Risk Report
In the past fiscal year the Group's standardized risk management system again played a major role in increasing the transparency of the risk situation at ThyssenKrupp and enhancing our ability to identify, evaluate and control risks. From the present perspective all risks are contained and manageable. The future existence of the Company is secured.
- Risk policy embedded in corporate strategy
- Risk management system established throughout the Group
- Key features of the internal control and risk management system with regard to the Group accounting process
- Utilizing opportunities and simultaneously managing risks
- Risk transfer by central service provider
- Financial risks
- Order risks
- Sales risks
- Risks associated with business relationships with customers in countries with trade restrictions
- Procurement risks
Risk policy embedded in corporate strategy
Binding throughout the Group, the risk principles at ThyssenKrupp are based on our corporate strategy. Our risk management system is targeted at safeguarding existing assets and sustainably increasing the value of the Company; it therefore fulfills a core business function. To achieve an appropriate increase in value, we make optimum use of opportunities while consciously and responsibly taking business risks in our core processes and managing these actively. As part of our efficient risk management, other risks are transferred, reduced or completely prevented. Overall the Group can extensively cover all risks taken.
The Group Policy Statement on Risk Management documents the framework conditions and responsibilities for orderly and forward-looking risk management and is binding for all employees. Groupwide codes of conduct such as the Group's compliance standards and the prohibition of speculative transactions also form part of the risk principles. Regular control measures and numerous training programs help communicate the importance of the requirements to all employees. We continue to consider the risks to the Group contained and manageable.
Risk management system established throughout the Group
Alongside the risk principles, the Group Policy Statement on Risk Management includes other binding standards for the risk management process. In various reporting elements we communicate information on operating and strategic risks in a standardized process which permits the identification, assessment, control and monitoring of risks. Because it is integrated in the Group's corporate controlling department, risk management is also closely interlinked with planning and other reporting processes. Risk maps for all Group entities are prepared with the help of a web-based reporting tool in which Group companies report on the status of their risk situation using tiered threshold values, identify risk management measures and update the early warning indicators for assessing risks.
Each business area updates its assessment of the opportunities and risks in the current fiscal year on a monthly basis and provides information on any changes to material risks in the risk map. The material risks – clearly defined at Group level on the basis of probability of occurrence and loss amounts - are discussed in the Risk Committee and then communicated in a systematic and transparent report to the Executive Board and the Supervisory Board Audit Committee.
This standardized and transparent risk management system was introduced by the Executive Board of ThyssenKrupp AG for the entire Group and has proven itself to be efficient. In addition, ad hoc risks and losses incurred are communicated directly to the risk management officers outside the normal reporting channels.
To ensure the efficient monitoring of the risk management system, Corporate Center Internal Auditing carries out regular audits worldwide. Their findings help us further improve the way risks are managed throughout the Group. In addition we continuously optimize the tools and methods for registering and managing risks so as to enhance the quality of the information generated and further strengthen the interlinking of internal processes.
Key features of the internal control and risk management system with regard to the Group accounting process
Our internal control system, defined as the entire body of coordinated principles, processes and measures applied in the Company to ensure business and control objectives are achieved, is continuously optimized to guarantee the security and efficiency of business management, the reliability of financial reporting, and compliance with laws and policies.
For the accounting process at ThyssenKrupp this means that implemented controls adequately ensure that despite any risks the consolidated financial statements comply with the requirements. Various integrated and independent supervision measures are in place to help achieve this aim.
Our consolidated financial statements are prepared on the basis of a standard accounting policy which is regularly updated and made available to all relevant employees via an internal internet platform. A specially developed consolidation tool based on standard software is used, which ensures a uniform procedure and minimizes the risk of false statements in the Group's financial accounting and external reporting.
Financial reporting is organized in clearly defined sub-processes. Clear-cut responsibilities in line with the principle of segregating functions and the dual-control principle reduce the risk of fraudulent conduct.
As the department responsible for the preparation of the consolidated financial statements, Corporate Center Accounting and Financial Reporting issues the decentralized units with binding standards for content and scheduling so as to safeguard the consistency of accounting practices in the Group and minimize scope for discretion in connection with the recognition, measurement and statement of assets and liabilities.
In some cases individual decentralized units use the Group's shared service centers to prepare their local financial statements. Service center employees and all other employees involved in the accounting process undergo regular training and receive support.
We control and monitor the relevant IT systems used in the consolidation process on a centralized basis and perform regular system backups to reduce the risk of data loss and system failure. Automatic controls and manual checks by experienced employees as well as custom authorizations and access controls are part of a security system designed to protect finance systems against misuse.
Corporate Center Internal Auditing is also involved in the overall process in that it regularly checks the efficiency of the internal control and risk management system in the accounting processes.
The overall package of processes, systems and controls provides sufficient guarantee that the Group accounting process is carried out reliably and in compliance with IFRS, German GAAP (HGB) and other standards and laws of relevance to accounting.
Utilizing opportunities and simultaneously managing risks
When we see and wish to utilize appropriate opportunities in connection with our strategic decisions, we take risks responsibly in compliance with the requirements of the risk principles and make the necessary provision to cover risks.
Risk transfer by central service provider
As central service provider, ThyssenKrupp Risk and Insurance Services again handled the Groupwide transfer of risks to insurers in 2010/2011. The scope and structure of insurance cover is determined on the basis of risk assessments in which insurable risks at the Group companies are identified, evaluated and reduced or removed through asset-specific protection plans. Depending on the Group's risk-bearing ability, we agree appropriate deductibles for individual classes of insurance.
