Risk management

We foster a high awareness of business risks and internal control, geared to safeguarding our risk appetite and providing transparency in our operations. The Board of Management (as of January 1, 2011, supported by the other members of the Executive Committee is responsible for managing the risks associated with our activities and, hence, for the establishment and adequate functioning of appropriate risk management and control systems (see Board of Management’s statement).

AkzoNobel risk management framework

Through our risk management framework, shown on this page, 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. Our risk management framework is in line with the Enterprise Risk Management – Integrated Framework of COSO and the Dutch Corporate Governance Code. The Board of Management reviews our risk management and control systems and our major business risks, which are also discussed by the Supervisory Board.

Risk appetite

Clarity on risk appetite and 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 set by our strategy, our Company Statement, business principles, Code of Conduct, company values, authority schedules, policies and corporate directives. Our risk appetite differs by objective area and type of risk:

• Strategic: In the pursuit of our strategic ambitions we are prepared to take considerable risk related to growth and innovation. Returns on investment in the development of innovative products and solutions are never certain. Yet, considerable amounts and efforts are spent on research, development and innovation, also in less certain economic circumstances. Candidates for acquisitions are carefully selected and investigated while making sure that the price to be paid is reasonable and affordable.
• Operational: With respect to operational risks, we continuously strive to minimize these risks. Our risk appetite is very limited, governed by our ambition to strive for top quartile safety performance, top quartile performance in diversity, employee engagement and talent development, top quartile eco-efficiency rates and a top three position in the relevant Dow Jones Sustainability Index.
• Financial: With respect to financial risks we have a prudent financing strategy and a strict cash management policy and are committed to maintaining strong investment grade credit ratings. Our financial risk management and risk appetite for several financial risks are explained in more detail in note 24 in the Financial statements.
• Compliance: AkzoNobel has a “zero tolerance” policy in relation to breaches of our Code of Conduct.

Risk management in 2010

The Enterprise Risk Management process provides top-down coverage of the organization and ensures that we focus on what we consider to be the areas of major risk exposure. Therefore, scoping of our 2010 risk management activities was performed by the Board of Management, business unit Managing Directors and Corporate Directors, in association with the risk management function. Besides the focus on coverage of our organization, emphasis is put on organizational changes, key strategic projects and high growth regions. In 2010, process improvements were made with respect to use of risk knowledge for trend detection and reporting.

During 2010, we held more than 120 facilitated Enterprise Risk Management workshops. More than 5,000 risk scenarios were identified and prioritized by the responsible managers, their management teams and functional experts. In addition, in selected areas with low risk tolerance, dedicated risk assessments were performed to safeguard our risk appetite. All major risks were responded to by the unit that identified them. The outcome of all risk assessments was reported to the next higher management level as part of our Business Planning & Review cycle. Risk profiles and trends were shared by managers across the company. In the bottom-up consolidation process, approximately 20 percent of the risks were taken to the next management level, where they were re-assessed, either because of the materiality of the risk exposure and/or because of the accumulated effect. The major risk factors for our company, identified through risk consolidation and the subsequent risk assessment by the Board of Management, are presented in the following paragraph. As a result of market conditions, the risk related to sourcing of raw materials increased in 2010. Furthermore, in view of our accelerated growth ambitions and competitive conditions in the relevant labor markets, attraction and retention of talent has become a top five risk.