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Expanding LP at Sterling Jewelers in the Sarbanes-Oxley Era

There’s something about starting a twelve-hour workday with an early morning teleconference with your company’s London-based risk committee. For Kevin Valentine, those trans-Atlantic meetings are not everyday events, but not that unusual either. He says by the time the conference call ends, he’s ready for a fresh cup of coffee and to get on with his regular day full of meetings, phone calls, and emails.

Valentine, who has been with Sterling Jewelers Inc. for over twenty-one years, arguably has one of the most unique and demanding executive positions in the profession today. His title is vice president of loss prevention and internal audit. Overall, Valentine is responsible for Sterling Jewelers’ loss prevention, facility security, inventory control, and internal audit functions.

With the popular Kay Jewelers as its most recognized mall-based brand, Sterling Jewelers Inc. is the U.S. operation of Signet Group plc, a United Kingdom-based company with $3.05 billion in annual sales. Signet is the world’s largest specialty retail jeweler operating 1,803 stores in the U.S. and U.K. The U.S. business, with over $2.0 billion in annual sales and 1,202 stores operating under twelve distinctive brand names across all 50 states has a 7.2 percent share of the $28 billion US specialty retail jewelry market.

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“Sterling plans to grow 7 to 9 percent per year, doubling space over the next ten years while continuing to upgrade an existing portfolio,” says Mark Light, president and chief operating officer at Sterling. “Effective inventory control procedures and loss prevention practices will play a crucial role in this company’s growth.”

Man of Many Hats

Under Valentine’s direction, specialized teams of loss prevention, security, and audit professionals are deployed in the field and home office to support the company’s geographical store operations.Expanding LP at Sterling Jewelers in the Sarbanes-Oxley Era

Sterling’s operations hub is its 350,000 square-foot headquarters and distribution center and a nearby 19,000 square-foot repair facility in Akron, Ohio. Throughout the year,Sterling purchases loose polished diamonds on the world market and outsources the casting, assembly, and finishing operations to third parties. The finished jewelry arrives at this distribution center from around the world for distribution to Sterling’s retail stores. Valentine is responsible for the 24 by 7 security operation at the Akron facilities and brings together the unit’s ongoing field and headquarters inventory control and internal audit operations.

Valentine has held the loss prevention part of his job since he joined the company in 1986. However, along the way he took on significant added responsibilities, including the facility security, the physical inventory tracking process, and internal audit functions. And that growing span of control has more recently led to even greater responsibility.

In 2003, Valentine’s job and life changed dramatically. That’s when he was given responsibility for Sterling’s implementation of the Sarbanes-Oxley Act (SOX). Valentine reports to Sterling’s executive vice president and chief financial officer, Robert Trabucco, and runs a special “Sarbanes-Oxley Project Management Office.” This is a hugh deal. With hisSarbanes-Oxley responsibilities, Valentine is now an integral member of Signet Group’s business risk assurance team, and he reports regularly to the Signet audit committee.

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How does Valentine find himself in this unique and varied position?

“Many of us at Sterling wear many hats,” says Valentine. “Because of our commitment to the company over theExpanding LP at Sterling Jewelers in the Sarbanes-Oxley Era years, more opportunity and responsibility have come. In the earlydays, Sterling had less than 100 stores, and I was part of a small core management team. As we grew, we slowly added structure and depth. Being fortunate enough to be able to build an exceptionally talented, experienced team has enabled myself and other colleagues to take on different responsibilities. That has made for an exciting and satisfying career.”

Loss Prevention at the Senior Management Table

The story of Sterling’s steady growth and Valentine’s steady career progression are obviously intertwined. His willingness to take on more and more coincided happily with Sterling’s fast-growing needs, the company’s recognition of his organizational and leadership capabilities, and the rapid expansion of the accounting and compliance requirements of public companies.

“Today, loss prevention professionals are entirely capable of taking on additional, non-traditional loss prevention roles,” explains Valentine. “For a long time, that was not generally recognized because at many companies the loss prevention function had such low visibility. But when every one of a company’s products is valuable and desirable, loss prevention is a highly visible function. Visibility can often lead to new opportunity.”

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The gradual expansion of Valentine’s roles at Sterling tracks with the company’s growth. With acquisitions and the constant opening of new stores came the obvious need for strong controls and internal audit, in addition to effective loss prevention. As Valentine points out, “There are many operational synergies among these functions that can be leveraged to protect the organization’s physical and human assets as well as its brand.”

