NED COMUNITY ERM & BUSINESS CASES PRESENTATIONBase case, Best case, Worst case. PIRELLI ENTERPRISE...
Transcript of NED COMUNITY ERM & BUSINESS CASES PRESENTATIONBase case, Best case, Worst case. PIRELLI ENTERPRISE...
NED COMUNITY
ERM & BUSINESS CASES PRESENTATION
JULY 2014
Pirelli Property
AGENDA
ENTERPRISE RISK MANAGEMENT IN PIRELLI- A WALKTHROUGH
BUSINESS GAME: ERM MEETS THE STRATEGIC PLANNING DURING LATEST INDUSTRIAL PLAN
BUSINESS GAME: ERM GOES BEYOND STRATEGIC PLANNING EMBRACING THE LONG TERM HORIZON
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BUSINESS CASE: ERM EMBRACES REPUTATION
manage risks in terms of
prevention and mitigation
proactively seize the
opportunity factors
disseminate the “culture” of the value@Risk within the Company, in particular, in the strategic and
operating planning and in the most significant
business choices
assure transparency on Pirelli risk profile and on risk
management strategies to the Board of Directors and to all
the Stakeholders
PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)
Philosophy & Mission
OUR PHILOSOPHY
ERM MISSION
Pirelli Property 2
TOP-DOWN
Enabling Board of Directors and
Top Managers to assess and
manage risk in all key business
decisions
VALUE-DRIVEN
Focusing on risk
threatening both
strategic objectives and
tangible and
intangible assets
PROACTIVE
Leading
to recovery plans
and mitigation
actions
INTEGRATED
In the strategic
and operational
planning and in the
decision-making
process
PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)
Approach
QUANTITATIVE
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EXTERNAL
RISKS
STRATEGIC
OBJECTIVE
STRATEGIC
ASSETS
STRATEGIC
BUSINESS RISKS
OPERATIONAL
CROSS RISKS
PIRELLI KEY
VALUE DRIVERS
PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)
Key value drivers and main risk areas
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EXTERNAL RISKS
STRATEGIC BUSINESS RISKS
MACRO ECONOMIC TREND COMPETITORS FUTURE REGULATION
CUSTOMER TECHNOLOGICAL WANTS INNOVATION
COUNTRY RISK (Economics, Politics, Security, Environment)
ORGANIZATION
PURCHASING
MARKETS
INNOVATION
OPERATIONS
PARTNERSHIP / JOINT VENTURE / M&A
SUSTAINABILITY
INFORMATION TECHNOLOGY
BUSINESS INTERRUPTION
HEALTH, SAFETY & ENVIRONMENTAL
SECURITY
COMPLIANCE
OPERATIONAL CROSS RISKS
FINANCE
PIRELLI KEY VALUE DRIVERS
PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)
Pirelli Risk Model
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RISK MANAGEMENT
OBJECTIVES
PIRELLI «CONTROL»
MODEL
RISK DEPARTMENT ROLE
EXTERNAL RISKS STRATEGIC BUSINESS RISKS OPERATIONAL CROSS RISKS
Reduce impact should risk event occur
Reduce likelihood and impact cost-effectively
Avoid or strongly reduce occurrence cost-effectively
«Envisioning» risk through scenario planning, stress test ,
business case etc.
Interactive discussion about risks related to strategic objectives,
measurement of Value@Risk, risk appetite/tolerance setting & check,
monitor of KRIs, resource allocation to mitigate critical risk events.
Develop mission statement, rules & boundaries systems, limit and actions, set up action plan to
reduce risk occurrence, monitor their implementation.
Complement strategy team in run stress-test/scenario planning, «envisioning»
scenarios, monitoring the risk evolution
Complement strategy team in target settings. Act as indipendent facilitator or indipendent experts for critical risk
events (including mitigation plan monitoring).
