(N.B.: Below you will find the text on risk management as published in the
“Report by the Managing Board” section on page 40 of the Annual Report 2008)
Responsibility
The Managing Board is responsible for risk
management in the company and has designed and implemented a risk management
system. The aim of the system is to ensure that the extent to which the
company’s strategic and operational objectives are being achieved is
understood, that the company’s reporting is reliable and that the company
complies with relevant laws and regulations.
Reporting structure
In this annual report, reporting on risk
management is organized as follows:
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Below, the Managing Board describes the most important risks and responses in
relation to the achievements of the Vision 2010 targets. It is also described
how the risk management system is used to arrive at conclusions regarding the
functioning of the internal controls over financial reporting (the ‘In Control
Statement’).
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In the risk management section (page 84) of the chapter on corporate
governance, risk management, financial policies and related functions, a
general description is given of the risk management system, the most important
adaptations of the system and the risks that are relevant for the company.
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Information on financial risks is provided in the financial statements on page
131.
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On the day of publication of this report, an updated full description of the
DSM Risk Management System as well as a more elaborate description of relevant
risks will be published on the DSM Internet site.
Main risks
As part of the annual risk management calendar, the
Managing Board updated the Corporate Risk Assessment. For this assessment,
last year’s list of risks was reviewed and supplemented by information from
external and internal risk reports, events and other views and information
obtained. These risks were ranked and responses were formulated by the
Managing Board. The outcome of the assessment was checked against internal
risk reports. The most important risks and responses are reported here:
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The impact of the global financial crisis and economic downturn is seen as one
of the most important risks for the remainder of the Vision 2010 period.
Especially in the end markets for some of the Materials Sciences products an
unprecedented decline has occurred, whose depth and duration is still very
hard to predict. Although the emerging economies have been less affected,
there growth rates have also declined below earlier expectations and prospects
have larger uncertainties than before. The financial crisis is making access
to cash more difficult and more expensive. The pension reserves have been
diminished by the stock price developments; this is expected to have a
considerable negative non-cash IFRS EBIT effect in 2009 compared to 2008.
DSM's response to the financial and economic downturn covers all of the above
aspects and is coordinated by a newly installed dedicated corporate team that
works with the full Managing Board and the DSM Leadership Council. The
responses include cost cutting measures, reduction of capital expenditure
programs, as well as an extra focus on cash and credit management.
Opportunities are, however, also investigated and promising innovation
initiatives are preserved as much as possible in order to safeguard future
growth opportunities.
Other main risks are:
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Disposals and acquisitions. DSM has tested methods to conduct these processes
successfully. There is, however, always the risk that suitable candidates do
not present themselves against affordable conditions. This risk has increased
due to the financial crisis.
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Price volatility (and secured supply) of raw materials and energy. Hedging
policies have been put in place and are now being reviewed and extra focus has
been put on single source situations. Extreme volatility can, however, always
lead to unavoidable losses and the stability of suppliers may be affected by
the crisis.
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Deteriorating market conditions and/or commoditization for the existing
product portfolio. This risk may be aggravated by the global downturn, due to
lower global utilization rates. DSM continues to counter this risk by
innovation and product differentiation, but also by low-cost country sourcing,
cost savings and process improvement measures.
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The ability to turn innovation efforts into profitable business. Close
monitoring of the innovation portfolio is in place and best practice solutions
for new product development and launch have been implemented. Nevertheless,
uncertainties with respect to the eventual success of new products and
applications remain, especially in today’s economic environment where some of
DSM's customers might re-prioritize their needs.
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People, organization and culture. The ability to attract and retain the right
people and to create an entrepreneurial yet responsible culture is key to the
achievement of the Vision 2010 targets. During the reporting year new
recruiting, management development and learning practices were implemented.
Organizational changes were set in motion and programs to support the
entrepreneurial spirit and cultural change were initiated. Nevertheless, the
above remains a critical success factor in the implementation of DSM's
strategy.
Functioning of the risk management system
The implementation of
the Corporate Requirements, which represent common controls for the most
important commonly occurring risks, was continued in those business groups
which were allowed by the Managing Board to delay parts of the implementation
until after the general due-date of 1 January 2008. In these units, much
attention was given to the implementation of temporary controls where
necessary.
All business groups and the major operational service units have an Audit
Committee, which, under the direction of the director, sets up annual risk
management plans, monitors their implementation and reviews risk management
issues on a regular basis. Major risk management events, such as the outcome
of corporate audits and business risk assessments and the occurrence of
material control failures or weaknesses were discussed with the responsible
Managing Board member.
Information on the functioning of the system was collected on a continuous
basis. Business groups tracked compliance with Corporate Requirements and
follow-up of actions from risk assessments; they conducted assessments on the
effectiveness of their internal controls and reported and investigated
incidents. The business group controllers confirmed that the quarterly
financial statements were produced according to the internal accounting rules
and reporting procedures by signing an affidavit. Independent audits on the
effectiveness of the risk management implementation were executed by Corporate
Operational Audit according to a program agreed with the Audit Committee of
the Supervisory Board.
The information thus gathered was used for improvements to the risk management
system as described on page 84, while any critical findings were addressed
immediately.
Together with the annual financial accounts, all business groups, staff and
service departments reported on any material operational, reporting and
compliance risks or incidents over the past year in their Letter of
Representation. The Corporate Risk Management department consolidated the
reported risks and incidents and compared them with the outcome of corporate
audits.
These data were used to spot weaknesses and formulate recommendations for
reinforcement of the risk management system. The reported risks were also
compared with the outcome of the Corporate Risk Assessment; on that basis the
final overview of main risks and responses was produced. The main risks were
discussed with the Audit Committee of the Supervisory Board on 16 February
2009.
Statements of the Managing Board
On the basis of the above and
in accordance with best practice II.1.4. of the Dutch corporate governance
code of December 2003, taking into account the recommendation of the Corporate
Governance Code Monitoring Committee on the application thereof, the Managing
Board confirms that internal controls over financial reporting provide a
reasonable level of assurance that the financial reporting does not contain
any material inaccuracies, and confirms that these controls functioned
properly in the year under review and that there are no indications that they
will not continue to do so. The financial statements fairly represent the
company’s financial condition and the results of the company’s operations and
provide the required disclosures.
It should be noted that the above does not imply that these systems and
procedures provide absolute assurance as to the realization of operational and
strategic business objectives, or that they can prevent all misstatements,
inaccuracies, errors, fraud and non-compliances with legislation, rules and
regulations.
In view of all of the above, the Managing Board confirms that, to its
knowledge, the financial statements give a true and fair view of the assets,
liabilities, financial position and profit or loss of the company and the
annual report includes a fair review of the position at the balance sheet date
and the development and performance of the business during the financial year
together with a description of the principal risks and uncertainties that the
company faces.
