Focus on key environmental,
social and governance value drivers

From 2007 onwards, the management of sustainability has developed from working on integrity, governance and compliance to value creation in the businesses by constantly improving process excellence, using eco-efficiency measurement and tools for sustainable innovation and talent development. In fact, it has been a significant step forward from managing risks to creating opportunities for a higher total shareholder return. The way we leverage our capabilities to create sustainable value is elaborated on in the chapter “Accelerating sustainable growth”. In this chapter, we focus on sustainability management.

Majority of risk factors within control and effectively managed

Doing business inherently involves taking risks. This calls for creating a proper balance between entrepreneurial attitude and risk level associated with business opportunities. We foster high awareness of business risks and internal control procedures, geared to safeguarding transparency in our operations. In the 2007 Annual Report, there is an extensive overview of Akzo Nobel’s major risks and how they are managed.

Some of these risks have specific sustainability aspects, requiring specific remedial measures.

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 its product development programs and manufacturing processes. We have been exposed, 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. Contingency plans and crisis management are in place to mitigate these risks.

Product liability claims could adversely affect the company’s business and results of operations.

Presently, the company is involved in product liability cases. Akzo Nobel 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.

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.

Differences in energy prices pose a risk to the competitiveness of several of the company’s chemical businesses.

The company operates a number of energy intensive businesses. A non-level playing field for energy prices can affect the competitive position of these businesses. The company aims to secure energy supply at competitive conditions, while benefiting from its size and market research.

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.

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 (e.g. 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 company-wide Margin Management Program was launched in 2006. The company’s businesses continuously monitor the markets in which they operate for developments and opportunities.

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 United States, 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.

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.

Compliance issues

Oil for Food

On December 20, 2007 Akzo Nobel N.V. reached agreements with the U.S. SEC and the Department of Justice related to Organon and Intervet’s participation in the UN Oil for Food Program where improper payments were made to the Iraqi government between 2000 and 2002.

In order to address any deficiencies in the internal controls, policies and procedures regarding compliance with the Foreign Corrupt Practices Act and other applicable anti-corruption laws, Akzo Nobel agreed to conduct a review of its internal controls, policies and procedures.

Integrity management

Business integrity is one of our core values. To enhance awareness and to clarify what we expect from our employees, our Code of Conduct was updated in 2007. This clear set of rules is part of the governance process of Akzo Nobel. All Akzo Nobel employees must adhere to our strict standards.

The Code of Conduct supports us to maintain our license to operate. The Code incorporates the fundamental principles within Akzo Nobel on issues such as business integrity, labor relations, health, safety and environment, and community involvement. They provide strict rules for doing business in a fair and open way, while forbidding anti-competitive behavior and bribery.

The process of embedding business integrity within our company is reviewed by the Akzo Nobel Compliance Committee consisting of the General Counsel, Vice-President HR, Director Internal Audit, Secretary to the Board of Management, Director Corporate Social Responsibility and Director Corporate Control. To strengthen the compliance monitoring, we set up a Compliance Committee at each of the businesses. A member of the BU Management Team is appointed as Compliance Focal Point and is responsible for:

• Identifying material legal, ethical and financial compliance risks
• Improving compliance within the BU
• Monitoring and assessing effectiveness of compliance efforts
• Investigating alleged breaches or compliance failures at the request of the Compliance Committee and report findings.

One of the tools to monitor compliance is a segment in the Annual Letter of Representation, signed by all senior managers within Akzo Nobel. It requires senior management to report on the performance of his or her business or function in following our compliance standards. The outcome is discussed with the responsible Board member, BU manager and General Counsel. Results are reported to the Board of Management and the Audit Committee.

Data privacy

In Akzo Nobel we want to ensure protection of personal data. We are in the approval procedure with governmental authorities in the EU for a Privacy Code of Conduct. This Privacy Code of Conduct will provide a consistent level of protection for personal data of all employees worldwide. The minimum protection level we require is based on EU legislation. If local legislation requires us to apply a higher data protection level, we will adhere to these requirements.

In 2007 we started an investigation into all databases containing personal data. On the basis of this investigation we will determine whether the correct actions are taken in relation to data privacy.
If not, measures will be taken to ensure full compliance with the Privacy Code of Conduct which includes having adequate security measures for data protection in place. In 2008 we will further roll out monitoring programs on the Privacy Code of Conduct and set up a system of audits that will be part of the regular audit process. In 2007 a selection of relevant employees from this sphere, dealing on a day-to-day basis with personal data, were trained. In addition e-learning tools were developed and will be further rolled out through the organization.

Complaints procedure

To encourage and enable employees to report violations of the Code of Conduct, Akzo Nobel has a whistle-blowing policy, which is laid down in our complaints procedure. The procedure describes the “normal” reporting within hierarchical lines and, in case this is not possible, the reporting directly to the office of the General Counsel.

In 2007, 31 alleged violations were reported via this procedure, which is obviously no guarantee for completeness. This has resulted in 12 dismissals as a consequence of investigations.