Medium-term risks

Global economy and the geo-political context

The world’s geo-political situation remains unpredictable and, as a company, we operate in highly competitive markets. Failure to carefully manage and develop a good understanding of end-user segments could have an immediate impact on financial performance, resulting in the company not realizing its financial guidance.

Mitigating actions

• Continue our strategy to reduce both our operational cost base and complexity
• Leverage our Global Business Services to further standardize core functional processes in all regions
• Further deploy our commercial excellence programs and more sustainable product solutions to capture organic growth
• Centralize management of foreign currency exposure and reduction of transactional exposure through natural hedges in our main currencies (see Note 25 of the Consolidated financial statements)
• Include political risk assessment in investment decisions and medium-term operational planning

Strategic moves in our value chain

An accumulation of strategic moves (horizontally and/or vertically) could impact our competitive position and/or increase the vulnerability of operations. Further industry consolidation renders acquisitions more expensive, makes possible anti-trust implications larger and the required synergy targets more difficult to achieve.

Mitigating actions

• Competitive intelligence analysis of (new) competitors, customers and suppliers
• Strengthen mergers and acquisitions (M&A) and integration capabilities
• Further enhance pipeline of viable market and technology opportunities for M&A, focusing on strategic rationale
• Secure freedom to invest through strategic alignment with shareholders and other stakeholders

Raw materials and energy

Prices for key raw materials and energy can be volatile, are affected by economic conditions and regulations, as well as national policies and subsidies. The chart below shows our relative spend on key raw materials, excluding energy.

Mitigating actions

• Actively leverage the cost, quality and delivery of raw materials and energy, including the performance of suppliers
• Manage risks related to single sourced materials, demand forecasting and margin-impact assessment
• Increase our sourcing efficiency by introducing new forecasting tools in close cooperation with the business
• Created the role of Resins Business Director to optimize the design and management of a sustainable resin strategy

Product liability

High impact product liability claims, while unlikely, could result from the use of former, current or new technologies and compounds.

Mitigating actions

• Quality improvement programs across the company
• Product stewardship and regulatory affairs integrated in R&D, HSE&S and sustainability agenda
• Tailored insurance coverage for product liability claims

Information technology and cybersecurity

The company’s longer term IT strategy means we increasingly rely on fewer consolidated critical applications. With the number of digital exchanges of business transactions increasing, the non-availability of IT systems – or unauthorized access – could have a direct impact on our business processes, competitive position and reputation.

Mitigating actions

• Focus on measures such as redundant design, back-up processes, virus protection, anti-spoofing, advanced forensic scanning and mission critical infrastructure support
• Improve incident response and reporting by implementing a cyber Security Operations Center (SOC), providing improved coordination, monitoring and response to cybersecurity
• Centrally monitor access control processes and identity and access enhancements
• Roll-out of the new Information Management security standard for industrial control systems to all manufacturing locations
• Further test and improve IT security response and incident management process
• Further rationalize our application landscape to reduce complexity and enhance efficiency and effectiveness

Post-retirement benefits

Our current policy is to contribute to defined contribution schemes wherever possible. A number of defined benefit pension and healthcare schemes from the past are generally 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 closed to new entrants and are managed and controlled by independent trustees
• We practice proactive pension risk management and continuously review options to reduce the financial and demographic risks associated with all our defined benefit plans, for example through hedging interest rates, inflation and mortality risks via investment in longevity and bulk annuity policies. The most significant defined benefit schemes have been closed to new entrants for more than 15 years

Complying with laws and regulatory development

Our global footprint exposes us to increasingly stringent laws and regulations covering an increasing range of subjects (such as safe use of hazardous compounds, environmental releases, soil contamination, human rights, competition law).

Mitigating actions

• Remain dedicated to minimizing AkzoNobel’s compliance risk by fostering an open and transparent culture, continuously educating and training our employees worldwide and increasing awareness (for example, our Code of Conduct)
• Monitor overall compliance through our comprehensive annual Non-Financial Letter of Representation (NFLoR) process
• Implementation of Business Partner Compliance Framework
• Define leading technology standards in VOC/dust emission/energy control systems
• Conduct mandatory annual environmental liability reviews
• Integrate environmental standards and regulations in plant design
• Continuously innovate to remain at the forefront of new, sustainable product introductions
• ALPS is being implemented to drive continuous improvement and operational excellence
• Operate under state-of-the-art safety requirements for our manufacturing and R&D sites (for example, AkzoNobel People, Process and Product Safety Common Platform)
• Ongoing business continuity planning

Innovation, identification and successful implementation of major transforming technologies

Our success and leadership positions depend on the sustainable growth of our business through research and the adoption of major transforming technologies, social media and digital applications in general.

Mitigating actions

• Prioritize funding for technology road maps and innovation strategies
• Enhance our global open innovation capability
• Invest in promising venture funds
• Explore acquiring/partnering with innovative startups
• Dedicated IT team to support the business in new technology applications

Attraction and retention of talent

Ensuring continued alignment between a rapidly evolving business environment and qualifications, capabilities and talent of our workforce across the globe is an increasingly complex process. At the same time, it determines to a large extent the success of our organization.

Mitigating actions

• Strengthen AkzoNobel’s employee value proposition
• Focus on talent development programs and succession planning (for example, Talent and Opportunity Review, Your AkzoNobel, nomination of Talent Managers)
• Fully embed values and behaviors in our Performance and Development Dialog annual appraisal

Management of change

Our Winning together: 15 by 20 strategy will help transform AkzoNobel into a long-term leader. But we also recognize the risks associated with such profound changes. This means we need to invest in building an organization structure which encourages and embraces change, while balancing opportunity and risk.

Mitigating actions

• Focus on core principles and values and embed these in reward systems to set desired behavioral changes in motion
• Identify organizational health initiatives and track progress periodically
• Roll out principles of commercial excellence in all levels of the organization
• Support adoption of a new organization model through the creation of a Planning and Transformation Office, including a network of Regional Transformation Leads
• Implement standard solutions across the company under the responsibility of designated Global Process Owners
• Continue the journey of creating fit-for-purpose support functions to drive synergies and standardization at a company-wide level
• Roll-out R&D effectiveness program, including Innovation Team and startup challenge

Analytics and big data

In order to utilize data analytics and “big data” to support even better decision-making, we recognize the need to invest in an appropriate organization structure and governance framework with common standards, methods and tools to deliver insightful information across the company.

Mitigating actions

• Maintain strong process and data ownership
• Define and implement an IM platform to support advanced analytics and management of big data