To keep risk prevention at a sustainable and appropriately high level, binding standards are in place for all Group companies. These standards were developed by experts from all areas of the Group under the leadership of ThyssenKrupp Risk and Insurance Services and are updated on an ongoing basis. Internal and external auditors regularly check compliance with these standards.
To limit the risk of insurer insolvency, we spread the risk over numerous insurers taking into account the ratings given to these insurers by recognized agencies.
Financial risks
Central responsibilities of ThyssenKrupp AG as parent company include the coordination and management of financial requirements within the Group and securing the financial independence of the Company as a whole. To this end we optimize Group financing and limit the financial risks. Risks in the individual financial risk areas are minimized through an ongoing process of monitoring and intensive controls.
Credit risk (default risk): We enter into financial instrument transactions in the financing area only with counterparties who have a very high credit standing and/or are covered by a deposit guarantee fund. Transactions are concluded only within specified counterparty risk limits. Outstanding receivables and default risks in connection with supplies and services are constantly monitored by the Group companies; in some cases they are additionally insured under commercial credit policies. The credit standing of key account customers is monitored particularly closely.
Liquidity risk: To secure the solvency and financial flexibility of the Group at all times, we maintain long-term credit facilities and cash funds on the basis of a multi-year financial planning system and a liquidity planning system on a rolling monthly basis. The cash pooling system and external financings are concentrated mainly on ThyssenKrupp AG and specific financing companies. We use the cash pooling system to allocate resources to Group companies internally according to requirements.
Market risk: Various measures are used to mitigate or eliminate the risk of fluctuations in the fair values or future cash flows from non-derivative or derivative financial instruments due to market changes. These mainly include off-exchange-traded foreign currency forward contracts, interest-rate swaps, interestrate/ foreign currency derivatives and commodity forward contracts with banks and commercial partners. To hedge against commodity price risks we also use exchange-traded futures. The use of derivative financial instruments is extensively monitored, with checks being carried out on the basis of policies in the framework of regular reporting.
Currency risk: To contain the risks of our numerous payment flows in different currencies – in particular in US dollars – we have developed Groupwide policies for foreign currency management. All companies of the Group are required to hedge foreign currency positions at the time of their inception; companies based in the euro zone hedge via our central clearing office. Translation risks arising from the conversion of foreign currency positions are generally not hedged.
Interest rate risk: To cover our capital requirements, we procured funds on the international money and capital markets in different currencies and with various maturities. The resulting financial liabilities and our financial investments are partially exposed to risks from changing interest rates. To manage these risks, regular interest rate risk analyses are prepared, the results of which feed into our risk management system.
Order risks
Cost overruns and/or schedule delays can occur in the handling of major orders. We counter these risks by deploying experienced project managers and continuously improving our management instruments. We select our customers carefully and minimize the risk of default by collecting progress payments.
Sales risks
As a global industrial group, ThyssenKrupp is dependent on the international economic situation. Especially in the currently weakening global economy, we closely monitor economic trends in our sales regions in order to minimize the market risks. If necessary we have a package of measures at our disposal, for example an immediate adjustment of our capacities.
Our international presence in different sectors and our widely differentiated product and customer structure make us largely independent of regional crises on our sales markets. Our effective receivables management system counters the risk of bad debt and continuously monitors the credit rating of our customers. More details on sales risks are provided in the section headed "Specific risks for our operations".
Risks associated with business relationships with customers in countries with trade restrictions
Due to our global organization, ThyssenKrupp has business relationships in countries subject to trade restrictions. In 2010 the Federal Republic of Germany, the EU and the USA, acting on the basis of UN Resolution 1929, expanded existing trade restrictions on the Islamic Republic of Iran to include the petroleum sector, and added further individuals and a number of banks to the sanctions lists to prohibit business with them. Violations of the tightened trade restrictions are subject to severe penalties and could damage ThyssenKrupp's reputation. We have always complied scrupulously with export control regulations and in particular trade restrictions. In addition, the Executive Board of ThyssenKrupp AG ordered a review of the business activities with Iranian customers in existence before the tighter trade restrictions came into effect to establish whether they comply with the new laws. In September 2010 it was decided that ThyssenKrupp will not enter into any new transactions with Iranian customers. This measure significantly reduces the risk of a potential violation of trade restrictions. In addition, an Elevator investment in Iran has been sold.
Procurement risks
Depending on the market situation, prices for raw materials and energy can fluctuate significantly. We safeguard our competitiveness by adjusting purchasing prices and securing alternative procurement sources. The geographical distribution of orders makes us less vulnerable to regional supply bottlenecks. To hedge against raw material price swings, in particular for nickel and copper, we also use derivative financial instruments – mainly commodity forward transactions. The use of these instruments is subject to strict rules. Details of these risk areas are provided in the Notes.
The energy transition in Germany will permanently increase the price of electricity with the rise in the share of renewable energies and the associated need to expand the electricity grids. On top of this there are cost-intensive regulatory requirements for the electricity and gas networks of our major production locations. To counter the risk of rising energy prices we pursue a structured energy procurement policy. Furthermore all business areas are further increasing their efforts to save energy and recycle waste so as to prevent greenhouse emissions and conserve natural resources.
Source: Annual Report 2010/2011, p. 108-113
For more details, please turn to the Corporate Governance Report Page.