Risk and Viability Reporting: Lab Project Report

Lab project report:
Risk and viability reporting

November 2017
Financial Reporting Council

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Lab project report Risk and viability reporting 2
Contents What is the Lab?
The Financial Reporting Lab was set up by the
Financial Reporting Council (“FRC”) to improve
Quick read 3 the effectiveness of corporate reporting in the
UK. The Lab provides a safe environment
Project introduction 6 for listed companies and investors to explore
innovative reporting solutions that better meet
Principal risk reporting 9 their needs.
Viability statement reporting 20 Lab reports do not form new reporting

requirements. Instead, they summarise
Participants and process 27 observations on practices that investors
find useful to their analysis and encourage
Appendix A: Schroders’ letter to FTSE 100 investee companies 28 companies to consider adopting the practices
if appropriate in the context of their own
Appendix B: Results from survey of retail investors 29 reporting. It is the responsibility of each
reporting company to ensure compliance with
relevant reporting requirements.
Published reports and further information on

the Lab can be found on the FRC’s website:
www.frc.org.uk/Lab
Do you have suggestions to share?

The Lab encourages readers of this report
to provide comments on its content and
presentation. As far as possible, comments
will be taken into account in shaping future
projects. To provide comments, please send
us an email at:
FinancialReportingLab@frc.org.uk
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Quick read The overall challenge for companies is getting an appropriate balance of disclosure.
There is inherent tension between the desire to provide succinct and useful
information to investors, and the pressure to disclose a list of principal risks which
Principal risk reporting does not give away any competitive advantage, and which may result in unspecific
and excessive disclosure. Companies have processes in place which gather risk
information from all levels of the organisation so as to ensure that their disclosures
Quick questions for companies on their principal risk disclosures are complete – the combination of a ‘top down’ and ‘bottom up’ approach is intended
to ensure that principal risk disclosures are accurate.
• Does
the description of principal risks identify how they are specific to the
company?
• Is it clear how the company categorises and prioritises principal risks? Attributes of good principal risk disclosure
• Are movements in principal risks, including movements into and out of the Lab project report l Risk and viability reporting 12
principal classification, explained? All investors are looking for principal risk reporting that is specific to the company,
avoiding boilerplate disclosure and jargon. Investors seek to understand both the
• Is it clear how the principal risks link to other parts of the annual report and What risk characteristics
principal risks identified / by the company and how theReporting company is managing those
FRC Annual Review of Corporate 2015/16
accounts, in particular the viability statement, business model, strategy, KPIs disclosures do investors
risks. They gain confidence inThemanagement when risks are clearly linkeda clearer
to the
FRC reported that the introduction of the strategic report has provided focus on the links between
and the risk reporting in the financial statements? tell us they like?
business model, show any changes However, more incan risk year
be done on year
to improve and
narrative give
reporting, some
including: indication
(i) providing ofon the company,
business models, strategies, risks and performance, and led to an improvement in narrative reporting generally.
information
• Do the mitigating activities include specific information that allows the reader to We asked investors
the potential impact
their views on the of
presentation ofrisks occurring.
the environment in Thewhichgraphic
it operates and below
the risks itsummarises
faces that is specific key information
to the company and not explained in
general terms; and (ii) explaining the links between information in the annual report, such as objectives,
principal risk disclosures. From this, we have compiled a
understand the company’s response? that
list of disclosure investors
characteristics, have told
with published examplesthe Lab they
KPIs and risks.are looking for companies to provide in their
taken from the annual reports of companies participating
in this project.principal risk disclosures.
Investors are unanimous that understanding those principal risks faced by a company
is important both before making an investment and during the holding of that What entity-specific information is important to investors about risk?
investment. A change in risk faced by a company is one factor that may cause an
Information that helps investors to Information that helps investors to
investor to change the size of their shareholding. understand the risk understand how the company is managing risk
Investors see the annual report as a reliable source of information that forms a part of • Presentation
• Likelihood How How does it link
the suite of information (including, for example, investor presentations) used to assess of risks as
gross or net & impact
• Priority important to thedoes
How company’s
it link • Link to rest of • Risk appetite
the risks of a company. Investors like the annual report to have good linkage between of controls is it? to thestory?
company’s annual report
sections, and for relationships between the key disclosures to be clearly explained. story?
What is the
What type
Since the financial crisis there has been an increased focus on risk management; in • Categorisation
of risk is it?
company doing
about it?
response, the reporting of principal risks has become more comprehensive. In more
What is the • Mitigating • Responsible
recent times there have also been calls for directors to demonstrate further how they company doing actions person
have promoted the success of a company and in doing so how its business model • Movement during year
How is it about it?
changing?
remains relevant and sustainable. Investors agree that the reporting of principal risks
and better engagement with companies has improved their understanding of how the
board identifies and manages risk to protect the sustainability of the company. They More important to investors
also understand that risk management is dynamic, and requires ongoing attention.
Investors highlight the information around the risk assessment process as one area of
disclosure that helps them to understand better why the company is comfortable with Quick read Project introduction Principal risk reporting Viability statement reporting Appendix A: Schroders’ letter to Appendix B: Results from
the principal risks disclosed. FTSE 100 investee companies survey of retail investors
Quick read Project introduction Principal risk reporting Viability statement reporting Appendix A: Schroders’ letter to Appendix B: Results from
FTSE 100 investee companies survey of retail investors
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Viability statement reporting However, the value of this greater focus is often not reflected in the viability
statement disclosures themselves. Investors are looking for companies to explain
the long-term prospects of the company more clearly. The current practice is often
Quick questions for management on their viability statement disclosures that viability statements are prepared as longer term going concern statements with
a focus on liquidity rather than as a means to communicate how the company will
• Does
the disclosure differentiate between the directors’ assessment of long remain relevant and solvent in the long-term and be able to adapt to emerging risks.
term prospects and their statement on the company’s viability?
• When disclosing the long-term prospects has the board considered their
stewardship responsibilities, previous statements they have made, especially in
Two-stage process in developing a viability
raising capital, the nature of the business and its stage of development, and its statement
investment and planning periods?
• Does the viability statement disclose any relevant qualifications and Assessment of prospects Assessment of viability
assumptions when explaining the directors’ reasonable expectation of the Taking into account:
Taking into account:
viability of the company? - Stress & sensitivity analysis
-Current position - Linkage to principal risks
• Is the link between the viability statement and principal risks clear, particularly in -Robust assessment of principal risks - Qualifications & assumptions
relation to the scenario analyses? -Business model - Level of reasonable expectation
• Are the stress and scenario analyses disclosed in sufficient detail to provide
investors with an understanding of the nature of those scenarios, and the extent
The Code envisages a two-stage approach to the viability statement. The directors
and likelihood of mitigating activities?
should firstly consider and report on the prospects of the company taking into account
its current position and principal risks. Secondly, they should state whether they
have a reasonable expectation that the company will be able to continue in operation
The Sharman Inquiry was initiated following concerns arising during the financial
and meet its liabilities as they fall due over the period of their assessment, drawing
crisis that companies were not adequately considering their long-term viability.
attention to any qualifications or assumptions as necessary.
Following the outcome of the inquiry, the viability statement was introduced to the UK
Corporate Governance Code (“the Code”) in 2014 as a means of requiring directors Investors are not necessarily looking for a viability statement which covers the period
to report annually on this. over which they assess their investments. They are encouraging companies to
consider their prospects over the longer term relative to their specific business. They
Companies and investors are clear that viability is a concept which is inherent to
understand that the directors must have a reasonable expectation which covers the
the decisions that each of them make. For companies, their continuing existence
period over which they state viability, and many companies have chosen a period that
and growth is dependent on the sustainability of their business model and strategy;
is limited to a medium-term strategic period.
their sustainability, as well as their resilience to risk, is a key consideration for
boards. For investors, investment decisions are determined, at least in part, by the While the Code suggests that the time period for the assessment of prospects and
confidence they have both in the sustainability of the business model and in those the statement should be the same, many investors would like more information about
who lead the company. the risks and prospects of a company over a longer time period consistent with the
company’s investment and planning periods (the first stage) even if the statement
It is clear that for most companies the introduction of the viability statement has
(the second stage) is limited to a shorter period.
resulted in greater focus on risk management at board level. Performing stress
and scenario analyses has improved decision making and helped companies Investors also find details of the stress or scenario analyses that have been
determine their risk appetite. Investors encourage this and support companies taking performed to be very useful in providing information on the company’s resilience to
appropriate risks if they are well considered and managed. risk. These should include details of the extent and likelihood of mitigating activities.
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List of examples
The lists below contains examples of how those companies participating in this project have applied reporting practices that investors are looking for in risk reporting
and viability statements.
Attribute of risk reporting Page Company

Categorisation of principal risks 13 Aberdeen Asset Management PLC
The priority of principal risks 13 Lonmin plc
Movement in principal risks 14 Daily Mail and General Trust plc
Linkage to other parts of the annual report 15 Smith & Nephew plc
Likelihood & impact 16 Vodafone Group plc
Risk appetite 17 Smith & Nephew plc
Presentation of risks as gross or net of controls 17 J Sainsbury plc
Responsible party & mitigating activities 18 Ashmore Group plc
Brexit, cyber and climate change 19 Vodafone Group plc
Attribute of viability statement Page Company

