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The Executive Board is responsible for the control environment including internal risk management and control systems, and for the optimum management of the strategic, operational, financial, tax and reporting risks confronting Kendrion. The internal risk management and control systems extend to issues including culture, policy-making, processes, duties, influencing conduct and other aspects of the organisation that jointly provide for the achievement of targets and the prevention or timely identification of potentially material errors, loss, fraud, or infringement of legislation and regulations.
During the year under review the major elements and foundations of Kendrion’s internal risk management and control systems were as follows:
Code of Conduct
Kendrion has implemented a Code of Conduct in its organisation that applies to all Kendrion staff, including the Supervisory Board. The principles and best practices established in this Code reflect the main values that need to guide Kendrion’s staff in the performance of their duties.
The core themes include market position, authorities, gifts, anti-bribery, corporate social responsibility, accountability in general, and the obligation for due care regarding safety and health, the environment, and social interests. Kendrion promotes compliance with the Code of Conduct by continually bringing the Code to the attention of (new) managers and staff. Kendrion also has a Supplier Code of Conduct in place to address the above themes in the supply chain.
Kendrion offers employees an opportunity to report irregularities or suspicions without jeopardising their (legal) position. Any such report gives cause to an internal investigation. In 2016, an external hotline was introduced. This gives employees an additional means of submitting such reports in their own language by phone or via a computer in a confidential manner if they so choose. Kendrion also appointed Confidential Counsellors whom employees can contact if they wish to make confidential reports about (suspicions of) irregularities. No irregularities were reported in 2016.
Regulations to prevent insider trading
Kendrion has implemented regulations to prevent insider trading which were updated as a consequence of the introduction of the Market Abuse Directive in the summer of 2016. These regulations include a prohibition on dealing in Kendrion’s shares in the period prior to the publication of the quarterly, half-yearly and annual figures.
Rules and Regulations and Letters of Representation
Kendrion employs Rules and Regulations and Letters of Representation. The Rules and Regulations constitute rules of behaviour governing all Kendrion Managing Directors.
The Letters of Representation are submitted once a quarter, in a bottom-up procedure, ultimately to Kendrion’s CFO. All officers are required to sign the letter to confirm to their managers that the financial and non-financial information they have reported is correct and complete and no violations of regulations and the Kendrion Code of Conduct with material impact occurred.
Group Reporting Manual
Kendrion has implemented a Group Reporting Manual governing all operating companies to provide for correct financial reporting. The Manual is continually updated. To this end the company has implemented measures including the formation of the Kendrion Group Reporting Committee, with representatives from the operating companies. Reporting sets are standardised based on a standard Chart of Accounts. A Corporate Social Responsibility Reporting Manual has also been implemented to ensure correct non-financial reporting.
Planning and control cycle
Insight into Kendrion’s performance is obtained from the monthly reports of the current figures submitted by all the operating companies, weekly cash forecasts and daily consolidated revenue reports. In the summer of each year, Kendrion starts preparing a Mid-term Plan which is finalised in the fourth quarter. In 2016 the planning horizon of the Mid-term Plan was extended from three to five years. This plan provides insight into the strategic course of the companies and business units.
The Mid-term Plan is accompanied by a more detailed annual budget to provide a precise management tool. A complete forecast prepared each quarter offers insight into financial expectations until the end of the year, and updates the expected performance against the budget. Assessment and follow-up on the progress, development of key performance indicators and deviations from short- and long-term targets are held at various levels in the organisation. Kendrion has implemented a capital expenditure procedure which makes use of standard investment request forms. Executive Board approval is required for new projects with planned annual revenue in excess of EUR 1 million to test return on investment, payback period and cash flows. Executive Board approval is also required for capital investments in excess of EUR 100,000.
Periodic reports and meetings
Regular discussions in weekly conference calls between the Executive Board, the Management Team and similar reviews within the business units address the risks and internal risk management system. Each business unit submits a comprehensive written report at least once a quarter which provides details about the financial and operational situation (to which CSR has been added in 2016) and the status of any current claims and proceedings, where relevant.
Strategic and business risk management
In 2016, the Executive Board together with the senior management of the holding, business units and operating companies conducted a risk survey which reviewed over forty potential risks that Kendrion might be confronted with in relation to the company’s strategic objectives. All participants were also requested to add additional potential risks based on their own experience and expertise. Each risk was scored on perceived likelihood, impact and vulnerability. Based on a multiplication of the scores and an evaluation per risk, a top ten of risks per participant was calculated. This initial result of the survey was discussed with business unit Management Teams based on their experience and professional judgment in order to establish the main risks for Kendrion. The final results were extensively discussed with the Supervisory Board. During this discussion the Supervisory Board gave its view and input on the potential risks and the final results of the risk management survey. The risk assessment is evaluated at periodic intervals in terms of relevance and mitigating actions.
Operational risk management
Kendrion’s companies make active use of quality systems designed to improve the processes. Virtually all companies have been awarded ISO certification, and possess the relevant safety and quality certificates.
Financial reporting risk management
The controllers’ regular duties include the structured management of financial reporting risks. Pursuant to this duty the controllers periodically monitor the organisation’s implementation of and compliance with control measures, i.e. monitor the use of control measures as an integrated element of the Group’s operations. Kendrion has also implemented corporate guidelines that specify the monthly closing procedures and the controls to be performed. Kendrion has an internal audit programme (KiC: Kendrion-in-Control) to determine the effectiveness of Kendrion’s control framework. Companies with an annual revenue of more than EUR 15 million are audited at least once a year. Companies with annual revenue of less than EUR 15 million are audited at least once every two years. The internal audits encompass the revenue and accounts receivable, the purchases and accounts payable, inventories, fixed assets, human resources and (tax) compliance reporting cycles. The internal audits also include procedures relating to fraud risks.
Compliance & regulation
Kendrion must comply with the local legislation and regulations in all countries in which the company is active. The responsibility for compliance rests with the local management. Kendrion introduced a Legal & Compliance framework in 2015. Transactions and affairs that could be of influence on the legal structure of the Kendrion group companies and material claims should be addressed at corporate level. Strict rules for the legal and insurance review of material contracts are prescribed. Kendrion obtains advice from external legal experts to acquire timely information about the latest developments in the legislation and regulations. Kendrion has also arranged for liability insurance at corporate level to protect the companies and their Managing Directors from possible claims. The Legal & Compliance framework includes internal legal & compliance audits conducted from time to time at the operating companies to investigate issues including compliance with local legislation and regulations.
Kendrion has also adopted an Anti-Bribery and Corruption (AB&C) policy. This policy encompasses issues including the periodic performance of risk assessments, due diligence, communication and training. Kendrion has introduced an online compliance training, which is compulsory for all staff working in purchasing, sales, management and for some other specific officers. An additional policy for competition law compliance, including online training for relevant staff, was introduced in 2016. Several sales teams within the Kendrion Group had contract training during 2016.