In delivering our strategy, it is important that we understand and manage the risks and opportunities that we face

The table below outlines our principal risks and identifies which strategic objectives they could impact.

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The following table sets out the 2016/17 principal risks and uncertainties facing the group, the mitigating actions for each and an update on any change in the profile of each risk during the course of the year. The net risk rating (after mitigating controls) is also shown.

1. Existing Market Outlook

Risk and impact
The risk of a change to the outlook for our key markets is either unplanned or unforeseen and as a result we are poorly positioned to respond.
This risk would include legislative change, for example as a result of Brexit or changes in customer or consumer behaviour impacting our business.

Mitigation
• Understanding the key drivers and the range of possible scenarios.
• Building plans against those scenarios.
• Monitoring changes to those drivers and adjusting business plans accordingly.

Changes since 2016 annual report
This risk partially replaces 'growth within our existing business'.
This risk is specifically focused on understanding the external influences which may impact our business.
It is rated as high as a result of the uncertainty of Brexit and the evolving pace of change in the BEV/European diesel market, making scenario planning essential. Risk 3 focuses on the related internal factors.

Risk rating
High (unchanged from risk 1 last year)

2. Future Revenue Growth

Risk and impact
Failure to grow through new opportunities either as a result of failing to identify the opportunity, fund or execute successfully.

Mitigation
• Monitoring and understanding market evolution as part of our strategic planning process resulting in opportunity identification.
• Growth opportunities are executed through targeted acquisitions, capital investment and research and development. Progress is monitored and tracked against specific key performance indicators (KPIs).

Changes since 2016 annual report
New growth opportunities may be realised through different combinations of investment including acquisition, capital investment and R&D. As the approach may change based on the circumstances, we believe the risk is better expressed by focusing on the missed opportunity irrespective of the investment type.

Risk rating
Medium (unchanged from the innovation risk rating last year)

3. Maintaining our Competitive Advantage

Risk and impact
Failure to maintain our competitive advantage in existing markets, and as a result, not meeting customers' evolving needs as efficiently as our competitors.

Mitigation
• Investment in understanding our customers.
• R&D and capital investment processes ensure resource is prioritised against the areas of greatest opportunity.
• Benchmarking business processes' efficiency.

Changes since 2016 annual report
This risk was previously captured under the very wide ranging 'growth within our existing business'. The external aspect of this risk is captured in risk 1 and the internal risk of failing to run our business to sustain our competitive advantage is captured here. We have a strong track record of meeting our customers' evolving technology needs, our capability coupled with ongoing process efficiency activity means we have rated this risk as medium.

Risk rating
Medium

4. Environment, Health and Safety

Risk and impact
In common with similar manufacturing companies, the group operates in a challenging safety environment that
is subject to numerous health, safety and environmental laws, regulations and standards.
If we fail to operate safely and respond to changes made to applicable laws, regulations or standards we could adversely impact our employees, we may lose production time and could attract negative media and regulator interest.

Mitigation
• Understanding of our business risk profile.
• Systems and processes to facilitate adherence to corporate policies, procedures and standards.
• Training and awareness activities.
• Risk, audit activities and safety checks.
• Safety culture programme and behavioural standards.
• Investigations to determine the cause of incidents and accidents and the development of remediation plans.
• An independent hotline for employees to report concerns.

Changes since 2016 annual report
Health and safety is our priority and we take our responsibility for environmental impact very seriously. Over the past 12 months we have worked to refine our mitigating activities.

Risk rating
Medium

5. Sourcing of Strategic Materials

Risk and impact
As Johnson Matthey has limited suppliers from which to source certain strategic raw materials, any breakdown in the supply of these materials would lead to an inability to manufacture and satisfy customer demand.

Mitigation
• Supplier key performance indicators, audits and quality management.
• Sourcing from multiple suppliers.
• Research and development alternatives to consider use of non-strategic materials.
• Expertise in supply chain, logistics, procurement and trade export controls.
• Business continuity management, identification of critical failure risks and plans in place to manage these.

Changes since 2016 annual report
The prior year risk rating was principally driven by the risks associated with sourcing of strategic materials. During the year, we have focused on building expertise in supply chain and procurement and as such have assessed the risk as reducing.

Risk rating
Medium

6. People

Risk and impact
To achieve our strategic objectives,
we continually assess the skills and capabilities that will enable us to deliver our strategy. An inability to recruit and retain key skills may result in a slower growth trajectory.

Mitigation
• Assessment of skills and capability requirements.
• Robust talent management processes.
• Remuneration strategy with clarity around market best practice and Johnson Matthey's position on base pay, annual and long term incentives, pensions and regional benefits.
• Transparency of policies.

Changes since 2016 annual report
This risk has been reassessed in the context of our recent strategic review, which has identified some areas where we need to build additional capability. We have therefore increased the risk rating.