Audit committee considerations on the viability statement 24 Vodafone Group plc
Application of the two-stage approach 25 Equiniti Group plc
Stress and sensitivity analysis 26 J Sainsbury plc
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Project introduction The scope of the project report
Business model reporting
This report examines the views of those companies and
investors participating in this project on the key attributes Key findings from the Business model reporting
of principal risk and viability reporting, their value and project which link through to the key findings from
Project initiation use. It also provides illustrative examples of reporting this project are:
favoured by investors. 1. Improvement could be made in linking
Since the 2008-09 financial crisis there has been an In this report we use the following definitions: business model reporting to other areas of
increasing focus on how boards of companies manage the annual report (see diagram below).
risk and assess their viability. Investors are also • P
rincipal risk and mitigating action disclosures – these
increasingly focused on how directors promote the are the disclosures made by a company applying the 2. Investors find it helpful when changes made
success of a company and how they manage risks that Code. to a company’s strategy since the last annual
might threaten this success. The Lab is undertaking a report are clearly explained.
• V
iability statement - the statement made by
series of projects which seek to explore the areas of most companies to assess their prospects and viability to 3. Language should be plain, clear, concise
interest to investors and consider where companies face comply with provision C.2.2 of the Code. and factual and presentation should be fair,
challenges in deciding what disclosures to make and how balanced and understandable.
best to present them. Views were obtained from 25 representatives from
companies and 27 members of the investment 4. Information is important both at the initial
Business model reporting was the first in this series, community. Companies range in size from FTSE 100 investment stage and for investors’ ongoing
because establishing views on good business model to AIM, and participants include members of finance, monitoring and stewardship responsibilities.
reporting provides the foundation for the strategic report risk, company secretarial and investor relations
as a whole, and in particular on how the company 5. Many companies express concern that
teams. Investment community participants include disclosure of their competitive advantage is
considers risk and viability. retail investors, buy-side and sell-side analysts, fund commercially sensitive and could jeopardise
The Lab published its report on Business model reporting managers, fixed income investors, and credit rating the company’s prospects. However, investors
in 2016 and commenced this project on Risk and viability agency representatives. The Lab also carried out a believe companies can balance commercial
reporting in May 2017. During this project the Lab has survey of approximately 200 private investors. See the sensitivity with providing sufficient disclosure to
also considered the impact of the revisions to the UK ‘Participants and process’ section for further details. enable them to understand what differentiates
Corporate Governance Code (“the Code”) in 2014 which the company and how the board is responding
introduced the requirement for directors to carry out to emerging risks.
a robust assessment of risk and assess the prospects of
the company sufficient to make a statement about
its viability.
Annual Report
Business model Strategy Principal risks KPIs Remuneration &
Explain key elements
Maintenance or dividend policy
development of key In relation to key Measure success of
and drivers drivers drivers key drivers Linked to KPIs/results
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The regulatory context • P
rovision C.2.2: Taking account of the company’s
current position and principal risks, the directors
Companies Act 2006
The Companies Act 2006 414C(2)(b) requires that the
should explain in the annual report how they have
The financial crisis raised questions about the extent strategic report contains a description of the principal
assessed the prospects of the company, over what
to which companies were managing going concern risks and uncertainties facing the company.
period they have done so and why they consider that
and liquidity risk. As a consequence some regulations period to be appropriate. The directors should state This requirement applies to a wider range of companies
and guidance were introduced that are relevant to the whether they have a reasonable expectation that than the Code, including UK AIM and many private
management and disclosure of risk and viability. These the company will be able to continue in operation companies. In PN 130, the FRC commented: ‘As the
are set out below: and meet its liabilities as they fall due over the purpose of the business review is to inform members of
The Sharman Inquiry and revisions to the Code period of their assessment, drawing attention to any the company and to help them assess how the directors
qualifications or assumptions as necessary. have performed their duty to promote the success of the
The primary purpose of the Sharman Inquiry was to company, [we] believe that a board should state how the
understand whether going concern and liquidity issues The intention of C.2.2 is for companies to apply the
company manages its principal risks and uncertainties.’
were being appropriately managed and reported. provision in two stages, firstly for directors to assess
This report, and especially the section on principal risks,
the prospects of the company and secondly to make a
In June 2012, it published its report1 which included may be of interest to any company reporting principal
statement of its viability.
recommendations that: risks and uncertainties in the annual report. For the
The provision in the Code on the going concern purposes of this report, the Lab refers to ‘principal risks’.
• e
ncouraged companies to move away from a model confirmation was updated in 2014 to clarify that this
where disclosures about going concern risks are only FRC Guidance on the going concern basis of
is a separate statement confirming the choice of
highlighted when there are significant doubts about a accounting and reporting on solvency and
accounting policy.
company’s survival; and, liquidity risks
FRC Guidance on Risk Management, Internal Control
• the going concern assessment should be integrated This Guidance is intended to serve as a proportionate
and Related Financial and Business Reporting (2014)
with the directors’ business planning and risk and practical guide for directors of non-Code companies.
management processes and include a focus on both The FRC also issued Guidance on Risk Management, It brings together the requirements of company law,
solvency and liquidity risks, considering the possible Internal Control and Related Financial and Business accounting standards, auditing standards, other
impacts on the business over the longer term. Reporting in 2014. This provides further guidance on risk regulation and existing FRC guidance relating to
and viability reporting, including a section on the ‘Long reporting on the going concern basis of accounting, and
Following these and other recommendations, the Code Term Viability Statement’. solvency and liquidity risks, and reflects developments in
was updated in 2014 to include the following new the FRC’s thinking as a consequence of the
requirements: The Listing Rules
Sharman Inquiry.
• P
rovision C.2.1: The directors should confirm in the The Listing Rules were updated in October 2015 to
annual report that they have carried out a robust require a statement by the directors on their assessment
assessment of the principal risks facing the company, of the prospects of the company (containing the
including those that would threaten its business information set out in provision C.2.2 of the Code)
model, future performance, solvency or liquidity. The prepared in accordance with the ‘Guidance on Risk
directors should describe those risks and explain how Management, Internal Control and Related Financial and
they are being managed or mitigated. Business Reporting’ published by the Financial Reporting
Council in September 2014.
1 https://www.frc.org.uk/getattachment/870d840d-2455-47bb-949e-
d7f29c32b506/The-Sharman-Report-final-0311111.pdf
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FRC Guidance on the Strategic Report The Form 20-F calls for prominent disclosure of risk
factors that are specific to the company or its industry
The FRC Guidance on the Strategic Report supports
and an investment in the company's shares in a section
the legislative requirements in respect of the
headed “Risk Factors.” This requirement is focused on
Strategic Report.
the risks of investment and typically results in a longer
The FRC is currently in the process of revising its list of risk factors than the principal risks required to be
Guidance to reflect the enhanced disclosures that certain disclosed in an annual report, as set out in the Code.
large companies are required to make in respect of the Another important distinction is that the SEC does not
environment, employees, social matters, respect for allow disclosure of mitigating actions, a further illustration
human rights and anti-corruption and anti-bribery matters. that the objectives of the two apparently similar
requirements are different.
The Guidance also encourages all companies to disclose
information on how boards have considered broader Companies which are subject to both sets of
stakeholders in fulfilling their duty to promote the success requirements adopt different approaches to deal with
of the company. these reporting requirements. Some companies include
both disclosures in one document, which fulfils the
Risk factors for companies registered with the SEC
function of both the annual report and the 20-F, with
UK companies that are registered with the US Securities separate sections describing principal risks (as required
and Exchange Commission ("SEC") under the US by the Code) and risk factors (as required by Form 20-F).
Securities and Exchange Act of 1934 (usually because Other companies prepare two separate documents, each
they have securities listed on exchanges in the US) containing the disclosure required to satisfy the different
are required to make an annual filing (Form 20-F if the requirements applicable to it.
company is a "foreign private issuer"). The requirements
for the disclosures to be included in a Form 20-F include
specific risk reporting requirements, which are different
(in their terms and objective) from the requirements under
the Code for risk reporting in the annual report.
The Code requires companies to include in their annual
report a description of the principal risks facing the
business and explain how they are being managed
or mitigated. The objective of the annual report is to
provide the shareholders of the company (and other
stakeholders) with "the information necessary for
shareholders to assess the company’s position and
performance, business model and strategy".
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Principal risk Institutional investors and intermediaries (e.g. equity
analysts, ratings agencies) also have access to:
Together with the reporting changes introduced through
the Code, this has resulted in companies disclosing
reporting
more information around risk management systems and
• In-house sector specialists
principal risks.
• Company board and management
Companies and investors agree that risk is integral to
The principal risk and risk management disclosures their engagement, although it is unlikely that investors will
themselves also provide comfort to investors that the use the principal risk disclosures in the annual report as
Importance of principal risk company has appropriate risk management processes in
place. Where disclosures are inconsistent with investor
the basis for a line of enquiry (unless they fundamentally
disagree with the risks disclosed). Rather, questions
reporting expectations, institutional investors seek to engage with around risk are included in wider discussions on strategy,
management in order to improve their understanding. business model and future performance. It is therefore
During its Business model reporting project, the Lab Retail investors have far less access to management and important that disclosures on principal risks are given
concluded that investors used business model reporting our survey indicates that where risk disclosures appear context and linked to relevant areas in the annual report,
as part of their initial investment appraisal process, inconsistent with their expectations, they are less likely as this allows investors to understand how the company
monitoring the investee company’s performance and to invest. is addressing these issues.
fulfilling their stewardship responsibilities. Investors in
this project similarly consider the reporting of principal 62% of the retail investors surveyed say that
risks to be an important factor in their decision making their investment decisions are influenced by the Lab Comment
process. Having an understanding of the principal risks principal risk disclosures in the annual report and
faced by a company is important, both before making The Lab reviewed how the principal risk disclosures
accounts of those companies participating in this project had
an investment and during the holding of that investment.
Changes in risks faced by a company are one factor Source: Lab survey of retail investors developed. The average length of the risk disclosure
which may cause an investor to change the size of their increased from 2.8 pages in 2011/12 to 5.5 pages in
Investors confirm that they read the principal risk 2016/17.
shareholding or bondholding.
disclosures in the context of the annual report and
When researching a potential investment in a company, accounts as a whole. Although there is variety in how Developments include:
investors consider the annual report to be a reliable the annual report is consumed, with some reading it • A
dditional information on the risk management
source of information on principal risks and mitigating from start to finish and others focusing on specific areas, process.
activities. Even when they have invested in a company or investors stress the importance of consistent information
sector for a long period of time, investors will still review and clear linkage within the annual report. Clear linkage • Greater contextualisation of risk. For example:
the principal risk disclosures in the annual report in order is also helpful in reducing repetition of information. 4 risk movement
to evaluate their own views on the company’s risk and to
Although many investors think that reporting of principal 4 categorisation of risk
understand how the board is managing those risks.
risks by companies can be improved, most did comment
However, the annual report is not the only source of during interviews that risk disclosures have become more 4 identification of the risk owner
information on risk. Investors, both institutional and retail, helpful over the period since the financial crisis. Investors (e.g. relevant committee)
use a variety of sources, such as: have noted during their engagement with companies that 4 links to other parts of the annual report
the board and management are now more focused on
• Investor presentations (usually available via the 4 diagrams and visual aids (e.g. heat maps)
and better able to explain how they manage risk.
company’s website)
Companies report that risk has become more integral
• Newspapers / media
to strategic decisions, while the process by which they
• Prospectuses assess viability has resulted in a more uniform approach
to assessing the impact of principal risks.
• Sell-side analyst reports
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What challenges do companies Investors highlight the information around the risk “The more honest and open a company is on risk,
assessment process as one area of disclosure which the more confident we’re going to be that they’re
face when reporting their risks? helps them to understand better why the company is looking at the issues in the right way and have an
comfortable with the principal risks disclosed. However,
this is also cited as one disclosure which contains intelligence around the table considering it. If it is
The main challenge that companies identify is how to
report succinct information on principal risks that is of 30
‘boilerplate’ Strategic
30
30
Strategic
Strategic
Strategic
Report
Report
information and excessive jargon. Two
Report
Report
all good news, you’d worry that they are burying
things. Honesty has to be the best starting point.”
most use to the reader. The basis for the principal risk
disclosure is usually the risk register, which often includes
30
examples ofStrategic
30
disclosure
information Strategic
which
Report
Strategic Report
Report
on internal
provide useful and specific
control and risk management Investor
risks at a disaggregated level. Aggregating a substantial systems are included on this and the following page.
number of risks, often across a business which has Risk
Risk
Risk
During Management
of this project, both and
Management
Management
the course
and
and
companiesAssurance
Assurance
“One of the problems is excessive business jargon
Assurance
and
several different segments, and still ensuring that the
disclosure is sufficiently insightful, can present Risk
investors
Management
have
Riskthese
address
discussed ways in which
Management
challenges. The diagram
and
and Assurance
reporting
(pg. 12)
can
and
and too technical aspects of risk management
Assurance
a challenge. extracts from annual reports and accounts provide
which I am not sure most users / readers of annual
guidance about the ways in which companies can reports would necessarily get.”
Companies are also concerned that not having a
‘complete’ set of principal risks could result in challenge disclose relevant and specific information which Investor
Effective risk management is critical to the achievement of our strategic objectives of portfolio management, geographical diversification,
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Comment
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Guidance on the Strategic Report 2014
principal risks and the steps they and Head Office
risksare
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different divisions assess
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its monitoring
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on an aggregate basis globally.
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party property plans, crisis management strategies
ize Management carried out a top-down and how frequently these are tested.
cation
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modelling of Governance
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What risk characteristics /
FRC Annual Review of Corporate Reporting 2015/16
disclosures do investors
The FRC reported that the introduction of the strategic report has provided a clearer focus on the links between
tell us they like? business models, strategies, risks and performance, and led to an improvement in narrative reporting generally.
However, more can be done to improve narrative reporting, including: (i) providing information on the company,
We asked investors their views on the presentation of the environment in which it operates and the risks it faces that is specific to the company and not explained in
principal risk disclosures. From this, we have compiled a general terms; and (ii) explaining the links between information in the annual report, such as objectives,
list of disclosure characteristics, with published examples KPIs and risks.
taken from the annual reports of companies participating
in this project.
What entity-specific information is important to investors about risk?

