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Compliance Risk Management

-The essentials of protecting your organization from compliance riskas an organization leader -

Education Topics

Why is compliance so important ?

What is my role regarding compliance ?

What specific compliance issues should I be especially aware of as a Leader ?

Why is compliance important?Every business entails risk, but few are truly aware of the risks they face

☞

Why is compliance important?Regulatory Risk is one of the most important risks business leaders face today

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Risk Perception : What risks do experts widely regard as “Significant” ?

NaturalDisaster

RegulatoryRisk

-30

-20

-10

0

10

20

30

IT Risk HRRisk Reputation

Risk MarketRisk

ForeignExchange

Risk

CountryRisk Credit

Risk

PhysicalSecurity

Risk

PoliticalRisk Financing

Risk Terrorism%

%

%

%

%

%

* Percentage of survey respondents that say a category of risk is a significant threat to the business minus percentage of respondents that say a category of risk is a low threat to the business

* Based on responses from over 230 Chief Risk Officers & Senior Executives of major global companies

Source : Economist Intelligence Unit Survey (‘05)

Hig

h R

isk

Low

Ris

k

Unexpected Competition Troubles in Latvia (Nov. ‘09)

Why is compliance important?

Sanctioned for Vertical Price Fixing

4.1M LVL (USD $8.6M) fine incurred→ Amounts to 3.4% of annual turnover→ Samsung’s fine almost equal to

4 other cartel members fine combined

Subsidiary president replaced

Spread of “western” regulation throughout the world meansdeveloping countries are now legal danger areas

☞

Latvia Domestic Sales Imports

Samsung

A B C D

Russia

• Enacted Federal Competition Law in Oct. ’06

• R$1.42 Billion fine against oil product companies (‘08)

Why is compliance important?Spread of “western” regulation throughout the world meansdeveloping countries are now legal danger areas

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Brazil

• Mutual Enforcement Treaty with US in ‘99

• R$15 Million fine against BASF / Hoffman-La Roche (’04)`

China

• Enacted aggressivenew AntimonopolyLaw in Aug ’08.

• Coca-Cola / HuyanJuice merger blocked (‘09)

China

India

• ‘02 Competition Act entered into force in Mid ’08

• New Competition Commission in operation (May, ’09)

Why is compliance important?Increasing regulatory scrutiny towards “Foreign Companies”,especially in markets with competing domestic industries

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Average jail time for foreign defendantsin international cartel cases (’00 ~ ’08)

0

2

4

6

8

10

12

14

16

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

Months

Source : US Department of Justice

Companies fined by US Dept. of Justicefor Antitrust violations (’08 ~ ’09)

Amount Company Case

$400 M LG Display TFT-LCD

$350 M Air France KLM Air Cargo

$120 M Sharp TFT-LCD

$110 M Japan Airlines Air Cargo

$109 M Aerolinas Brasileiras Air Cargo

$65 M Chunghwa TFT-LCD

$61 M Qantas Air Cargo

$60 M Cathay Pacific Air Cargo

$52 M SAS Cargo Air Cargo

$42 M Martinair Holland Air Cargo

Source : Global Competition Forum

Why is compliance important?Regulators are also much more aggressive in enforcinglaws and regulations

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The New Rules of the Game : Regulatory “Example-Making”

“Today, impatient regulators try to changethe law through enforcement cases against individual companies…

… and are inclined to impose legal sanctionsretroactively for past actions taken in good faith … [but] now judged “improper” under changing expectations…”

- Ben Heineman, former General Counsel of GE

Why is compliance important?In today’s world, the potential consequences are too bigto ignore

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April, 2004“EU probes Intel-friendly procurement rules”

March, 2005“Japan antitrust watchdog bites Intel”

June, 2005“AMD files antitrust suit against Intel”

September, 2007“Korea alleges Intel violated antitrust laws”

June, 2008“US FTC opens formal probe into Intel salespractices”

→ $450M fine to settle criminal charges→ $350M disgorgement of illegal profits

made over past 6 years (’01 ~ ‘07)

“Disgorgement of Profits”

“Punitive Damages”

→ $821K in Compensatory Damages→ $79.5M in Punitive Damages

“The Multiplier Effect”

Why is compliance important?

