enterprise risk management
Effective management of risk is essential to the achievement of our business objectives and to the protection of our people, assets and reputation. Identifying, assessing and managing risks is integral to the way we run our business. It is part of our focus on operational excellence and best performance which are key priorities for the Group. The various risks attached to our activities are consistently assessed, recorded and reported in a visible, structured and continuous manner.
During 2010, we enhanced our risk management process through the creation of an enterprise risk management function to further improve, where possible, the integration and efficiency of our risk management framework and, in doing so, to address the increased demands and requirements from external and internal stakeholders. The new function, whose director sits on the executive leadership team and reports directly to the chief executive, draws together our existing risk based responsibilities and builds on the good risk management processes and practices already in place across the Group. This section describes our well established risk management process and outlines the main factors that may affect the execution and implementation of our strategy.
Rexam risk management process
Rexam risk management process
Rexam objectives
The purpose of the Rexam risk management process is to support achievement of Rexam’s key objective to deliver shareholder value. Although risk can never be eliminated, the process aims to identify and set appropriate mitigation responses for the key risks faced by Rexam. The approach is based around the ISO 31000 risk management process and on both the bottom up and top down assessments of operational, financial and strategic risks.
risk identification
The first stage of our risk management process is to identify the risks faced by Rexam. This is initially a bottom up process with business units and functions undertaking an annual process of risk identification. Risk workshop sessions, previous year’s risk registers and a risk categorisation check list, among other tools, are used to structure and support the process. The enterprise risk management function leads and supports the process but is also there to challenge the findings. Executive directors and other senior management are also closely involved at critical stages in the process. They review, challenge and debate the risks identified by the business units from a top down perspective. The resultant output is a list of identified risks faced by Rexam for each business and function – the risk register.
risk assessment
The next stage involves the assessment of each identified risk on the register in terms of its likelihood of occurring, and the impact on Rexam if the risk does occur. The assessment of likelihood and impact enables us to identify the key material risks for each business and function. Again this involves both the business units and the senior management and there may be further discussion and analysis. To aid assessment we use specific tools, such as the Heat Map and Radar, to illustrate the impact and likelihood of different risks faced and to show their trend over time. Images of these tools are shown below.
Rexam risk management tool – radar
Year 1
Year 0
Rexam risk management tool – heat map
risk response/mitigation
Once risks have been assessed an appropriate mitigation response is determined for each risk identified. The mitigation response will depend upon the impact and likelihood assessment and, for example, may consist of a control action or insurance. The risk response reduces either the likelihood of the risk occurring or the impact on Rexam if the risk does occur or both.
risk reporting
Once we have assessed the risks and the responses have been determined each business unit and function provides a risk report to the enterprise risk management function. These reports are considered together and a Group level risk register is produced showing the key risks to Rexam and key mitigation responses.
risk monitoring
The Group level risk register is monitored by the board through a monthly report which updates on key movements in the trend of the risk and key mitigations. The executive leadership team, the audit and risk committee and full board all review the risk profile and any changes on a periodic basis. Ownership of each key Group risk is allocated to the relevant accountable member of the executive leadership team. The audit and risk committee reviews the overall risk management process.
development
We are constantly looking to enhance our risk management process. In line with external best practice and following the creation of the enterprise risk management function in 2010, a project was undertaken to determine future development opportunities for the Rexam risk management process. The process will be developed in line with the results of this project through 2011.
summary of key Group risks
Set out in the tables below is a summary of the key risks for the Group as a whole. Although the recent global financial and economic situation has heightened many Group risks and exposed new ones, the challenge remains the same in terms of identifying the most relevant risks, assessing their impact and importance and developing appropriate methods to eliminate or mitigate them.
The tables provide brief descriptions of the key types of risk to which the Group is exposed and identify, in each case, their potential impact on the Group, and the principal processes in place to manage and mitigate the risk. Each risk is specifically owned by a senior executive. The tables do not provide an exhaustive analysis of all risks affecting the Group. Not all of the factors listed are within the control of the Group and other factors besides those listed may affect the performance of its businesses. Some risks may be unknown at present and other risks, currently regarded as immaterial, could turn out to be material in the future. Further information on the process by which risk is managed and reported is covered in the risk management and internal control section in the corporate governance report.
health and safety
We use Rexam’s environment, health and safety audit to drive our sites to best practice standards. It was created with the input of both internal and external specialists and is supported by an auditing process using an approved third party auditor. The process highlights gaps between current site practices and best practices so that we can put in place appropriate actions and monitor them for completion. As recognition for high scoring sites we have introduced Bronze, Silver and Gold awards which will also determine future audit frequency.
