A structured and formalized Enterprise Risk Management (ERM) process is implemented within the Group in line with international best practice. The process is aimed at identifying and assessing key group risks and involves Group's managers at a global level under the coordination of Risk Management & Internal Audit.
Managers across the Group at a global level identify and evaluate risks – both on a potential and residual basis – in connection with the Group's strategic goals based on a specific risk model and identify risk mitigation strategies.
According to the risk model, the Group Chief Risk Officer first identifies priority risk areas with regard to strategic objectives and guidelines as per business plan (key value drivers, such as raw materials/commodities, economic scenario, currency exchange rates, technological innovation, balance of customer portfolio, competitor monitoring, etc.), and defines the reference economic-financial parameters for risk and impact measurement (impact on revenues, EBIT, cash flow, etc.) where applicable. Managers at the business unit and local levels are required to validate/supplement exposures within the priority risk areas identified beforehand and submit the corresponding risk mitigation plans to help finalise the global Sogefi Group ERM Report. This method ensures that the following elements are defined and kept up to date at all times:
- target levels of exposure to priority risks;
- risk management strategies in line with existing risk attitude (risk transfer, reduction, avoidance, mitigation);
- action plans and management guidelines to keep exposure levels within target limits.
Sogefi Group ERM Report findings are also used to define the Internal Audit's Action Plan adopting a risk-based approach in line with international best practice. The Internal Audit's Action Plan is prepared on an annual basis based on the findings of the assessments performed within the Enterprise Risk Management process, and focuses on those areas that are determined to be associated with higher risk after such ERM assessments.
For more details of the risk assessment method and the tasks and functions involved in the company's Control and Risk System, please refer to the “Code of Conduct of Sogefi S.p.A.” attached to the “Annual Report on Corporate Governance” for the year 2014, available at www.sogefigroup.com.
The following section looks at the main risks and uncertainties that the Group is potentially exposed to in the achievement of its business objectives/operations, together with a description of the ways in which said risks are managed.
To facilitate comprehension, risk factors have been grouped on the basis of their origin into homogeneous risk categories, with distinction between those that arise outside the Group (external risks) and those associated with the characteristics and structure of the organisation itself (internal risks).
In terms of external risks, first of all, the Group adopts a centralised management approach to financial risk (which includes risks of changes in interest rates and exchange rates, risks of changes in raw materials prices, credit risk and liquidity risk), described in further detail in the Explanatory and Supplementary Notes to the Consolidated Financial Statements which should be referred to[1].
With regard to risks relating to competitors, the Group is one of the leading players in both the suspension components and engine system sectors at a worldwide level, and benefits from a progressive consolidation of the market and the resulting gradual reduction in the number of competitors.
With regard to the suspension components sector, the Group benefits from objective barriers to the entry of new competitors, as this sector is structurally capital intensive and a wide technological and qualitative gap puts manufacturers in low-cost countries at a disadvantage.
Similarly, the technological and qualitative gap represents a barrier to the entry of new competitors in the original equipment engine system sector as well, while in the aftermarket, important barriers to entry are represented by the Group’s exhaustive product range and by the lack of notoriety of the brands of manufacturers in low-cost countries.
As regards the risks associated with customer management, as well as the management of credit risk already mentioned within financial risk, the Group manages the risk of the concentration of demand by appropriately diversifying its customer portfolio, both from a geographic perspective and in terms of distribution channel (the major world manufacturers of cars and industrial vehicles in the original equipment market and leading international customers in the spare parts market).
Credit risk has significantly diminished in the independent aftermarket (IAM) thanks to the recent reorganisation of the business unit, whereas the overall upturn in sales volumes on global markets has helped reduce the actually limited risk exposure with original equipment (OEM) and original equipment spares (OES) customers.
As regards the risks associated with supplier management, mostly managed centrally by the Group, increased focus on multi-sourcing, especially from non-European suppliers and the ongoing search for alternate suppliers helps to reduce the risk of being excessively dependent on key suppliers/single suppliers.