Safety Scandal scathes Mitsubishi Motors (’00, ‘04)

Systematically falsified customer safety complaint reports to Transportation Ministry and conducted “Secret Replacements”

The company was initially fined only $4,500 by the Osaka District Court

However, public outcry and bad media publicity led to over 50% drop in international sales in less than 1 year

Eventually had to recall over 1 million vehicles in the US alone

Lead to breakup of DaimlerChrysler M&A

In today’s world, the potential consequences are too bigto ignore

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Why is compliance important?Electronic business communication has lead to transparent exposure of wrongdoing to investigators and the media

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Indelible, Unstoppable, Condemning E-mail (‘98 ~ ’02 DRAM Price Fixing Case)

Source : Bloomberg

What is my role regarding compliance?Compliance Leadership☞Risk Management☞

“Commitment” “Courage” “Communication”

CEO personally telephones each member of the company’s management team who does not complete his or her ethics education program within the agreed-upon time frame

Publically announced dismissal of 2 very senior executives with long career of service to the company for illegal conduct at annual goal-setting meeting, and explained reason of dismissal in front of 600 other executives and officers

When a customs officialin a developing country blocked the entry of $250,000 raw material shipment demanding a $5,000 bribe, P&G shut down the plant for 4 months until appeal reached the country’s president rather than pay the bribe

L e a d e r s h i p


CEO Message for the LGE Code of Conduct


“Dos”“Don’ts”

Never compromiseJeong-Do Management principles

Never accept rationalizations such as :

• “It is necessary in order to meetour objectives…”

• “Everyone else is doing it…”• “I did it to serve our customer…”

Make sure employees are fully aware of the laws and regulations relating to their business

Make sure any employee who has concerns about a possible violation can raise issues to a manager without fear of retaliation

“Leaders & Organization Managers hold ultimate accountability forCompliance Risk in their organization”

What is my role regarding compliance?

Business Units• Identify risks that

can occur in each organization

• Assess their likelihood & impact

HQ• Establishes compliance

policy and criteria

• Provides support forBU risk managementactivities

Business Units & HQ

• Monitors major risks

• Reports results to senior management

Compliance Leadership☞☞ Risk Management

Business Units• Develop and implement

mitigation measures

• Improve compliance risk area in their operations

Risk ManagementProcess

Risk MitigationActivities

RiskAssessment

Monitoring& Reporting

RiskStrategy

What is my role regarding compliance?Compliance LeadershipRisk Management☞

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Risk Assessment : “Know your Compliance Risks”

Employees must identify Compliance Risks that canoccur in your organization

Employees must also assess likelihood and impact

Results must be reported to you

Identify Risks

Risk ??

?? ??

?? Risk A

Risk B

Risk C

Risk D

Risk E

Risk F

Risk G

Risk IdentificationAssess Likelihood & Impact

Impact

Likelihood

Risk A

Risk B

Risk C

Risk D

Risk E

Risk F

Risk G

Risk A

Risk B

Risk C

Risk D

Risk E

Risk F

Risk G


RiskAssessment


Risk Mitigation : “Control your Compliance Risk”

Each organization must assume ownership in controlling their own risk

“Mitigation”

Risk A

Risk B

Examples of Risk Controls

Risk A

54321 6

1

2

3

4

5

Impact

Likelihood

Check Controls

Improve Risks

Check whether existing controls are effectiveImprove controls for risk-heavy operations

Awareness & Knowledge Process

• “Tone at the Top”• Education• Code of Conduct /

Internal Policies

• R&R Allocation• Internal Review/

Expert Review• Internal Regs.

/ SOPs / Checklists


RiskMitigationActivities


Monitoring & Reporting : “Know your Status”

Must receive periodic reports on your Risk Status & Risk Improvement Progress

Must follow-up on risk management activities

Examples of Reports

Risk AssessmentResults

OperationsSelf-Check Results

Root CauseInvestigation Reports

Risk ImprovementProgress Reports


Monitoring& Reporting

Must always be cautious about possible competition law violations

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What issues should I be especially aware of ?

Price Fixing : Not worth the risk

“Despite several attempts to fix global DRAM prices, collusion among rivals failed to halt a long term decline in chip prices”

DRAM chip price per megabyte (’98 ~ ’02)

Source : iSuppli

Remember two major risk areas

Cartel• Never attempt to fix prices / volume / territory• Never talk about prices / volume / territory

with a competitor• Be careful during social meetings / business

meetings• Make sure employees also know and follow

these rules

Resale Prices• Always consult your legal advisor before

approving any RRP related incentive plan• Strongly recommend having internal Resale

Price regulations based on local law

Subsidiaries must communicate Local Product Standards regulations to HQ / Companies

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Failure of communication

Recently, a developing nation in Africa announced a new compulsory product quality standard for imported electrical products. However, it was only when customers began mass-returning unlabeled products that an alarmed subsidiary realized that nobody had notified the Company of this important change for almost 3 months.

