Overview of risks

The table below summarizes the major risks for the company. The symbols represent management’s assessment of how these risks are expected to develop compared with the previous year.

External – Strategic

 

 

Internal – Strategic

 

Worsening of economic conditions

 

Innovation and identification of major transforming technologies

International operations

 

 

 

External – Operational

 

 

Internal – Operational

 

Energy pricing and emission trading rights

 

Attraction and retention of talent

Sourcing of raw materials

 

Production process risks

Product liability

 

Management of change

Environmental liabilities

 

 

 

 

Information Technology

 

 

 

 

External – Financial

 

 

 

 

Post-retirement benefits

 

 

 

 

Free cash flow generation

 

 

 

 

Fluctuations in exchange rates

 

 

 

 

Decline of asset values

 

 

 

 

External – Compliance

 

 

 

 

Complying with laws and regulations

 

 

 

 

Risk has been assessed to increase

 

 

 

 

 

Risk has been assessed to decrease

 

 

 

 

 

Risk has been assessed to remain fairly stable

 

 

 

 

 

External - Strategic

Worsening of economic conditions

The global economy remains fragile and it continues to be difficult to predict customer demand and raw material costs. AkzoNobel is susceptible to decreased growth rates within high growth markets and/or continued economic and market downturn in mature markets. The effects could lead to a decline in demand and deteriorating financial results, which in turn could result in the company not realizing its financial targets.

Mitigating actions

  • Execute our strategy to bring down our operational cost base and reduce complexity
  • Continue the implementation of Global Business Services aimed at standardized core functional processes in all regions across the organization
  • Further deploy the commercial excellence programs to capture organic growth and offset the effects of decreasing economic growth rates

International operations

We are a global business with operations in more than 80 countries. We are therefore 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 will further expose us to these risks.

Mitigating actions

  • Strategically spread our activities geographically and serve many sectors to benefit from opportunities and reduce the risk of instability
  • Carefully monitor the political, economic and legislative conditions across the company
  • All significant investments, and the countries and industry segments in which AkzoNobel conducts its business, are decided on by the Executive Committee
  • Country organizations are in place in order to mitigate country-specific and generic business risks

External - Operational

Energy pricing and emission trading rights

Our Specialty Chemicals business operates two energy-intensive businesses, Pulp and Performance Chemicals and Industrial Chemicals. The latter conducts its business primarily in Europe. A non-level playing field for energy on a global level (e.g. shale gas, national policies, subsidies) and emission trading rights can affect the competitive position of these businesses and the competitive position of our customers.

Mitigating actions

  • Continue to analyze and review our competitive positions and proactively manage energy usage and costs
  • Implement our Carbon Policy and work on energy efficiency programs
  • Diversify our energy source portfolio to reduce the amount of gas-based heat
  • Closely monitor and manage our carbon management plans. We have policies for energy contracts and long-term purchase contracts in place (see Note 23 of the Consolidated financial statements)

Sourcing of raw materials

Prices for key raw materials can be volatile and are affected by economic conditions. The table below shows our relative spend on these key raw materials, excluding energy. We may also be impacted by inability to access sufficient raw materials, business interruption or product discontinuation at key suppliers. These potential circumstances may increase cost and expenses for raw materials and energy.

Breakdown of total raw material spend
in %

Breakdown of total raw material spend, in % (pie chart)Breakdown of total raw material spend, in % (pie chart)

Mitigating actions

  • Periodically review all critical raw materials, with the aim of bundling the purchasing power in both product related and non-product related requirements
  • Use our purchasing power and long-term supplier relationships to acquire raw materials and safeguard their constant delivery in a sustainable manner
  • Implement plans to mitigate dependencies brought about by single sourced raw materials
  • Monitor our critical value chains to understand the critical suppliers and markets of our suppliers to detect risks and opportunities at an earlier stage

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 the use of former, current or new technologies and compounds.

Mitigating actions

  • Quality improvement programs are in place in our different Business Areas
  • Product stewardship is embedded in the company’s HSE and sustainability agenda. Product stewardship is also integrated into product slate decisions
  • We also have a central policy to optimize insurance coverage which relates to specific insurance programs covering product liability

Environmental liabilities

We use, and have used in the past, hazardous materials, organic and inorganic compounds in product development programs and manufacturing processes. We have been, and can still be, exposed to risks of contamination and substantial claims due to potential non-compliance with environmental laws, regulatory enforcement, property damage and personal injury. Regulations and standards are becoming increasingly stringent.

Mitigating actions

  • Conduct 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
  • Accrue and charge environmental clean-up costs or indemnifications against earnings when it is probable that a potential liability has materialized and an amount can be reliably estimated (see Note 20 of the Consolidated financial statements)

Information Technology

An effect of AkzoNobel’s longer term Information Technology strategy is that our IT landscape is converging into fewer ERP systems and other critical applications. The amount of digital exchanges of business transactions with customers, suppliers and other stakeholders is increasing. Non-availability of our critical IT systems or unauthorized access, through cybercrime or other events, can have a direct effect on our production processes, our competitive position and the reputation of the company.

