Risk management and awareness are important elements in the group’s organisational culture and educational activities. Overall risk management is primarily handled by the following corporate functions, in close cooperation with the business areas:
- Enterprise risk coordinates risk management outside the traditional project and financial areas
- Internal compliance audits and secures operations according to the framework
- Project and operational support provides assistance with project assessments in the tendering and execution phases, and chairs the group’s corporate risk committee
- Treasury is responsible for the group’s exposure to financial markets, and is a permanent member of the group’s investment committee
- Corporate tax handles tax risk related to transactions, operations, tax returns and audit, and is a permanent member of the group’s investment committee
- Insurance handles the purchase of the group’s insurance programme and provides insurance-related support for projects, as well as operating as the group’s captive underwriter
- Corporate legal supports all these functions in their management of risk and is a permanent member of the group’s corporate risk and investment committees. It also handles contractual and legal issues related to projects, partners, contracts and disputes, and follows up on the company’s compliance with applicable regulatory and legal requirements.
Enterprise risk
The enterprise risk function is responsible for ensuring that the group’s own framework and management tools – including its principles, procedures, policies, instructions and standards – are in place and regularly updated. This includes group wide principles, procedures and instructions for the way various types of risk are to be identified, reported and managed. The framework also embraces the group’s authorisation matrix which defines what decisions can be taken at various levels in the group – including those which must be reached by the Board of Directors. Evaluation of country risk is an integrated part of the group’s decisionmaking processes. The enterprise risk function, together with other staff functions, arranges analysis of relevant countries. These assessments focus primarily on ethical, political and reputational risks. In addition, the project and operational support function conducts a detailed assessment of execution risk related to relevant countries for significant projects. Attention is paid to integrity in Aker Solutions’ operations, and significant effort is devoted to risk management in this area – not least in relation to partners and other business relations. A summary of the most important principles and policies is established in the group’s code of conduct, which was published in the autumn of 2009. Targeted training programmes strengthen understanding of, and help to ensure compliance with, the group’s policies. The group’s whistleblowing policy provides for the notification, through several channels, of any failure to comply with our code of conduct. The central whistleblowing function is assigned to the enterprise risk function. The procedures involved are specified in the group’s People Policy, and are consistent with the provisions of the Norwegian Working Environment Act.
Internal compliance
The internal audit function assists corporate management in verifying the group’s principles, procedures and instructions are implemented in all its operations, and undertakes assessments and analyses to ensure effective internal control routines. It also evaluates whether internal requirements are implemented and followed; that fixed assets are adequately secured; and that reported operational and financial information is reliable. The annual internal review programme is drawn up in cooperation with the business areas. Previous reviews are followed up to check that recommended improvements have been made.
Project and operational support
This function supports projects with evaluation and control of risk during the tendering and execution phases. Assessments of the risk related to contracts, both potential (tenders) and awarded, are conducted continuously. The business areas are responsible for maintaining an overview of their risk exposure and of potential opportunities, and for implementing the necessary measures. Project risk includes the ability to deliver contracts at the agreed time and to the agreed quality, functionality and price. There is also a risk related to the customer’s ability to fulfil its commitments under the contract. Delivering projects and equipment according to the contract and within the anticipated cost framework is critical to the group’s results. This implies that understanding of, and control over, the risks associated with actual project execution is an important priority for Aker Solutions. Project and operational support is responsible for a central risk management tool known as Aker Solutions’ Project Execution Model™ (PEM™). This model is used by all the group’s business areas to ensure uniform execution and follow-up of projects and deliveries in every phase – evaluation, tendering, decision, execution and completion. The PEM™ allows for each business area’s differing types of projects and deliveries, while securing a unified approach and providing opportunities for crossorganisational deliveries. Project reviews related to project milestones help to ensure that quality, functionality, time and cost requirements are in place before entering the next phase. Project and operational support participates in a number of these reviews together with the business areas.
Treasury
The corporate treasury function is responsible for managing financial market risk and the group’s exposure to financial markets. Aker Solutions has defined procedures and routines for managing the group’s financial market exposure. Financial risk includes currency, interest rate, counterparty and liquidity risk. Guarantees are also issued to customers in connection with the group’s activities.
- Currency risk: operating units in Aker Solutions identify their own foreign currency exposure and mitigate this via corporate treasury when contracts are awarded. Such cover is provided in the operating unit’s functional currency. All major contracts are furthermore hedged in the external market and documented to qualify for hedge accounting. More than 80 percent of project related currency risk exposure either qualify for hedge accounting or are embedded derivatives. Corporate treasury also has a mandate to participate actively through positions in the currency and interest rate markets within clearly defined limits and with strict stop-loss restrictions. All open positions are subject to continuous market assessment. This activity delivered earnings of NOK 18.9 million in 2009.
- Interest rate risk: it has been decided that 30–50 percent of the group’s gross debt will have fixed interest rates with durations related to the outstanding debt at any given time Floating and fixed interest rate loans are combined with interest rate swaps. 46 percent of the borrowings had fixed interest rate at the balance sheet day
- Counterparty risk: assessments are made of major contractual counterparties and sub-contractors. Risk is reduced through bank and parent company guarantees and/or structuring of payment terms. Where bank risk and the placement risk for surplus liquidity are concerned, specific maximum levels have been set for the group’s exposure to each financial institution. A special debtor list is signed annually by the group’s CFO.