Employees must register all product standards related New Regs. / Amendments

Will be sent to appropriate Companies / Labs

Regulation Gathering Process

EU

4Countries

3Countries

14Countries

14Countries

3Countries

6Countries

9Countries

CIS

MEA

China

NA

SCA

AsiaGMP System

Companies& Labs

LGE advertisements have a large audience and are always under scrutiny from customers and competitors

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UK bans Samsung “LED TV” Ads

: “LED TV” likely to mislead

“Samsung has been rebuked by the UK Advertising Standards Authority (ASA) for using the term ‘LED TV’. The ASA upheld complaints against the advertisements that they misled customers into thinking that the TVs had a full LED display, while in truth they only had an LED backlight system.”

Check whether the advertisement has been reviewed by :

• Product Planning / R&D • Internal / External legal expert

Make sure there is a clear line of responsibility concerning compliance

When approving an advertisement

Types of issues to avoid

• Deceptive Advertising• Unfair Advertising• Clear Exaggerations• False Endorsements

• Unsubstantiated Advertising

• Nondisclosure of Material Facts

“It’s better to be careful ahundred times than bekilled once”

- Old Persian saying -

Compliance with LGE Contracting Policy

Legal TeamDec. 9, 2009

Contracting Policy

Compliance with LGE contracting policy is critical to maximize corporate interests and manage contractual risks

LGE Contracting Policy consists of the following five components

Contract Guidebook

Globally applicable contract policy for principle-based contract-making and negotiation with business partners

- Provides policies, standards, guidelines, alternatives and approval processes for major contractual issues

- Pre-approved “Country Unique Term” may be used if any of the policies and standards are not appropriate for any country

Standard Contract

Ready-to-use contract for global application incorporating our Contract Policy

- Provides LGE’s standard terms and conditions based on Contract Guidebook

Negotiation Policy

Sets out internal steps to be taken to prepare for negotiation

- Defines and clarifies the respective roles and responsibilities of Legal and Business in contract negotiation

- Explains negotiation strategy and planning to be adopted by Legal and Business

Negotiation Matrix

Provides rationale and supportive arguments to reinforce our preferred positions

- Sets out LGE’s preferred position on the issue under negotiation, discusses the rationale behind such position and provides a set of arguments to use in support of such position

Approval Matrix

Defines the level of approval required in respect of significant deviation from our standard positions

- Summaries LGE’s standard positions for major contractual issues and major types of contracts and provides approval authority for each non-LGE standard position requiring approval

Compliance with Contracting Policy

Approval process for non-standard position

Standard Contract must be used as much as possible in the circumstances to protect LGE’s interests and reduce transaction costs

HQ Legal has set out LGE’s standard positions for major contractual issues and approval process to proceed with a non-standard position, obtaining approval from the specified approver(s) based on Legal staff’s risk analysis

Approval process is to ensure all contracts are entered into based on informed decision by all relevant persons

Approval Form for Execution (“Sign-Off Sheet”) is to be used as a communication tool between you and the legal staff for the above-mentioned procedures

‘Red-signals’on Sign-Off Sheet

Approval Form

Checkpoints

Contracting-related matters

Early involvement by Legal staff

All contracts should be reviewed by Legal staff prior to execution

Check contract execution approval process - use of authorization matrix & Sign-Off Sheet

Know what contractual risks are and how to manage such risks

Business Units also have to understand and comply with Contracting Policy

Original contracts management

Coordinate with Regional General Counsel

Thank You !

Checkpoints

Whether or not Sign-Off Sheet (or through on-line) is used for entering into a contract

Whether or not the legal staff state non-standard provisions, if any, and associated risk analysis in the Sign-Off Sheet so that main contractual risks are properly communicated and managed

Ensure contractual risks are communicated at the right time to avoid any last minute decision without properly assessing risks

‘Red-signals’ on Sign-Off Sheet

1.No use of Sign-Off Sheet2.Simple summary of commercial terms and conditions without bring up non-

standard legal issues3.Sign-Off submitted for approval at the last minute

Compliance with Contracting Policy

Red signals on Sign-Off Sheet

Approval Form (Sign-Off Sheet)