Medium-term risks

The table below summarizes the major risk factors for the company in the next three-to-five years. The symbols represent management’s assessment of how these risks are expected to develop compared with the previous year.

External – Strategic

 

 

Internal – Strategic

 

Risk has been assessed to increase

Risk has been assessed to decrease

Risk has been assessed to remain fairly stable

Worsening of economic conditions

 

Innovation, identification and successful implementation of major transforming technologies

International operations

 

 

 

Strategic moves in our value chain

 

 

 

External – Operational

 

 

Internal – Operational

 

Sourcing of raw materials and energy

 

Attraction and retention of talent

Product liability

 

Production process risks

Environmental risks and liabilities

 

Management of change

Information technology

 

 

 

 

External – Financial

 

 

 

 

 

Post-retirement benefits

 

 

 

 

Fluctuations in exchange rates

 

 

 

 

External – Compliance

 

 

 

 

 

Complying with laws and regulations

 

 

 

 

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 in its major markets, as well as in several specific end-user segments. The effects could lead to a decline in demand, deteriorating financial results, impairments and book losses, which in turn could result in the company not realizing its financial guidance.

Mitigating actions

  • Continue our strategy to bring down our operational cost base and reduce complexity
  • Leverage our organization to further standardize core functional processes in all regions
  • Further deploy our commercial excellence programs and more sustainable product solutions to capture organic growth and offset the effects of decreased economic growth rates
  • Have contingency plans prepared for a select number of scenarios, dealing with geographical or segment slowdowns
  • Expand our innovation capabilities to develop and deliver faster differentiated customer value propositions

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 geo-political, social or economic developments and developments in laws, trade policies, regulations and standards could adversely affect our business, the value of our assets and results of our operations. Our ambition to grow the business in a balanced way across the globe 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
  • Decide all significant investments, and the countries and industry segments in which AkzoNobel conducts its business, via the Executive Committee
  • Benefit from our combination of country organizations and service centers in order to address country-specific and local business risks
  • Combine the implementation of international compliance standards with local transparency and accountability

Strategic moves in our value chain

The accumulation of strategic moves in relevant value chains (horizontally and/or vertically) may impact our competitive position and/or increase the vulnerability of operations. Further consolidation can negatively impact the landscape for strategic acquisitions in terms of their availability. This will result in higher multiples for acquisitions and make deals economically unattractive or synergy targets more difficult to achieve.

Mitigating actions

  • Continue our regular competitive intelligence analysis of strategic moves of (new) competitors, customers and suppliers
  • Further strengthen our merger and acquisition and integration capabilities
  • Enhance the pipeline of viable market and technology opportunities for mergers and acquisitions, focusing on strategic rationale with respect to the value chain
  • Finalize and implement our digital strategy to anticipate future changes and drive for new sources of value

External - Operational

Sourcing of raw materials and energy

Prices for key raw materials and energy can be volatile and are affected by economic conditions and regulations. This can limit our ability to protect our margins. The chart to the right shows our relative spend on these key raw materials, excluding energy. The risk may further increase as a result of the non-level playing field for energy and raw materials on a global level (for example shale gas, national policies, subsidies) and emission trading rights, which affect the competitive position of businesses and our customers.

Breakdown of total raw material spend
in %

Risk management – Breakdown of total raw material spend (pie chart)Risk management – Breakdown of total raw material spend (pie chart)

Mitigating actions

  • Our procurement sourcing processes (, Source) and organization are designed to actively leverage the cost, quality and delivery of raw materials and energy, including the performance of suppliers. This includes managing the risks related to single sourced materials, the forecasting of price trends and governance to ensure the supply base provides the best terms and conditions
  • Our supplier sustainability program is embedded in our sourcing strategy, selection and management process. This program not only ensures compliance of critical suppliers, but also drives continuous improvements. AkzoNobel also participates with several industry groups to conduct audits and improvement programs of common suppliers

Product liability

Product liability claims could adversely affect our business and results of operations. Claims with high impact on our organization, while unlikely, 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 and regulatory affairs is embedded in the company’s RD&I, and sustainability agenda. Product stewardship is also integrated into product slate decisions
  • We have a central policy to optimize insurance coverage, including specific insurance coverage for product liability claims

Environmental risks and liabilities

Due to the nature of our business, we use – and have used in the past – organic and inorganic compounds (some of which are hazardous to the environment) in product development programs and manufacturing. We have been, and may still be, exposed to risks of environmental releases and contamination with associated risk of substantial costs related to compliance with environmental laws and regulations, and claims relating to property damage and personal injury. The trend that, with time, regulations and standards are becoming increasingly stringent continues and is in part a reflection of growing public concern about human health and the environment in general.

Mitigating actions

  • Conduct our activities in the safest and most responsible manner
  • Contingency plans and assignment arrangements are in place to mitigate known material operational risks and monitor progress
  • A dedicated group of experts assesses, manages and resolves environmental liabilities. Sites with a higher environmental risk profile are subject to management review periodically
  • Mandatory annual environmental liability reviews are conducted to review risks, monitor progress in resolving our liabilities and assess changes in company exposure
  • Corporate directives are issued for recurring risk categories such as manufacturing sites that are closing
  • Environmental standards and regulations are integrated from the design phase of new plants onwards
  • Recognize environmental clean-up cost or indemnifications against earnings where a potential liability has materialized, cash outflow is probable and can be reliably estimated
  • Innovation efforts to remain at the forefront of new, sustainable product introductions

Information technology

One effect of the company’s longer term IT strategy is increased reliance on fewer consolidated critical applications, including our industrial process control systems. 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 impact on our production processes, our competitive position and our reputation.

