Principal risks and uncertainties

Successfully executing our strategy is, to a large extent, dependent on having the right people.

Diverse and inclusive talent development was identified as a Strategic focus area in the 2013 Strategy review. Consequently, we have developed a new global process for integrated talent management. This focuses on the further professionalization of recruitment, a more rigorous approach to the identification and development of leadership potential and a more transparent approach to career development opportunities. In addition, as part of the overall performance improvement program, we have further developed the AkzoNobel Academy. This is focused on building functional capability across the company and developing a higher level of project and change management skills, as well as providing a platform for the sharing of best practices. We have also continued with the harmonization of key HR administration processes to provide efficient service and free up time for the business partnering that is crucial to helping us attract, develop and retain talented people.

In order to implement our strategic agenda we are changing our operating model, which includes the setting up of a Global business services function. We are also undertaking various restructuring projects which require significant change, as well as stakeholder management and project management expertise. Failure to successfully execute these initiatives could lead to industrial action and, ultimately, to not achieving our strategic ambitions.

In 2013, we introduced new Core Principles and Values which will set in motion the behavioral changes that will help to accelerate the implementation of our strategy. 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 and thrust from the top for the company’s change agenda. Project management and change management are both included in the curriculum of the AkzoNobel Academy.

One of the principal uncertainties continues to be the development of the global economy, which remains fragile, and it is difficult to predict customer demand and raw material costs. Chronic fiscal imbalances may further adversely impact the global, regional or national economies in markets where we operate. AkzoNobel is susceptible to decreased growth rates within high growth markets and/or continued economic and market downturn in mature markets. The effects lead to a decline of demand and deteriorating financial results, thereby not realizing our financial targets.

As a key element of our strategy, we are committed to bringing down our operational cost base and reducing complexity. This will be done through introducing and implementing standardized core functional processes in each region across the organization, helping to reduce operational costs, as well as making the company more agile and competitive. We are also continuing with our performance improvement programs in the three Business Areas and began a structured program of commercial excellence to offset the effects of decreasing economic growth rates.

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.

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 by responsible functions at corporate, Business Area and business unit level. The Executive Committee decides on all significant investments and the countries and industry segments in which AkzoNobel conducts its business. Country organizations are in place in order to mitigate country specific, but business generic risks.

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

Our balance sheet and debt profile are strong. We have a long-term senior unsecured debt rating of BBB+ by Standard & Poor’s and Baa1 by Moody’s. We are committed to maintaining a strong investment grade rating. Regular review meetings are held between rating agencies and AkzoNobel senior management. We will 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 (see Note 23 of the Financial statements in the AkzoNobel Report 2013). Focus on cash management is stressed in our monthly Operational Control Cycle meetings and relevant metrics are included in our updated remuneration policies.