Medium-term risks

Global economy and the geo-political context

The world’s geo-political situation remains unpredictable and, despite an improved economic outlook, we continue to operate in highly competitive markets that require us to carefully manage cost and complexity and develop a good understanding of end-user segments. Failure in this area could have an immediate impact on market share and margins and 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 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
• Develop alternative business models – e-commerce, partnerships with start-ups
• Have contingency plans prepared for a select number of scenarios, dealing with geographical or segment slowdowns

International operations

As a global business we are exposed to a variety of risks, many beyond our control, such as unfavorable geo-political, social or economic developments and developments in laws, trade policies, regulations and standards. Our ambition to grow the business across the globe will further expose us to these risks.

Mitigating actions

• Strategically spread activities geographically and serve many sectors
• Carefully monitor the political, economic and legislative conditions across the globe
• Refer major investment decisions to Executive Committee
• Combine implementing international compliance standards with local transparency and accountability

Strategic moves in our value chain

An accumulation of strategic moves (horizontally and/or vertically) impacts our competitive position and/or increases the vulnerability of operations. Further 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 M&A and integration capabilities
• Enhance pipeline of viable market and technology opportunities for mergers and acquisitions, focusing on strategic rationale
• Pro-actively explore M&A outside auction processes

Sourcing of raw materials and energy

Prices for key raw materials and energy can be volatile, are affected by economic conditions and regulations and have a direct impact on margins. In addition, there is a non-level playing field on a global level (e.g. shale gas, national policies, subsidies), which affects our competitive position. The chart below shows our relative spend on these key raw materials, excluding energy.

Mitigating actions

• Our procurement sourcing processes (ALPS 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, demand forecasting and margin-impact assessment
• Our Supplier Sustainability Program is embedded in our sourcing strategy, selection and management process to ensure compliance of critical suppliers, while also driving continuous improvements. We are also active in several industry groups

Product liability

High impact product liability claims, while unlikely, could follow 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 RD&I, HSE&S and sustainability agenda
• Tailored insurance coverage for product liability claims

Environmental risks and liabilities

Due to the nature of our business, we use – and have used – potentially hazardous compounds 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 costs of regulatory compliance and claims.

Mitigating actions

• HSE&S principles are embedded in our training programs and work ethic
• Contingency plans and assignment arrangements are in place to mitigate material operational risks
• Mandatory annual environmental liability reviews are conducted
• Corporate directives cover recurring risk categories
• Environmental standards and regulations are integrated in plant design
• Provisions for environmental clean-up cost or indemnifications are recognized against earnings
• Innovation efforts to remain at the forefront of new, sustainable product introductions

Information technology

The company’s longer term IT strategy means we increasingly rely on fewer consolidated critical applications, including industrial process control systems. As the number of digital exchanges of business transactions is increasing, the non-availability of IT systems, or unauthorized access, can 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
• Centrally monitor access control processes and identity and access enhancements
• Improve and test end-user awareness and behavior via cyber-security campaigns and e-learning
• Roll-out of the new IM security standard for industrial control systems to all manufacturing locations
• Further test and improve the IT security response and incident management process

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 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 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 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

Fluctuations in exchange rates

With operations in more than 80 countries and reporting in euros, we are exposed to currency fluctuations.

Mitigating actions

• A centralized treasury function managing foreign currency exposure (see Note 24 of the Consolidated financial statements)
• Risk reduction through local-for-local production
• Strive for natural hedges in our main currencies to reduce transactional exposure

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 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 and training 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 Code of Conduct

Innovation, identification and successful implementation of major transforming technologies

Our success and leadership positions depend on the sustainable growth of our business through research, development and innovation in order to foster the adoption of major transforming technologies.

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 start-ups

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, based on the company purpose and brand
• Further improve talent and succession action planning
• Fully embed leadership behaviors in our Performance and Development Dialog annual appraisal
• Deploy the AkzoNobel Academy to the full extent

Production process risks

Production process risks arise from areas such as personal health and safety and process and product safety, and can impact our organization and reputation and cause business continuity risks.

Mitigating actions

• ALPS is being implemented to drive continuous improvement and operational excellence
• Operate under state-of-the-art safety requirements for our manufacturing and RD&I sites (e.g. AkzoNobel People, Process and Product Safety Common Platform)
• Ongoing business continuity planning and risk transfer arrangements

Management of change

To support the implementation of our strategy, we continue to implement important changes in our operating model across the entire company.

Mitigating actions

• Focus on core principles and values to set desired behavioral changes in motion
• Embed project and change management in the curriculum of the AkzoNobel Academy
• Roll out principles of commercial excellence in all levels of the organization
• Combine sales and marketing under the responsibility of the newly created role of Chief Operating Officer
• Accelerate the adoption of a new organizational model through the creation of a Planning and Transformation Office
• Continue the journey of creating fit-for-purpose support functions to drive synergies and standardization and leverage expertise at a company-wide level