Change

External Strategic – Top five risk

Adapting to economic conditions

One of the principal uncertainties we face is the development of the global economy. Economic conditions remain weak and it is difficult to predict customer demand and raw material costs. Construction and housing markets may remain soft in mature markets and our Decorative Paints and Performance Coatings Business Areas in particular have been affected by market downturns. In addition, the European sovereign crisis continues to drive instability in the financial markets, which may further adversely impact the global, regional or national economies in markets where we operate. Failure to adapt adequately and in time can be harmful to our business and results.

Risk corrective actions

The Executive Committee has defined a comprehensive performance improvement program to deliver €500 million EBITDA by 2014, based on funcational and operational excellence. Around 40 percent of the anticipated benefits will come from the Supply Chain and Sourcing programs, and a further 50 percent from margin management, research and development initiatives and business restructuring programs. These benefits will accrue across our Business Areas: more than 40 percent in Decorative Paints, over 30 percent in Performance Coatings and close to 25 percent in Specialty Chemicals. We continue to apply various scenarios for planning and budgeting to be best prepared for further changes in economic conditions.

External Strategic – Top five risk

International operations

We are a global business with operations in more than 80 countries. Therefore, we are exposed to a variety of risks, many of them beyond our control. Unfavorable political, social or economic developments and developments in laws, regulations and standards could adversely affect our business and results of operations. Our aspirations to fuel growth in high growth markets – double revenue in China, create a significant footprint in India, outgrow competition in Brazil and expand in the Middle East and sub-Saharan Africa – will further expose us to these risks.

Risk corrective actions

We spread our activities geographically and serve many sectors to benefit from opportunities and reduce the risk of instability. Political, economic and legislative conditions are carefully monitored. The Executive Committee decides on all significant investments and the countries and industry segments in which AkzoNobel conducts its business.

External Strategic

Ensuring stakeholder support

Failure to maintain the support of our stakeholders for our strategy and its execution could adversely affect our company and its businesses.

Risk corrective actions

We endeavor to define and implement a clear strategy and continuously seek dialog with stakeholders. As an organization, we are committed to helping our customers make their business a success, enhancing relationships with our suppliers, providing competitive returns to our investors by paying a stable to rising dividend, creating an attractive working environment for our people and conducting all our activities in the most socially responsible manner.

External Strategic – Top five risk

Sourcing of raw materials

We use significant amounts of various raw materials in manufacturing our products. Prices for some key raw materials can be volatile and are affected by economic conditions. We are, to some extent, able to pass on higher input prices to our customers, but this is, to a large extent, dependent on market conditions. We may also be impacted by inability to access sufficient raw materials, business interruption or product discontinuation at some of our key suppliers. Inability to access sufficient raw materials, growth in cost and expenses for raw materials and energy and changes in product mix may adversely affect future results and growth.

Risk corrective actions

We aim to use our purchasing power and long-term relationships with suppliers to acquire raw materials and safeguard their constant delivery in a sustainable manner, to secure volumes and to cooperate on innovation and sustainability. We have made an inventory of single and sole sourced raw materials and are actively pursuing plans to improve this situation. We have diversified contract length and our supplier base. Our strengthened global sourcing strategy enables us to bundle the purchasing power, both in product related and non-product related requirements. We continuously monitor the markets in which we operate for developments and opportunities and adapt our purchasing strategy accordingly.

External Operational

Energy pricing and emission trading rights

The Specialty Chemicals business operates two energy-intensive businesses, Pulp and Paper Chemicals and Industrial Chemicals. A non-level playing field for energy and emission trading rights can affect the competitive position of these businesses.

Risk corrective actions

We are pro-actively managing energy usage and costs. We operate several cogeneration units which enable us to make efficient use of combined heat and power. We are implementing our Carbon Policy, working on energy efficiency programs and investing in energy from waste and biomass. Carbon management plans are closely monitored and strategically managed. We have policies for energy contracts and have long-term purchase contracts in place (see Note 24 in the Financial statements).

External Operational

Product liability

Product liability claims could adversely affect our company’s business and results of operations. Unlikely long-term implications with a high impact for our organization could follow from usage of new technologies and compounds.

Risk corrective actions

Currently, we are involved in a number of product liability cases. However, we believe that any unexpected costs and liabilities will not have a material adverse effect on our consolidated financial position. We have a central policy to optimize insurance coverage.