Act as an indipendent overseers on risk assessment and mitigation
plans monitoring
REPORTING TO CEO & CCIRCG*
PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)
Risk Management objectives, «control model» and risk department role
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The Board is responsible for
supervising the risk management
process so that the risks assumed in
the business are consistent with the
strategies. Furthermore, the Board
defines the attitude to risk (the
“acceptable risk threshold”) and
establishes the guidelines to manage
significant risks, in line with its top
management and strategic policy-
making mission
Focus on enabling the Board of Directors and Top Management to assess and manage risks in all key business decisions
Transversal to the organization and fully integrated in the planning processes
PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)
The Board of Directors plays a central role with reference to the risk “governance”
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EXTERNAL RISKS
External risks: examples of risk monitoring
EUROZONE USA CHINA BRAZIL RUSSIA
2012 forecast at 13/04/2012
2012 GDP OUTLOOK -0.5 2.2 8.4 3.2 3.7
Year end forecast vs current month
EXCHANGE RATE OUTLOOK* STABLE STABLE STABLE STABLE
POLICY RATE OUTLOOK STABLE STABLE STABLE STABLE FALLING
Momentum vs previous month
CONSUMER CONFIDENCE
RETAIL SALES
MANUFACTURING CONFIDENCE (PMI) <50 >50 >50 >50 >50
INDUSTRIAL PRODUCTION
UNEMPLOYMENT RATE N/A
INFLATION RATE
Financial stress indicator vs previous month ( 20/4/2012)
5 years CDS (bps)** 83 31 115 130 201
MA
CR
O
COUNTRIES
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2010 - 2011: ENHANCED RISK AWARENESS
- Methodology -
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Three criteria to quantify risk exposure:
EBIT, financial-fiscal charges and cash flow.
Three possible scenarios for each risk/opportunity:
Base case, Best case, Worst case.
PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)
Strategic Risks: our methodology to quantify the Value@Risk
Simulation analysis based on historical raw
material price and exchange rate volatility.
Risks aggregation through Montecarlo simulations
and representation of the overall Group exposure
to risk (Value@Risk).
Pirelli Property
PIRELLI ENTERPRISE RISK MANAGEMENT (ERM)
Operational Cross Risks: an example of indept risk analysis on supply chain
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AGENDA
ENTERPRISE RISK MANAGEMENT IN PIRELLI- A WALKTHROUGH
BUSINESS CASE: ERM MEETS THE STRATEGIC PLANNING DURING LATEST INDUSTRIAL PLAN
BUSINESS CASE: ERM GOES BEYOND STRATEGIC PLANNING EMBRACING THE LONG TERM HORIZON
11 Pirelli Property
BUSINESS CASE: ERM EMBRACES REPUTATION
OVERVIEW
According to the evolution journey of the Enterprise Risk Management Model adopted, Pirelli decided to foster the analysis of risk and opportunity events related to Industrial Plan 2013-2017
The risk analysis was aimed at providing the Management and the Board with relevant information on key risks related to expected targets and the degree of volatility of Industrial Plan financial results as well as a first outlook to Group results in case of strong changes in macroeconomic / market trends
For this purposes, the risk analysis focused on:
the creation of macroeconomic and tyre market alternative scenarios (“what if analysis”) distinctive with respect to the one considered in making Industrial Plan (“Base Case Scenario”);
the calculation of volatility of Industrial Plan (“Base Case Scenario”) results, based on risk and opportunity events potentially affecting Group business and related performance
► The analysis was performed in line with the Industrial Planning Process timeframe in order to present Group/BU expected financial results together with related risk profiles
1
2
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1- ALTERNATIVE SCENARIOs
Management to be involved
Group Controller e Risk Officer: identification and evaluation of
macro economic scenarios
Selected Management:
Marketing + BU
Purchasing: Raw Material prices
Finance: Exchange rates
Sharing results
Identification of macro economic Worst / Best worldwide scenarios and
of related assumptions in terms of:
Markets: OE / replacement / Premium & Std
Sales: Volumes, Market Share, Price erosion.
Industrial Efficiency / Production capacity constraints
Raw Material prices
Exchange Rates
Identification of potential «disruptive» events at Country level
(es. ARS and VEF depreciation vs USD, etc.).
