PCA and PCA internal audit overview The metrics: how successful have we been?

1. Using Internal Audit to Identify and Build Future LeadersBoise Chapter Institute of Internal AuditorsMark PearsonDirector, Internal Audit ServicesPackaging Corporation of AmericaOctober, 2014

2. "I am convinced that nothing we do is more important than hiring and developing people. At the end of the day you bet on people, not on strategies."Lawrence Bossidy, Former CEO, Allied Signal

3. Outline • PCA and PCA internal audit overview • The metrics: how successful have we been? • Why use internal audit to develop leaders? • Key challenge: optimizing the roles of internal audit • Recruiting future leaders • Developing future leaders

4. Introduction to PCA • Headquartered in Lake Forest, Illinois • Acquired Boise Inc. on October 25, 2013 • With the acquisition annual sales grew to $5.5 billion, and the number of employees to 14,000 • Operates 8 mills and 98 corrugated product plants • Fourth largest producer of containerboard and corrugated container products in the Unites States • Third largest producer of uncoated freesheet (primarily papers for the office) in the United States • Traded on the NYSE as PKG

5. Introduction to PCA Internal Audit • From the Audit Committee approved charter: Internal audit is an independent and objective assurance and advisory activity of Packaging Corporation of America (PCA). It assists PCA in accomplishing its objectives by bringing a systematic and disciplined approach to evaluate and improve the effectiveness of the organization's governance, risk management, and internal control. • Staff of 16 located in Boise, Idaho, and Lake Forest Illinois. • Director reports to the Audit Committee of the Board and administratively to the CFO.

6. Internal Audit Vision • We are considered by our stakeholders as trusted and impactful advisors. • We are a center of excellence in recruiting, developing, and placing high potential future leaders. • We comply with the Standards for the Professional Practice of Internal Auditing and employ leading assurance and advisory practices. • We are considered world-class by stakeholders and peers. • Our team has deep knowledge of the business and appropriate professional standards and regulations. • We are diverse, technology savvy, trained in leading process improvement and problem solving techniques, and skilled in using advanced analytics.

7. Examples of Successful Alums • Dave Kunz: Vice President, Northwest Region • Erik Fredriksen: Controller, Nampa Container • Javier Cardiel: Controller, Hexacomb • Tim Kusmertz: General Manager, Louisiana Timber Procurement • Gretchen Gauthier: IT Manager of Planning and Administration • Billy D’Souza: Manager of Finance and Systems, Transportation Group

8. Successful Alums: Related Companies • Tom Carlile: CEO, Boise Cascade • Wayne Rancourt: SVP, CFO, Boise Cascade • Tom Corrick: EVP, Wood Products, Boise Cascade • Dan Hutchinson: VP, Operations, Boise Cascade • Diane Crompton: VP, Finance Systems, OfficeMax • Collette Simo: Senior Director, Internal Audit, Office Depot

9. Successful Alums: Other Companies • Rob McNutt: CFO, Expera Specialty Papers (formerly CFO, Boise Inc.) • Rob Saper: General Manager, Supply Chain, True Value • Shelley Nash: Previously VP, Operational Excellence, New Page • Sanjay Singh: VP, Internal Audit, Starbucks • Colin Connor: VP, Internal Audit, Kapstone • Joey Hale: Director, Internal Audit, Simplot • Yulia Gurman: Director, Internal Audit, RPAI

10. Why Internal Audit? • Best seat in the house: learn the business, operations, processes, people, culture. • Develop key skills: Communications, executive presence, project management, problem solving, decision making, process improvement, sales, conflict resolution, team leadership. • Address skill obstacles that could flatten/derail a career. • Exposure to hiring managers. • Pool for high impact special projects.

