Wärtsilä Corporation Annual report 2014

Risks and risk management

Wärtsilä, like all companies, is exposed to risk through the normal course of its activities. No business can be conducted without accepting a certain level of risk, and any expected gain from a business activity is to be assessed against the risk that activity involves.

The purpose of risk management is to ensure that Wärtsilä is able to effectively execute its strategy and to reach its targets, in the short term as well as over the long run. The key is to identify the risks that have the potential to restrain the company from reaching its goals, and thereafter to determine whether those risks are on an acceptable level.

Actions need to be taken to avoid, mitigate, transfer, or monitor identified risks. Wärtsilä's structured risk management process offers a set of reactive, proactive, protective, and preventive tools that are used not only to protect it against threats, but also to turn some of the risks into opportunities.

Risks can only be managed if they are identified and understood in advance, if plans have been made to manage them, and if a process of continuous follow-up is in place for the related controls. Therefore, risk management is a central part of Wärtsilä's strategic and operational management.

Risk management principles

Risk management at Wärtsilä is a continuous process of analysing and managing all the opportunities and threats faced by the company in its efforts to achieve its goals, and to ensure the continuity of the business. The basis for risk management is the lifecycle quality of Wärtsilä’s operations and products, and the continuous, systematic, loss-prevention efforts at all levels of the Group based on the principle “everybody is responsible”. In the long-term this is the only way to reduce the total risk related costs.

The Board of Directors and the Board of Management decide and give guidelines on strategic matters. Each Business is responsible for achieving its set strategic goals and for mitigating and managing its risks. The Corporate Risk Management function is part of Group Treasury, which reports to the Chief Financial Officer. The function is responsible for the risk reporting process and for conducting risk assessments with the Businesses and their underlying organisations. It co-ordinates risk management activities within the Group, reviews the business risk profile, and co-operates with the Businesses in the implementation of risk mitigation work. It is also responsible for the preparation of the group risk management policy, which was reviewed and revised during 2014 to accurately describe the current way of working in relation to risk reporting. The policy is Wärtsilä specific; it derives from the actual needs of the group and the Businesses and is, to a large extent, in line with the ISO 31000 standard. The ISO 31000 vocabulary has been adopted in order to streamline risk related communication within the group. Furthermore, the Risk Management function develops and manages global and local insurance schemes for insurable risks. The Audit Committee reviews and assesses the adequacy of risk management. The Internal Audit function is responsible for reviewing the risk management process on an annual basis.

Risk mitigation actions are decided in the normal course of business. At its meetings, the Board of Management conducts annual Management Reviews for each Business and certain main support functions, including their risks and risk mitigation. The risk map of the Group is then presented within the Finance Management Review once a year.

The risks are identified as being either internal or external; they are quantified in euro, and their probabilities are estimated. The Group risk report is then prepared and presented to the Board of Directors.

Risk management is part of the Businesses’ management process and risk management has been integrated into the Business Management teams’ agenda. The Businesses are accountable for organising and reporting on risk management from their underlying geographical business areas, business lines, organisations, and product centres. All follow-up actions are also the Businesses’ responsibility.

Risk categories

Wärtsilä defines risk as the effect of uncertainty on its objectives. A failure to capitalise upon an opportunity is also recognised as a potential risk. The magnitude of a risk is determined based on the probability of an occurrence and the potential loss exposure. The relevant risks for Wärtsilä have been classified under four categories, namely; strategic, operational, hazard, and financial risks. The potential loss expectancy is highest with strategic and operational risks and lowest with hazard and financial risks.

Risk radars are used to map the main risks within the risk categories. In annual risk assessment workshops between the Businesses and the Corporate Risk Management function, Business specific risk radars are generated for the use and evaluation of the Business Management teams, and are reviewed and updated by them on a regular basis. The Business specific radars are consolidated into a single Group Risk Radar, which is presented to the Board of Directors and the Audit Committee once a year. The purpose is to facilitate the discussion on risk and to give a quick overview of where priorities should lie in terms of risk management.

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