3 years ago

Annual Report 2008 - AMG Advanced Metallurgical Group NV

Annual Report 2008 - AMG Advanced Metallurgical Group NV

Risk Management and

Risk Management and Internal Control Risk Management Approach The global economy is facing unprecedented challenging times. A typical risk management process identifies potential risks, monitors those risks and develops mitigation planning. Such a process works well when there is general stability and certainty in the underlying business and in macroeconomic conditions. Its utility, while still valuable, is limited in the environment in which we are operating. The current economic crisis and global uncertainty is causing the simultaneous occurrence of several significant risks. AMG’s Management Board has identified the following six risks as the most pertinent to the business: accounts receivable and customer default, or performance, risk; metals price volatility; foreign currency volatility; capacity utilization; temptation to abandon innovation; and financing risks. During these challenging times, extensive focus throughout AMG is being given to managing and avoiding these, as well as other, risks. More detailed explanations of these risks, as well as actions AMG has implemented to mitigate the risks, are provided below. AMG’s strong focus on risk management, and traditional risk assessment processes, had previously identified most of the risks above as potential risks – albeit not necessarily planning for the “perfect storm” of all the risks occurring simultaneously or to the current level of severity. This preparation, while not making AMG immune from the global crisis, has benefited AMG is two main ways: (i) AMG recognized the risks early and had plans in place to reduce the impact; and (ii) AMG was building its business model, specifically as it relates to metals price volatility, around the avoidance of this risk. AMG employs a traditional approach to risk management including a ‘top-down’ and ‘bottom-up’ analysis and assessment of the Company’s risks, together with a very strong focus on ‘entrepreneurial risks’. Traditional Risk Assessment In 2008, AMG implemented a comprehensive strategic risk management program, centered on AMG’s Risk Assessment Package (“RAP”). The RAP is a comprehensive document requiring each business unit to (i) identify potential risks and quantify the impact of such risks; (ii) prioritize the risks using a ranking system to determine the impact, likelihood of occurrence, and mitigation or avoidance procedures in place; (iii) identify adverse events that presage the actual occurrence of an identified risk; and (iv) document the periodic monitoring of the risks. AMG is keenly aware that this thorough screening has its limitations. Customers, suppliers and competitors do not give you advance notice of their confidential plans and actions. Economic conditions can deteriorate. Governments can change policies and acts of nature can disrupt even the best executed strategies. Intimate knowledge of AMG’s businesses and markets is critical in mitigating these risks. AMG is also developing scenario planning to be better prepared for adverse events. Moving Beyond Best Practices Information is an important element to managing risk. Improved visibility to information for all AMG management, whether market or company specific or operational or financial in nature, is the focus for moving AMG’s traditional risk assessment beyond best practices. In 2009, AMG will begin a project to migrate its RAPs to a web-based platform. The on-line platform will (i) improve the design and ease of use of AMG’s enterprise risk management tools allowing for more frequent updates; (ii) standardize risk categories and terms across all business units; and (iii) improve the ability to better connect monitoring risks into financial results and impact. In addition to migrating the RAPs to a webbased platform, the database will enable data retrieval allowing mitigation plans, market data and other documents to be viewed remotely and shared across the Company. Improved information flow should, in addition to other benefits, allow more timely management decisions using more accurate data and allow the Company to build and execute more robust mitigation plans. 28 Report of the Manaagement Board | Risk Management and Internal Control

The last phase of the project will be to combine the features of the database with key performance indicators. The use of key performance indicators in the risk management process will enable business unit managers to better monitor risks and allow the Strategic Risk Management Officer to better set goals to challenge business unit managers. Risk Reporting Procedure Each business unit undertakes a full review of its RAP on a quarterly basis. The RAPs are then reviewed in detail by AMG’s Strategic Risk Management Officer in coordination with the operating managers of the business units. Key risks from all business units are then summarized and presented to the Management Board on a quarterly basis. Individual risks of special note will be discussed at the Management Board’s bi-weekly meeting. The Supervisory Board receives a report from the Management Board at its quarterly meetings. AMG’s Strategic Risk Management Officer reports directly to the Chief Executive Officer to provide assurances that the risk management process is respected and that risk identification and management are carried out effectively. The Management Board has the responsibility to inform the Supervisory Board of the most significant risk exposures and the related risk management plans in place. The Audit Committee of the Supervisory Board will carry out a semi-annual review of the company’s internal control and risk management systems. Entrepreneurial Risk Assessment AMG focuses on developing and producing products to reflect growing global trends. Executing this strategy requires the development of new products, processes and businesses that utilize proprietary production methods and novel approaches. In an economic crisis, the temptation is to delay new innovative initiatives until more market clarity exists. This response risks the viability of the company when the economic crisis ends. AMG will continue to invest in innovation during these times as the continued growth of AMG’s business requires the Management Board to undertake innovations. Investments in innovation do come with risk, albeit measured risk. The most significant decisions surround the careful planning of investing in innovations versus cash conservation. Aiding in this decision is a two-phase risk analysis conducted before a decision is made to invest in a project. The first phase is a traditional, thorough analysis of the proposed project, including likelihood of success, to determine a projected internal rate of return (“IRR”) or net present value using discounted cash flows. The second phase analyzes the risks AMG faces if it does not innovate or proceed with the proposed project. If there is a potential loss of business, and subsequent loss of cash flows, in a ‘steadystate’ scenario, this outcome is included in the IRR and net present value calculations to get a true picture of the benefit of the project. In addition to looking at the inherent risk on a project-by-project basis, AMG also evaluates the risk of the ‘portfolio’ of projects being undertaken or in the pipeline. Evaluating a project within a portfolio of opportunities allows AMG to better manage its liquidity and capital allocation. This portfolio evaluation of projects is very important given current economic conditions. While certain projects may be beneficial and worthwhile in the long run, timing of cash flows is critically important as AMG always seeks to maintain sufficient liquidity to operate its existing businesses. Managing entrepreneurial risk requires active management. Some of the biggest risks in new projects are unknown, since a company is doing something for the first time. On top of unknown risks, competitive dynamics can change and new technologies can become available forcing alternative plans to be implemented. Frequent Management Board meetings enable the senior executives of AMG to stay informed of all the latest information, allowing for quick action, further reducing risk. Report of the Management Board | Risk Management and Internal Control 29

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