Risk management is an essential part of Lemminkäinen's business operations; it ensures that the most significant strategic, operative, financial and accident risks are identified, analysed, assessed and managed proactively. Risk management aims to ensure the achievement of the Group's strategic and operational targets with the best possible results, including the continuity of the operations under changing conditions.
Our risk management is based on the risk management policy approved by the Board of Directors. The Board of Directors defines the Group's risk appetite and risk tolerance in conjunction with its strategic and annual planning processes and through its decisions. We assess liquidity monthly by taking cash flow and risk forecasts into account. The Board's Audit Committee monitors the adequacy and effectiveness of the Group's risk management in accordance with the annual planning.
The Group's President and CEO is responsible for the implementation of risk management. Members of the Group Executive Team are responsible for the execution of risk management in their respective areas of responsibility. The Group Executive Team monitors the implementation of risk management regularly. Every Lemminkäinen employee is responsible for identifying any risks related to their own work and for bringing them to the attention of their supervisor.
We provide training in legal and contractual matters. The Group also has detailed guidelines for different areas, such as competition law and insider issues. We monitor compliance with these guidelines as part of line operations and management. We implement risk management procedures through business management systems.
Most significant risks
Uncertainty in the global economy and financial markets may have a negative effect on Lemminkäinen's operations, performance, financial position and sources of capital. Our business operations are sensitive to new construction cycles in Finland in particular. We manage these kinds of risks structurally by distributing our business operations throughout Scandinavia, the Baltic countries and Russia.
Change management, successful recruitment and skilled and motivated personnel play a key role in ensuring that operations are in line with the targets set, yield results and comply with business-related laws and regulations and good business practices. The business segments and functions develop their operating models to increase agility, cost efficiency and operational consistency. We manage these risks with careful planning and training as well as by developing management systems and by supporting supervisory work.
In Russia, the weakened economic situation, the exchange rate fluctuations of the rouble and the prolonged political uncertainty or the significant escalation in the sanctions between the EU and Russia could have a negative effect on our business operations. Furthermore, the political culture, legislation, its interpretation and procedures of the authorities in Russia compared to Finland, in addition to the uncertainty of the legal system, administrative procedures and interpretation of law enforcement mechanisms, as well as changes in them, may result in significant risks. In order to maintain a moderate risk level in Russia, we will not start new development projects in building construction in Russia for the time being; instead we will focus on negotiated construction contracts in building construction.
Legislative and political changes can affect market development and, consequently, the profitability of our business operations. We continuously monitor and analyse our operating environment, invest in the maintenance and implementation of our Code of Conduct and Corporate Governance and provide guidelines and training to our employees.
In the residential and commercial development and construction projects, we are exposed to sales and price risks, especially outside the Helsinki metropolitan area, due to the market situation continuing to be challenging and due to the full responsibility over the entire project, starting with plot acquisition. Our target is to actively manage and monitor the risk related to the capital tied up in unsold completed apartments and other assets. We take market changes and risks into account when assessing whether to start new development and construction projects. We only start new housing construction if a sufficient number of units have been reserved in advance. The number of unsold completed apartments is kept to a minimum. Commercial development projects are usually sold to property investors in the early stages of construction, thereby reducing risks.
Lemminkäinen's financial performance depends on successful permit, contract and project management, which involves risks related to, for instance, project pricing, use of resources, project planning and scheduling, ability to procure raw materials at competitive prices, cost control, change management as well as handling of claims for damages. In addition, project-related legal proceedings may have a negative effect on our financial performance. We are continually developing our contractual expertise and project management practices during the tender and execution stage. In addition, we are renewing project tracking systems and steering models.
Fluctuations in the price of raw materials may have an impact on financial performance. Lemminkäinen's biggest individual outsourced raw material is bitumen, and its price largely depends on the world market price of oil. We manage the bitumen price risk with contractual terms and derivatives.
Changes in the public demand affect the competitive situation and may cause fluctuations in the income. Changes in weather conditions influence especially the lengths of the Paving segment's paving and mineral aggregates businesses working seasons, which may have an effect on the company's profit and its timing.
In its business operations, Lemminkäinen is exposed to impairment risk of tangible and intangible assets and to financial risks, mainly funding, liquidity, foreign exchange rate, interest rate and credit risks. Management of financial risks is based on Lemminkäinen's treasury policy, which defines the operating principles and division of responsibility in financial risk management and funding activities. External events may also impact negatively with regard to the availability of funding, its costs and/or repayment plans.
We seek to ensure the availability of funding, optimise the use of liquid assets in funding its business operations and to minimise interest and other finance costs. Lemminkäinen protects itself from currency exchange risks primarily through operative means. If necessary, transaction risks are hedged with the aid of foreign currency loans and currency derivatives. In 2016, approximately 25% of our net sales were generated in currencies other than the euro, the major currencies being the Norwegian, Swedish and Danish kronas as well as the Russian rouble. We do not hedge translation risk. The translation difference of our shareholders' equity is mainly related to the Russian business operations.
We regularly monitor our environmental impact, and constantly seek to reduce it by enhancing our production methods, for example with regard to machinery usage. Our guidelines, compliance with our management systems and personnel training help us to manage our environmental risks.
We manage risks associated with occupational safety by preparing guidelines, by providing training for our personnel and subcontractors and by investing in the reporting of safety observations. In addition, we share best practices to prevent accidents. Lemminkäinen's Board of Directors, the Group Executive Team and the business segment management teams regularly monitor the development of occupational safety.
We also take the risks of our procurement chain into account in our operations. We monitor responsibility in our supply chain with partner audits, among other measures, and require our suppliers to commit to Lemminkäinen's Supplier Requirements which define our operating principles with regard to financial, legal and social as well as environmental, health and safety responsibility.
Accidents and damage involving IT systems, personnel security and information security may also pose accident risks for us. We manage these by making plans for exceptional circumstances. The implementation of new IT systems also involves risks which we manage through careful planning and training.
A one-off risk is posed by the charges for an alleged environmental offence related to the amounts of recycled asphalt used in asphalt mass production. More information about the legal proceedings and related claims can be found in the Board of Directors' report and in the asphalt cartel issue section.
More information about financial risks and their management can be found in the consolidated financial statements.
We publish an up-to-date assessment of the most essential risks in the Interim Reports and the Financial Statements Bulletin.
Updated 1 March 2017