Information that helps investors to Information that helps investors to
understand the risk understand how the company is managing risk
• Presentation
of risks as • Likelihood How How does it link
• Priority important to thedoes
company’s
gross or net & impact How it link • Link to rest of • Risk appetite
of controls is it? to thestory?
company’s annual report
story?
What is the
What type
• Categorisation company doing
of risk is it?
about it?
What is the • Mitigating • Responsible
company doing actions person
How is it about it?
• Movement during year
changing?
More important to investors
Technology and information security Risk profile: Increased
• Risk
Beyond the fund range, the core issue is how we will be able to provide our investment management skills from the UK into the EU
description:
•market - whether throughsecurity
the benefit of passporting, acceptance
insecurelythat the UKinforms an ‘equivalent’
access. regime or through co-operation
13
Inadequate technology systems or data held resulting unauthorised
agreements
Lab project report
• Flaws l Risk
with
in our member states.
and viability
hardware, softwarereporting
or processes could expose a system to be compromised by third parties.
Trend and outlook:
Potential impact:
Categorisation of principal risks AsAset out above, until the negotiation begins formally the terms of the withdrawal toand
ourany impact will
and be largelyloss.
unknown. We are
Risk breach
Example: of information
Aberdeen
management security could
Asset Management
continued expose the Group
PLC Annual to significant
Report damage2016
and Accounts reputation financial
Some form of categorisation of principal risks is useful confident that we will be able to meet any challenges and opportunities which leaving the EU may present.
for investors, and can provide insight into how the board Mitigation response
are thinking about these risks. Several investors stated •Operational
The information
riskssecurity and business continuity committee provides the overall strategic direction, framework and policies for
that clear categorisation of principal risks to identify those technology and information security, with a particular focus on cyber-crime prevention. This is supported by Aberdeen’s global cyber
which are company specific and those which are more Operational risk is the risk
security programme of loss
which resulting
is focused on from inadequate
the protection ofor failed
the internal processes,
confidentiality systems,
and integrity human
of our factors or
information due to external
assets.
general (e.g. industry) risks would be helpful, especially Principal
events. risks
Operational and
risk uncertainties
can manifest itself in various ways, including business interruptions, inappropriate behaviour of employees
• We employ an external global capability to support the management and protection of our network, critical internal assets and data.
as this aids the comparison of principal risks across (including fraud), failure to comply with applicable laws and regulations or failure of vendors to perform in accordance with their
TheThis includes
Board an incident
believes that theresponse
risks andservice in real time
uncertainties as they
described occurboth
below, to identify and thwart
those driven potential
by delivering onmalicious activity.
our strategy and by external
companies. contractual arrangements. These events could result in financial losses, litigation and regulatory fines, as well as other damages to
market forces, concluded
have the potential tosimulation
have a significant impact ondevelop
the long-term performance of the business.
•theWe recently
Group. a security to help test and defence planning. To mitigate risks, a large-scale programme to
improve user access controls is in progress. This includes the implementation
We therefore continue to focus on mitigating these risks at all levels of the business. of a staff education programme on information
protection focusing on phishing attacks, safety at home, physical security, password protection, and social media best practices.
Lab comment Strategic and business risks
• Internal process
We are devoting failure significant resources to maintaining and updating systems and processes designedRisk
increasingly to protect the security
profile: Unchanged
Aberdeen Asset Management have used categories of ourdescription:
Strategic
Risk assets.
risks are those that arise from decisions taken by the Board and senior managers concerning our strategy. They relate to how we
of principal risks to identify the level of influence they are• positioned in theexecution
asset management industry as a whole, rather than justclient
a particular part
Trend and outlook
Failure or poor of significant operational processes, including mandate or of the business.
exposure limits.
have over each, providing investors with some level
With the advancements
Potential
Business risksimpact: of technology within the industry and business in general, security risk relating
materialise due to poor business implementation or a failure to respond appropriately to internalto human or error, malicious
external factors.intent,
of information on how specific the risk is to Aberdeen
and compliance regulations is increasing.
Compensation for operational risk events including breach of investment mandate and trade errors, damage to our reputation and
Asset Management as a business.
the potential for a decline in future cash flows and capital.
Financial and capital
Investment processrisks
and underperformance Risk profile: Unchanged
Mitigation response
Risk description:
Financial and capital risks arise from movements in the financial markets in which we operate and inefficient management of capital
The priority of principal risks • We
• Prolongedaand/or
operate three lines of defence
significant risk management
investment model, asrelative
underperformance set outtoonthat
pageof41.
peer funds, due to poor investment decisions or
resources.
• Client and economic
adverse investmentormandate restrictions are automated as much as possible to reduce areas where judgement or manual
market conditions.
Most investors seek to understand the priority placed by
the directors on each principal risk as it provides insight intervention is required. Timely and accurate monitoring of restrictions is also facilitated through our compliance monitoring system
Potential impact:
into their judgement. Several investors told us that where Credit
and risk
A decrease in the demandoffor
there is segregation duties betweenand
our products all client
conflicting
losses,roles.
which affect our ability to retain and grow AuM, as wellRisk profile: Unchanged
as reducing revenues.
there is no obvious ordering of risks (for example, by • Risk
We continue to invest in our system capabilities and business processes to comply with regulatory, legal and financial requirements,
description:
category), they would assume that the first risk on the list Mitigation response:
• Inability of a client orofcounterparty
meet the expectations our customers,
to aand mitigate
financial the risksto
instrument of pay
lossin
orfull
reputational damage
amounts when due.from
Theoperational riskare
principal risks events.
in respect of
Example: Lonmin plc Annual Report 2016
is the most important to the company. It is important for •Trend
We adhere
deposits to
and outlook disciplined
placed with investment
banks. Fund processes,
managers docentred
not on
bear team
credit based
or decision
liquidity risk making
on the and
client first hand
assets thatresearch.
they manage – all client
disclosures to be clear on the means of prioritising their business
• recent
In Investment is undertaken
years,decisions as agent and
are based onofthe
the implementation client assets are held
long term, significant
acquisitions, by
which mayprojectsan independent
occasionally custodian.
leadinitiatives
and new to periodstoofsupport
underperformance.
strategy has inherently increased
principal risks, so as to avoid any misunderstanding of the profile of operational risks across
• •We Forare
Aberdeen,
transparentcredit
withrisk
clients andthe
principally
ourGroup.
arises However,
from in 2016
a fewdrivers
performance areas: there
trade
are andwere
supportedothernoreceivables
by large scale
relevant acquisitions
(i.e.
analysis collectionand therefore
management
of performance the risktoofa internal
and
components.
where the company is focusing its efforts in managing process failure remained unchanged. fees) due from clients; cash balances on deposits in banks; and investments.
much lesser extent performance
• We have a market risk team, which reviews and challenges investment risks across all asset classes, independently of our fund managers.
risks.
• Potential
We aim toimpact
control inflows, where necessary, to avoid dilution in the quality of the portfolios. For example, we retain an initial charge
Negative
on our UKimpact on the Group's
and Luxembourg financial
global position.
emerging market funds strategies (for the benefit of the fund).
Legal, regulatory and conduct Risk profile: Unchanged
Lab comment Trend and outlook:
Risk description:
Mitigation response
Lonmin rank their principal risks on net basis, As outlined in the market review we are currently operating in an environment dominated by macro themes including government and
• •WeFailure
monitor to correctly
the valueinterpret
of depositsandwith
implement applicable laws
our counterparties andlimits
against regulations or take on
in our treasury a legal
policy. Asor regulatory
our obligation
cash balances have that
grown, we did
providing investors with clarity around how the board central bank policies. Investment markets are inherently cyclical and different asset classes perform well at different times. Our key
wenot
haveintend to assume.
increased the number of counterparties with which we deposit our cash.
sees the risks. response to the challenges we face is to become a full-service asset manager with the breadth and depth of capabilities across active and
•The
Poor
•passive, judgement
treasury
multi function
asset or is
and behaviour
supported
alternative ofinvestments
employees
by the front in
tothe
office execution
credit
serve team,ofas
all investor our business
well activities
as theRegulators
audiences. market risk and processes.
function
are that perform
increasingly focusedinternal credit
on the role reviews.
played by
Potential
•asset
Where
managers impact:
appropriate, we extend
with respect our assessment
to liquidity which has ofimplications
counterpartyforriskourtoportfolio
include major suppliers.
management and risk management.
• Regulatory
We set capital censure
asideand related
for seed negative
capital publicityincould
investments damage
response therisk
to the market and clients’inconfidence
of movements valuations inin us and affect
stressed our ability
conditions to
or our
generate new inflows.
ability (whether through Poor conduct
credit could also
or liquidity haveto
stresses) a negative
recover theeffect
valueonof customer outcomes, impacting the ability of the Group to
the investments.
Pricingitspressure
achieve strategic objectives. Risk profile: Increased
Trend and outlook
Risk description:
Quick read Project introduction Credit
Principal riskreporting
remains low and it is unchanged from thereporting
previous year. The value invested in seed capital
letter has
to increased in recent yearsfrom
as we
• risk
Mitigation
Pressure on fees charged toViability
response statement
clients for fund management Appendix
services, as a resultA: of
Schroders’
growing competition Appendix
within the B: Results
industry;
commit to
• Theincluding the
Group isthe longer-term
subject to of development
regulatory of
oversighta broader range
and inspection of investment
by the
FTSE products.
100 investee companies survey of retail investors
impact (a) the growth of lower cost passive and FCA and other
ETF funds international
and (b) regulators.among active managers,
greater competition
• Thewhich account for
management a smaller
of legal percentagerisk
and regulatory of total
is theglobal AuM dueoftothe
responsibility thesenior
growth in allocationoftoallpassive
management managers.
functions, In addition
supported by the in-house
The
The Group’s
Group’s risks
risks are
are categorised
categorised asas either
either strategic
strategic or
or operational.
operational. Strategic
Strategic risks
risks
are linked
linked to to DMGT’s
DMGT’s strategic
strategic priorities
priorities and
and impact
impact thethe whole
whole Group.
Group.
14
are
Lab project report l Risk and Operational
Operational risks
risks are
viability reporting are those
those arising
arising from
from the
the execution
execution of
of the
the business
business functions
functions
and typically impact on one or more of the operating businesses.
Further
Further details
details of
of the
the Group’s
Group’s risk
risk management
management process,
process, the
the governance
governance structure
structure surrounding
surrounding risk
risk
Movement in principal risks and the Auditand the Audit & Risk Committee can be found in the Corporate Governance Report on pages 44 to 59
& Risk
Example: Daily Mail and General Trust plcCommittee
Annual can be found
Report in the Corporate Governance Report on pages 44 to 59
2016
Investors are keen to understand the reasons why the
assessments of principal risks have changed in the year.
Disclosures which show only a direction of travel were Changes in principal risks during the year
commented on less positively than those which explain Changes in principal risks during the year
Two principal risks disclosed last year, ‘Internal investment’ and ‘New product launches’, have been combined this year due to their overlap. These are now
the context and cause of the movement. In general, Two principal
described in arisks
new disclosed last
risk called year, ‘Internal
‘Success of new investment’ and ‘New
product launches andproduct launches’, have
internal investments’. been combined
In recognition of the this year
results ofdue to theirreferendum
the recent overlap. These are UK
on the now
described in aofnew
membership risk called ‘Success
the European Union (EU) ofand
newwider
product launches and volatility,
macroeconomic internal investments’. In recognition
a new principal of theand
risk, ‘Economic results of the recent
geopolitical referendum
uncertainty’, hason the UK
been
investors believe that once a company has identified its membership
added and theof the European
potential Union
impact on (EU)
DMGT and wider macroeconomic
is outlined volatility,
below. At this early stage,aduenewtoprincipal risk,nature
the diverse ‘Economic
of ourand geopolitical
portfolio, uncertainty’,
we believe has been
that the impacts will
principal risks, it is unlikely that there will be substantial be manageable,
added however,
and the potential we willon
impact continue
DMGT isto monitorbelow.
outlined these At
carefully as stage,
this early they develop anddiverse
due to the adapt nature
accordingly.
of our portfolio, we believe that the impacts will
changes year-on-year. However, where a company be manageable, however, we will continue to monitor these carefully as they develop and adapt accordingly.
judges a risk to no longer be a ‘principal’ risk, investors Strategic risks
would appreciate a short explanation.
Strategic
Description risks Examples and dynamics of the risk
Description
Market disruption Examples and dynamics
• dmg media: acceleration of the
inrisk
the decline of print advertising and circulation
Market disruption creates opportunities as well as risks. revenue, but growth in digital advertising revenue.
Market disruption
This enables us to move into new markets and geographies • dmg media: acceleration
RMS: convergence in the decline
of reinsurance of printmarkets
with capital advertising and circulation
and increased
Lab comment Market
to growdisruption creates opportunities as well as risks.
the business. revenue, but growth
consolidation in digital advertising
in the insurance industry. revenue.
Daily Mail and General Trust outline the changes “Risk

This movement
enables
Failure us to move
to respond information
into new
to market markets
disruption, would
and
such be useful
geographies
as changes to – risks are not static. The trick, from a fund manager’s
dmg convergence
• RMS: information, for
information,
consolidationdriven
ofexample,
in theby
reinsurance Genscape
potentialindustry.
insurance
andmarkets
with capital EDR: theand
availability
increasedof free
changes in legislation, could dilute the value
to grow the business. and demands, technological changes, the
in principal risks early in the disclosure, thereby point of view,
customer
availability of freeis
behaviours
Failure to respond
the ongoing,
information iterative
and the emergence
to market disruption,
process
of competitors
such as changes to
about the information on the organisation. They would
• of
dmgsome offerings in
information, forthe portfolio.
example, Genscape and EDR: the availability of free
drawing investors’ attention to the changes they can expect the principal andrisks to move up and down
may affect the long-term viability of some principal businesses in
customer
the Group.
behaviours demands, technological changes, the in importance to the business. Being able to provide some
information, driven by potential changes in legislation, could dilute the value
of some offerings in the portfolio.
expect to see. information about certain issues on the horizon
availability of free information and the emergence of competitors
would be useful.”
may affect the long-term viability of some principal businesses in
the Group.of new product launches
Success
Investor • MailOnline: monetisation of digital strategy.
and internal investments • RMS: client adoption of the first RMS(one) application, Exposure Manager,
The Group is continually investing in our products and services. and further planned releases from the RMS(one) suite of products.
Success of new product launches
Internal investments in new products and services, and
• MailOnline: monetisation
Xceligent: continued of digital
expansion strategy.
across the US.
•
• dmg events:
RMS: client geo-cloning
adoption of theoffirst
individual
RMS(one) events across new
application, locations.
Exposure Manager,
and internalofinvestments
development existing products and services may fail to Geographic expansion presents significant opportunities as well as risks.
The Group is continually investingand
in our products andbenefits.
services. and further planned releases from the RMS(one) suite of products.
achieve customer acceptance yield expected Risks may include unexpected costs or logistical and management challenges
• Xceligent: continued expansion across the US.
Internal
A lack ofinvestments in new
innovation and products
failure and services,
to successfully and
invest in our due to differing business cultures, heightened security threats or local legal
• dmg events: geo-cloning of individual events across new locations.
products
developmentand services may
of existing compromise
products their competitiveness.
and services may fail to and regulatory requirements.
Geographic expansion presents significant opportunities as well as risks.
achieve customer
Uncertainty acceptance
as a result and yield
of geographic expected
expansion into benefits.
new and Risks may include unexpected costs or logistical and management challenges
emerging markets. and failure to successfully invest in our
A lack of innovation due to differing business cultures, heightened security threats or local legal
products and services may compromise their competitiveness. and regulatory requirements.
Economicas
Uncertainty and geopolitical
a result uncertainty
of geographic expansion into new and • The European property businesses in dmg information: possible decline in
The Groupmarkets.
emerging generates income from certain sectors and markets residential and commercial property transactions versus pre UK referendum
that can be impacted by economic and geopolitical uncertainty. volumes.
• dmg media: a weakening of the UK economy, particularly if consumer led,
Following the UK vote to leave the EU, there is uncertainty
Economic
surrounding theand geopolitical
nature, timing anduncertainty
associated trade conditions • could accelerate
The European the decline
property in print
businesses advertising
in dmg revenue.
information: possible decline in
• Euromoney: uncertainty in the financial services sector could affect a number
of the
The UK exit.
Group generates income from certain sectors and markets residential and commercial property transactions versus pre UK referendum
of businesses in the Euromoney portfolio.
that can beisimpacted
The Group byexperience
also likely to economic and geopolitical
ongoing uncertainty.
foreign exchange volumes. fluctuations in the global commodities markets could impact
• Genscape:
rate fluctuations • Genscape’s
dmg media: revenues.
a weakening of the UK economy, particularly if consumer led,
Following the UK in theto
vote currencies
leave thein our
EU, key is
there markets.
uncertainty
couldevents:
• dmg accelerate the decline
fluctuations in theinglobal
print advertising
oil markets revenue.
could impact revenue
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nature, timing uncertainty
and associated associated
trade conditions
with the • achieved
Euromoney: fromuncertainty
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the financial
shows. services sector could affect a number
of the UKoutcome
exit. of the US presidential election.
of businesses
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the Euromoney
weakening portfolio.
in British pound to US dollar exchange rates
The Group is also likely to experience ongoing foreign exchange will positivelyfluctuations
• Genscape: affect consolidated
in the globalrevenues.
commodities markets could impact
rate fluctuations in the currencies in our key markets. Genscape’s revenues.
Acquisitions and disposals
There is further long-term geopolitical uncertainty associated •
• dmg
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opportunities andinpotential
the global oil markets
synergies lostcould impact
through revenue
failure to identify
Active
with theportfolio
outcome management is key to the
of the US presidential Group’s strategy.
election. achieved
acquisitionfrom
andassociated
investmenttrade shows.
targets.
The success of portfolio management could be compromised • The impact
Failed of further
investments weakening
may in Britishreturn
lead to reduced pound tocapital
on US dollar exchange rates
and/or
by not identifying the right targets, investments failing, or not impairment
will positivelylosses.
affect consolidated revenues.
divesting from non-core businesses at the right time. • Underperforming acquisitions and investments could result in a diversion
of management time.
The Group completes multiple small acquisitions and bolt-on
Acquisitions and disposals
investments every year; some may not perform as expected.
• Optimal
• Growth opportunities
value may not and
be potential
achievedsynergies lost through failure to identify
from disposals.
Quick read Project introduction Active acquisitions
Principal portfolio
Larger risk
management
reporting is key toViability
the Group’s strategy. reporting acquisition
statement and investment targets. letter to Appendix B: Results from
are rarer. SeeAppendix A: Schroders’
Operating Business Review for details of active portfolio management
The success of portfolio management could be compromised • Failed investments may lead to reduced return on capital and/or
FTSE16100
on pages to 27investee companies survey of retail investors
by not identifying the right targets, investments failing, or not impairment losses.
divesting from non-core businesses at the right time. • Underperforming acquisitions and investments could result in a diversion
of management time.
l
Linkage to other parts of the annual report
Annual Report
As discussed in Business model reporting, clear linkage
within an annual report is desirable. The business model Business model Strategy Principal risks KPIs Remuneration &
WWW.SMITH-NEPHEW.COM SMITH & NEPHEW ANNUAL or
REPORT 2016
Maintenance dividend policy
or strategy, not the principal risks, are considered the Explain key elements
43
In relation to key Measure success of
and drivers OVERVIEWdevelopment of key
OUR BUSINESS OPERATIONAL FINANCIAL RISK GOVERNANCE ACCOUNTS
base from which to link other parts of the annual report, drivers & MARKETPLACE
drivers
REVIEW REVIEW
key drivers Linked to KPIs/results
and therefore it is important to show how principal risks fit
into those disclosures.
RISK REPORT
Investors commented positively on disclosure which
explains the link. Some investors also highlight Lab comment
consistency with other reports, e.g. the sustainability
report, as a key consideration for companies. Our Principal Risks
Investors identify clear linkage as a key component of good reporting. The Lab’s Business model report used the
above diagram to highlight the relationship between certain key disclosures in the annual report and accounts,
and the example below provides a suggestion of how principal risks can be linked to strategy. Clear linkage helps
to avoid repetition of information and assists the board in their assessment of whether the annual report and
Lab comment accounts are fair, balanced and understandable.
Investors want to be able to understand the
relationship between different disclosures. Smith & Our risk management programme has identified a broad range of risks which we believe could seriously impact the profitability or future prospects of
Nephew link to information which they believe is key the Company.
Example: We define
Smith our Principal
& Nephew Risks asReport
plc Annual those risks which
2016 could threaten our business model or the future long-term performance, solvency or
(Strategy)
to understanding the company. liquidity of the Company. These are listed below and each is linked to one or more of our Strategic Priorities as detailed below.
PRICING AND REIMBURSEMENT