Valentine’s career evolution is evidence of a strong positive trend in both the loss prevention and security fields. As CEOs and CFOs, as well as boards of directors, more fully recognize the many risks their companies face, they also recognize and reward the contributions of loss prevention and security executives. Thus, increasingly, loss prevention and security directors are being promoted and given added business responsibilities.

Risk Control and the Sarbanes-Oxley Era

“Kevin takes such pride in his profession and represents this company with the highest degree of integrity,” says CFO Trabucco. “As a highly esteemed peer and an invaluable asset to this team, he was a natural choice for leading the Sarbanes-Oxley section 404 initiative.”

Expanding LP at Sterling Jewelers in the Sarbanes-Oxley EraValentine does not seem either surprised or daunted by his current challenge of driving the implementation of Sarbanes-Oxley at Sterling. “I’m proud to be part of this effort.Sarbanes-Oxley places significant demands on all of our company’s process owners. Any change in a process triggers the rewriting and redocumentation of the entire process,” Valentine explains. “So the work of compliance pretty much merges with our ongoing operations and our continuous improvement strategy…and that’s a very good thing.”

In other words, Sarbanes-Oxley is all about internal controls. Similarly, loss prevention, inventory control, and internal audit are also all about internal controls. So Valentine’s current role at Sterling Jewelers is a natural fit.

“Our project leader, Tom Kimble, director of internal audit, along with the corporate audit staff have been working with process owners to ensure that we meet SOX requirements,” adds Valentine.

There is no public company today that has not been heavily impacted by the Sarbanes-Oxley Act of 2002. In addition to extensive guidance and regulation dealing with the legal and fiduciary responsibilities of company directors and officers, Sarbanes-Oxley, specifically Section 302, mandates that the CEO and CFO formally attest that their company has in place effective internal controls for financial reporting.

While sounding entirely logical and reasonable, possibly even simple, this requirement has had two profound impacts. First, it has driven financial management processes to a far higher degree of accountability than was typical at many companies in the pre-Sarbanes-Oxley era. Second, it has more explicitly than ever before strengthened the accountabilities of corporate governance (board of directors) and management (executive officers) with regard to a company’s financial dealings.

To make Sarbanes-Oxley really work, implementation is necessarily a bottoms-up process, occurring within and throughout a company’s operating divisions. For Signet, this hasmeant that its Sterling Jewelers Inc. division, under Valentine’s leadership, has identified and is validating and documenting its business process streams, covering everything from accounts payable to physical inventory counts. Because Signet, while a U.K.-based company, trades a version of its shares on the New York Stock Exchange (NYSE: SIG), the entire company is required to comply with Section 404 by the end of 2006.

“Sarbanes-Oxley is truly a company-wide effort,” says Valentine. “The U.S. internal audit team works with our counterparts in the U.K. division. At the end of the day, all of our processes need to come together at the group level.”

At Signet Group, as at many other large businesses, there is a huge focus on recognizing and managing risk. This explains the frequent alignment…sometimes informal, but increasingly formal…between loss prevention and internal audit. Signet’s corporate risk committee sends its reports directly to the board of directors’ audit committee. It pulls together the company’s “risk register” of emerging issues reported by its operations, tracks new regulations, and closely watches over the activities of the internal audit function, which ultimately touches every store within the entire Signet organization.

“With Sarbanes-Oxley, business practices that have always made sense to us make even more sense today. We always felt we were operationally strong and risk aware. Bringing largeportions of asset control (that is, physical inventory control, facility security, and loss prevention) and risk control under one umbrella, and then using section 404 as the standard we must adhere to, strengthens our business greatly,” Valentine says.

Operationally and Culturally Integrated Loss Prevention

“Loss prevention, inventory control, and facility security practices greatly contribute to the company’s operating profit margins,” says Trabucco. “With over 15,000 associates and more than 1,200 specialty jewelry stores, loss prevention training and advancements are a priority both in the field and at the home office.”

Operational focus at Sterling has always been a hallmark of its loss prevention effort, but that effort has been expanded to support the entire business and its commitment to providing a consistently “exceptional” customer experience.

