templates by the Traditional Risk Management team, who then produce heat map reports from the information at the total company level, with further breakouts by corporate area and business process. A risk priority ranking table is also constructed showing the company’s top 100 risks, including the migration of risk priorities over the past 5 quarterly updates. Traditional Risk Management also includes a summary of material changes in risk controls and mitigations in its reporting from the risk templates. All risk information is shared quarterly by the SVP of Finance with Coty’s Executive Leadership Team (ELT), which includes the following individuals:  Chief Executive Officer  Chief Legal Officer and General Counsel  Chief Financial Officer  Chief Transformation Officer  Chief Corporate Affairs Officer  President, Luxury Brands  Chief Procurement Officer  Chief Human Resources Officer  Chief Digital Officer  Chief Commercial Officer, Luxury  Chief Brands Officer, Consumer Beauty  Chief Commercial Officer, Consumer Beauty  EVP, Americas and CEO Kylie Jenner Beauty Brands The SVP of Finance is allotted 30 minutes quarterly at the ELT meeting to present on the latest results and highlight any areas of concern or progress. The presentation and subsequent question and answer session do not usually result in any definitive actions by the ELT on Coty’s risk profile, but do informally influence strategic and operational decisions being contemplated by the team. The greatest influence of the risk information and analysis is on communication with investors as to earnings guidance and adjustments to the strategic plan. In addition, Coty’s Legal Team uses the information to update and modify the Company’s risk disclosures in the 10-K and 10-Q. Coty Inc. Board’s Role in Risk Oversight The Board of Coty, Inc. oversees, with management, the various risks faced by the Company. The Board and management consider risks in all facets of the Company, including strategy and all lines of business. The Board dedicates a portion of one meeting each year to evaluating and discussing risk, risk mitigation strategies and the Company’s internal control environment. At this meeting, the Board considers an enterprise risk management analysis. Topics examined in the enterprise risk management analysis include, but are not limited to, strategic, operational, financial and compliance risks. The Board’s risk oversight also includes a comprehensive annual review of the strategic plan. Because overseeing risk is an ongoing process and inherent in Coty’s strategic decisions, the Board also receives input from senior management and considers risk at other times in the context of specific proposed actions. In addition to the Board’s risk oversight responsibility, the Board’s committees are also charged with overseeing risks within their areas of responsibility and reviewing significant risks identified by management and management’s response to those risks. The Audit and Finance Committee (“AFC”) is responsible for oversight of accounting, auditing and financial-related risks, as well as the Company’s compliance program and its cybersecurity and privacy programs. The Remuneration and Nomination Committee (“RNC”) is responsible for overseeing the management of legal and regulatory risks as they relate to the Company’s corporate governance structure and processes, as well as risks related to employee compensation policies and practices. In fiscal year 2020, the RNC reviewed compensation policies and practices to determine whether they encouraged excessive or inappropriate risk taking. Following such evaluation, the RNC determined that such compensation policies and practices do not encourage excessive or inappropriate risk taking that could result in a material adverse effect on Coty. During the COVID-19 crisis, which began to impact the Company’s business in the third quarter of fiscal 2020, the Board has exercised oversight of the Companys response and risk management through periodic meetings and regular communications with management on business performance, employee health and safety, risk mitigation efforts, and long-term planning. Audit and Finance Committee’s Role in Risk Management. Reviews and discusses the Company’s practices with respect to risk assessment and risk management, and oversees and evaluates the Company’s risk management policies in light of the Company’s business strategy and capital strength. The Committee also evaluates on a periodic basis the Company’s investment and derivatives risk management policies, including the internal system to review operational risks, procedures for derivatives investment and trading, and safeguards to ensure compliance with procedures. The Committee also evaluates on a periodic basis the Company’s cybersecurity and … Qualitative Risk Assessment Advance Communication Letter Dear Colgate-Palmolive Executive, Hope you are doing very well. On behalf of the Enterprise Risk Management consultants authorized by the Board of Colgate-Palmolive, we are writing to sincerely invite you to attend the Qualitative Risk Analysis (QRA) interview session this Thursday. We would like to specify the related information, such as the objectives of this event, the process of QRA, the expectations of participating in this event, and the outputs from the processes, as follows. The Purpose of the QRA in the New ERM Approach A Qualitative Risk Analysis is a formal and systematic management tool to improve Colgate- Palmolive’s ERM program by identifying critical assumptions and risk driving elements, estimating the likelihood and consequences of risk events, and expressing the results qualitatively to senior management and the board. The main objectives of QRA are: 1. To assess and evaluate the characteristics of individually identified risk and prioritize them based on the agreed-upon characteristics; 2. To identify and assess the effects of uncertainties and assumptions; 3. To get an analysis of potential risk scenarios, including changes in processes and each business segment, initiating and controlling factors, and consequences; 4. To suggest possible preventive and mitigation methods based on the results of QRA in order to reduce the risk as low as reasonably practicable. QRA provides advanced qualitative means to supplement other risk identification, analysis, assessment and management methods to identify the potential risks and to evaluate control strategies. The QRA Process For the process of QRA, our team will use a Probability/Impact Matrix to rate probability and impact. The probability if the likelihood that a risk will occur, and the impact is the consequence or effect of the risk associated with cost, scope, or quality. This study source was downloaded by 100000831857057 from CourseHero.com on 10-16-2021 04:05:15 GMT -05:00 https://www.coursehero.com/file/70955312/QRAdocx/ Th is stu dy re so ur ce w as sh ar