(N.B.: These descriptions are to be considered as an elucidation of the Annual Report; they will not be updated during the year.)
The following section contains a selection of important risks that have been identified and for the management of which strategies, controls and/or mitigating measures have been put in place as part of DSM’s risk management practices. They nevertheless involve uncertainties that may lead to the actual results differing from those projected. There may also be current risks that the company has not yet fully assessed and that are currently qualified as ’minor’ but that could have a material impact on the company’s performance at a later stage. The company’s risk-management and internal-control system has been designed to signal and respond to these developments on time, but 100% assurance can never be achieved, of course. The top five risks and other important risks as derived from these categories during the year under review (and the corresponding responses) are described in the Annual Report.
Generic/strategic risks
Global financial and economic developments
Being a global company, DSM is subject to business risks associated with macroeconomic trends and events. The global financial crisis and economic downturn has become one of the most important risks for the remainder of the Vision 2010 period.
Risks related to emerging economies
The crisis has further increased the relative importance of the emerging economies for the success of DSM’s growth strategy. There is a risk that opportunities in these markets will be missed. Also, price pressure from these countries may jeopardize profitability in established markets. The emerging economies are characterized by rapid legislative developments; keeping up with these requires an extra effort.
Risks of competition and commoditization in existing markets
DSM’s Vision 2010 strategy is aimed at further reducing the cyclical and commodity elements in the portfolio and at being cost competitive in mature markets. A substantial portion of DSM’s current activities, however, are still experiencing a material impact on sales and results from the economic downturn. Margins may erode under the influence of commoditization, a risk that may be aggravated by low global utilization rates.
Political risks
DSM has subsidiaries in more than 45 countries. These subsidiaries can be exposed to changes in government regulations and potentially unfavorable political developments that might hamper the exploitation of certain opportunities or might impair the value of the local business.
Risk related to disposals, acquisitions and joint ventures
The success of DSM’s strategy is partly dependent on the company’s ability to spot and implement opportunities for disposals and acquisitions. Risks in this field are connected to the company’s failure to identify interested buyers for its disposals or relevant acquisition targets, or its failure to do so in time, or its lack of success in bid processes or in the integration of acquired businesses needed to safeguard its path of growth. This risk is aggravated by the financial crisis, which is having a negative influence on financing possibilities. DSM uses joint ventures and other strategic alliances whenever it is beneficial to do so (for example to combine strengths and to share investments and inherent risks). Although joint ventures and strategic alliances are always intended to add value, situations can arise that result in a conflict of interests that could potentially damage the business.
Innovation risks (new markets, products and technologies)
In its Vision 2010 strategy, DSM is increasing its focus on innovation in order to develop new technologies and products and explore new markets. To this end, the company has strengthened its market intelligence and enhanced its market and customer orientation. Nevertheless, the actual developments in the targeted markets, the speed with which new products and technologies are accepted and the emergence of new competition will always constitute risks to the success of the chosen strategy.
A multitude of actions have been taken to ensure success in the R&D and market development processes and in product launch efforts. There is a risk that goals will nevertheless not be achieved and that the company will have to abandon projects on which it has already spent substantial sums of money. The company may reach a point where its overall sales volume does not justify its R&D expenditure. This risk may be aggravated by the economic downturn, amongst other things because potential customers may re-prioritize their needs.
People, organization and culture risks
DSM’s ability to attract and retain the right people and create an entrepreneurial yet responsible culture is key to the achievement of the Vision 2010 targets. In the year under review, the organization of corporate and central functions was made more clear and more efficient in order to increase the effectiveness and speed of decision-making. The Inpact / Motion program was launched to support the operational units in achieving inspirational leadership, an ‘outside-in’ mindset and enhanced accountability for performance. Nevertheless, the company may have to adjust or may fail to achieve its projected growth path, due to constraints in this field.
