Risks and risk management
Risk management principles
Risk management in Wärtsilä is a continuous process of analysing and managing all the opportunities, threats, and risks faced by the company to achieve its goals and to ensure the company remains a going concern. The basis for risk management is the lifecycle quality of Wärtsilä's operations and products, and the continuous, systematic, loss-prevention work at all levels of the Group on the principle that "everybody is responsible". In the long term this is the only way to reduce the total risk costs.
The Board of Directors and the Board of Management decide and give guidelines on strategic matters. The Businesses are responsible for achieving their set strategic goals and for mitigating and managing all their risks. The risk management function is part of Group Treasury, which reports to the CFO. It reviews the business risk profile, prepares the risk management policy, co-operates with the businesses in the implementation of risk mitigation work, and develops global and local insurance schemes with insurance companies and brokers. The Audit Committee reviews and assesses the adequacy of risk management. The risk management policy is endorsed by the Board of Directors.
Wärtsilä continued to strengthen its risk reporting during 2010. The Board of Management in its meetings carries out annual Management Reviews on each Business, including their risks and risk mitigation. The risk map of the Group and all Businesses is then presented in the Finance Management Review in the autumn before the budgeting round. The risks are identified as either internal or external, quantified in euro and their probabilities are estimated. The results of this work are summarised in the Wärtsilä Risk Radar. Risk mitigation actions, including potential investments, are decided in the normal course of business. The Group Risk report is then presented to the Board of Directors.
The Business Management Teams have risk management as a separate item on their agenda. The Businesses are responsible for organising, follow-up actions, and reporting on risk management from underlying Business units. During 2010 separate risk assessments were performed for each business resulting in the creation of business specific risk radars. In addition to divisional risk reporting, Wärtsilä has four cross-business risk groups. The manufacturing, supply chain, and liability groups have been active for the past two years, and a strategic risk group, as the latest addition to the cross-business risk identification and mitigation work, was established in 2010. These forums concentrate on risk identification and mitigation from the corporate view. The groups have approximately four meetings annually.
The Corporate Risk Management function co-ordinates risk management activities and reporting within the Group. The Internal Auditing is responsible for reviewing the Risk Management process on an annual basis.
The relevant risks for Wärtsilä have been classified in four sections; strategic, operational, hazard and financial risks. Risk is defined as the outcome of the probability and the loss exposure of the occurrence. The outcome or potential loss expectancy is highest with strategic and operational risks, and lowest with hazard and financial risks.