While executing its strategy and reaching for 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. The President and CEO is also responsible for defining changes in the risk reporting process, in the Sanoma common risk language and in the applied risk model.
The Audit and Assurance function coordinates the Group risk management process and produces periodical risk reports 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 for strategic planning, management monitoring and quarterly reporting. Strategic Business Units (‘SBU’) and businesses identify, assess, manage and monitor risks related to achieving the objectives of their operations.
Group internal control systems, as well as internal audit and external audit activities are presented in more detail in the Corporate Governance Statement.
Identified key risks
General 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.
In 2016, 36% of Sanoma’s net sales was derived from media advertising and 33% from single copy or subscription sales. Rapid changes in media advertising and consumer confidence will affect the Group’s results.
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 include risks related to changes in customer preferences or the competitive situation as well as risks regarding suppliers or operating countries, intellectual property rights, laws and regulations. Risks associated with mergers and acquisitions, Sanoma’s strategic agility, development of technology and innovation capabilities are also included in strategic risks.
At the Group level, the most significant risks relate to changes in customer preferences and the threat of new entrants. The management and protection of customer data and intellectual property rights are also associated with 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 the behaviour and influence of business-to-business customers.
Ongoing digitisation and mobilisation is the driving force behind many of these changes. The increased usage of mobile devices has changed the way people consume media. There is also a trend of decreasing viewing time in free-to-air TV. Sanoma’s strategic business units have action plans on how to respond to this challenge.
The media units are, for example, developing hybrid products and services built around specific domains. Nevertheless new entrants and / or new technological developments might be in a better position to utilise changes in customer preferences and digitisation, and therefore gain market share from Sanoma’s established businesses. Sanoma constantly develops its offering to advertisers, introducing services such as cross-media solutions, native/branded content and sales of premium content.
Mergers & Acquisitions ('M&A')
Sanoma has previously grown through acquisitions. Acquisitions can 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 Policy defines the decision-making and follow-up within the Group for 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 that are 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 issues such as the strategic reasons for the transactions with related risks, 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.
Laws and regulations
Changes in laws and regulations may affect Sanoma’s ability to effectively conduct business. Changing regulations regarding the use of consumer data for commercial purposes and the deterioration of publisher’s and broadcaster’s copyright protection or changes in legislation related to education can have impact on Sanoma’s commercial propositions and content investments. Furthermore changes in tax legislation, such as higher value added tax rates for printed products, might have significant financial consequences.
Monitoring and anticipating developments regarding changing legislations and adapting business models accordingly are ways to partially mitigate these risks.
Intellectual Property Rights (‘IPR’s)
Key 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 its Digital Single Market Strategy, emerging new regulation will likely have an impact in existing business models concerning licensing and distribution of content, and increases competition, 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.
Political changes or instability in countries Sanoma is operating in may affect the ability to effectively conduct business. Reasons can be a change in government, legislative bodies, other foreign policy makers, or even military intervention. Monitoring and anticipating developments regarding changing political climate are a priority for management in countries where Sanoma conducts business.
Currently Sanoma faces political risks in particular in Poland, where legislative changes can have significant impacts on the learning business. Monitoring and anticipating developments regarding changing legislations and adapting business models accordingly are ways to partially mitigate these risks.
Operational risks relate to the quality of products and services, customer satisfaction, readiness to change, information and communication technologies, 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 strategic business unit. At the Group level, the most significant risks are associated with leadership and human resources, knowledge management and (security of) information technology systems.
Leadership and human resources
The Group’s successful performance depends on how competent its management and its personnel are, as well as the ongoing development of their competencies and skills. In particular, their competencies and skills in developing appealing products and services for Sanoma’s customers in line with customer needs in a constantly and rapidly changing environment play an important role. The Group’s success requires a culture that supports innovation, facilitates change and renewal and encourages balanced risk taking. Sanoma’s leadership plays a big role in creating this culture and in leading by example.