Sterling brands have at least one certified diamontologist resident in each store. Its extensive analysis of sales performance and customer surveys confirms that aExpanding LP at Sterling Jewelers in the Sarbanes-Oxley Era store’s success is directly linked to customer satisfaction both with the product and their experience with the purchasing process. And that experience has much to do with the knowledge, sales approach, and overall enthusiasm of the salesperson. Valentine says the company does not separate product knowledge and loss prevention from dealing with customers. All are integral to the customer experience.

In that regard, Valentine also points out that although Sterling has regional loss prevention managers and operational auditors throughout the U.S. who work closely with district and store managers, “Loss prevention is part of everything we do. We carefully screen and question prospective new associates. We expect them to display a high level of integrity and professionalism. Training takes place at all levels and is extensive. Qualifying to handle gold products or watches or rings requires successful completion of separate training modules. Each training module addresses specific issues about how to handle each type of product and how to interact with the customer.”

Associates must also become educated about strict policies and procedures covering everything from obtaining and returning keys to the showcases to verifying overnight product shipments to a store. Success at Sterling requires success at all of these—one step at a time. The company rewards this progress and personal commitment by maintaining a promote-from-within system whenever possible. “It’s become part of our company culture to reward talent and hard work and to encourage loyalty. It’s a two-way street that benefits everyone,” says Valentine.

Perhaps that’s why Valentine describes loss prevention at Sterling as a “thought process” that extends from hiring and training personnel to developing new stores. “Of course we are concerned about crime at our stores,” he explains, “and that concern is fully integrated into the bigger picture of developing successful stores and strong employee teams. Loss prevention is part of every employee’s job, right along with customer service.”

Sterling COO Light adds, “What we believe is unique to Sterling and helps distinguish us from others is the positive, cooperative relationships between both our field and homeoffice operations and loss prevention teams in areas such as audit and inventory control. The relationships are united in helping to ensure that our store associates can focus on addressing the needs of our customers and maximize sales, in a safe and secure environment.”

Valentine and his loss prevention team review the security requirements of every proposed new store. Their security review looks at the neighborhood, which can range from midtown Manhattan to downtown Chicago to an upscale suburban shopping center in Florida; specific placement of each store within a mall or shopping strip; and even the selection and placement of safes, alarms, and CCTV equipment.

Securing a Variety of Store Formats

In 1993, Sterling Jewelers Inc. established an entirely new type of store that differs dramatically from its nearly 775 Kay stores. The 111 Jared the Galleria of Jewelry stores are typically much larger (5,900 square feet versus 1,460), offer a much larger range of merchandise, and are at off-mall locations. They tend to be in what are considered “destination” locations—shopping strips or multibusiness campuses that include big-box booksellers and electronics chain stores.

“Each store presents its own risk factors,” explains Valentine. “At an enclosed mall that has its own complete security program, our stores face less risk. At some other locations the risk can be greater.”

Like other large retailers, Sterling maintains a “risk list” of stores that ranks each store’s risk based on location, design, and any actual incidents. Degree of risk is linked directly to each store’s budget for security. “We have a very well proven approach to site hardening for existing and new stores that is based on the degree of risk each one has.”

Sterling typically refurbishes its stores on a ten-year capital budget cycle, but that can be accelerated if business conditions at a particular store warrant it. Within that cycle, Valentine explains, “We look at security incident data and at any significant changes in the neighborhood crime rates and other demographics. Our analysis can trigger a variety of decisions, from updating and repositioning security systems to relocating the store entirely.”

“Every Kiss Begins With Kay”

The highly recognized national advertising campaign “Every Kiss Begins With Kay®” for Sterling’s anchor chain, Kay Jewelers, sets the desired tone for what many customers nodoubt would call the most important purchases of their lives. What customers don’t see…and benefit from at every store visit…is the highly professional, complex, and tireless application of controls throughout the Sterling Jewelers Inc. and Signet Group enterprise.

In an otherwise forthcoming and insightful conversation, one thing the company does not discuss is actual shrink and crime statistics at Sterling. “Maintaining a safe and secure environment for our customers and employees is our utmost concern,” Valentine says.

“Using the latest and most innovative security solutions as we strategically plan our company growth, including properly assessing a range of risk factors, allows our sales associates to provide first-class customer service,” says Light. “Kevin and his loss prevention team have helped the organization successfully create a unique shopping experience so enjoyable that it continually leaves a lasting and memorable impression on our customers.”


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