Intellectual Property protection risks
The establishment, protection and exploitation of Intellectual Property rights is of increasing importance in DSM’s strategic development. When the creation and protection mechanisms that have been introduced do not work properly and the company is unable to follow up these situations appropriately, e.g. through new valuable patents and licenses or litigation, there is a risk that the financial results might deteriorate.
Raw material / energy price and availability risks
It may not always be possible to off-set the effect of raw material and energy price increases by sales price increases. A commodity hedging policy has been put into effect but this will never ensure that price changes may not negatively influence margins. Although single source situations are avoided as much as possible, the risk of occasional shortages of raw materials cannot be completely excluded. Single source situations may become more risky because of the economic situation affecting suppliers’ stability.
Operational risks
Reputation risks
Any failure by any of its business units to meet production safety, social, environmental and/or ethical standards could harm DSM’s reputation and thereby impact on its business and results. DSM values such as good corporate citizenship, open communication and transparency should reasonably assure appropriate employee conduct. Moreover, the company mitigates its reputation risk by making substantial efforts to reduce the probability that any of its units will fail to comply with internal requirements and/or external laws and regulations.
Customer risks
The company makes considerable efforts to delight its customers. Compliance with customer agreements and commitments is measured regularly. Appropriate process and product quality checks are in place to mitigate the risk of non-compliance with customers’ and DSM’s sales conditions. Nevertheless, it cannot be totally excluded that issues could arise in this area.
Production-process risks
DSM tries to mitigate production process risks by spreading production where possible, but concentration is necessary in order to achieve economies of scale. The design of any new facilities and/or production processes is required to include state-of-the-art safety and security facilities. Plants are designed according to high technical and technological standards and are regularly and systematically inspected against predefined risk and maintenance standards. Nevertheless, technical and technological risks may not always be sufficiently well known or controlled so as to exclude any mishaps.
Business continuity risks
The influence of major disruptions caused by mishaps affecting the supply line or facilities in the company has been inventoried and business continuity plans have been put in place. Unexpected developments may nevertheless result in interruptions of supply to customers, causing financial and reputational damage.
Product-liability risks
As a result of the progress made towards DSM’s current corporate goals following from the Vision 2010 strategy, the company’s product portfolio has shifted and is still shifting. This has been accompanied by a corresponding shift in DSM’s risk profile. DSM is aware of this ongoing process and is putting more emphasis on managing product liability exposures. To protect itself against these risks, DSM has put in place highly demanding process and product requirements and is putting in a great deal of effort on an ongoing basis to assure that all its units comply with internal and external regulatory requirements (e.g. FDA). Additionally, sales contracting policies have been enhanced. Nevertheless, product-liability issues can never be totally excluded.
Insurable risks
Global insurance policies are in place to reduce the risk of damage to property, business interruption loss and general liability exposures, including the liability risks related to the products produced. Especially the ongoing change in the product portfolio makes product liability an issue that needs and receives careful monitoring. At the moment, all of the products in DSM’s total portfolio are covered under the company’s corporate liability insurance programs. For losses covered by the several policies the self-retention at corporate level in 2009 for any one incident will not exceed about €30 million per occurrence with an annual aggregate maximum of €45 million. DSM has in place insurance cover for excess risks related to property damage/business interruption as well as general liability up to contracted maximum amounts that are deemed to be appropriate in view of the risk profile of the company.
ICT risks
In order to control potential ICT risks DSM employs a policy of using the latest proven hardware and software solutions. Group-wide, DSM works with integrated and standardized ICT infrastructures, back-up, encoding and encryption systems, replicated databases, virus and access protection and a fully compatible global network and intranet. Regular local ICT-security assessments should assure adequate local applications. External ICT-service providers have been contracted in and are required to report regularly on the measures they are taking to reasonably assure that DSM’s IT processes are not disrupted.
Although DSM has applied strict measures with regard to the security and reliability of its IT systems, incidents regarding for example back-up recovery, hot failover systems, virus attacks and international network connections may still occur, and this can have a material impact on business operations.
