Updated: 21.10.2011
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Risk management
While executing its strategy and reaching agreed business objectives, Sanoma and its businesses encounter numerous risks as well as risk taking opportunities. Managing business risks and the opportunities associated with them is a core element in the daily responsibilities of Sanoma's management.
Risk management policy and process
Sanoma's Risk Management Policy describes the scope, objectives, processes as well as roles and responsibilities of various corporate bodies.
The Board of Directors is responsible for approving and setting Sanoma's Risk Management Policy and for overseeing the effectiveness of risk management.
The Audit Committee regularly reviews and monitors the implementation of the Risk Management Policy and risk management process.
The President and CEO, with the support of the Executive Management Group, is responsible for defining risk management strategies and procedures, and for setting risk management priorities. He is also responsible for defining changes in the risk reporting process, the Sanoma common risk language and in the applied risk model.
As a part of its duties, Group Internal Audit evaluates the overall effectiveness of risk management processes.
Strategic business units and businesses identify, assess, manage and monitor risks related to the objectives of their operations. Risk coordinators of the Group and the strategic business units coordinate the risk management process within strategic business units and at the Group level and produce a periodical risk report for the President and CEO and the Executive Management Group. Updated Group risk assessment results with related ongoing or planned mitigation actions are communicated to the Audit Committee and further to the Board of Directors twice a year.
The Group's risk management process is integrated into the systems of strategic planning, management monitoring and quarterly reporting.
Group internal control systems, as well as internal audit and external audit activities are presented in more detail in the Corporate Governance section.
Identified key risks
Normal business risks associated with the industry relate to developments in media advertising and consumer spending. Media advertising is sensitive to economic fluctuations. Therefore, the general economic conditions of the countries in which the Group operates and the economic trends of the industry influence Sanoma’s business activities and operational performance.
Around a quarter of Sanoma's net sales is derived from media advertising and some 50% from consumers as single copy or subscription sales or from retail. Rapid changes in media advertising and consumer confidence will affect the Group's results. Newspaper and TV advertising react fastest to changes in media advertising expenditure. Sanoma's diversified operations in various fields of media in over 20 European countries balance the effects of market fluctuations.
In Sanoma's risk model, the Company-specific risks are divided into four main categories: strategic, operational, financial and hazard risks. The most significant risks in each category, that is, those that could have a negative impact on Sanoma's business activities, operations' performance, or financial status if realised, are illustrated below.
Strategic risks
Strategic risks include risks related to changes in customer preferences or the competitive situation, risks related to suppliers or operating countries, intellectual property rights as well as to laws and regulations. Risks related to M&A, Sanoma's strategic agility, the rapid development of technology and innovation capabilities are also included in strategic risks. At the Group level, the most significant risks relate to the changes in customer preferences, the threat of new entrants and the success of M&A. The management and protection of intellectual property rights are related to many of these risks.
Changes in customer preferences and the threat of new entrants
Many of the identified risks relate to changes in customer preferences. This applies both to the changes in consumer behaviour as well as to the changes in business-to-business customers' behaviour and influence.
Ongoing digitisation is the driving force behind many of these changes. The increased usage of smart phones and the arrival of iPads and other tablets will change the way people consume media. Sanoma is well prepared for this change and has action plans in all its divisions on how to respond to this challenge.
With regard to changing customer preferences and digitisation, new entrants might be able to better utilise these changes and therefore gain market share from Sanoma's established businesses. To further enhance Sanoma's capability to be aligned with these changes, the Group is introducing a new innovation programme in early 2011. It will provide more focus on the Group's innovation efforts and provide tools to accelerate organic growth.
Technological advancements generate new opportunities for new digital business activities for multimedia companies such as Sanoma. Online operations are one of the focus areas in Sanoma's growth strategy. Cross-divisional innovation teams ensure that expertise and best practices are shared within the Group.
Mergers & Acquisitions
Sanoma has grown vigorously through acquisitions. Due to these acquisitions, the Group may become exposed to risks related to new markets and different business environments. The acquisitions also include risks related to the actual transaction process, integration of the new business, retention of key personnel and achieving the targets set for operations.
Regarding risks associated with acquisition decisions, the Sanoma Corporate Governance Principles specify the approval procedures for investments (including acquisitions.) The Group's M&A Investment Policy defines the decision-making and follow-up within the Group with respect to mergers and acquisitions, how the M&A projects are organised and how the decision-making is to be formatted. In addition, various bodies discuss investments when addressing strategies as well as action and operational plans also outside the formal process set out in the M&A Policy. Final investment decisions are made on the basis of specific proposals, in accordance with the form set out in the M&A policy and authorisations governing approval of investments. A specific proposal for a major acquisition is submitted for the purpose of decision-making providing information on e.g. the strategic reasons for the transactions, key terms of the underlying documentation and synergy calculations. In the Group's M&A policy, there is also a procedure for follow-up of acquisitions.