Risk rating
Medium

7. Security of Metal and Highly Regulated Substances

Risk and impact
On any given day, the group has significant quantities of high value precious metals or highly regulated substances on site and in transit; loss or theft due to a failure of the security management systems associated with the protection of metal or highly regulated substances may result in performance impact, reduced customer confidence and potential legal action.

Mitigation
• Security management systems and site security systems.
• Assay and other process controls.
• Security awareness campaigns and training.
• Audits of site security systems.
• Stock takes to check inventories.
• Use of approved carriers for transit.
• Insurance coverage for losses from theft or fraud.
• Liaison with local law enforcement for high risk sites.

Changes since 2016 annual report
Unchanged from 2016 although we have amended the title to reflect the specific risks.

Risk rating
Low

8. Intellectual Capital Management

Risk and impact
Failure to identify and protect the group's intellectual capital or failure to identify third party intellectual capital rights could lead to a loss in business advantage, loss of freedom to operate and reputational damage associated with litigation.

Mitigation

  • Business intellectual capital strategy and new product introduction process.
  • Portfolio management of intellectual capital.
  • Monitoring of third party intellectual capital.
  • Use of intellectual capital lawyers to provide specialist guidance.
  • Training and awareness.

Changes since 2016 annual report
Decreased to reflect our increasingly effective mitigations.

Risk rating
Medium

9. Failure of Significant Sites

Risk and impact
Potential risks include a disruptive event such as fire, flood or earthquake, a major incident at site level, such as an explosion, IT systems failure, cyber attack or other events such as geopolitical instability.
The consequences associated with this risk include the impact on our ability
to manufacture goods and satisfy customer demands.

Mitigation
• Assessment of critical sites.
• Business continuity plans in place and annual programme of testing in place.
• Cyber awareness and monitoring.
• IT disaster recovery.
• Inventory management to provide critical spares and inventories.
• Use of external suppliers for key activities and services including generators and utilities.
• Insurance of sites.

Changes since 2016 annual report
No change

Risk rating
Medium

10. Ethics and compliance

Risk and impact
Failure to comply with ethical and regulatory compliance standards leading to reputational damage, to civil or criminal legal exposure for the company or for individuals or to risk of contractual breach.

Mitigation
• Code of ethics in place supported by training and formal acknowledgement.
• Understanding of key ethics and compliance risks.
• Use of subject matter experts, internal and external, on legal compliance and risk mitigation matters.
• Group and local policies and procedures in place including full integration with business processes.
• Group control requirements such as supplier on-boarding, counterparty due diligence and payments approval.
• Independent confidential speak up hotline for employees, contractors and third parties.
• Oversight on contractual provisions and commercial arrangements by legal teams.
• Global network of ethics ambassadors.
• Emergency response procedures for events such as dawn raids.
• Investigation of incidents and allegations of misconduct.

Changes since 2016 annual report
This risk is reassessed on an ongoing basis in the light of the evolving regulatory and business background. There is significant mitigation in place but the risk rating remains unchanged this year as we embed upgraded third party intermediary processes.

Risk rating
High

11. Business Transition

Risk and impact
To position the group for future growth and maximise available efficiencies, we are evolving the way we run our business. Historically we have operated as a decentralised organisation but to drive efficiency we are in the process of standardising some activities across the group, directed by strong functional leaders in order to ensure best practice is used and maintained across the group. The risk is that we fail to achieve the benefits of these efficiencies, lose our business agility and / or fail to maintain a very high level of customer responsiveness.

Mitigation
• Communication and employee engagement plans are in place for all programmes with support from the GMC as appropriate.
• Change management processes.
• Programme management and governance activities with KPIs and red, amber, green (RAG) review reports.
• Capital allocation decision making process.

Changes since 2016 annual report
Risk reflects our business transition that will position the group for future growth. The risk rating remains unchanged from the business transition risk rating last year.

Risk rating

Medium

12. Product Quality

Risk and impact
Our products are used in a wide range of applications, processes and systems. The safety and quality of these products is crucial to ensuring that they operate as intended.
We may be exposed to liability claims should a product fail to perform as expected. This could lead to loss of future business and reputational damage.

Mitigation
• Quality management systems in place supported by accreditation and audit.
• Robust manufacturing processes.
• Monitoring and reporting of quality performance, taking corrective action where required.
• Robust contract terms and conditions.

Changes since 2016 annual report
We considered whether quality management should be a principal risk in 2016. At that time we concluded that while important, it was not significant enough to be considered as a principal risk as the impact and likelihood varied by sector according to the product produced, customer and contractual risk. With our continued emphasis on quality and brand we have elevated this risk to ensure greater board visibility.

Risk rating

Medium