Our success depends on governments providing adequate funding to meet increasing demands arising from demographic trends. The prices we
charge are therefore impacted by budgetary constraints and our ability to persuade governments of the economic value of our products, based on
41% of FTSE 350 companies link principal risks clinical data, cost, patient outcomes and comparative effectiveness.
to strategic objectives
In implementing innovative pricing strategies, we have a moderate to high tolerance for risk and are willing to accept certain risks in pursuit of new
Source: Accountability in changing times,2 PwC business opportunities.
Link to strategy Actions taken by management

Our Strategic Priorities to ‘Build a Strong Position in Established Markets’ and to – Developing innovative economic product and service
‘Focus on Emerging Markets’ depends on our ability to sell our products profitably solutions for both Established and Emerging Markets,
in spite of increased pricing pressures from governments. VXFKDV6\QFHUD
– Maintaining an appropriate breadth of portfolio and
Examples of risks geographic spread to mitigate exposure to localised risks.
– Incorporating health economic components into the
– Reduced reimbursement levels and increasing pricing pressures. design and development of new products. Emphasising
– Reduced demand for elective surgery. YDOXHSURSRVLWLRQVWDLORUHGWRVSHFL²FVWDNHKROGHUV
– Lack of compelling health economics data to support and geographies through strategic investment and
reimbursement requests. marketing programmes.
– Trading margin will be impacted when the currencies in our main – Holding prices within acceptable ranges through global
manufacturing countries (US, UK, Costa Rica and China) move against pricing corridors.
2 https://www.pwc.co.uk/audit-assurance/assets/pdf/ftse-350- WKHFXUUHQFLHVLQWKHUHVWRIWKHZRUOGZKHUHRXUSURGXFWVDUHVROG
reporting-opportunities.pdf
PRODUCT INNOVATION, DESIGN AND DEVELOPMENT

The medical devices industry has a history of rapid new product innovation. FTSE
The sustainability
100 investee of our business depends
companies on finding
survey andinvestors
of retail developing
suitable products and solutions to meet the needs of our customers and patients to support long-term growth.
In acquiring and developing new technologies and products, we have a moderate to high tolerance for risk and are willing to accept certain risks in
informed decision making. It also helps senior Principal risks
management to understand our overall risk
High
profile, current levels of control and the culture
16
Vodafone Group Plc Annual Report 2017 29
of our business.
l
Lab project report Risk and viability reporting
11
Strengthening our framework

Likelihood & impact Assurance and oversight
We constantly strive to improve risk
Our principal risks 1
of risks Example: Vodafone Group management
plc Annual and have made 2017
Report the following
We undertake a two stage process enhancements
to identify our over the last 12
principal months:
risks. All local markets and entities
Many investors feel thatIninformation on
order to provide thethe likelihood
Executive and
Committee, 2 3
Assurance and oversight
Performance
identify their priorityrisks
risks which are
– Aconsolidated into a Group-wide
and oversight view. We then conduct 4
possible impact of principal
Audit risks
& Risk providesand
Committee, useful
Board insight
with a clear Our principal consistent reporting
of risks
into the environment in which a company operates and, interviews with over 40 senior leaders to gain their
methodology hasinsights. The results
been extended acrossofallboth exercises are 6 5
view on how we mitigate our principal risks and We undertaketoa produce
two stageour
process to identifyasour principal risks. All local markets and entities
Overview Overview
consolidated principal risks, reported here.
Impact
In order tothe
provide the local markets and entities.
when provided by multiple companies
whether inExecutive
mitigations Committee,
aaresector, allows
effective, we apply identify their priority risks which are consolidated into a Group-wide view. We then conduct
Audit
for a detailed assessment &
a model Risk
of the Committee,
risk profile
of co-ordinated and Board
of each.
assurance. with a clear
Our Risk, Key changes
interviews within the40year
over – Weto
senior leaders have
gainincreased our engagement
their insights. The resultswithof both exercises are 9 8 7
view on howand
Compliance we mitigate our principal
Internal Audit communitiesrisks and Our risk profiletoremains
consolidated producestable riskto
relative
our principal owners to improve
lastasyear,
risks, with the
reported monitoring
following
here. ofkey
key changes:
The most common formwhether of disclosure for this information
work together on planning, executing andapply
the mitigations are effective, we risks, actions and indicators. 10
is a risk heat map. Some investors think these – The
Key two technology
changes risks are now considered separately, as the causes for these are
in the year
areporting
model ofassurance
co-ordinated tocan
assurance.
activities Our Risk,
ensure – We have invested in a global risk tool, which
be useful, although this Compliance
depends on
and how
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communities Ourdifferent (now
risk profile risks 5stable
remains & 7). relative to last
allows us toyear, with thethe
standardise following key changes:
data stored
that there is adequate coverage across the
company can be in quantifying
work
controltogethertheon
environmentinformation
planning,
with a executing
robust included and
level – The Customer eXperience
two technology nowonconsidered
all risks
eXcellence
risks are andrisk
(‘CXX’) to share
nowinformation
focuses
separately, across
as theoncauses
digitalfor
capability (risk 8).
these are
reporting
in the diagram. Many investors assurance
comment activities
thattocurrent
ensure the Group.
Governance
of independent testing. different (now risks 5 & 7).
– The adverse political measures risk now includes upcoming 5G auctions (risk 3).
practices in the use of heatthat there
maps is adequate
do notcoverageprovide across the – We have worked to develop our risk
Information gathered through
control environment our level – The Customer eXperience eXcellence (‘CXX’)through
risk now focuses
practiceon digital capability (risk 8).
sufficiently precise information to be of with much a robust
benefit and community best sharing,
co-ordinated assurance
testing. process is provided
Low
of independent training
nowand our annual Global Risk Forum. (risk 3).
would prefer some narrative description to provide further – The adverse political measures risk includes upcoming 5G auctions
Strategy Strategy
to the relevant committees to help drive Low Likelihood High
explanation. Information
informed decisiongathered through
making. ourhelps senior
It also Risk movement
Principal risks
co-ordinated
management assurance
to understand process
our isoverall
provided
risk l Risk increased l Risk stable l Risk decreased
When companies do use riskrelevant
heat committees
maps, they should be Example: Vodafone Group plc Annual Report 2017
High
to the
profile, current levels of to
control help
and drive
the culture
clear as to whether principal
informed risks are reported as
decision making. It also helps senior gross
of our business. Principal risks 1 Cyber threat and information security 7 Technology failure
or net of mitigating actions.
management to understand our overall risk 11 External or internal attack resulting in service Failure of critical IT, fixed or mobile assets
High
Some investors are veryprofile, currentabout
levels ofthe control andofthe culture unavailability or data breach causing service disruption
Strengthening
positive our framework
idea
Financials
of our business. 2 Market disruption 8 Failure to deliver on digital transformation
quantifying principal risks,We constantly strive to improve risk this
although recognise that 11
Disruptive technology, changes in competitor and CXX
may not be practical as management
some risksand are difficult tofollowing
quantify 1
Strengthening have ourmade the
framework business models, lack of agility Failure to create a differentiated, digital
(and some may be unquantifiable
enhancementsaltogether).
over the last 12One months: 3 Adverse political and regulatory measures
customer experience
We constantly strive
totounderstand
improve risk which 2 3
Performance
suggestion is that it would be helpful 4 1 Excessive pricing of 5G licences, tax authority 9 Non-compliance with legal and regulatory
–management
A consistentand reportingmade and oversight
segments of the business a principal have risk might theimpact,
following challenges, changing national politics requirements
Non-compliance with laws, regulations,
methodologyover
enhancements has the
been extended
last 12 months: across all 4 Failure to converge and integrate
and the relative size of those segments. 6 5 2 3 network licence requirements
Performance
Impact Impact
local markets and entities. 4 acquisitions

– A consistent reporting and oversight Incumbent re-monopolisation, failure to 10 Failure to deliver major Enterprise
– We have increased
methodology our engagement
has been extended across withall 9 8 access critical content, inability to integrate contracts profitably
57
Additional information
6 acquisitions Failure to meet commitments and/or deliver
risk
localowners
markets toand
improve monitoring of key
entities.
Lab comment risks, actions and indicators. 5 IT transformation failure
at appropriate profitability levels
– We have increased our engagement with 10 IT transformation failures impacting NPS 11 EMF health related risks
Investors like the clarity of have
Vodafone’s 9 8 7
– We
risk owners invested in adisclosure,
to improve global risk tool,
monitoring which
of key 6 Unstable economic conditions/
EMF found to pose health risks causing
which provides a heat map allows but also identifies
us to standardise
risks, actions and indicators. the data andstored inadequate liquidity
reduction in mobile usage or litigation
10
explains changes in theon risk profile
all risks and toand shareenables
information easy
across Global financial crisis reducing consumer
– We
identification of each risk. the have
Group. invested in a global risk tool, which spending and ability to refinance
GovernanceGovernance
allows us to standardise the data stored
– We have
on all worked
risks and toto develop
share our risk across
information
community
the Group. through best practice sharing,
Low
training and our annual Global Risk Forum.

