Coty's assignment QRA

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.

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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.

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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 company's 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

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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

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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.

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