Intellectual Property Rights
Key Intellectual Property Rights (IPRs) with regard to Sanoma's products and services are the copyrights including publishing rights, trademarks, business names, domains, know-how, and e-business-related patents and utility models owned and licensed by the Group.
The acquisition, management and exploitation of IPRs involve risks associated with the scope of rights, continuity of rights and insufficient protection of rights or infringements. Unauthorised use of IPRs increases with the digitisation of media. Copyright enforcement lags behind rapid technology development making it possible for new players to enter into the online advertising market without their own investments into content.
In the wake of the European Commission having published a Digital Agenda for 'one European digital market', new regulation increases not only competition but complexity and cost pressure.
Sanoma manages rights in accordance with the Group-wide IPR policy and procedures. Because of the dispersed IPR portfolio, no material risks arise in relation to any individual IPR cases.
Operational risks
Operational risks relate to the quality of products and services, customer satisfaction, readiness to change, ICT, integration of new operations, human resources and leadership as well as to knowledge management.
Operational risks related to product and service quality and customer satisfaction vary by division. At the Group level, the most significant risks relate to leadership and human resources, knowledge management as well as to ICT systems.
Leadership and human resources
The Group's successful performance depends on how competent its management and other personnel are, and on the ongoing development of their competencies and skills in developing appealing products and services in accordance with customer needs. The Group's success also requires that the leadership culture supports change management and encourages managed risk taking.
Recruiting and retaining skilled and motivated personnel is estimated to become more difficult in years to come as a result of various factors, including changes in the age structure of the population and intensifying competition for personnel. Sanoma is responding to these challenges by continuously improving, among other things, in-house training programmes and increasing opportunities for job rotation. Special focus in leadership training, more systematic succession and career planning as well as the development of supporting HR systems are used in the mitigation of these risks. In addition, remuneration principles and practices are continuously developed and readjusted in order to enhance retaining and recruiting talented personnel and to help in change management.
Since Sanoma employs numerous professionals, it is estimated, however, that the discontinuation of one key person's employment would not have an adverse effect on the Group's result nor on its ability to execute its strategy.
Knowledge management
The management and transfer of knowledge across the Group are crucial for the success of Sanoma. Even though the principle of independent divisions has been one of the cornerstones of Sanoma's governance model, it is important that information, best practises and successful business concepts are shared within and between divisions.
Sanoma constantly works on making the information flow within the Group as smooth as possible. The transformation of the Group-wide intranet into an electronic desktop solution is one example of actions used in the mitigation of risks related to the knowledge management. Several cross-divisional teams, for example the Future Media Team, Online Execution Team and Innovation Teams that were formed to steer and implement Sanoma's digital strategy are other examples of knowledge sharing within the Sanoma Group.
ICT systems
Functioning and reliable ICT systems are integral aspects of the Group's business. These systems include newspaper and magazine subscription, advertising and delivery systems, as well as various production control and customer relations management systems. Risks related to information systems may arise in connection with the confidentiality, integrity or availability of information as well as reliability and compliance of data in the systems. These can be divided into physical risks (fire, sabotage and equipment breakdown) and logical risks (related to data security, employees and software failure). It is highly important that the Group succeeds in renewal projects of its critical, integrated systems, such as subscription systems. Sanoma has also established separate continuity plans for the systems critical to the Group.
Sanoma's ICT Governance model is being updated and it will be launched in 2011. It includes roles and responsibilities also regarding IT security issues.
Financial risks
Sanoma's financial risks include interest rate and currency risks as well as risks related to liquidity, counterparties, impairment and availability of capital. At Group level, the most significant risks relate to changes to interest rates, and refinancing risks.
Sanoma manages its long-term financial risks by maintaining a financial structure equivalent to a good credit rating, with the aim of ensuring sources of low-cost financing. Meeting this aim is based on close co-operation within the Group, operating with several banks and actively monitoring developments in the financial market. The Group mainly operates in the euro area, which essentially reduces the influence of currency risks. Sanoma may also mitigate financial risks with various financial instruments whose use, effects and fair values are clearly verifiable.
A more detailed description of the Group's financial risk management can be found in Note 26 of Sanoma's Financial Statements.
As a result of acquisitions, the consolidated balance sheet on 31 December 2010 included about EUR 1.9 billion in goodwill, publishing rights and other intangible assets, most of which is related to magazine operations. In accordance with the International Financial Reporting Standards (IFRS), instead of goodwill being amortised regularly, it is tested for impairment on an annual basis, or whenever there is any indication of impairment. The impairment losses on goodwill and other immaterial rights for 2010 totalled EUR 38.5 million (2009: EUR 0.9 million), and there were no indicators of other impairment losses.
Hazard risks
Hazard risks include business interruption and risks related to health and safety issues or environmental issues. Material hazard risks are mitigated through process management and operational policies as well as through contingency planning and insurance. Due to the nature of Sanoma's business, hazard risks are not likely to have a material effect on Sanoma's performance.