– We have worked to develop our risk Low Likelihood High
community through best practice sharing, Risk movement
Low
training and our annual Global Risk Forum. l Risk increased l Risk stable l Risk decreased
Low Likelihood High
Risk movement
Cyber
1 Risk
l threat l
increased and information
Risk security
stable l Risk decreased 7 Technology failure
External or internal attack resulting in service Failure of critical IT, fixed or mobile assets
unavailability or data breach causing service disruption
Financials Financial
1 Cyber threat and information security 7 Technology failure
Quick read Project introduction 2 Market disruption
Principal Failure to deliver on digital transformation
Externalrisk reporting Viability
8 statement reporting Appendix A: Schroders’ letter to Appendix B: Results from
or internal attack resulting in service Failure of critical IT, fixed or mobile assets
Disruptive technology, changes in competitor and CXX FTSE 100 investee companies survey of retail investors
unavailability or data breach causing service disruption
business models, lack of agility Failure to create a differentiated, digital
2 Market disruption 8 customer
Failure toexperience
deliver on digital transformation
3 Adverse political and regulatory measures
– Reduced
Link reimbursement levels and increasing pricing pressures.
to strategy Retail
designGroup
Actions taken to
byensure that
management
and development of they reflect the
new products. risk across the Sainsbury
Emphasising
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Group, including the acquired Argos business. It is considered
17
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and all that we have
geographies comprehensive
through product and
strategic investment quality
– Lack of compelling health economics sb
erdataeto
ttsupport that of the
andrisks are incorporated
from design towithin the principal
supply. risks and
project l
reimbursement requests. cust
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report and
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to produce
and viability er tof
products
reporting haquality and to ensure processes controls
marketing programmes. customer
continuity of supply of products
ur and services to customers.n an uncertainties disclosed below, with no material change required.
–– Ensuring
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prices withinand incidentranges
acceptable management
throughand
global exposure to
o
– Trading margin will be impacted yo main
when the currencies in our Itbusiness
was considered
recoveryhowever
plans arethat Sainsbury’s
at majorGroup’s
facilitiesrisk
ow (US, UK, Costa Rica and China) move against pricing corridors. in place and
Risk appetite manufacturing countries political and regulatory
for key products and keyrisks and business continuity incidents may
suppliers.
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kn
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Both investors and companies agree that risk appetite Great
e
– Defects in design or manufacturing of products supplied to, and sold or products.
is a very difficult concept to succinctly articulate in the by, the Company could Colleagues products
lead to product recalls or product removal or The most significant principal risks identified by the Board and the
making the – Undertaking risk based review programmes for
principal risk disclosures. Companies say they inherently and services
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at fair prices
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and some investors say that it is possible to get a feel for –The medical
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issues of rapid
us new
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make product
source innovation.
facility The sustainability of our business depends on finding and developing
or supplier
a company’s risk appetite from the annual report without suitable products and solutions to meetdifferent
the needs of our customers and patients to support long-term growth.
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having an explicit statement attempting to explain or –In Ifacquiring
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products, weorhave
we alost a
moderate Business
to high tolerance continuity
for risk and are willing toand major
accept incidents
certain risks in response
quantify it. number of leaders or employees in a catastrophe, business plans
pursuit of innovation, whilst having a very low tolerance for product safety risk.and
targets may not be met. Risk
For companies who want to provide some information There
Link to strategy for our Actions Atakenmajor byincident
managementor catastrophic event could impact on the
on risk appetite, investors say it is important to provide customers
a basis for the amount of appetite they have. Our Strategic Priority to ‘Innovate for Value’ depends heavily on our ability to – R&D processes focused trade.
Group’s ability to Following
on identifying new the acquisition
products and of Home
MERGERS AND ACQUISITIONS Retaildisruptive
potentially Group, Sainsbury’s
technologies exposure to business continuity and
and solutions.
continue to develop new innovative products and bring them to market.
As the Company grows to meet the needs of our customers and patients, we recognise–that major
we are
Increasing not incident risks
able to develop
prioritisation andmay
all thebe greater
products
allocation dueservices
and
of funds toR&D.
for the increased size
Lab Comment required
Examples using internal resources and therefore need to undertake mergers and acquisitions
of risks – Pursuing andbusiness
in order complexity ourofoffering
to expanddevelopmentthe business.
and to complement
opportunities, our
which
existing business. In other areas, we may divest businesses which are no longer core to our activities.
augment ourIt is crucial for our long term success that we
portfolio.
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order to take advantage of opportunities. They find The Sainsbury’s
product developmentOperating
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In acquiring new businesses and business models, we have a moderate to high tolerancetoforcustomers. commercial risk and are willing to accept certain risks in
it helpful to understand how companies distinguish map twice
– Competitors a year, which
introduce captures
disruptive the principal
technologies risks to
or business achieving
models. The Grouprisk.
has detailedmarket
plans trends
in place, supported by senior
pursuit of new business. However, we have an extremely low tolerance for regulatory or–compliance Monitoring of external and collation of
those risks that they are willing to take (e.g. in Sainsbury’s
– Inability business
to prioritise objectives.
and focus on key The risk discussion
projects, investmentsincludes
and representatives
customer insights who are trained
to develop in dealing
product with major incidents
strategies.
Westrategic
have a well-defined
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risk,for managing
where grossrisks
risk associated with mergers
reflects the and acquisitions that is subject to scrutiny from executive
pursuit of innovation) and those where there is low – and have
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that ‘design forlevels to make
manufacture’ isdecisions
embedded in into
the event of a
management and theand
risk exposure Board of Directors.
risk landscape before considering the mitigations in potentially
tolerance (e.g. product safety). They also want to be disruptive
product development. incident.
able to understand the relationship between different place, and net risk the residual risk after mitigations. The risk appetite
Link toforstrategy
each key risk is also discussed and assessed with a target risk Actions taken by
The business management
continuity strategy, including incident management,
disclosures.
position
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to ‘Supplement level of
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Growth with the businessdepends
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activity isand testing,
aligned withhas been aligned
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and the
to accept. The Sainsbury’s Operating Board reviews risk dashboards
on our ability to identify the right acquisitions, to conduct thorough due diligence Group. The towards
prioritised Businessproducts,
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franchises Group, which includes
markets
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integratethe year, comprised
acquisitions of key risk indicators, to ensure they
effectively. representatives from Sainsbury’s Bank, Argos and Habitat, meets
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identify any potential risk movement towards or away from their quarterly to ensure that the business continuity (BC) policy and
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on returnison fitcapital,
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with itCapital
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risk appetite.
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enables the Report
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risks
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associated
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and uncertainties and how these are being managed or – Failure to identify appropriate acquisitions or to conduct effective – ofUndertaking
any unplanned or unforeseen
detailed events, the
and comprehensive Business Continuity
cross-functional
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acquisition duerisk movement from prior year for each principal risk and
diligence. Sainsbury
due diligence
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convened for investors
at short notice to manage the
mitigated. In the disclosures around this information the and
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assessed and is presented
businesses as follows:
effectively. – response
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– Inheriting regulatory or compliance risks from previous owners. to identify and mitigate risks in the early stages
some companies prefer to present principal risks on a Increased gross Reduced gross Group wide business continuity resilience exercises are undertaken
post completion.
‘gross’ basis (i.e. before controls) as this is felt to be No change
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risk exposure risk exposure – to imitate
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our desired standardsscenarios and test the Group’s
of compliance
quickly enough following acquisition.
less judgmental. with laws,
ability internal effectively.
to respond policies and controls.
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Investors did not express a clear preference either – Comprehensive post-acquisition review programme.
way. The emphasis from investors was that companies – Key strategic
Proactively locations
clearing newhave secondary
products backup sites
from competitive which would
patents
need to be clear about which basis they are using when be
and made available within pre-defined timescales and are regularly
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disclosing information around principal risks. – tested.
Compliance risks included as part of due diligence
reviews, integration plans and reporting for acquisitions.
– Market capacity issues and increased competition – Experienced Emerging Markets investment professionals participate in
18
constrain growth Investment Committees
Lab project report
– Inadequate l
Risk and viability
communication with, andreporting
management of, existing – Strong balance sheet with no borrowing
and potential shareholders of Ashmore Group plc – Diversification of investment themes and capabilities, and periodic
Responsible party & mitigating activities capacity reviews
– Dedicated investor relations position that reports to the Group Finance
Investors are interested in how the board responds Example: Ashmore Group plc Annual Report 2017 Director and Board
to principal risks. Companies should pay attention to
how they describe the mitigating activities. One way – Group Media policies and list of approved spokespeople
of illustrating that response is by disclosing the party Client risks (Responsibility: Product Committee and Group Risk and Compliance Committee)
responsible for each principal risk. Those investors
interested in this information say it provides insight into – Inappropriate marketing strategy and/or ineffective – Frequent and regular Product Committee meetings review product
governance over principal risks. Where provided, it is management of existing and potential fund investors and suitability and appropriateness
important that this information is consistent with other distributors – Experienced distribution team with appropriate geographic coverage
disclosures around the risk management and internal – Inadequate client oversight including alignment of interests – Investor education to ensure understanding of Ashmore investment
control systems. themes and products
– Monitoring of client-related issues including a formal complaints
handling process
Lab Comment – Compliance and legal oversight to ensure clear and fair terms
Investors like the clear identification of where of business and disclosures, and appropriate client communications
responsibility for principal risks lies in the and financial promotions
organisation.
Treasury risks (Responsibility: Chief Executive Officer and Group Finance Director)
– Inaccurate financial projections and hedging of future cash – Defined risk appetite and ICAAP demonstrates excess
flows and balance sheet, as well as inadequate liquidity and financial resources
regulatory capital provision for Group and its subsidiaries
“Individual ownership gives you more of a shape of – Group Liquidity and FX hedging policies
the process and confidence that there is a line of – Seed capital is subject to strict monitoring by the Board within
a framework of set limits including diversification
accountability, that the board has a chain to pull.”
Investor Investment risks (Responsibility: Group Investment Committees)
– Downturn in long-term performance – Consistent investment philosophy over 25 years with dedicated

– Manager non-performance including i) ineffective leverage, Emerging Markets focus including country visits and network of
cash and liquidity management and similar portfolios being local offices
managed inconsistently; ii) neglect of duty, market abuse; iii) – Funds in the same investment theme are managed by consistent
inappropriate oversight of special purpose vehicles and related investment management teams, and allocations approved by
legal structures and compliance with law and regulations; iv) Investment Committees
inappropriate oversight of market, liquidity, credit, counterparty – Frequent and regular reviews of market and liquidity risk
and operational risks; v) insufficient number of trading
– Policies in place to cover conflicts, best execution and market abuse
counterparties; and vi) breaching investment guidelines
or restrictions – Tools to manage liquidity issues as a result of redemptions including
restrictions on illiquid exposures, swing pricing and ability to use
in specie redemptions
– Investment decisions are subject to pre-trade compliance
– Legal team and use of external counsel to ensure appropriate
documents are in place
– Group Trading counterparty policy
information about the likely terms of the post- of the financial statements. licensed
Boardin the
has concluded that keythe
elements
assessment of the principal risks facing the Group, detailed on pages 30 to 33, in
business, incorporated andThe of our stra
most relevant tim
this assessment should be three years to align with the Group’s normal to
jurisdiction in which it operates, and able to adapt of market share conve
business
Brexit arrangements between the UK and the
Lab project report l Risk and viability reporting that would threaten its business model, future performance, sol19
to a wide range of local developments. As such,
cycleour
and thetolong-range
ability planto
provide services toour March 2020, as wellcyber-attack
31 customers
vency or liquidit
as taking intoand a subse
considera
macro political uncertain
EU, as well as about any possible transitional paceinoftheongoing
includes
outside
countrieschange
in whichinwe
consideration
the EU, is veryof
the telecoms
operate,
the forecast
unlikely
insideindustry.
or
cash flows
to be affected
The assessment for this three
of emerging market curr
by and obligations of Vodafone In
Brexit, cyber and climate Example: Vodafone arrangements,
Group Annual to drawReportany concl2017usions about Against this background, the output of the long-range plan has been used to pe
Brexit. We are not a major international trading
The company,
plans andand projections To assess viability, the he
do not useprepared
passporting asfor
part
anyofofthis forecasting cycle include the
change theRiskprobabl e impact. Although we are a UK
management in action flows,
ourcommitted andorrequired the cash and facilities av
processes.funding and other key financial ratios. They were
Brexit implications central debt profile and cash headroom analysis, including a review of sensitivity
major services
up on the basis that debt refinance will be available in alland
Depending on the arrangements agreed
likely effectiveness
plausible market condio
The FRC has highlighted the need for companies to headquartered company, a large majority of our that there will be no material changes to the business structure over theunderly
of the identified review
consider a broad range of factors when determining
The Board continues to keep the possible
implications of Brexit for Vodafone’s operations as usual”
As ridirectly
sks to2017,revenue and profit
between the UK and the EU, two issues that
ofcould
31 March affect the
ourGroup had growth.
operations, sources
in Iofn addi
both cases tion,Having
liquidity severeconsidered
(primarily butcomprised
plausiblthee sce
ofp
their principal risks, including the impacts of cyber-crime, customers
under review. areAincross-functional
other countries,team, accounti ng two
led by for and potentially
cash equivalent causingbalances)
us to incur and available
additional cost, facilities,
are: ofstress-testing
€18.8 billion, basedwhich asse
incl
climate change and Brexit. The intention was for such
risks to be part of the consideration for determining a
Executive Committee members, has identified
most inofwhich
ways our revenue and cash
Brexit might flow.theEach
affect of our
Group’s
event– ofcreation
Revolving each Creditofofthe prifrontier
nciexpiring
aFacilities
data pal between
risks inmaterithe alising individuall
FY2020/21. y andintowhere
taking accountmulthe
tiplei
severe but plausible scen
company’s principal risks. operations. Despite the Article 50 Notice
nationalbeen
having operati ng compani
served, es is a standal
there remains one
insufficient iton parallUK
e l,
freely
identifying
were
and the
betweenalso
EU:
tested.
the
the Thi
inability
UK and s
to
EUcombi
move
n ed
data
scenari
The Risk Management Framework on page 28 outlines the approach the Board
countries might o in cl u ded
risks
and managing risk. In making this statement, the Board carried ou
the
which im pact
may of faithlin
occur,
Investors consider that companies should only include cause us to have to move some technical our viability was also con
these as principal risks if they are relevant. Many
information about the likely terms of the post-
business,
Brexit incorporatedbetween
arrangements and licensed
the UKinand thethe key el
assessment
ements
facilities, of
of and
our
the affect
strategy
principal
and
risks
future respond
facingdesign.
network to market dis rupti o n resul
the Group, detailed on pages 30 to 33,
that would threaten its business model, future performance, solvency or liquidit mitigating ti
actionsng in a siing
availa
investors that participated in this project invest in EU, as well as about any possible transitional – inability to access the talent we need to run
companies for the long term and would like to see
companies assess how longer term risks such as these
jurisdiction in whitocdraw
arrangements, h it operates, and ableabout
any conclusions
the probable impact. Although we are a UK
to adapt of marketaUK:this
Against share to converged
background,
multinational
increased
Groupthe
controls
andor restrictions
output
operation
over
OTT players.
of the
from This wasplan
thelong-range consihasondered
Based
expectation
thetogether
been results
used toofpe
that the Gro
with
central debt profile and cash headroom analysis, including a review of sensitivity
might impact the company. to a wide range company,
headquartered of local devel opments.
a large majority As such,
of our
cyber-attack
as usual”to our
risks andto revenue
ability
atosubsequent
employ andleading
General
profit talent
growth.Data Protectionsevere
fromIn addition,fall
Regulati
due but onplausible
over fine,three
the as wellye
sce
customers are in other countries, accounting for non-UK markets could cause us to have
Investors find it helpful when companies have some our abioflitoury torevenue
most provideand servicash
ces toflow.ourEach
customers
of our event oftoeach
macro
in poliadjust
parallel, were
of the
ticalouruncertai
also
principal risks materialising individually and where multiple
ntytheresul tpeople
ing in restri
operating model to ensure that
tested. This cted access to capithetalimpact
marketsofand
explanation of the effect of Brexit and how they are national operating companies is a standalone we attract and retain bestcombined scenario
for the included failin
responding to the potential impact. Investors have in the countri
business, es in whichandwelicensed
incorporated operate,inintheside or key elements
roles weof our strategy and respond to market disruption resulting in a sig
have.
their own views on the potential impact of Brexit on
a company, and therefore find it helpful if companies
jurisdiction in which it operates, and able to adapt
outsia wide
to de therangeEU, iofs very
localunli kely to be affected
developments. by
As such,
of market
of emergi nshare
A further, g market currenci
to converged
indirect, issue thatecould
s.and OTT players. This was considered together wi
affect our
cyber-attack and a subsequent
future performance would ariseGeneral Data Protection Regulation fine, as well
if the Brexit
explain how they are preparing to address some of the our ability to provide services to our customers macro political uncertainty
significant resulting
revisions toinmacro-
restricted access to capital markets and
risks that may arise. Brexithet.countries
in We are notinawhich majorweinternati
operate, onalinside
tradiorng process
To assess
of emerging
caused
viability, the headroom position under these scenarios has been calcu
economicmarket currencies.
performance in our major European
outside the EU, is very unlikely to be affected by
company,
Brexit. We are andnotdo anotmajoruse international
passporting fortrading
any of markets including the UK, thus affecting
company, and do not use passporting for any of the cash
cash
To assess
the and faciimpacting
litthe
ies available
viability,climate
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and inand
turnfacilities
avai lable toto the
headroom
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Group.
Group. The assessment took into account
under these scenarios has been calcu
of the The assessment took into account
our major
our major services
services oror processes.
processes. the performance
Depending on the arrangements agreed andthelikely

likidentified
ely effectiveness
and operating
of effecti veness of the
companies inofthose
underlying therisks.mitigating
mimarkets.
tThe
igatiheadroom
ng actions
actions remained
that couldpositive
be takenintoallreduce
scenarit
that could be taken to reduce t
Depending on the arrangements agreed

could directly affect our operations, in both cases of the idconsidered
Having entified underl the yprincipal
ing risks.risks Thethat
headroom remaimaynedface,
the Group posithe
tiveDirectors
in all scenari
con
potentially causing us to incur additional cost, are:
– creation of a data frontier between the
stress-testing based assessment of the Group’s prospects is reasonable in the ci
taking into account the inherent uncertainty involved. Although this review has
coulUK
d diand the
rectly affect ourinability
EU: the operatitoons,move
freely between the UK and EU countries might
in both
datacases Having considered the principal risks that the Group may face, the Directors con
severe but plausible scenarios relevant to the Group, any such review cannot co
risks which may occur, therefore an overall view of the total level of risk required
potenti
cause allusy causing ustotomove
to have incursome
addittechnical
ional cost, are:
facilities, and affect future network design.
stress-testing based assessment of the Group’s prospects is reasonable in the ci
our viability was also considered. The cash and available facilities at year end, alo
mitigating actions available to reduce cash outgoings, provides a sufficient level
– creation of a data frontier between the
– inability to access the talent we need to run
a multinational Group operation from the
taking onintotheaccount
Based resultsthe inherent
of their uncertai
analysis, nty involvconfirm
the Directors ed. Although this revi
that they ewahas
have reas
UK and the EU: the inability to move data

