Risk Management

Principal risks across the Group are managed on a day-to-day basis by the executive management and steps are taken to access whether the business is within the Group’s risk appetite as set by the Board. The Board receives regular feedback on the degree to which management is operating within acceptable risk tolerances. All members of the executive leadership team have individual ownership for one or more of the principal risks. Management of these risks forms part of their personal objectives.

Set out below is the Board’s view of key risks and uncertainties currently facing the Group. They are ranked by net predicted impact.

Breach of legal and regulatory requirements

How does it impact the Group?

It is possible that our employees or overseas representatives could act in contravention of our stringent requirements in relation to bribery and corruption, anti-competitive behaviours and management of the third party partners (TPPs). This could cause major reputational and financial damage to the Group.

 

What are we doing to mitigate it?

Our commitment to ethical standards is articulated in the Code of Business Principles. This is supported by underlying policies which are reviewed regularly and enforced robustly. Non-compliances are dealt with through disciplinary procedures.

We have a particular focus on raising awareness as well as training on anti-bribery and corruption, and competition law. Our policies and processes are independently audited. Our whistle-blowing policy and associated procedures are integral aspects of the compliance framework.

The appointment, management and remuneration of TPPs operates independently of the sales function. The behaviours of TPPs are strictly monitored and the process is overseen by the General Counsel and Company Secretary, who reports directly to the Board on these matters.

We are accredited to the Banknote Ethics Initiative, which provides governments and central banks with assurance regarding our ethical standards and business practices.

Failure to win or renew a material contract

How does it impact the Group?

While we operate globally and have a diversified geographic, product and customer profile, we rely heavily on a small number of medium and longer term material contracts. Failure to win or renew a key contract could restrict growth opportunities and have a material impact on our financial performance and reputation.

 

What are we doing to mitigate it?

Our track record of product innovation and our commitment to quality, combined with a commercial approach to tendering, mean we are well positioned to win or renew strategic or significant contracts.

We are focused on retaining key contracts and on winning new opportunities as they arise. The most significant contract due for renewal in the next three years is the UK passport contract.

Pension fund deficit

How does it impact the Group?

The Group’s post-tax defined benefit pension obligations were valued at £196.7m as at 26 March 2016 under IAS 19. If at the next triennial valuation in 2018 the deficit increases further under actuarial valuation, the future cash flow commitments may put future capital investment and dividends at risk.

 

What are we doing to mitigate it?

We are working with the pension trustees to explore methods of improving the return of the scheme’s assets and reducing the scheme’s liabilities.

Failure to maintain and exploit competitive and technologically advanced products and services

How does it impact the Group?

We operate in competitive markets. Our products and services are characterised by continually evolving industry standards and changing technology, driven by the demands of our customers. Longer term threats include the growth of e-commerce, the emergence of cashless societies and lower barriers to manufacturing. Failure to maintain and exploit technical innovation and intellectual property may result in lower demand, loss of market share and lower margins.

 

What are we doing to mitigate it?

We maintain sustained levels of investment in R&D to ensure a steady flow of ideas into our innovation pipeline. Our product roadmaps are designed to meet our customers’ needs. We aim to double our R&D investment in the five years to 2020.

We continue to invest in new technologies to enable us to advance our R&D capabilities, and have increased our focus on digital technologies since the strategy review in 2015.

Cultural change

How does it impact the Group?

We carried out a reorganisation in 2015/16. The focus is to achieve sustained cultural change in order to enable us to adapt to a rapidly changing market environment. Without a change in our culture, we may not be able to execute the strategy laid out in May 2015.

 

What are we doing to mitigate it?

We have a three year programme of training, communication and recruitment to fill capability gaps. This plan is on track and the outcome is expected to be a change in behaviours and skills that will enable us to be a more dynamic, agile and high performing organisation.

We have set specific targets for performance appraisal and employee engagement. The results of the employee engagement survey in late 2016 have been cascaded throughout the business, and we have developed appropriate response plans.

Failure to secure strategic partnerships to address key issues

How does it impact the Group?

Our ability to address the key issues of volatile demand in banknotes and overcapacity depend on third party agreements. If we fail to do so, the predictability of future revenue streams and our ability to increase the return on capital employed may be compromised.