Nowadays, to recruit and retain talent is becoming more and more a challenge. Sanoma’s primary respond to this is to offer an innovative workplace and learning opportunities for all employees, by providing for example e-learning via an online Learning Management System and other in-house training programmes in each of its businesses. The learning opportunities focus mainly on transforming employees’ current skills to skills that are required in the digital world. Also Sanoma’s strong brand portfolio makes the company interesting for potential employees. Finally, remuneration principles and practices are aligned in order to enhance the retention and recruitment of talented personnel. In addition to this, Sanoma Group focuses on succession planning for top positions. There are supporting HR systems in place to keep track of employee’s performance.
The management and transfer of knowledge across the Group are crucial for the success of Sanoma. It is important that information, best practices and successful business concepts are obtained and shared within and between strategic business units. One of the ways to ensure that knowledge flows efficiently is to develop clear processes. During the recent years, Sanoma has reviewed and renewed its Corporate Governance Framework and most of its policies and created a Code of Conduct. In 2016, internal online trainings modules on e.g. ICT Security and Privacy were launched.
Information and Communication Technologies (‘ICT’) systems
Reliable ICT systems are an integral aspect of the Group’s business. These systems include online services, newspaper and magazine subscriptions, advertising and delivery systems, digital learning platforms, as well as various systems for production control and the management of customer relations.
Regarding ICT security, risks relate to confidentiality, integrity or availability of information, as well as reliability and compliance of data processing. These can be divided into physical risks (fire, sabotage and equipment breakdown) and logical risks (related to data security, employees and software failure). Sanoma has established continuity plans for systems critical to the Group. Sanoma’s ICT Governance model includes responsibilities regarding ICT security.
Data is an increasing part of Sanoma’s products and services through personalized features and content recommendations. Sanoma’s principles and governance model for privacy and data protection are approved by the Board, and in 2016 Sanoma launched Group-wide training on these policies.
Sanoma is exposed to financial risks including interest rate, currency, liquidity and credit risk. Other risks include risks related to equity and impairment of assets. Financial risk management is centralised to Group Treasury, and aims to hedge the Group against all material risks. Group Treasury operates as counterparty to business units in risk management.
Financial risks can be mitigated with various financial instruments and derivatives whose use, effects and fair values are clearly verifiable. The Group used interest rate and currency swaps to hedge against financial risks during the year. The Group’s interest rate risk is mainly related to changes in the reference rates of floating rate loans in the Group’s loan portfolio, and managed by using a mix of fixed and floating rate loans, and some interest rate derivatives. The majority of the Group cash flow from operations is denominated in euros, but the Group is exposed to some transactional currency risk resulting from revenue and expenditure in foreign currencies. The main source of transaction risk in 2016 was the acquisition of TV programming rights in US dollars. The Group uses forward contracts as a means of hedging against significant transaction risks.
Liquidity risk relates to servicing debt, financing investments and retaining adequate working capital. Sanoma aims to minimise its liquidity risk by ensuring sufficient revenue financing, maintaining adequate committed credit limits, using several financing institutions and forms of financing, and spreading loan repayment programmes over a number of calendar years.
Sanoma’s long-term objective is to have a capital structure where net debt/EBITDA ratio is below 2.5, and equity ratio 35%–45%. This can be achieved by ensuring strong cash flow from operations and managing financial risks efficiently.
The consolidated balance sheet on 31 December 2016 included about EUR 2.1 billion in goodwill, publishing rights and other intangible assets, most of which are related to magazine and TV operations in the Netherlands. In accordance with the IFRS, instead of goodwill being amortised, it is tested for impairment on an annual basis, or whenever there is any indication of impairment. The impairment losses on goodwill, immaterial rights and other immaterial intangible assets for 2016 totalled EUR 36.6 million (2015: 106.7). Changes in business fundamentals could lead to further impairment, thus impacting Sanoma’s equity-related ratios.