For each selected scenario, evaluation of PBIT and Cash Flow 2014-2017 profiles
Identification of Group main leverages (commercial, crash program, investments, etc.) to reduce scenario impact in case of occurrence
Activities
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VENEZUELA - Stress Scenario
Steeper than currently expected Bolivar devaluation coupled with few import licences for not strategic sector and tighter implementation of price control
STRESS SCENARIO
2014 2015 2016 2017
10.0 17.0 25.0 30.0
59%y/y* 70%y/y 47%y/y 20%y/y
*% y/y appreciation USD vs LCU
The government implements a steeper devaluation in order to boost its revenues from flat $-oil exports prices/further reduced $ availability for not-strategic sectors
Gap between official and parallel market becomes unsustainable, Maduro administration is “forced” to devaluate again in a desperately attempt to reduce the gap.
Rising importance of Shale gas put downward pressure on WTI, thus reducing government revenues. Maduro push the usual devaluation / price control botton to keep government spending (in LCU) afloat
………………….
…………………..
……………………
…………………..
…………………..
POSSIBLE RAMIFICATIONS ON PIRELLI BUSINESS
*% y/y appreciation USD vs LCU
METRIC
Cash Flow
Cash reserve
PBIT
PBIT
PBIT
ALTERNATIVE SCENARIOs- The Venezuelan case…
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Analysis of main risk/opportunity events related to Industrial Plan, with focus on:
Strategic Guidelines and Targets :
Volatility of market variables (raw material prices, exchange rates, etc.)
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
Pro
bability
AR PBIT [M EUR]
424 M €
74% probabilità di avere PBIT < AR PBIT 26% probabilità di avere PBIT > AR PBIT
Probabilità di avere:
PBIT < 540 M€ 19 %
540 < PBIT < 599,5 M€ 55 %
599,5 < PBIT < 660 M€ 25 %
PBIT > 660 M€ 1 %
718 M €
660 M €
PBIT atteso 572,6 M€
AR PBIT 599,5 M€
540 M €0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
Pro
bability
AR PBIT [M EUR]
424 M €
74% probabilità di avere PBIT < AR PBIT 26% probabilità di avere PBIT > AR PBIT
Probabilità di avere:
PBIT < 540 M€ 19 %
540 < PBIT < 599,5 M€ 55 %
599,5 < PBIT < 660 M€ 25 %
PBIT > 660 M€ 1 %
718 M €
660 M €
PBIT atteso 572,6 M€
AR PBIT 599,5 M€
540 M €0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
Pro
bability
AR PBIT [M EUR]
424 M €
74% probabilità di avere PBIT < AR PBIT 26% probabilità di avere PBIT > AR PBIT
Probabilità di avere:
PBIT < 540 M€ 19 %
540 < PBIT < 599,5 M€ 55 %
599,5 < PBIT < 660 M€ 25 %
PBIT > 660 M€ 1 %
718 M €
660 M €
PBIT atteso 572,6 M€
AR PBIT 599,5 M€
540 M €
GROWTH on PREMIUM SEGMENT
COST / EFFICIENCY COMPETITIVENESS
COMMERCIAL TRANSFORMATION
Activities
Management to be involved
Regions: Region CEO/CFO, Controlling and other Corporate functions (i.e.
Operations, HR) relevant for Regions
BUs: All BUs. Then, Involvement of Regions to check / fine tune main
risk/opportunity events identified by BUs.
Other Corporate functions (i.e. Purchasing, Finance) to be involved to
analyze corporate risks (i.e. raw material prices, exchange rates)
Sharing results
2- VOLATILITY OF INDUSTRIAL PLAN RESULTS
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AGENDA
ENTERPRISE RISK MANAGEMENT IN PIRELLI- A WALKTHROUGH
BUSINESS CASE: ERM MEETS THE STRATEGIC PLANNING DURING LATEST INDUSTRIAL PLAN
BUSINESS CASE: ERM GOES BEYOND STRATEGIC PLANNING EMBRACING THE LONG TERM HORIZON
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BUSINESS CASE: ERM EMBRACES REPUTATION
Key forces that may (will?) shape the future of the automotive and auto parts
industries
IMP
AC
T O
N A
UT
OM
OTI
VE
IND
UST
RY
MEDIUM-TERM LONG-TERM SHORT-TERM Downside risks dominate the world economic outlook:
US replaces automatic sequestration with a tighter fiscal policy;
Euro survives intact minus Greece but the recession is prolonged and deepened;
Sluggish emerging markets growth, with China slipping into sub-7% territory.
