Risk management

Unidentified risks are a threat; identified risks are a managerial issue

Doing business inherently involves taking risks, and by taking measured risks we strive to be a sustainable company. Risk management is one of the essential elements of the company’s corporate governance. This calls for creating a proper balance between entrepreneurial attitude and risk levels associated with business opportunities. We foster a high awareness of business risks and internal control procedures, geared to safeguarding transparency in our operations.

Akzo Nobel risk management framework

Through our risk management framework we want to provide reasonable assurance that our business objectives can be achieved and our obligations to customers, shareholders, employees, and society can be met. The Akzo Nobel risk management framework encompasses the following elements:

Policy. Our risk management policy is to ensure that risks are timely identified, adequately understood, properly assessed and effectively responded to by responsible employees at all levels within the company.
Process. Our risk management process provides a structured approach to risk identification, risk assessment, control assessment and response to risks. It is a management process that can be applied at all levels and project areas in the organization and enables sharing of best practices and knowledge.
Language. A common risk language facilitates communications and decision-taking on risks.
Accountabilities. Within Akzo Nobel all managers at all levels are responsible for risk management as an integral part of their day-to-day operations and decisions. Clarity on risk boundaries that determine the freedom of action or choice in terms of
risk-taking and risk acceptance is provided to all managers. Risk boundaries are governed by Akzo Nobel’s Company Statement, Business Principles, Internal Authority Schedules, and Corporate Directives.
Reporting. Risk reporting covers the perceived likelihood, the assessed impact, and the effectiveness of control measures in place to deal with risks. Reporting on these elements, as well as those pre-emptive and remedial actions, is an integral part of our Business Planning & Review cycle.
Assurance. Annual assurance is provided by line management regarding the extent of compliance with the risk management policy. The internal control framework, audit procedures, and independent appraisals provide reasonable assurance of the effectiveness of our risk management framework.
Monitoring, development and support. The Akzo Nobel risk management function consists of a Corporate Risk Manager with a central staff and experts in the business units. The corporate risk management staff monitors the risk management process and supports and develops the framework that enables managers to fulfill their responsibilities by providing tools, training, facilitation and knowledge.

Our risk management framework complies with the Enterprise Risk Management – Integrated Framework of COSO (the Committee of Sponsoring Organizations of the Treadway Commission). The procedures and results are reviewed by the Board of Management and discussed in the Supervisory Board.

The Akzo Nobel risk management framework is mature. In 2008 the focus will be on implementation of the framework in newly acquired businesses.

Major risk factors

Within Akzo Nobel a large number of different risk factors have been identified, each of which may result in a material impact on a particular business unit, but may not materially affect the company as a whole.

Under the explicit understanding that this is not an exhaustive enumeration, our major risk factors are listed below. There may be current risks that the company has not fully assessed and are currently identified as not having a significant impact on the business, but which could at a later stage develop a material impact on the company’s business. The company’s risk management systems endeavor the timely discovery of such incidents.


Identified risks		Risk management

Strategic risks
External
A global economic downturn can have a harmful impact on the company’s business and results of operations.

Because the company conducts international operations, it is exposed to a variety of risks, many of them beyond its control, which could adversely affect the business.	>	The company aims to spread its activities geographically to benefit from opportunities and reduce the risk of political and economic instability.

Failure to get support of the company’s stakeholders for its strategy could adversely affect the company and its businesses.	>	The company endeavors to define and implement a clear strategy and continuously seeks dialog with stakeholders.

Internal
A failure to implement the company’s strategic agenda effectively could adversely affect the company and its businesses.	>	The feasibility of the company’s strategic agenda is continuously monitored by the Board of Management and Supervisory Board. Specific attention is paid to areas such as macroeconomic developments, general market developments, geographical spread, emerging markets, political risks, future acquisitions and divestments.

The company may not be able to identify major transforming technologies.	>	The company continuously aims for sustainable growth of its business through research and development, production, and sale of new products and regularly adds new businesses and technologies through alliances, ventures, or acquisitions.

The company may not be successful in integrating acquired businesses and not reach the full synergy effects.	>	We place a strong focus on integration of acquisitions as this is critical to achieve the expected results. Akzo Nobel’s policies and directives are implemented without delay in newly acquired businesses.

Operational risks
External
Seasonality may adversely affect the operating results of the company’s business.	>	A portion of the company’s business is seasonal due to weather conditions. A lag in earnings may not be offset during the corresponding financial year.

Differences in energy prices pose a risk to the competitiveness of several of the company’s chemical businesses.	>	The company operates some energy intensive businesses. A non-level playing field for energy can affect the competitive position of these businesses.