External Operational

Environmental liabilities

We use, and have used in the past, hazardous materials and biological compounds in several product development programs and manufacturing processes, including waste thereof. We have been, and can be, exposed to risks of accidental contamination or past practices that give rise to current liabilities. We could be exposed to events of non-compliance with environmental laws, regulatory enforcement, property damage, possible personal injury and any resulting claims for damage. Regulations and standards are becoming increasingly stringent.

Risk corrective actions

We are committed to conducting all our activities in the safest and most responsible manner. We have a specialist group managing these issues.Contingency plans and assignment arrangements are in place to mitigate known risks and regular reviews are conducted to monitor progress and assess financial and reputational exposure. Our policy is to accrue and charge against earnings environmental clean-up costs, damages or indemnifications when it is probable that a liability has materialized and an amount can be estimated (see Note 21 in the Financial statements).

External Financial – Top five risk

Cash flow

Potentially worsening economic conditions, the threat of a European sovereign crisis, potential raw material price increases and potential exposure to funding of pension schemes may lead to insufficient free cash flow generation to support funding for the implementation of our strategic agenda.

Risk corrective actions

Our balance sheet and debt profile are strong. We are committed to maintaining strong investment grade credit ratings. Ratings at year-end were Standard & Poor’s BBB+ (stable outlook) and Moody’s Baa1 (stable outlook). We have launched a comprehensive performance improvement program to deliver €500 million EBITDA by 2014. We have a prudent financing strategy and a strict cash management policy, which are managed by our centralized treasury function (see Note 24 in the Financial statements).

External Financial

Contributions to pension funds

Various external developments may affect assets and liabilities of pension funds, causing higher post-retirement charges and pension premiums payable. We are at risk from potential shortfalls in the funding of defined benefit pension schemes.

Risk corrective actions

We practice pro-active pension risk management. Our pension policy is to offer defined contribution schemes to new employees and, where appropriate, to existing employees. Our largest defined benefit schemes have been closed to new entrants since 2001 for ICI, and 2004 for AkzoNobel. We measure and monitor our pension risks frequently and adopt investment strategies designed to reduce financial risks. In 2011, cash pension top-ups were €354 million. In January 2012, we concluded the triennial actuarial funding review of the ICI Pension Fund. We expect to have top-up payments over the remaining six years of the recovery plan that are £198 million lower in total than the sum of the current schedule. We are committed to further de-risking over time. Pension activities are overseen by the Board Committee Pensions (see Note 17 and Note 22 in the Financial statements).

External Financial

Decline of asset values

Impairments and book losses could adversely affect our financial results. In view of the current financial market conditions, asset value decline offers both opportunities and threats to our company. We are actively participating in industry consolidation. As such, we may decide to make selective acquisitions and may hold assets for sale.

Risk corrective actions

Acquisition and divestment opportunities and the management of assets held for sale are continuously monitored by the Executive Committee. We do impairment tests for intangibles with indefinite lives (goodwill, some brands) every year and whenever an impairment trigger exists. For tangibles and other fixed assets, we do impairment tests whenever an impairment trigger exists (see Note 1 in the Financial statements).

External Financial

Fluctuations in exchange rates

Exchange rate fluctuations can have a harmful impact on our financial results. We have operations in more than 80 countries and report in euros. We are particularly sensitive to the relation between the euro and US dollar, pound sterling, Swedish krona and Latin American and Asian currencies.

Risk corrective actions

We have centralized treasury and a hedging policy is in place for certain currency exchange rate risks (see Note 24 in the Financial statements). At a more operational level, risks are reduced by the prevalence of local-for-local production, which is the norm in many of our businesses.

External Compliance

Complying with laws and regulations

We may be held responsible for any liabilities arising out of non-compliance with laws and regulations. For example, we are involved in investigations by antitrust authorities into alleged violations of the antitrust laws and we are engaged in court proceedings and civil litigation resulting from (alleged) involvement in anti-competitive behavior in the past (see Note 21 in the Financial statements).

Risk corrective actions

We are monitoring and adapting to significant and rapid changes in the legal systems, regulatory controls and customs and practices in the countries in which we operate. These affect a wide range of areas. We are dedicated to minimizing such risks with special emphasis on the application of our Code of Conduct. We operate under a comprehensive competition Law Compliance program including training, monitoring and assessment. We advertise the use of our company-wide complaints procedure called SpeakUp!, which enables all our employees to report irregularities in relation to our Code of Conduct (see Compliance and integrity management in this section).
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