Project risks
On a regular basis, the company is undertaking major projects whose success is important to the overall business results. DSM has extensive experience in project management. It seconds its best people to projects that are considered critical. Moreover, independent Value Assurance Reviews are conducted and direct Board involvement and monitoring are in place to mitigate the risk of failure of major projects. Projects may nevertheless not always produce the (financial) results projected.
(Information) security and Internal Control related risks
DSM employs strict practices with regard to the assessment and control of (information) security risks. In the design of the processes governing the goods and money flows, strict standards of Internal Control have been taken into account and the functioning of these controls is being monitored regularly. Nevertheless, (information) security incidents and / or misappropriation of goods or money through mistakes or fraud may still occur, possibly causing material damage to the company.
Industrial relations risks
DSM invests in a good relationship with its employees and tracks employee engagement, amongst other things by worldwide polls. Nevertheless, it cannot be excluded that risks materialize in the area of industrial relations.
Safety, health and environmental risks
DSM implements strict policies with regard to the containment of safety, health and environmental risks. Nevertheless, safety, health or environmental elements may not always be sufficiently well known or controlled so as to prevent any possible mishaps.
Financial risks
Liquidity and market risk
The main financial risks faced by DSM relate to liquidity risk and market risk (comprising interest rate risk, currency risk and price risk). DSM’s financial policy is aimed at minimizing the effects of fluctuations in currency-exchange and interest rates on its results in the short term and following market rates in the long term. DSM uses financial derivatives to manage financial risks relating to business operations and does not enter into speculative derivative positions. DSM's financial policy is discussed extensively In the Annual Report 2009, which also contains specific information on liquidity risks and market risks and is available on http://www.dsm.com/.
Pension risks
With significant defined benefit obligations in six countries, DSM is exposed to volatility in financial markets that can cause changes in future pension costs for the company and in the funded status of the individual pension plans. To reduce these risks, the investment strategies of the respective pension plans are aligned with the risk profile of the underlying pension obligations and the investment policies are closely monitored by the company. The volatility in cash contributions to these plans is limited due to contractual arrangements. The financial crisis, however, has materially impacted the financial situation of the funds.
Other financial risks
Financial risks additional to the liquidity and market risks mentioned above include commodity price risk, credit risk and country risk. Furthermore, the major credit rating agencies may change their assessments of DSM creditworthiness, thereby affecting the company’s borrowing capacity and/or the conditions under which it can borrow money and causing fluctuations in the cost of finance. The company aims to keep its single A credit rating. With respect to income tax DSM has accrued for tax liabilities on the basis of interpretations of tax laws and regulations that may be challenged by tax authorities. In the determination of tax liabilities these uncertainties are taken into account. Furthermore, DSM has recognized deferred tax assets that require utilization of tax loss carry forwards. In certain countries these loss carry forwards are restricted in time and /or amount and DSM runs the risks that these assets may not be fully recovered.
Compliance risks
Risk of non-compliance with the DSM Values (to be replaced by the DSM Code of Business Conduct in 2010), Policies, Requirements and Management Directives
DSM has put in place Values, Policies, Requirements and Management Directives in order to induce ethical behavior in the company and clearly mark the limits of risk taking to be observed in (operational) processes. The implementation of these principles, policies and requirements is monitored and reported by the units themselves and through independent full operational audits. It can nevertheless not be excluded that non-compliances may occur, leading to risks and possible financial and/or reputational damage.
Risks related to legal non-compliances
DSM operates in fields to which a multitude of (international) laws and regulations apply. Although a great deal of attention is being given to full compliance with all these laws and regulations, breaches may still go unnoticed, possibly leading to fines, loss of permits and/or reputational damage.
Control failures
In DSM’s Triple P Report some of the control failures are mentioned that occurred in spite of the company’s risk management efforts. They can be found in the section: “What still went wrong”. All failures are extensively analyzed and lessons learnt are implemented.