UK: increased controls over or restrictions
to our ability to employ leading talent from severe
duebutoverplausible scenari os relevant to the Group,2020.
any such review cannot co
expectation that the Group will be able to continue in operation and meet its lia
fall the three year period ending 31 March
freely between the UK and EU countries might
non-UK markets could cause us to have
to adjust our operating model to ensure that risks which may occur, therefore an overall view of the total level of risk required
cause us to have to move some technical
we attract and retain the best people for the
roles we have. our viability was also considered. The cash and available facilities at year end, alo
Quick read Project introduction Principal risk reporting
facilit
A further,ie s, and affect
issuefuture network desiourgn.
Viability statement reporting
indirect, that could affect
Appendix A: Schroders’ letter to Appendix B: Results from
future performance would arise if the Brexit
process caused significant revisions to macro-
mitigating actions available to reduce cash outgoings, provides a sufficient level
l
Viability statement Companies and investors are clear that viability is a
concept which is inherent to the decisions that each of
Some investors are encouraging companies to explain
how they consider longer term prospects. The Investment
reporting
them make. For companies, their continuing existence Association published Guidelines for Viability Statements3
and growth is dependent on their business model and in November 2016, that provide suggestions for improved
strategy, and the sustainability of these, as well as their reporting based on the expectations of its members (see
resilience to risk, is a key consideration for boards. For box overleaf).
investors, their decisions are determined, at least in part,
Similarly, Schroders sent a letter to FTSE 100 investee
by the confidence they have both in the sustainability of
What is the purpose of the the business model and in those who lead the company.
companies in December 2016 noting that the majority of
FTSE 350 companies had selected a three year viability
viability statement? statement period. The letter encourages companies to
consider how they will perform through an entire business
One of the recommendations of the Sharman Inquiry was Investors’ perspectives on cycle, and suggests that particular attention should be
for companies ‘to provide information to stakeholders
about the economic and financial viability of the company
current practice paid to gearing levels, loan covenants and off balance
sheet liabilities. The full letter is reproduced in
and to help demonstrate the directors’ stewardship and Appendix A.
governance of the company in that respect.’ Overall, investors want a better indication that companies
are looking at the longer term. They find that few
The report concluded that information supporting this companies currently use the viability statement as a
‘should be specific to the entity and avoid standardised means of communicating positive messages about the
language. The directors should be free to rely on long-term prospects of the company, treating it rather as
their judgement, experience and understanding of the an extended going concern confirmation.
underlying business in making their assessment and
in disclosing what they believe will be most relevant to While some investors agree that they engage with
shareholders and other stakeholders.’ companies on their viability statement, few companies
report that they receive questions on their statement.
It also highlighted the need for consideration of solvency Of the companies that participated in this project, three
risk as well as liquidity risk which had previously been the reported that they had received questions on the viability
focus of going concern assessments: statement from investors.
‘The evidence we received confirmed that for many the
principal focus of the going concern assessment process
is on liquidity and that, outside the financial services “We have engaged with management on viability
sector, there is little focus on solvency… Solvency risk statements a few times. Many of them have been
on the other hand is about the viability of the business feeling their way a bit.”
model and the maintenance of capital. Solvency risks are Investor
therefore longer term and may be more qualitative and
judgmental, whereas liquidity risks tend to be more short
term and more quantitatively based.’
3 https://www.ivis.co.uk/media/12490/Guidance-viability-statements-
final2.pdf
l
The Investment Association - Developments in Corporate Governance and Stewardship 2016

Guidelines for Viability Statements
1. Period for the viability assessment: Published by the FRC in January 2017, Developments in Corporate Governance and Stewardship 2016
analyses 89 companies from ten FTSE 350 sectors and encourages all companies to provide more constructive
• Consider longer time horizons
reporting in line with the spirit of the Code. Specific observations and suggestions for improvement include:
• State clearly as to why the period was chosen
• D
ifferentiate time horizons for prospects and Explaining clearly the rationale for their choice of timeframe
viability Across the ten FTSE 350 sectors there is a lack of variation in the viability period chosen. Two thirds of the
sample chose three years, and the remainder mainly elected five years. The basis for the period of viability
2. Consider prospects and risks when assessing selected is the business planning/strategy period and this gives a greater level of assurance. The FRC
viability encourages companies to provide clearer disclosure of why the period of assessment selected is appropriate for
the particular circumstances of the company.
• Consider the current state of affairs
• Address the sustainability of dividends Describing what qualifications and assumptions were made and linkage to principal risks
• D
istinguish risks that impact performance from The sections covering business model, strategy, principal risks and the viability statement should align. More
those that threaten operations meaningful disclosures are also needed to understand how the underlying analysis was performed and what
• Separate prospects from viability judgments the company made in arriving at its viability statement.
• S
tate clearly why the risks are important, and
Explaining how the underlying analysis was performed
how they are managed and controlled
The report encourages companies to share more detail on their modelling approach, including:
• Prioritise risks
• If they modelled individual sensitivities, scenarios and/or a cluster of sensitivities/scenarios;
3. Stress testing • How they quantified one-off catastrophic events (if at all); and
• D
isclose specific scenarios considered and likely • How mitigations were modelled.
outcomes
• Describe specific mitigating or remedial action The FRC also acknowledges the role that investors have, and suggest they engage with companies to discuss
what improvements they wish to see in order to stem any criticism of ‘boilerplate’ reporting.
• Perform reverse stress testing
4. Qualifications and assumptions