- Liquidity risk: the group’s policy is to maintain satisfactory liquidity at the corporate level. This liquidity buffer is expressed as the sum of undrawn bank credit facilities and available cash and bank deposits. Working capital will vary over time, depending on the composition of revenues in the various segments – and good liquidity is important. Aker Solutions ASA issued a five-year bond loan of NOK 2.1 billion in the Norwegian market in June. A new five-year bank loan of NOK 750 million was established in October. The liquidity buffer amounted as of 31 December 2009 to NOK 8 514 million and corresponded to roughly 16 percent of 2009 revenues. NOK 2 087 million of this amount was related to projects or placed in countries where it was not available to the corporate treasury at short notice. The average weighted duration of existing outstanding debt and committed credit facilities is 3.08 years. Aker Solutions is in compliance with all the financial covenants in its loan agreements (see also note 27 to the consolidated accounts on borrowings).
- Guarantee risk: a significant proportion of business area contracts are supported by bank and/or insurance guarantees. These are largely on demand, which means that they can fall due for payment at short notice. Careful assessments are made before providing such guarantees, with insurance policies to protect against unfriendly claims. Bank/insurance guarantees totalling NOK 7 284 million had been issued under the group’s guarantee agreements with financial institutions as of 31 December, including guarantees worth NOK 2 742 million issued during 2009. Parent company guarantees worth NOK 57 070 million had been issued on behalf of the group by 31 December. This is the contract value at the date of award, with no account taken of the reduction in liability due to contract progression. Further details about uncertainties and contingent events are presented in note 32 to the consolidated accounts describing contingent events.
Corporate tax
Corporate tax manages tax-related risk in the following areas:
- Transaction risk is managed by subjecting all transactions (both external and internal) to special approval procedures. In connection with internal transactions, the group has established guidelines to ensure the preparation of documentation which satisfies local transfer pricing regulations.
- Operational risk is identified and managed through the use of various tax standards established by the group. Deviations from these standards must be approved by corporate tax. Corporate tax is also involved in all tenders which cross borders. A special centre of expertise (the international assignment centre) manages employee-related tax risk in connection with the transfer of personnel between countries.
- Various risks associated with completing and submitting tax returns for companies in the group are managed through internal guidelines. All subsequent communication with the tax authorities is conducted in close cooperation with corporate tax.
Aker Insurance Services and Aker Insurance
The Aker Insurance Services AS insurance intermediary is the group’s internal centre of insurance expertise. It is responsible for establishing and following up the group’s global insurance programme as well as defined countryspecific policies. This work includes a continuous assessment of the group’s insurance needs, taking account of contractual requirements, the nature and scope of the business, and the availability of optimum insurance products in the market. In addition, Aker Insurance Services supports the business areas and other corporate functions in evaluating insurance-related risk in contracts, primarily during the tendering phase. This includes assessing the need to purchase project-specific policies and evaluating policies established by customers. These activities also embrace responsibility for ensuring that local expertise is available to the business areas. Aker Insurance AS is the group’s captive underwriter. It is licensed to provide the group’s non-life insurance, both directly and as a re-insurer. As a general rule, Aker Insurance AS will be used to provide insurance if this can be done on more advantageous terms than those offered in the external underwriting market.
Corporate legal
Corporate legal collaborates closely with all other corporate functions to secure and implement the best possible overall risk management. It is also a permanent member of the corporate risk and investment committees and routinely participates in assessing and managing various aspects within the purview of the enterprise risk function. Corporate legal also provides direct support for tendering organisations in connection with assessing and managing the contractual and legal risks related to inquiries and tenders. In addition, it helps to ensure that tenders and contracts take account at all times of statutes, statutory regulations and rules which apply in the relevant jurisdictions where projects are executed. Through the development, administration and continuous improvement of business norms, best practice guidelines and various standard documents, the group seeks – through corporate legal in collaboration with other corporate functions – to help minimise the scope of unknown and uncontrollable risks. This risk management is supported by various types of training and education for project and contract managers. In connection with the acquisition or disposal of businesses, corporate legal also conducts company reviews, prepares contracts and checks compliance with legislation and statutory regulations in the relevant jurisdictions. A company of the size of Aker Solutions will find itself, from time to time, in disputes during the lifetimes of projects. In close collaboration with the project and operational support function, corporate legal supports project organisations with contractual and risk management, both to avoid disputes and to enhance the predictability of outcomes to a possible dispute. Corporate legal follows up ongoing disputes closely, and is responsible for ensuring that the group has the best possible control of the latent financial risk represented by such actions. More detailed information can be found in note 32 to the corporate accounts describing contingent events.
Corporate committees
The group has various levels of evaluation and decision-making fora for both project delivery and investment.
Corporate risk committee
The corporate risk committee reviews and assesses the tenders that must be approved by the President & CEO or the Board of Directors, pursuant to the authorisation matrix. With members consisting of experienced project managers and participants from corporate functions, the committee reviews the opportunities and risks associated with entering into and executing projects. The results of these reviews are submitted to the business areas’ management and decision-makers with relevant recommendations. Project and operational support administers and chairs the corporate risk committee. In 2009 they reviewed 60 of the largest tenders.
Corporate investment committee
The corporate investment committee reviews all proposals to acquire or divest substantial operations, and major investments in fixed assets (real estate, machinery or equipment) before they are submitted to the executive management or the Board of Directors for approval. The committee, which represents relevant staff functions, is involved in investment processes at an early stage and provides thorough assessments of this type of decisions and checks that the investments satisfy the group’s required rate of return. The committee often provides guidance on future work in the business and checks that investments made are followed up including post investment reviews.