Mitigating actions

  • Continuously test and update the systems used for information security as part of the strategic IT security roadmap 2016-2017
  • Improve and implement measures such as redundant design, back-up processes, virus protection, anti-spoofing and advance forensic scanning to protect and detect IT security vulnerabilities
  • Centrally monitor access control processes to our key IT systems to improve protection of critical business data
  • Improve end-user awareness and behavior via cyber security campaigns and IT security e-learning training to prevent and detect potential vulnerabilities
  • Continue with the roll-out of the new IM security standard for industrial control systems to our manufacturing locations
  • Further test and improve the IT security response and incident management process
New digital solutions are making technical service reporting more efficient. (photo)

Colleagues from our Technical Service and Quality Assurance groups in Europe and North America teamed up to devise new digital solutions that are making technical service reporting more efficient. As well as improving quality, customer issues can now be identified and resolved much faster.

External - Financial

Post-retirement benefits

Our current policy is to contribute to defined contribution schemes wherever possible, although 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 . This may require additional funding from the former employing entities and Akzo Nobel N.V. 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 to the Consolidated financial statements)

Fluctuations in exchange rates

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

Mitigating actions

  • A centralized treasury function and hedging policy is in place for certain currency exchange rate risks (see Note 23 to the Consolidated financial statements)
  • At a more operational level, risks are reduced by the prevalence of local-for-local production
  • Reduce as much as possible the impact of transactional exposure on the results of our businesses by striving for natural hedges in our main currencies
  • Further extend our hedging strategy based on risk analysis and market developments

External - Compliance

Complying with laws and regulations

Our international footprint exposes us to (continuously expanding) laws and regulations. We may be held responsible for any liabilities arising out of non-compliance with these laws and regulations.

Mitigating actions

  • Implementation of our Business Partner Compliance Framework
  • 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
  • Continue to embed company-wide standard setting and compliance awareness through activities and training programs, including training on the

Internal - Strategic

Innovation, identification and successful implementation 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 loss of our leadership positions, and adversely affect our business.

Mitigating actions

  • Advance our technology roadmaps and innovation strategies with appropriate research and development spend. In 2016, this amounted to 2.6 percent (€363 million) of total revenue
  • Bring to market suitable new technologies using our innovation core process to assess market needs and relevant know-how
  • Enhance our global open innovation capability to identify, assess and acquire the most recent promising technologies
  • When applicable and appropriate, invest in venture funds
  • Explore acquisitions of/partnerships with innovative start-up companies

Internal - Operational

Attraction and retention of talent

We face the challenge of ensuring continued alignment between a rapidly evolving business environment and qualifications, capabilities and talent of our workforce. This is an increasingly complex process as the labor market poses different challenges across disciplines and regions. Having the right people, with the right capabilities, experience and background will, to a large extent, determine the success of our organization and requires the development of an increasingly longer term view on future talent needs.

Mitigating actions

  • Strengthen AkzoNobel’s employee value proposition, based on the company purpose and stronger brand strategy
  • Further improve talent and succession action planning and follow up
  • Fully embed the new leadership behaviors with impactful leadership assessment and development curriculum and integration into our
  • Further build and develop the AkzoNobel Academy with strong functional competency frameworks and well-defined development curriculum and career planning

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 reputation damage.

Mitigating actions

  • The AkzoNobel Leading Performance System (ALPS) is being implemented to reduce complexity and drive continuous improvement
  • Continue the implementation of the Safety Common Platform introduced in 2013 and the Process Safety Management (PSM) framework, which was introduced in 2014. The framework provides a set of common, state-of-the-art safety requirements for all our manufacturing sites
  • Carry on with business continuity planning and make sure there are appropriate risk transfer arrangements in place

Management of change

In order to achieve our overall strategy, we have implemented – and continue to implement – numerous changes in our operating model across all functions and businesses in order to further enhance organic growth, and the quality of services, while reducing cost and complexity.

Mitigating actions

  • Pave the way to organic growth by embedding commercial excellence in all levels of the organization
  • Ongoing focus on core principles and values to set desired behavioral changes in motion. Values and behaviors are 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
  • Consolidate change management by streamlining and aligning the work of a range of supporting processes under the umbrella of Global Business Services blueprints, including the operating model and Responsible, Accountable, Consulted, Informed (RACI) matrices
GBS

Global Business Services, which covers functional support activities such as Human Resources, Finance and Information Management, as well as non-product related Procurement.

ALPS

AkzoNobel Leading Performance System.

HSE

Health, safety and environment.

Regulatory action

We have defined four categories of regulatory action, from self-reported issues (Level 1) to formal legal notifications with fines above €100,000 (Level 4).

Code of Conduct

Our Code of Conduct defines our core principles and how we work. It incorporates fundamental principles on issues such as business integrity, labor relations, human rights, health, safety, environment and security and community involvement.

P&D Dialog

The Performance and Development Dialog is AkzoNobel’s global performance and appraisal system for employees.