• Be clear on the difference
• Ensure they are specific to the company
l
What time horizons are 31% of reports in our sample show an apparent What impact has viability
disconnect between the time period chosen in the
investors interested in? viability statement and other parts of the annual reporting had on companies?
report (e.g. the strategic timeline or investment
Due to the variety of investor participants in this On behalf of the FRC, McKinsey & Company interviewed
project, there are a number of views expressed
cycle or lifecycle of key resources) but only 7% a sample of FTSE 350 companies on their approach
about the period over which investment decisions acknowledge and explain this disconnect. to the viability statement – see ‘Risky business: UK plc
are considered. Investors are not necessarily looking Source: Business Reporting Annual reporting in 2016/17: Broad assesses its viability’5 overleaf for a summary of these
for a viability statement which covers the period over perspective, clear focus4, EY results.
which they assess their investment. Rather, they are
Some companies participating in this Lab project
looking for information which is consistent with other
are very positive about the impact that the viability
time horizons in the annual report, e.g. strategic and The requirements of the Code also allow companies to statement has had on their internal processes and
business cycles, debt repayments, lease periods, put in appropriate qualifications and assumptions when specifically how risk is better incorporated into strategic
goodwill impairment, capital investment periods and making their viability statement. and planning processes.
technology development periods.
Other companies say that the introduction of the viability
Reasonable expectation does not mean certainty. It statement has introduced an extra layer of reporting and
The length of the period should be determined, does mean that the assessment can be justified. The
question the value that this is giving to investors.
taking account of a number of factors, including longer the period considered, the more the degree of Several financial services companies commented that
without limitation: the board’s stewardship certainty can be expected to reduce. the regulatory context and procedures to which they are
responsibilities; previous statements they have subject should provide some reassurance to investors,
made, especially in raising capital; the nature of Source: Guidance on Risk Management, Internal Control and and they have sought in their viability statement to make
Related Financial and Business Reporting the link back to those (e.g. ICAAP).
the business and its stage of development; and its
investment and planning periods. What is clear is that the companies the Lab spoke to
are doing a lot of work in order to assess and respond
Source: Guidance on Risk Management, Internal Control and to the impact of principal risks and support their
Related Financial and Business Reporting viability statement.
While companies have always had to assess their
liquidity risks in order to apply the going concern basis
Investors understand that the directors must have a
of accounting, the requirement to make a viability
reasonable expectation which covers the period over
statement (as well as the confirmation of the robust
which they state viability. They do not expect companies
assessment of principal risks) has increased focus
to give unrealistic expectations of the distant future.
on the work that companies do around liquidity and
Companies often select a period consistent with their
solvency risks. In some cases, it has improved the way
medium-term strategic plan. However, investors would
in which the company integrates risk into its strategic
like to see directors assessing the wider risks and
decision-making process.
prospects of the company over a longer term. They
are looking for disclosure which gives them confidence
that the board is addressing long-term threats to the
company’s business model and is making strategic 4 http://www.ey.com/uk/en/issues/governance-and-reporting/ 5 http://www.mckinsey.com/global-themes/europe/risky-business-
decisions which maintain the relevance of the company corporate-governance/ey-annual-reporting-in-2016-17-broad- uk-plc-assesses-its-viability
in the long-term. perspective-clear-focus
l
Some companies include disclosures in their annual
Risky business: UK plc assesses its viability report which describe the work performed by the
directors around the viability statement. Investors
On behalf of the FRC, McKinsey & Company interviewed CFOs, company secretaries and controllers of 17 highlight this type of disclosure as helpful in providing
FTSE 350 companies on their approach to the viability statement and reported on their findings in December context for the disclosure and understanding the extent
2016. Their results highlight a clear difference between the assessment process in financial and of oversight from the board on the assessment process
non-financial institutions: and annual report disclosure.
• Financial institutions (six of the 17 companies interviewed) reported that they were generally well equipped to Investors would like the board to explain how it looks
model risk and the incremental work for the viability statement was minimal due to the fact that they are able beyond three to five years to demonstrate their
to rely on regulatory risk processes and modelling frameworks as the basis. The benefit of the work for some stewardship responsibility and show that it is thinking
was better integrated board discussion on the different strands of risk modelling. about the company’s future beyond the tenure of the
• Non-financial institutions (11 of the 17 companies interviewed) reported less sophisticated processes, current executive management.
although the majority acknowledged that the viability statement process had been useful in improving internal
risk dialogue, understanding the quantification of risk, and thinking through mitigating activities.
“What has concerned us about the viability
Regardless of the type of company being interviewed, McKinsey & Company found that the disclosure in the statement is this dependency on a single
annual report often did not do justice to the underlying exercise. management team and not looking further than
Overall, the report identified three elements of an ‘advanced practice’ approach to the viability statement: that. We have seen that to be detrimental to so
• Model stress scenarios (instead of sensitivities), one-off events and mitigations. many companies.”
Investor
• Establish a governance process through both the executive team and the board (and committees), including
regular feedback loops into the strategic planning and capital allocation processes.
• Ensure a comprehensive disclosure in the annual report of a company’s risk identification framework,
rationale for time period considered, modelling approach and governance process.
The report concluded that companies using this approach would not only go some way towards fulfilling the spirit
of the Code, but would also be in a better position to take a more integrated view of strategy, risk and return.
“I know of no company who is in business right “I was against the viability statement when it
now who is operating on a going concern basis came in. But it has changed practices in a very
that doesn’t believe they are not going to be good way. There wasn’t a systemic framework
viable in 3, 5, 10 or 30 years’ time. They may everywhere in the world. But now, it is more of a
know that somewhere along that track they’re coherent approach, and the board can look at it in
going to have to change their business, but they a coherent way.”
don’t know when.” Company
Investor
the Committee also considered the financial reporting responsibilities
Audit risk
of the Directors under section 172 of the Companies Act 2006
24
At the start of the audit cycle for the 2017 financial year we received
Performance
to promote the success of the Company for the benefit of its members
from project report l Risk and
LabPricewaterhouseCoopers LLPviability
a detailed audit plan identifying
reporting
as a whole as well as meeting the needs of wider society.
their audit scope, planning materiality and their assessment of key risks.
These processes allowed us to provide positive assurance to the The audit risk identification process is considered a key factor in the
Board to assistVodafone
them in making theAnnual
statement required by the 2014 overall effectiveness of the external audit process. For the 2017 financial shorter time period to make the statement on whether the
Example: Group Report 2017 directors have a reasonable expectation of viability. Most
UK Corporate Governance Code. year,Lab Comment
the key risks identified were as follows;
investors are positive about this approach.
Long-term viability statement Vodafone’s
– Taxation matters,Audit and
including Risk Committee
recognition reports
and recoverability on
of deferred
As part of the Committee’s responsibility to provide advice to the Board their
tax review
assets of the work
in Luxembourg conducted
and Germany by management
and a provisioning claim for When discussing the long-term prospects of a company,
on the form and basis underlying the long-term viability statement during the
withholding taxprocess
in India. of writing the viability statement. investors point to the sustainability of the business model
as set out on page 34, the Committee reviewed the process and This disclosure provides investors with clarity around as a key consideration, and expect the directors to be
– Carrying value of goodwill. able to discuss its resilience to risk and adaptability to
assessment of the Group’s prospects made by management, including: where responsibility lies at the board level and what
Governance
the directors
– Provisions have considered
and contingent liabilities. before approving the market challenges.
– the review period and alignment with the Group’s internal long-
disclosure. Investors also highlight the various timescales discussed
term forecasts; – Revenue recognition including accuracy of revenue recorded given
the complexity of systems and fraud. by companies in annual reports, investor presentations
– the assessment of the capacity of the Group to remain viable and during other meetings, and want to understand how
after consideration of future cash flows, expected debt service – Management override of internal controls. these relate to the assessment of prospects.
requirements, undrawn facilities and access to capital markets; The two-stage process:
– Accounting for significant one-off transactions.
– the modelling of the financial impact of certain of the Assessing prospects and
– Capitalisation and asset lives. The wording of the Code provision that gives rise to
Group’s principal risks materialising using severe but plausible
scenarios; and
stating viability
– Change in the Group’s presentation currency.
the viability statement also makes a distinction
between the assessment of prospects and the ability
– ensuring clear and enhanced disclosures in the Annual Report The
The keyCode envisages
audit risks for the 2017a financial
two-stage approach
year, are unchanged tofrom
the the
viability to make the formal statement – directors assess
Financials
as to why the assessment period selected was appropriate to the
Group, what qualifications and assumptions were made and how
statement. The directors should firstly consider
2016 financial year except for the addition of a new risk arising from the and report prospects first and then decide whether they have
on the
change prospects
in the of the company
Group’s presentation taking
currency from intotoaccount
sterling the euro. its a ‘reasonable expectation’ that the company will be
the underlying analysis was performed, consistent with recent current position
These risks are regularlyand principal
reviewed by therisks. Secondly,
Committee to ensurethey
the should able to meet its liabilities as they fall due over the
FRC pronouncements. state auditor’s
whether they have a reasonable expectation that
external areas of audit focus remain appropriate.
– Management also sought independent external advice on best the company will be able to continue in operation and period of the assessment.
Working
meet its with the auditor
liabilities as they fall due over the period of their
practice to ensure appropriate compliance with the requirements Source: Tackling the viability statement6, PwC
Weassessment,
hold private meetings
drawing withattention
the externaltoauditor
any at each Committeeor
qualifications
of the 2014 UK Corporate Governance Code.
meeting to provide as
assumptions additional opportunity for open dialogue and
necessary.
feedback from the Committee and the auditor without management “Having to make a choice of a period is quite binary,
External audit While
being the Matters
present. Code typically
suggests that the
discussed timetheperiod
include externalfor the when actually you need to think about a lot of
Additional information
assessment
auditor’s assessment of of
prospects and
business risks, thethe statement
transparency andshould be
The Committee has primary responsibility for overseeing the
the same,
openness some companies
of interactions with management,haveconfirmation
taken the thatopportunity
there
information.”
relationship with, and performance of, the external auditor. This includes
tobeen
has talkno about long-term
restriction in scope prospects,
placed on them and then selected a
by management, Company
making the recommendation on the appointment, reappointment
and removal of the external auditor, assessing their independence the independence of their audit and how they have exercised
on an ongoing basis, negotiating and approving the statutory audit fee, professional scepticism. I also meet with the external lead audit partner
the scope of the statutory audit and approval of the appointment of the outside the formal Committee process throughout the year. VIABILITY STATEMENT
lead audit engagement partner. Assessment of prospects Assessment of viability
Taking into account: Taking into account:
-Current position -Stress & sensitivity analysis
-Robust assessment of principal risks -Linkage to principal risks
-Business model -Qualifications & assumptions
-Level of reasonable expectation
6 https://www.pwc.co.uk/assets/pdf/tackling-the-viability-statement.pdf
VIABILITY STATEMENT
l
Viability statement
Example: Equiniti Group plc Annual Report 2016
Lab Comment
Equiniti conducts a significant portion of its business through Detailed financial forecasts are prepared, with the first year of Equiniti provides specific information considered key
recurring revenue secured via long term contracts and has a the financial forecast forming the Group’s operating budget
stated modest growth strategy, evidenced both by its past and is subject to a rolling forecast process throughout the year.
to understanding the prospects of the company:-
performance and resilience and the position it occupies in the Subsequent years of the forecasts are extrapolated from the first
market. A period of three years has been chosen as this period year, based on the overall content of the strategic plan. Progress
• mix and quality of clients;
is covered by our financial planning time frame and the Directors against financial budgets and key objectives are reviewed in
have a reasonable confidence over this time horizon. detail on a monthly basis by both the Group’s executive team
• market position;
and the Board. Mitigating actions are taken whether identified
The Group’s strategy is well documented (see pages 16-17).
through actual trading performance or the rolling forecast
• platforms and technology; and
As such, the key factors affecting the Group’s prospects are:
process.
• Underlying mix and quality of our client base: we serve 70% • growth aspirations.
of the companies in the FTSE 100, and our revenues are The key assumptions within the Group’s financial forecasts
distributed as follows: c46% derived from our top 25 private include: This gives investors guidance on key aspects of the
clients, c36% from other private clients and c18% from our • Organic revenue growth supplemented by acquisitions, business. The disclosure is laid out so as to provide
public sector clients. As such, we have a resilient underlying supported by market trends and increased cross-selling into
portfolio of clients. We normally provide multiple services our customer base.
context to the assessment process and the key
under many contracts to each client which diversifies our risk assumptions used.
• Modest margin improvement driven by operating leverage,
further.
offshoring, automation and property rationalisation. The disclosure also clearly differentiates between
• Market position: the Group is the leading provider of share
registration and corporate action services, and the number
• No change in the stated dividend policy. the assessment of prospects and the assessment
two provider by the number of pension scheme members. • No change in capital structure given the Group has secured of viability (which enables the directors to make the
The underlying tenure of FTSE 100 clients for share registration term debt and a revolving credit facility out to October 2020. viability statement).
extends beyond 20 years.
3. ASSESSMENT OF VIABILITY
• Platforms and technology: the Group has invested
Although the output of the Group’s strategic and financial
continuously in developing and acquiring platform technology
planning process reflects the Directors’ best estimate of the
that is both proprietary and well recognised in the industry and
future prospects of the business, the Group has also assessed the
by its clients.
financial impact of a number of alternative scenarios.
• Modest but realistic growth aspirations: the Group is targeting These represent stresses which include the following potential
organic revenue growth supplemented by acquisitions, scenarios:
with moderate margin improvements driven by offshoring,
automation and property rationalisation. • Depressed market activity leading to a prolonged reduction
in corporate action revenue.
2. THE ASSESSMENT PROCESS AND KEY ASSUMPTIONS
• Reduction in revenue growth for a long period of time, with
The Group’s prospects are assessed primarily through its a lag in cost reduction action.
strategic and financial planning process. This includes a detailed
annual review of the ongoing plan, led by the Group Chief • Significant change programmes (offshoring/automation/
Executive and CFO in conjunction with divisional and functional property rationalisation) do not deliver anticipated benefits.
management teams. The Board participates fully in the annual • 20% reduction in planned EBITDA across a three year period.
process by means of an extended Board meeting.
The results of the stress testing, including a combination
The output of the annual review process is a set of objectives,
of the individual scenarios, demonstrated that due to the
detailed financial forecasts and a clear explanation of the key
Group’s high cash generation and access to additional funds
assumptions and risks to be considered when agreeing the plan.
that it would be able to withstand the impact in each case.
The latest updates to the plan were finalised in December 2016.
Mitigations considered as part of this stress testing included cost
This considered the Group’s current position and its prospects
reduction programmes, dividend cuts and a reduction in capital
over the forthcoming years, and reaffirmed the Group’s stated
expenditure.
strategy.
4. VIABILITY STATEMENT
Based on the results of the analysis, the Directors have a
reasonable expectation that the Group will be able to continue
in operation and meet its liabilities as they fall due over the three
year period of their assessment.
48
profitability, the Group’s cash flows, committed funding and liquidity maturities
was signed and maintaining
off in Novembersufficient
2016, andlevels of standby
refreshed liquidity.
in March 2017 as part upon a numbersevere
represent of thebut
Group’s principal
plausible risks and
scenarios uncertainties
were selected for(asmodelling
positions and forecast future funding requirements over three years, Whilst each of the risks on pages 42 to 44 has a potential impact documented on pages 42 to 44). The scenarios were overlaid into the
ofThe
theGroup’s
normalprospects
budgeting process. This is reviewed by
are assessed primarily through its corporatethe Operating through the corporate plan. These were:
26
with a further two years of indicative movements. The most recent and has
Board andbeen considered
ultimatelyThisby
as part
the PLC of the assessment,
anBoard
annualwith
only those
involvement that
throughout corporate plan to quantify the potential impact of one or more of
was signed off in November 2016, and refreshed in March 2017 as part Lab
of the normal budgeting process. This is reviewed by the Operating
planning
represent
from project
process.
severe
report
both thethe
profitability, CFO but
includes
plausible
Risk
and CEO.
Group’s
and
cashPart
scenarios
viability were l
review
reporting
of committed
flows, the Board’sfunding
which considers
selected for
role is to
and
modelling
consider
liquiditythe
these crystallising over the assessment period.
through the corporate plan. These were:
Board and ultimately by the PLC Board with involvement throughout appropriateness of anyfuture
positions and forecast key assumptions, taking into
funding requirements overaccount the
three years, Whilst each of the risks on pages 42 to 44 has a potential impact
from both the CFO and CEO. Part of the Board’s role is to consider the external environment andof business
indicative strategy.
Stress and sensitivity analysis
appropriateness of any key assumptions, taking into account the
with a further
Example:
was signed off
two years
J Sainsbury
in Novemberplc Annual
2016,
movements. The most recent
Report and
and refreshed Financial
in March 2017 asStatements
part
and has been considered as part of the assessment, only those that
2017severe but plausible scenarios were selected for modelling
represent
external environment and business strategy. of the normal budgeting process. This is reviewed by the Operating through the corporate plan. These were:
Board and ultimately by the PLC Board with involvement throughout Link to principal risks and
Stress and sensitivity analysis has been carried out in Scenario modelled uncertainties
the Financial Services sector for a number of years. from both the CFO and CEO. Part of the Board’s role is to consider the
The introduction of the viability statement has led appropriateness of any key assumptions,Link totaking into
principal account
risks and the
Scenario modelled Scenario 1 uncertainties
externalsavings
Forecast environment andnot
targets are business
achieved strategy.
more companies outside of this sector to carry out this — Business strategy and change
Scenario 1 The Group Corporate Plan currently assumes £160 million of synergies as a result of the HRG acquisition in the third full-year post acquisition,
analysis, and they have found that it has been useful in
Forecast savings targets are not achieved along with £500 million of cost savings to offset inflationary pressures by the end of 2017/18. A scenario has therefore been modelled in which
shaping internal
The Group discussions
Corporate around
Plan currently assumes risk.
£160 million all planned
of synergies as a result of the HRG acquisition in thesavings/synergies
third full-year postare not realised in—
acquisition, the years planned
Business strategyand
and are delayed by one year during the assessment period.
change Link to principal risks and
Scenario
along with £500 million of cost savings to offset inflationary pressures by the end of 2017/18. A scenario modelled
has therefore been modelled in which uncertainties
Likewise, most
all planned investors
savings/synergies are highlight that
not realised in the yearsdisclosures
planned and are delayed by one year Scenario 2
during the assessment period.
around stress and sensitivity analysis are useful Scenario
Data breaches 1
Scenario 2 Forecast
The impact savings targets are
of any regulatory finesnot
hasachieved
been considered. The biggest of these is the General Data Protection Regulation (GDPR) fine for data — Data security
although current practice is often too high level.
Data breaches The Group Corporate
breaches, which will be Plan currently
enacted assumes
in May 2018.£160
Thismillion of synergies
was considered as ainresult
both of theand
isolation HRGinacquisition
conjunctionin the third
with full-year
a fall post
in sales as a result—
acquisition,
volumes of Business strategy and change
Investors
The are particularly positive about disclosures
impact of any regulatory fines has been considered. The biggest of these is the General Data along with
Protection
breaches, which will be enacted in May 2018. This was considered both in isolation and in conjunction
£500 million
Regulation of cost
(GDPR)
any reputational brand damage.
all planned savings/synergies
with a fall
savings
fine
in sales volumesare
for
as anot
to
data offset
realised
result
— Data security
inflationary pressures by the end of 2017/18. A scenario has therefore
of in the years planned and are delayed by one year during the assessment period.
been modelled in which
that provide specific

any reputational insight into the scenarios
brand damage.
Scenario
Scenario 2
3
considered, including how they link back to the principal Legal breaches
Scenario 3 Investors also highlight as useful a
risk disclosure. Data breaches
Similar to the above, we considered the reputational impact of any legal or health and safety incidents, modelling a fall in sales volumes in the — Health and safety, people and product
Legal breaches The impact of any regulatory fines has been considered. The biggest of these is the General Data Protection Regulation (GDPR) fine for data — Data security
year ofmodelling
occurrence. Weinalso considered regulatory fines such
and as those levied byand
theinGroceries Supply
withCode
a fall of Practice (GSCOP). — Political and regulatory environment
description of above,
Similar to the the weoutcome
considered theofreputational
the scenario analysis,
impact of any breaches,
legal or health and safety incidents, whichawill
fallbe enacted the This—
in Mayin2018.
sales volumes wasHealth
consideredsafety,
both people
in and
isolation productconjunction in sales volumes as a result of
year of occurrence. We also considered regulatory fines such as those levied by the Groceries SupplyanyCode
reputational
of Practicebrand damage.
(GSCOP). — Political and regulatory environment
including the likelihood and extent of mitigating activities Scenario 4
modelled
Scenarioin response
4 to the scenarios. Scenario 3
Brexit
Brexit Legal
The breaches
impact of the UK’s decision to leave the EU was considered. Scenarios were modelled assessing potential impacts of weakening sterling — Political and regulatory environment
The impact of the UK’s decision to leave the EU was considered. Scenarios were modelled assessing Similar
foreign to the
exchange
potential above,ofwe
rates
impacts inconsidered thewell
reputational
all years,sterling
weakening as as World impact of any legal or(WTO)
Trade Organisation
— Political and regulatory health and safety
tariffs
environment incidents,
being applied modelling a fall
to inventory in sales volumes
purchases in year in
three — Health—and
the of the safety,environment
Trading people and product
and competitive
year of occurrence.
assessment
foreign exchange rates in all years, as well as World Trade Organisation (WTO) tariffs being applied to inventory period. We also
purchases considered
in year three of regulatory
the —fines suchenvironment
Trading as those levied
andbycompetitive
the Groceries Supply Code of Practice (GSCOP). — Political and regulatory environment
landscape
“I think it is useful, as it makes us think ‘What
assessment period.
Scenario54
landscape
Scenario
if…?’Scenario
It makes 5 you understand the business and Brexit
Bank transition
— Political
— and regulatory environment
forcesBank
you
It was to really
transition
considered what levelthink
of sustainedabout
loss would‘what
be requiredcould goBank before its capital
in Sainsbury’s
It The
wasimpact
foreign
of thewhat
considered
exchange
ratios
UK’s decision to leave theloss
level of sustained
rates in all
were breached,
additional material fundingleading
requirements
EU was considered.
would
years,toas well as World
— Trade
Scenarios
be required
Financial
from the Group.
were modelled
in Sainsbury’s
Organisation (WTO)
and treasury
assessing
Bank before potential
its capital impacts
ratios wereofbreached,
weakeningleading
sterlingto
risktariffs being applied to inventory purchases in year three of the
Financial and treasury risk
— Trading environment and competitive
wrong’? I do wonder how much of this was being
additional material funding requirements from the Group. assessment period. landscape
done in the past.” Scenario 5