It should be noted that this multi-sourcing approach, i.e. sourcing each raw material from multiple suppliers based in different world countries helps to reduce the risk of changes in raw materials prices mentioned earlier when discussing the management of financial risk.
The Group places particular attention on the management of country risk, given the considerable geographic diversification of its business activities at world level.
In terms of the risks associated with technological innovation, the Group constantly seeks to innovate products and production processes.
Specifically, the Group's pipeline includes certain product/process innovations that are not available to key competitors, such as new elastic suspension components made from composite materials, a new oil cooling technology that uses aluminium foam and an innovative particulate emission control system.
With regard to the risks related to health, safety and the environment, each subsidiary has its own internal function that manages HSE in accordance with local laws and in accordance with Sogefi Group’s guidelines. More specifically, the Holding Company Sogefi S.p.A. has approved an Environmental Policy for Health and Safety, which sets out the principles that all operations of subsidiaries should observe for the organization of the HSE management system. Special emphasis is placed on monitoring the risk of accidents, which is a pillar of the plant operating approach “Kaizen Way” adopted at all production sites across the world and coordinated by a dedicated central management team at Group level.
In correlation with the environmental policy, 16 plants in the Engine Systems business unit and 13 in the Suspension Components business unit are currently certified as complying with the international standard ISO 14001. Within the Engine Systems business unit, two companies have had their health and safety systems certified to the OHSAS 18001 standard. The activities carried out in the plants are audited by both experienced internal auditors and external auditors. Particular attention is paid to personnel training in order to consolidate and disseminate a safety culture.
As regards internal risks, namely risks mostly connected with internal activities and with the characteristics of the organisation itself, one of the major risks identified, monitored and actively managed by the Group is the risk of product quality/complaints due to non conformity: in this regard, it is worth drawing attention to the fact that the Sogefi Group considers ongoing quality improvement as a fundamental objective to meet customers’ needs. In this regard, a central organisation was set up at Group level with the specific task of monitoring product quality and preventing non-conformities on an ongoing basis through local plant units that operate under its supervision. The same focus on quality is placed on the supplier selection and approval process, as well as in the ongoing quality control of supplies used in the manufacturing process (raw materials, semifinished products, etc.), in order to prevent non-conformities in Group products partly or totally due to defective supplies. In correlation with the Group's quality policy, 18 plants in the Engine Systems Business Unit and 14 in the Suspension Components Business Unit are currently certified as complying with the international standard ISO TS 16949. Some plants’ systems are certified according to business specifications. Unforeseeable risk is adequately covered by insurance, as regards both third party product liability and the potential launch of product recall campaigns.
With regard to the risks associated with adequacy of managerial support (e.g. the effectiveness/efficiency of Group monitoring and reporting, of internal information flows etc.), information can be found in the “Annual Report on Corporate Governance”.
In terms of the set of risks associated with human resource management, the Group acknowledges the key role played by its human resources and the importance of maintaining clear relationships based on mutual loyalty and trust, as well as on the observance of conduct dictated by its Code of Ethics.
Working relationships are managed and coordinated in full respect of workers’ right and in full acknowledgement of their contribution, with a view to encouraging development and professional growth. Established selection processes, career paths, and incentive schemes are the tools used to make the most of human resources. The Group also uses a system of annual performance appraisals based on a clear definition of shared objectives, which can be measured in numerical, economic, financial, qualitative and individual terms. A variable bonus is paid depending on the degree to which said objectives are achieved. As regards medium-long term incentive schemes, again in 2014 a stock grant plan has been allocated to top management positions.
With regard to the risks associated to the management of Information Systems, the Group manages the risks linked to the potential incompleteness/inadequacy of IT infrastructure and the risks related to the physical and logical safety of systems in terms of the protection of confidential data and information by means of specific units at group level.
[1] For a detailed description of the centralised management of financial risk adopted by the Group, please see the “Explanatory and Supplementary Notes to the Consolidated Financial Statements”, Chap. E, Note no. 39.