Risk management

Managing risks – an important part of conducting business

Swedish Match focuses on understanding the risks to which the business is exposed.

To help to maximize shareholder value and be a sustainable and socially responsible company, Swedish Match needs to manage risks efficiently.

Risk management within Swedish Match

Swedish Match applies a systematic risk management model, which includes risk reviews as well as loss prevention, continuity planning, crisis management and insurance programs.

The Swedish Match Board of Directors determines the Company’s strategic plans and associated risks based on recommendations from the Group Management Team. The Board of Directors oversees the Company’s risk management processes, and is on a recurring basis informed about the existing and emerging risks as well as on related mitigation activities. Each operating unit is responsible for managing the risks associated with their plans, and if required, coordinating risk management activities with other operating units. Appropriate competencies in the organization and governance structure with clear responsibilities set the prerequisites for risk management at the local level. The Code of Conduct further ensures an organizational culture that helps to prevent taking those risks deemed to be unacceptable.

To efficiently manage risks, existing and potential risks need to be known. Swedish Match strives to establish a broad understanding among its employees of the concepts and importance of risk management. Employees in all parts of the organization are encouraged to identify and report events and circumstances which are indications of risks. Existing and potential risks are regularly discussed within different operating unit management teams and the Group Management Team.

Annually, as part of the strategic planning process, a review is conducted to assess the major risks to which the Company is exposed. This review and assessment helps to ensure that appropriate actions are taken, thereby helping to reduce and prevent undesired risks. These risks are closely monitored. Strategies are developed to manage new or changed risks. Risk responses are either risk avoidance, risk reduction, risk sharing or risk acceptance.

Risk areas

Important risks to address arise in the areas of production, competition, and regulation among other areas.1)

Production

Production facilities are exposed to risk of various harmful incidents such as fires and machinery breakdown, as well as potential natural disasters and other catastrophic events. In order to avoid delivery problems or other production interruptions, Swedish Match has implemented a loss prevention and continuity planning program. Periodic inspections are conducted by an independent third party at all major production facilities that are identified as critical. These inspections assess to what level the production facilities meet the Swedish Match safety standards and whether there are investments or actions required to reduce risk. The purpose of the continuity planning is to minimize any negative impact of an incident.

Suppliers

A loss of a key supplier or a supplier’s non-compliance with regulations or unethical behavior could be harmful to the Group. Selected suppliers of production inputs are reviewed by the procurement departments on a recurring basis. The suppliers’ own financial stability and risk management systems are an important consideration for Swedish Match. As a complement to the internal reviews, an independent third party conducts risk inspections at critical suppliers. In order to help to ensure that suppliers have high ethical standards, a specific Supplier Code of Conduct has been developed which Swedish Match strives to include in contractual agreements with significant suppliers. During 2016, Swedish Match has assigned external expertise to advance the risk assessment of human rights and in particular child labor. Suppliers have been assessed on the basis of manufacturing country or origin of raw material, known category and industry risks as well as spend.

Competition

Swedish Match operates in highly com­petitive markets, which requires an agile organization in an ever changing environment. Swedish Match continuously monitors the competitive environment and assesses changing consumer needs. To meet these consumer needs, the Company conducts extensive consumer and market research. This research forms the basis for product development and ensures consumers are offered high quality products that meet their needs.

Regulation

Swedish Match is exposed to a high degree of regulation from different authorities. Regulations, many related to the Company’s involvement in the tobacco industry, concern among other issues, tobacco excise taxes, marketing, packaging and warning label requirements, ingredients, reporting to authorities, product approvals, and introduction of new products. Many authorities have and continue to implement various forms of restrictions on sales and usage of tobacco products. Swedish Match closely monitors the development of tobacco regulation and regularly shares information and opinions with governments and other regulatory agencies on issues that affect the Company’s operations.

A critical activity is to educate and inform decision makers about Swedish Match’s tobacco products, especially snus and its dramatically less harmful health characteristics compared to cigarettes.

1) More information on risks can also be found in the Swedish Match Annual Report 2016, in the Report of the Board of Directors and financial risks are presented in Note 26 Financial Instruments and financial risks to the Group Consolidated Financial Statements.