Brazil fails to exploit World Cup / Olympics to develop infrastructure
Mismanagement withdrawal excess liquidity Country Risks as driver of business
interruption
Strong move towards low carbon economies:
More stringent green -house gas emissions in EU - from 130 g/km in 2015 to 95
g/km in 2020 fleet average emissions .
Tighter municipality regulations ( i.e.
congestion charge/access limited to certain hours)
Strict policies restraining new vehicle purchases* and vehicle on the road in China
(auctions/lotteries to sell limited number of licence plates)
Increased car hybridization, which by 2035 might
account for around 30% of total light duty vehicle sales
Demographic changes – shift in social-cultural behaviours:
Young drivers (16-29 year age) have already been
increasing at slowest pace since 1995 and car ownership will not be perceived as a status symbol.
Aging population (1/4 of world population will be in its
60’s or older by 2050)
Virtual mobility (Connectivity and texting),
telecommuting and video conferencing
Cars is likely to decrease importance in the
mobility mix.
Continued urbanisation- More people will move
away from suburbans/rural areas (emerging economies)
*Already in place in Beijing and Shanghai, which are likely to be followed by 8 more cities over the short term 17
Pirelli Property
AGENDA
ENTERPRISE RISK MANAGEMENT IN PIRELLI- A WALKTHROUGH
BUSINESS CASE: ERM MEETS THE STRATEGIC PLANNING DURING LATEST INDUSTRIAL PLAN
BUSINESS CASE: ERM GOES BEYOND STRATEGIC PLANNING EMBRACING THE LONG TERM HORIZON
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BUSINESS CASE: ERM EMBRACES REPUTATION
Pirelli Property
REPUTATION GOVERNANCE
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Sources: Variation on M. Porter’s Value Chain, Hill+Knowlton, Expanded model of Reputation Institute research
Corporate Principles
employees
INFRASTRUCTURE (ie Finance, Administration & Control, IR)
HUMAN RESOURCES MANAGEMENT (ie Organizational Check)
TECHNOLOGY DEVELOPMENT (ie R&D)
PROCUREMENT (ie Purchasing)
Shareholders, Investors, Financ.
Community, Institutions
Suppliers
OE
INBOUND
LOGISTICS OPERATIONS
OUTBOUND
LOGISTICS
SALES
SERVICES
MARKETING, ADV, BRAND,
COMMUNICATIONS:
OF WHICH:
F1 SPONSORSHIP
INTER SPONSORSHIP
CALENDARIO
SU
PP
OR
T A
CT
IVIT
IES
P
RIM
AR
Y A
CT
IVIT
IES
Environemental
Social
Governance activities
Corporate Culture
Activities
(Culture, Foundation,
Hangar)
P Zero Moda Business*
All other Reputation
activites
MA
RG
IN a
nd
LO
YA
LT
Y
AD
DE
D M
AR
GIN
A
ND
LO
YA
LT
Y D
UE
TO
INT
AN
GIB
LE
S
Employees
Dealers and Final Consumer,
Media
Public
at large
BRAND as the sum of perceptions about a
company’s specific product/service or line of
products/services
held primarily by current and potential client,
LEGENDA
Unique vision
Company
Activities
Key
Stakeholder
Brand
Building
activity
REPUTATION as the sum of perceptions about a Company’s corporate actions held by
the public.Reputation Drivers: Product/Service, Transparency, Innovation, Financial
Performance, Leadership, Workplace, Citizenship.
Pirelli Property
REPUTATIONAL RISKS MODEL
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Risk Identification
and Framework
Reputation Risk Survey
Mitigation Strategy Definition
General Public, Italy, Germany, Brasil, Us, Russia
and China
3 pillars: learning from the past, understanding the present, foresee the
future
MAIN SOURCES: PAST (10 year database) PRESENT (interviews to key Pirelli executives) FUTURE (interviews to Key opinion leader such as WBCSD, RMA, EU)
Selection of 24 reputational risks events
Survey
Events likelihood evaluation
Tool delivery
Each event will have a mitigation plan and a risk
governance
Pirelli Property