Bank transition
Company
In performing the above analysis, the Directors have made certain InThe
It performing
wasresults
considered theabove
of what
the above
level analysis,
stress
of sustainedtestingtheshowed
loss would Directors inhave
that
be required made
the Group
Sainsbury’s certain
would
Bank Thewere
before its capital ratios results of the
breached, above
leading to stress testing showed
— Financial that
and treasury riskthe Group would
assumptions around the availability of future funding options, assumptions
additional
be able to around
material theimpact
funding the
withstand availability
requirements from theof
of these future
Group. funding
scenarios options,
occurring over the beLabable to Comment
withstand the impact of these scenarios occurring over the
“It is difficult
including thetoability
predict,
to raiseand
futurethere are some
finance. including
assessment theperiod.
ability to raise future finance. assessment
The scenario period.testing disclosure by Sainsbury
scenarios where you could go bust overnight.
The scenarios above are hypothetical and severe for the purpose of 4
The Viability
scenarios statement
In performing above
the aboveare hypothetical and severe
analysis, the Directors haveformade certain of The4results
the purpose
provides investors with detail around the actual
Viability statement
of the above stress testing showed that the Group would
Lookcreating
at Lehmanoutcomes Brothers.”
that have the ability to threaten the viability of Taking into
assumptions
creating account
outcomesaround the
theGroup’s
that current
availability
have the position
of future
ability and principal
funding
to threaten options,
the risksof
viability be able
scenarios tested, quantifying certain parts of the test.
Takingto withstand
into account the impact of these
the Group’s scenarios
current occurring
position over the risks
and principal
Companythe Group; however, multiple control measures are in place to prevent the and uncertainties,
including
Group; the ability
however, the
toDirectors
raise future
multiple confirm
control finance.that theyare
measures havein aplace
reasonable
to prevent assessment andThe disclosure
period.
uncertainties, is Directors
the clear onconfirm
the outcomethat theyofhave thea reasonable
and mitigate any such occurrences from taking place. In the case expectation
and mitigatethat anythesuch Group will be able
occurrences fromto continue in operation
taking place. and
In the case analysis, that
expectation andthe also links
Group willthe scenarios
be able to continue to the principaland
in operation
The scenarios above are hypothetical and severe for thetopurpose of 4 Viability statement
“Would all these scenarios happen at the same time?
of these scenarios arising, various options are available to the Group meet its liabilities as they fall due over the three
of these scenarios arising, various options are available to the Group
creating outcomes that have the ability to threaten the viability of
years March 2020. risks
meet itsand uncertainties
liabilities as they fall disclosed.
due over the three years to March 2020.
Taking into account the Group’s current position and principal risks
in order to maintain liquidity so as to continue in operation. These
The point
includeis that we’d
reducing never thought
any non-essential of that.”and operating in5the
capital expenditure
order
Going to maintain
Group;concern
liquidity so as to continue in operation. These
however, multiple control measures are in place to prevent and5uncertainties, the Directors confirm that they have a reasonable
include reducing Going concern
Companyexpenditure on projects, as well as not paying dividends. The
and Directors
mitigate alsoany
any such non-essential
considered
occurrences capital
it appropriate
from toexpenditure
taking adopt
place.the and
In going
the operatingexpectation
case that the Group will be able to continue in operation and
expenditure oninprojects, The Directors also considered it appropriate to adopt the going
concern
of these basis
scenarios arising,asvarious
preparing well
the asoptions
not statements,
financial paying dividends.
are available which areGroup
to the shown meet its liabilities as they fall due over the three years to March 2020.
on pagesto99maintain
to 185. liquidity so as to continue in operation. These concern basis in preparing the financial statements, which are shown
in order
include reducing any non-essential capital expenditure and operating 5 Going on pages 99 to 185.
concern
expenditure on projects, as well as not paying dividends. The Directors also considered it appropriate to adopt the going
concern basis in preparing the financial statements, which are shown
on pages 99 to 185.
l
Participants and •
•
Equiniti Group plc
Hill & Smith Holdings PLC
Project process
•
process
Intercontinental Hotels Group plc
• Intu properties plc A combination of individual company meetings
• ITV plc and round-table meetings were held with company
• J Sainsbury plc participants to understand their process and challenges
• Lonmin plc in presenting principal risk and viability disclosures, and
Project participants join Lab projects by responding to a • M.P. Evans Group PLC share their experiences.
public call or being approached by the Lab. An iterative • M&C Saatchi PLC The Lab prepared a discussion pack, which was shared
approach is taken with additional participants sought • Rolls-Royce Holdings plc with investors in advance of each meeting, containing
during the project to obtain input from various types of • Smith & Nephew plc reporting excerpts and the project questionnaire. We
investors and analysts, and ensure a range of company • Standard Chartered PLC met each investor to understand their views on current
examples and input. • UBM plc practice, how they use principal risk and viability
It is not intended that participants represent a statistical • Vodafone Group Plc disclosures, and the information they are looking for in
sample. However, a range of companies participated those disclosures.
(from AIM through to FTSE 100) and views were received
In addition, two round table meetings were held with
from a range of UK and international institutional Involvement of investors investors and company participants together, to further
investors, analysts and retail investors.
explore views and practical solutions.
References made in this report to views of ‘companies’ The following members of the investment community
A qualitative online survey was developed to obtain
and ‘investors’ refer to the individuals from companies participated in the project:
retail investor views. In total, 191 respondents
and investment community organisations that participated
• Aberdeen Standard Investments completed the survey.
in this project. Views do not necessarily represent those
• Allianz Global Investors GmbH
of the participants’ companies or organisations. The term Survey results were combined with interview results
• FIL Investment Management Ltd
‘investors’ includes a broad range of individuals in their to reflect investor views in this report. The report
• Fitch Ratings
capacity as investors or their role in analyst organisations distinguishes results when retail shareholder views and
• HSBC Global Asset Management
that work in the interest of investors in the UK and views of institutional investors and analysts differ.
• Invesco Asset Management Ltd
overseas markets.
• Legal & General Investment Management Ltd The reporting suggestions provided in this report should
• M&G Investments be considered by companies in the context of their
Involvement of companies • Moody’s Investors Service Ltd own circumstances and audience for reporting. The
• Primavenue Advisory Services Ltd examples used illustrate reporting practices that are
• Schroder Investment Management Limited considered helpful by investors. The report does not seek
The following companies volunteered to participate in the
• ShareSoc (UK Individual Shareholders Society) to comment on the underlying risks or viability of those
project:
• S&P Global Ratings companies who are referred to.
• Aberdeen Asset Management PLC • UK Shareholders’ Association
• Ashmore Group plc • Walter Scott & Partners Ltd
• AstraZeneca plc • 191 individual retail shareholders
• Croda International plc
• Daily Mail & General Trust plc
• Deltex Medical Group plc
• Dialog Semiconductor Plc
l
Appendix A: 12th December 2016
Schroders’ letter to
FTSE 100 investee Dear XYX
Both the Financial Reporting Council and the Investment Association have in recent weeks put out
companies comment on the current state of viability statements. In the FRC’s view only 15% of companies they
surveyed across the FTSE 350 had a comprehensive statement.
As equity holders we are providing permanent capital to companies and we are naturally interested in a
company’s long term viability. We think viability statements, and the process of constructing them, are an
In December 2016, Schroders sent a letter excellent opportunity for boards to sense check that the strategic and financial decisions being taken are
to FTSE 100 investee companies concerning the right long term ones.
viability statement disclosures. The letter is In the FRC’s sample, 75% of companies chose a three year time horizon. A survey done by KPMG
reproduced here. confirms this, with over half of companies saying it is based on existing budgeting processes. It also
coincides with our more informal polling.
It is essential for viability statements that boards consider how companies will perform through an entire
business cycle. We note that no company has gone beyond five years, yet it is often the longest running
business cycles that can end with the most dramatic changes in the environment. Particular attention
should be paid to gearing levels, loan covenants and off balance sheet liabilities to ensure that the balance
sheet is robust. We realise that it is difficult to be definitive about the future but it is helpful when companies
provide colour to the scenarios, processes and possible mitigating actions that are inputs into their
discussions.
Choosing a three year horizon also means that the viability statement rarely covers a period beyond
the existing management team’s horizon. The average tenure of CEOs in the FTSE is five years, and
shortening. As long term investors, we would encourage boards to look beyond the tenure of one
management team. In particular, we are dismayed all too often to see dividends cut, exceptionals rise as
well as to hear of historic underinvestment when new management come in.
We hope that you will take the opportunity of reviewing your viability reporting as you prepare your next set
of Report and Accounts. We have found the viability statement produced by Fresnillo in their 2015 accounts
insightful. Interestingly viability is also examined in their Strategic and Risk report and there is a good
linkage between these three sections. There is helpful detail provided on a number of scenarios, stress
tests and mitigating actions.
Please do contact us if you have any additional questions.
Yours sincerely,
Global Head of Stewardship
l
Appendix B: • 5
9% of retail investors think that the annual report and accounts is important for providing principal
risk information.
Results from survey • 5

7% of retail investors say that their investment decisions are influenced by the robust risk
assessment process in the annual report and accounts.
of retail investors • 6
2% of retail investors say that their investment decisions are influenced by the principal risk
disclosures in the annual report and accounts.
• R
etail investors’ most popular source of information to identify risks to companies is financial analysis
and media, for example analysts’ reports and financial/business publications (including business
The Lab undertook a survey of 191 retail
sections of national newspapers).
investors from ShareSoc and the UK
• For principal risk disclosures in the annual report:
Shareholders’ Association. Overall, the
results were consistent with the messages • The most useful piece of information is the changes in the principal risks since the previous year.
heard from institutional investors. • Retail investors also find categorisation of risks useful, although had no preference between type
or timeframe.
Highlights from the survey are shown here. • There is no obvious preference for risks being presented as either gross or net.
• 6
1% of retail investors find useful the quantification of the impact of each principal risk. The vast
majority would like to see the quantification of monetary impact and likelihood. Some retail investors
also suggested quantification of the impact on stakeholders.
• T
he long-term viability of a company is important to 87% of investors when making their investment
decisions.
• H
owever, only 43% of retail investors are aware of the viability statement requirement in the Code. Of
those that are aware, over half consider the viability statement useful.
• The most important information to include in the viability statement is:
• Length of period over which the company has assessed viability.
• The assumptions and qualifications included in the assessment.
• The sensitivity/scenario analysis conducted by the company.
• R
etail investors on average think that a four year time frame for viability is right. However, individual
views ranged from 1 to 10 years, with several citing that it is dependent on the sector and
business cycle.
• A
lmost all retail investors think that disclosure of principal risks and uncertainties and long-term
viability could be improved.
Lab project reports
The Lab’s project reports provide practical suggestions on reporting from our work with the Information about the Lab can be found at:
corporate and investment communities.
https://www.frc.org.uk/Lab
Each of the following reports suggests reporting that is focused on meeting the needs of
the investment community for consideration by companies. These reports can be found at:
https://www.frc.org.uk/investors/financial-reporting-lab/publications Follow us on Twitter @FRCnews or
Strategic report:
• Towards clear & concise reporting The FRC’s mission is to promote transparency and integrity
in business. The FRC sets the UK Corporate Governance
• Disclosure of dividends – policy and practice
and Stewardship Codes and UK standards for accounting
• Business model reporting and actuarial work; monitors and takes action to promote
the quality of corporate reporting; and operates independent
Remuneration report: enforcement arrangements for accountants and actuaries.
• A single figure for remuneration As the Competent Authority for audit in the UK the FRC sets
auditing and ethical standards and monitors and enforces
• Reporting of pay and performance
audit quality.
Governance reporting:
• Reporting of Audit Committees The FRC does not accept any liability to any party for any
• WM Morrison Supermarkets PLC – Disclosure of supplier relationships loss, damage or costs howsoever arising, whether directly
or indirectly, whether in contract, tort or otherwise from any
Technology: action or decision taken (or not taken) as a result of any
person relying on or otherwise using this document or
• Digital present arising from any omission from it.
• Digital future: A framework for future digital reporting
Financial statements: © The Financial Reporting Council Limited 2017

• Net debt reconciliations The Financial Reporting Council Limited is a company limited
• Operating and investing cash flows by guarantee. Registered in England number 2486368.
• Debt terms and maturity tables
• Accounting policies and integration of related financial information
• William Hill: Accounting policies
• HSBC: Presentation of market risk disclosures Registered Office:
Financial Reporting Council
8th Floor, 125 London Wall
London EC2Y 5AS
www.frc.org.uk

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Lab project report:

Risk and viability reporting

Financial Reporting Council

Viability statement reporting 20 Lab reports do not form new reporting

Published reports and further information on

Do you have suggestions to share?

Attribute of risk reporting Page Company

Attribute of viability statement Page Company

Application of the two-stage approach 25 Equiniti Group plc

Stress and sensitivity analysis 26 J Sainsbury plc

oard monitoring the risk management Management carried PR

financial systems across with

exercise asin strategy Risk management

is globally. have put this approach into practice. continues

the 2014 UKcontracts Corporate l

into with potential refinancing measures.

continues to be relevant PR for the CBE:of key events

purpose of scenario modelling impact

What entity-specific information is important to investors about risk?

More important to investors

Daily Mail and General Trust outline the changes “Risk

PRICING AND REIMBURSEMENT

Link to strategy Actions taken by management

PRODUCT INNOVATION, DESIGN AND DEVELOPMENT

Strengthening our framework

local markets and entities. 4 acquisitions

training and our annual Global Risk Forum.

Depending on the arrangements agreed andthelikely

Depending on the arrangements agreed

UK and the EU: the inability to move data

The Investment Association - Developments in Corporate Governance and Stewardship 2016

4. Qualifications and assumptions

that provide specific

done in the past.” Scenario 5

Global Head of Stewardship

Results from survey • 5

Financial statements: © The Financial Reporting Council Limited 2017

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