ed v ia C ou rs eH er o. co m https://www.coursehero.com/file/70955312/QRAdocx/ Especially, in the interview, we will identify around 15 participants, who are members of the Board and the senior management, directors of major business segments, executive risk owners, and valued employees. During the interview, you will be asked to rate the likelihood, severity of such credible worst-case scenarios. We will provide the probability/impact matrix to help you score each risk event. We will also have a consensus meeting with all survey participants and relevant members of the ERM Program to enhance the level of consensus for qualitative scores and to review the rankings and discuss the highly ranked risks. Finally, we will get output results based on the QRA. We will input the risk scores for each risk event into a risk analysis model to get quantitative results in the next stage. Expectations of Those Participating in the QRA To save your time and make sure the process could smoothly go through. We prepared the following suggestion to ensure your better participation during the interview and we appreciate your time and effort in this interview. In the interview, we will ask you that the top two risks that you think Colgate-Palmolive is facing. Please give the likelihood and severity score for each risk you mentioned. In addition, please decide the likelihood and severity scores based on the credible worst-case scenario. The definition of credible worst-case scenario, a credible worst-case scenario tends to ensure a reasonable level of consistency in scoring yet is not overly prescriptive to the point of impinging upon survey participants’ freedom to provide their own input. A credible worst-case scenario is not the most unlikely of events, but neither is it a common event. It is somewhat in between but still representing a fairly pessimistic scenario with a severe impact. For your convenience and to have a comprehensive understanding of the credible worst- case scenario, we provided a figure to illustrate the credible worst-case. This study source was downloaded by 100000831857057 from CourseHero.com on 10-16-2021 04:05:15 GMT -05:00 https://www.coursehero.com/file/70955312/QRAdocx/ Th is stu dy re so ur ce w as sh ar ed v ia C ou rs eH er o. co m https://www.coursehero.com/file/70955312/QRAdocx/ For your convenience, we provided the RCD tool format to help you select the key risks for Colgate-Palmolive. This tool categorized the risks into 3 categories which are financial, strategic, and operational. For each of the categories, there are some subcategories along with the definition of those subcategories that help you to better understand. Using this tool, you can put different risks into each category. Also, this RCD tool can also help you group the risks by sources that may avoid the overemphasized of those risks. You may provide some risks that are not a key risk, in other words, the impact of which may be negligible, where you may consider as negligible any risk with a potential impact on a companys market capitalization value of less than $300M (i.e., a severity score of “1” / see below). The table below is called the likelihood and severity table. We are expecting you to think about what are the potential key risks that are linked to Colgate-Palmolive and assign them to the frequency and severity table. The following illustrated are the criteria we suggest you use while you scored those key risks. Likelihood Severity (Impact on This study source was downloaded by 100000831857057 from CourseHero.com on 10-16-2021 04:05:15 GMT -05:00 https://www.coursehero.com/file/70955312/QRAdocx/ Th is stu dy re so ur ce w as sh ar ed v ia C ou rs eH er o. co m https://www.coursehero.com/file/70955312/QRAdocx/ Market Capitalization) 5 More frequently than 1-in-10 years (>10\%) 5 > $10B 4 1-in-10 years (10\%) 4 $5B - $10B 3 1-in-20 years (5\%) 3 $1B - $5B 2 1-in-50 years (2\%) 2 $300M - $1B 1 1-in-100 years (1\%) or less frequently 1 < $300M In addition to likelihood and severity, another key thing for you to know is that you should score the risks based on the time horizon. You may provide likelihoods corresponding to a variety of time horizons, some are short-term and some are long-term. For example, Risk 1 may have a 5\% chance of occurring next year, but Risk 2 may have a 5\% chance of occurring in 10 years. In this case, these likelihoods cannot be compared directly. Therefore, it is not an apples-to-apples basis comparison. Despite allowing a different time horizon score can still work, it requires combining two pieces of data, both time horizon and likelihood, to properly interpret. As two risks have the same severity but will occur in different time horizon is very difficult to compare. We would like you to list the risks based on a near-term event in which the risks will happen in the next three years. For any risk event, you believe will happen in for a longer-term, please assign it in the lowest likelihood score. Tangible Outcome In general, there are three main tangible outcomes of our QRA process. The first tangible outcome is QRA process helps Colgate-Palmolive’s identify its key risk. Many risk factors affect the operation of Colgate-Palmolive. However, not all risks are equally important to the ERM department to deal with it. With the help of the QRA process, our ERM department will identify the top 10-15 key risks Colgate-Palmolive will face in the future. QRA process not only enhances the efficiency of Colgate- Palmolive’s ERM system but also guarantees the sustainability of Colgate-Palmolive. The second tangible outcome is QRA process let Colgate-Palmolive can quantify the effect of risks. In the past, quantify risks be regarded as one of the most important things to the ERM department. By quantifying the risk either This study source was downloaded by 100000831857057 from CourseHero.com on 10-16-2021 04:05:15 GMT -05:00 https://www.coursehero.com/file/70955312/QRAdocx/ Th is stu dy re so ur ce w as sh ar ed v ia C ou rs eH er o. co m https://www.coursehero.com/file/70955312/QRAdocx/ the positive or negative risk effect, Colgate-Palmolive can base on the risk effect to modify its company policy and formulate operation strategy. The third tangible outcome is QRA process is a tool for Colgate- Palmolive to monitor the change of risks. QRA process provides a list of risks with likelihood-severity scores. The change in risks will also reflect on this list. As a result, the QRA process helps our management team understand the difference of each risk’s severity and find other unknown risks. This study source was downloaded by 100000831857057 from CourseHero.com on 10-16-2021 04:05:15 GMT -05:00 https://www.coursehero.com/file/70955312/QRAdocx/ Th is stu dy re so ur ce w as sh ar ed v ia C ou rs eH er o. co m Powered by TCPDF (www.tcpdf.org) https://www.coursehero.com/file/70955312/QRAdocx/ http://www.tcpdf.org