11. Key Challenge: Optimizing the Roles Process Improvement & Value-Add -Assess key processes -Perform high impact special projects -Identify process improvement opportunities Corporate Governance -Support SOX 404 & 302 compliance -Support compliance in other key areas -Perform control assessments -Assess and monitor risks -Support investigations of ethics violations Talent Development -Recruit & develop high potential candidates -Place candidates in key positions

12. Optimizing the roles • Maintain a core of seasoned professionals who know the company and profession. • Establish and continually improve the key components of success: right plan, right processes, right people. • Establish and maintain standard methodologies and templates: make it easy to train new team members. • Effective orientation of new team members. • Strong training program.

13. Right Plan Risk-based Management Input Updated Continually Structured Framework Right Process Proven Audit Methods Use of Technology Advanced Audit Techniques High Payback Reviews Effective Reporting Right People Effective Recruiting Orientation Training & Development Feedback Placement Key Processes

14. Thoughts on Recruiting “Eagles don’t flock, you have to find them one at a time.” Ross Perot "I hire people brighter than me and I get out of their way." Lee Iacocca "If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But if each of us hires people who are bigger than we are, we shall become a company of giants." David Ogilvy, former advertising executive considered “the father of advertising” “If you pay peanuts, you get monkeys." Chinese Proverb

15. Successful Recruiting • Strong support from executive management, operational management and human resources • Willingness to go over budget staffing levels should an “eagle” surface. • Constant focus on identifying possible future candidates. • Sell, sell, sell: Sell your function to key stakeholders, recruiting sources, and potential candidates inside and outside the company. • Effective college recruiting programs

16. Thoughts on Development "Development can help great people be even better--but if I had a dollar to spend, I'd spend 70 cents getting the right person in the door." Paul Russell "A good manager is a man who isn't worried about his own career but rather the careers of those who work for him." H. S. M Burns, Former President of Shell Oil company

17. Successful Development • Leverage existing corporate programs • Succession planning • Leadership development • High potential development • 360 degree feedback • Training • Reverse mentoring • Develop annual and multiyear individual development plans • Leverage other resources: • Professional associations and related leadership opportunities • Temporary developmental assignments • Strong formal and informal feedback

18. Ambitious Established strong relationships Consistently high performance Team building & leadership skills Intelligence Willing to take risks Able to adapt Problem solver Characteristics of successful leaders Source: Center for Creative Leadership

19. Problems with interpersonal relationships Not meeting business objectives Inability to build & lead a team Inability to change or adapt during transition Derailment Themes • Source: Center for Creative Leadership Source: The Center for Creative Leadership

20. Had more diversity in their track records Maintained composure under stress Handled mistakes with poise & grace Focused on problems & solved them Got along with all kinds of people Successful Executives… • Source: Center for Creative Leadership Source: The Center for Creative Leadership

21. Had problems with interpersonal relationships Had difficulty molding a staff Lacked follow-through Showed over-dependence Had strategic differences with management Derailed Executives… • Source: Center for Creative Leadership Source: The Center for Creative Leadership

22. Take Charge of Your Development Personal Vision Proactive Stance THE PERSON YOU WANT TO BE OPPORTUNITIES TO GROW SELF- AWARENESS  +  + Create a Learning Environment Morgan W. McCall, Jr., High Flyers: Developing the Next Generation of Leaders Boston: Harvard Business School Press, 1998, p. 206. Morgan W. McCall, Jr., High Flyers: Developing the Next Generation of Leaders Boston: Harvard Business School Press, 1998, p. 206.

23. What is a high-potential employee? • Characteristics of the high-potential employee: • Ability • Aspiration • Engagement • Performance Evidence Definition: High potential employees consistently and significantly outperform their peer groups in a variety of settings and circumstances….They show a strong capacity to grow and succeed…They deliver strong results, master new types of expertise, and recognize that behavior counts. Adapted from Corporate Leadership Council, CEO Executive Board research

24. Summary • Developing and implementing a risk-based audit plan meets only the basic expectations of our stakeholders. • To truly add value: • Be a trusted and impactful advisor. • Help improve the business, processes, and controls. • Help management identify and respond to key risks. • Recruit and develop the leaders of the future.