 

What are we doing to mitigate it?

We are in ongoing discussions with a number of potential strategic partners for our paper business, while actively looking for long term outsourcing partners for banknote print. If third party agreements cannot be concluded, we will continue to mitigate this risk through a combination of driving efficiency, diversifying revenues, and investing in innovation.

Information security risk

How does it impact the Group?

The confidentiality and integrity of our customers, employees and business data could be affected by factors that include human error, ineffective design or operation of key data security controls, or by the breakdown of IT control process. Any compromise in the confidentiality of information could impact our reputation.

 

What are we doing to mitigate it?

Our corporate information systems are accredited to the ISO27001 Information Security standard.

We maintain a strict control environment to enforce disciplined information security practices and behaviours. A number of key technical controls are in place to manage this risk, including network segregation, access restrictions, system monitoring, security reviews and vulnerability assessments of infrastructure and applications.

We regularly review all aspects of information security arrangements, and our employees undertake mandatory information security e-learning.

Loss of a key site

How does it impact the Group?

A number of our manufacturing sites are exposed too business interruption risks. The total loss of any one of these key sites could have a major financial impact, particularly where the site represents a single source of supply.

 

What are we doing to mitigate it?

Our head office and the banknote production operations in Debden, UK are both accredited to ISO22301:2012 Business Continuity standard.

We maintain a high degree of interoperability across our banknote production and security printing sites. We aim to minimise risk by adopting the highest standards of risk engineering in our production processes.

In recognition of our customers’ increasingly high requirements regarding business continuity. We continue to enhance the resilience of our major facilities in line with the ISO standard.

Health, safety or environmental failure

How does it impact the Group?

All of our activities are subject to extensive internal health, safety and environmental (HSE) procedures, processes and controls. Nevertheless, there is a risk that any failure of an HSE management process could result in a serious injury or an environmental breach.

 

What are we doing to mitigate it?

At all major facilities, we have a robust HSE management system which is internally audited and certified to the OHSAS18001 and ISO14001 standards.

The Group HSE Committee regularly reviews HSE performance. This is also monitored by the Chief Operating Officer’s leadership team and reported to the Board monthly. Each manufacturing facility has clear HSE action plans which are prioritised, monitored and subject to review by local senior management.

Quality management failure

How does it impact the Group?

Each of our contracts has a unique specification on product quality and delivery. Some of these contracts demand a high degree of technical specification. A shortfall in quality management may expose us to additional cost to remake as well as to any associated warranty costs.

 

What are we doing to mitigate it?

We operate an established quality management system across all production sites. All major sites are certified to ISO9001 quality management standards.

In 2012, we introduced an Operational Excellence programme to further drive continuous improvement across our manufacturing sites. This programme is well established and continues to deliver operational enhancements.

Supply chain failure

How does it impact the Group?

We have close relationships with a number of key suppliers, including unique producers of specialised components that we incorporate into our finished products. Failure of a key supplier, the inability to source critical materials or poor supplier performance could disrupt our supply and ability to deliver on time and in full.

 

What are we doing to mitigate it?

Our organisation is reduced because we source many components from within our own organisation.

Where we rely on external supply, we have established procedures for identifying possible risks for each supplier. Key suppliers are managed through a supplier relationship management programme. This incorporates checks on their financial strength and their ability to deliver to our quality standards and security, as well as their business continuity arrangements. Key suppliers are audited on a rotational basis.

As a contingency, alternative suppliers are pre-qualified wherever possible and where necessary we retain higher levels of stocks.

Unpredictability of substantial contract awards

How does it impact the Group?

The timing and size of contract awards is often uncertain. Delays lead to volatility in our order book and financial performance.

 

What are we doing to mitigate it?

We maintain close and regular contact with customers so that any changes are recognised promptly.

We monitor our sales activity, order pipeline and forward order book to optimise production planning. We also monitor any delays in order confirmation on a weekly basis.

To minimise future unpredictability, we proactively pursue longer term commitments from customers. We also aim to grow recurring revenues by expanding our digital and service offerings.