Mitigating actions

  • Continuously test and update the systems used for information security
  • Further implement measures such as redundant design, back-up processes, virus protection, anti-spoofing and forensic scans
  • Centrally monitor access control processes to our key IT systems
  • A company-wide directive describing the rules regarding Information Management was issued in 2014

External - Financial

Post-retirement benefits

Our current policy is to sponsor defined contribution pension and other post-retirement benefit plans wherever possible, but we still have a number of defined benefit pension and healthcare schemes from the past. Generally, these schemes have been funded through external trusts or foundations, where AkzoNobel faces the potential risk of funding shortfalls.

Mitigating actions

  • Our policy is to offer defined contribution schemes to new employees and, where appropriate, to existing employees. The most significant defined benefit schemes are the ICI Pension Fund and the AkzoNobel (CPS) Pension Scheme in the UK. Both are closed to new entrants. They are managed and controlled by independent trustees. The funded status of these schemes is affected by the trustees’ investment decisions, market conditions, demographic experience and any regulatory actions. This may require additional funding from the former employing entities and may adversely impact our business and results
  • We practice proactive pension risk management and continuously review options to reduce the financial risks associated with all of our defined benefit plans (see Note 15 of the Consolidated financial statements)

Free cash flow generation

The potential for further deterioration of economic conditions could have an impact on the free cash flow generation of our businesses. Furthermore, we are potentially exposed to additional funding of pension schemes. This may lead to insufficient free cash flow generation, which limits our strategic degrees of freedom.

Mitigating actions

  • Maintain a strong investment grade credit rating; our long-term senior unsecured debt rating is BBB+ by Standard & Poor’s and Baa1 by Moody’s
  • Focus on cash management is stressed in our monthly Operational Control Cycle meetings and relevant metrics are included in our remuneration policies
  • Engage in restructuring of underperforming parts of our portfolio if deemed strategically appropriate
  • We have a prudent financing strategy and a strict cash management policy, which are governed by our centralized treasury function

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 adverse movements in the US dollar, Pound sterling, Swedish krona and Latin American and Asian currencies.

Mitigating actions

  • A centralized treasury and hedging policy is in place for certain currency exchange rate risks (see Note 23 of the Consolidated 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

Decline of asset values

Impairments and book losses could adversely affect our financial results.

Mitigating actions

  • Perform impairment tests for intangibles with indefinite lives (goodwill, some brands) every year and whenever an impairment trigger exists. For tangibles and other fixed assets, impairment tests are only carried out whenever an impairment trigger exists (see Note 7 and Note 8 of the Consolidated financial statements)
  • Continuous monitoring of acquisition and divestment opportunities and the management of assets held for sale are performed by the Executive Committee

External - Compliance

Complying with laws and regulations

We may be held responsible for any liabilities arising out of non-compliance with laws and regulations.

Mitigating actions

  • Monitor and adapt to significant changes in the legal systems, regulatory controls, customs and practices in the countries in which we operate
  • Remain dedicated to minimizing AkzoNobel’s compliance risk by fostering an open and transparent culture, continuously educating our employees worldwide and increasing awareness
  • Monitor overall compliance through our comprehensive annual non-financial letter of representation process, as well as our annual competition law compliance declaration
  • Embed company-wide standard setting and compliance awareness through activities and training programs

Internal - Strategic

Innovation and identification of major transforming technologies

Our success depends on the sustainable growth of our business through research, development and innovation. If we are not able to identify and adopt major transforming technologies in a timely manner, this may lead to the loss of our leadership positions and adversely affect our business.

Mitigating actions

  • Support continuous research and development through a spend of 2.5 percent (€363 million) of total revenue
  • Maintain the use of our detailed technology roadmaps, which assess relevant technological horizons and pathways to acquire and detail new technologies
  • Promote our global open innovation capability to identify, assess and acquire the most recent promising technologies

Internal - Operational

Attraction and retention of talent

Having the right people, with the right capabilities, experience and mindset can, to a large extent, determine the success of our organization.

Mitigating actions

  • Continue the roll-out our Talent management process, initiated in 2013
  • Establish a more rigorous and differentiated assessment of performance, with enhanced focus on alignment with AkzoNobel’s core principles and values
  • Further develop the AkzoNobel Academy aimed at increasing functional capabilities across the company and sharing best practices

Production process risks

Risks in production processes can adversely affect our results. They arise from areas such as personal health and safety, process safety and product safety. Unlikely scenarios can involve major incidents with a high impact on our organization, causing business continuity risks and reputational damage.

Mitigating actions

  • Project ALPS has been implemented to reduce process complexity and drive continuous improvement
  • Continue the implementation of the Process Safety Management (PSM) framework, which was introduced in 2014. The framework provides a set of minimum safety requirements for all our sites
  • Carry on with business continuity planning and make sure there are appropriate risk transfer arrangements in place

Management of change

In order to implement our overall strategy, we have implemented, and continue to implement, numerous changes in our operating model. We are also undertaking various restructuring projects which require significant change. Failure to successfully execute these initiatives could lead to industrial action and, ultimately, to not achieving our strategic ambitions.

Mitigating actions

  • To accelerate the implementation of our strategy we have introduced core principles and values intended to set the desired behavioral changes in motion. The values and behaviors have been included in the performance management process
  • Senior management is involved in all critical projects that have been prioritized and are supervised by the Executive Committee to ensure an aligned and integrated vision for the company’s change agenda
  • Project management and change management are both included in the curriculum of the AkzoNobel Academy