Bad publicity and damage to the company’s brands could adversely affect its business and results of operations.	>	The company’s diverse portfolio, brand approach, and response management system provide a certain degree of protection against such damage.

Product liability claims could adversely affect the company’s business and results of operations.	>	Presently, the company is involved in a number of product liability cases. However, it believes that any unaccrued costs and liabilities will not have a material adverse effect on the company’s consolidated financial position. The company has a central policy to optimize insurance coverage.

The company’s business will continue to expose it to risks of environmental liabilities.	>	The company uses hazardous materials, chemicals, and biological and toxic compounds in several product development programs and manufacturing processes. We have been, and can be exposed to, risks of accidental contamination. We could be exposed to events of non-compliance with environmental laws, regulatory enforcement, property damage, and possible personal injury and property damage claims resulting therefrom. Contingency plans and crisis management are in place to mitigate these risks (see also note 27).

Internal
The company’s ambitious growth plans may not be achieved when we fail to attract and retain the right people.	>	The company puts emphasis on attracting, retaining, motivating, and educating staff, using Human Resources instruments such as the talent factory and provides clarity in the working environment through information and communication programs. Special focus is required in the emerging markets.

If the company’s management of change projects is not adequate this may possibly lead to loss of key staff or knowledge or other business disruption, which could have a negative effect on productivity and customer focus.	>	The company undertakes significant projects in the areas of sourcing, IT, Human Resources and various business areas that require significant project management. The company holds a lot of project management experience. Our best employees are involved in the management of critical projects which are supervised by the Board of Management.

Inability to swiftly adapt the cost structure of the company’s businesses to changes in the economic environment could adversely affect the company’s operational results.	>	The company continuously monitors macro-economic developments and general market trends. Our businesses practice operational excellence for continuous monitoring of its cost structure and the company has a Margin Management program in place. Changes in the economic environment shifts the allocation of the company’s global resources in alignment with the new optimum.

Risks in production processes can adversely affect the company’s results of operations.	>	It is the company’s policy to mitigate production risks by spreading of production and an adequate inventory policy combined with contingency planning and appropriate risk transfer arrangements (for example insurances).

Inability to access raw materials, growth in cost and expenses for raw materials, petroleum and natural gas, and changes in product mix may adversely influence the future results of the company.	>	The company aims to use its purchasing power and long-term relationships with suppliers to acquire raw materials and safeguard their constant delivery at the best conditions. Akzo Nobel is sensitive to price movements that may lead to erosion of margins and allow product substitution. A global sourcing strategy enables us to bundle the purchasing power both in product related and non-product related requirements. The company’s businesses continuously monitor the markets in which the company operates for developments and opportunities.

Financial risks
External
Exchange rate fluctuations can have a harmful impact on the company’s financial results.	>	The company has operations in more than 80 countries and reports in euros. It is particularly sensitive to the relation between the euro and U.S. dollar, pound sterling, Swedish krona, and Latin American and Asian currencies. The company has a hedging policy for certain currency exchange rate risks (see also note 26).

A downgrading by credit rating agencies could result in higher financing costs or reduced availability of credit.	>	Ratings at year-end were Standard & Poor’s A- (A minus) and Moody’s A3.

The company’s financial condition and results of operations could be adversely affected if the company does not successfully mitigate risks associated with interest rate changes.	>	The company has centralized the treasury function to minimize financing charges and manage interest rate related risks (see also note 26).

Adverse stock market developments may affect assets of pension funds, causing higher pension charges and pension premiums payable.	>	The company’s pension policy is to offer a defined contribution scheme where appropriate. For the defined benefit schemes, the company’s pension funds follow a diversified investment policy and actively manage their investment portfolio to match their required risk profiles. In recent years the deficit reduced significantly. Adverse stock market developments led to a substantial provision on the balance sheet in 2002 and to additional pension charges in 2002 and subsequent years (see also note 22).

The outcome of tax disputes, litigation, indemnification and guarantees, and regulatory action could adversely affect the company’s business and results of operations.	>	There are pending a number of claims, all of which are contested. Akzo Nobel is also involved in disputes with tax authorities. While the outcome cannot be predicted with certainty, management believes that the final outcome will not materially affect the company’s consolidated financial position, but could affect the timing of tax payments.

Compliance risks
External
The company may be held responsible for any liabilities arising out of non-compliance with laws and regulations.	>	For instance, with respect to antitrust laws, the company is involved in investigations by the antitrust authorities in the European Union, the U.S., and other countries into alleged violations of the respective antitrust laws in these jurisdictions and is engaged in civil litigation in this respect. The company is dedicated to minimizing such risks with special emphasis on the practical application of the company’s Business Principles. The company operates under a comprehensive competition law compliance program including training, monitoring and assessment tools.