To further focus our operations on the importance of health and safety we have introduced the Rexam incident rate (RIR) which is the number of lost time accidents plus the number of medical incidents divided by the total man hours worked. Over the years, we have been successful in reducing lost time accidents and the RIR was created to allow for a greater focus on medical incidents and therefore enhance the safety of our people. This measure is now used in addition to the lost time accident rate (LTAR).
LTAR (number of lost time accidents x 200,000/total worked hours).
RIR (number of lost time accidents and medical incidents x 200,000/total worked hours).
supply chain risk
In the wake of the recent global recession, supply chains and businesses have come under significant pressure and are, in general, more vulnerable to supply chain disruption. Removal of capacity and the financial stress within the supply chain may take months, if not years, to restore. From experience, we know that lower risk supply chains can deliver enhanced value, and since early 2009 we have been implementing measures to affect a more robust approach to supply risk management and embed it into the organisation. To this end we established a team from across the business to develop tools which allow us to proactively identify potential risk by mapping out the supply chain so that we can better assess and evaluate this risk. The data is essential to develop the right strategy to either remove or mitigate the risk impact on the business.
In Beverage Can Europe & Asia, for example, this approach has enabled us to identify and then reduce the risks associated with the supply of graphic plates used for can decoration. Activities undertaken included strengthening our supplier relationships, implementing more rigorous and controlled back up capabilities and a review of the design process to reduce the overall leadtime and resource involved.
strategic risks
these are the key risks that relate to and impact the longer term strategic business activities of the organisation
description
The risk of continuation of the global economic downturn and its impact upon revenues. Many major economies are starting to emerge from recession but this still remains a significant risk.
key mitigations
In line with the strategic priority of best performance, Rexam has continued to focus on taking cost out of the affected businesses throughout 2010. Further details on restructuring can be found in the financial review. Rexam has also closely managed capital investment and focused on maximising utilisation of its assets.
description
The risk of changing consumer trends resulting in a shift away from demand for the consumer packaging products that Rexam manufactures. Drivers of this risk can include lifestyle and taste change, nutrition and health considerations, environmental concerns or legislation.
key mitigations
We monitor market and consumer trends as well as political developments through our own and external business intelligence services and through our involvement in national and international packaging associations in the countries and regions where we operate.
description
Rexam operates in countries and regions with diverse economic and political conditions and sensitivities. Our expansion in emerging markets means that this exposure is increasing.
key mitigations
Emerging market risks are assessed in detail by management when considering investment opportunities and setting financial policies and procedures. We also take advice on such matters and use local external advisors. We will continue to carry out reviews of key risk areas both internally and with external expert support.
description
Packaging will continue to be a focus for government legislators working within the sustainability agenda. Changes in packaging legislation and regulation affecting producer responsibility for recycling, recycled content, carbon footprint and landfill taxation are an increasing risk.
key mitigations
Rexam continually monitors changes or proposed changes in laws or regulations that may adversely affect our business if implemented arbitrarily. This is done through established and effective membership of relevant trade associations, by direct collaboration with governmental and non governmental organisations and through our own efforts. This ensures the best possible chance of shaping a constructive outcome which is also favourable to Rexam and our stakeholders.
business operations risks
these are the key risks arising from Rexam’s day to day business activities
description
The risk of adverse commercial impact upon Rexam from customer and competitor activities. This risk can be driven by dependency on key customers, competitor activity, price pressure or contract negotiations.
key mitigations
Many of our largest customers have traded with us for many years, during which time we have built up a strong interdependency and sense of partnership. These relationships increase the likelihood of retaining customers and we successfully completed several major customer contract renewals in 2010. We continue to focus on providing value adding service and innovation as well as competitive performance which are key parts of our strategic focus of strengthening our customer relationships. We currently have about 30% of beverage can contracted volumes in long term contracts which go until at least 2015.
description
Every business faces the potential risk of its operations being impacted by disruption due to loss of supply, industrial disputes, failures with technology, physical damage as a result of fire, flood or other such event.
key mitigations
As part of our strategic focus on operational excellence, Rexam has established protocols and procedures across the Group as a whole such that plans are in place to ensure business continuity in our operations. Strong relationships with customers and suppliers mean that, where possible, there are arrangements in place to ensure alternative sources of supply or production for critical product lines. A project was also undertaken in 2010 to look more deeply at mitigating supply failure risk as exemplified by the supply chain risk case study.
description
Aluminium is our most significant raw material cost. Resin is also important to us and we purchase quantities of steel for our European beverage can operation. Steep and prolonged rises in input prices may have a material impact on our results. One consequence of a substantial rise could be a change in demand for our products as customers adjust their packaging mix and the materials they use.
key mitigations
In Beverage Cans, almost all of our metal needs are on a pass through basis or hedged. In the Americas businesses, we charge the majority of our customers on a pass through basis while in Europe 75% of our supply costs are on this basis. To mitigate the risk on the remaining aluminium exposure, we hedge the aluminium cost and associated currency requirements. We purchase aluminium and steel from a small number of regional and global suppliers with whom we have long term relationships and contracts. In Plastic Packaging, some 70% of the resin costs are on a pass through basis which includes resin escalator/de-escalator provisions that allow change in our selling price as resin prices change. We pursue a dual qualification of suppliers for all major new projects. Additionally, since late 2008, Rexam has had an active programme to qualify alternative supply sources for existing applications. As a result, we are now more than 40% dual qualified globally and 75% of our resin supply is covered by a security of supply agreement.
description
Risk of significant environmental, fire or health and safety issue.
key mitigations
An environment, health and safety audit was created in cooperation with internal and external specialists to drive the plants to best practice. A system of awards is being introduced to recognise businesses receiving high scores during audits. In addition to lost time accident rate, Rexam incident rate was implemented to further strengthen the focus on health and safety and bring increased attention to medical incidents. Further details can be found in the health and safety case study.
description
Rexam’s reputation as a business partner relies heavily on its ability to supply quality products on time and in full. The consequences of not being able to do so could be severe. Such consequences might include adverse effects on consumer health, loss of market share, financial costs and loss of turnover.
key mitigations
Within our strategic focus on operational excellence we have strict control measures and externally accredited systems in place to ensure that the safety and quality of our products are maintained.
description
Risk of counterparty failure (for example bank, customer or supplier) resulting in financial exposure for Rexam.
key mitigations
A range of financial counterparties are used and their credit ratings are monitored. Customer credit limits are imposed and customers’ credit risk is reviewed and monitored regularly. In addition, we have implemented procedures across the business to manage working capital tightly.
financial risks
these are the key risks that are specific to the effective management and control of the finances of Rexam and the effects of external financial factors
description
Risks related to the cost and availability of funds to meet our business needs, movements in interest rates, foreign currency exchange rates as well as commodity prices.
key mitigations
Rexam’s financial risk management is based upon sound economic objectives and good corporate practice. Rexam negotiates funding requirements in a timely manner ensuring appropriate headroom is secured to mitigate availability risk. Derivative and other financial instruments are used to manage exposures under conditions identified by the board and monitored by its finance committee. Further details of our financial risks and the way in which we mitigate them are set out in note 25 to the consolidated financial statements.
description
In an increasingly complex international tax environment, some uncertainty is inevitable in estimating our tax liabilities.
key mitigations
We seek to plan and manage our tax affairs efficiently in the jurisdictions in which we operate. Tax planning will complement and be based around the needs of our operating businesses. We exercise our judgement in assessing the required level of provision for tax risk and allocate resources appropriately to protect our position.
description
Risks related to cash contributions, charges to the income statement and balance sheet volatility.
key mitigations
Rexam’s retirement benefit risk management is overseen by the Retirement Benefits Committee (RBC) which is chaired by the finance director. The RBC reviews all proposed new promises for and improvements to retirement benefits. Managing pension deficit volatility on the balance sheet and general derisking of funded plans, which includes equity, interest rate and inflation risk are undertaken by pension plan fiduciaries in consultation with the RBC. Cash contributions are paid having regard for regulatory requirements in the countries in which the respective plans operate.
related content
