Risk management

The main risks and the design and operation of the risk management systems at Batenburg Beheer N.V. in 2008, are explained below by reference to best practice II.1.4 of the Corporate Governance Code.

Risk profile

With its installation and trading activities, Batenburg Beheer N.V. is exposed to a considerable variety of risks. Set out below is an overview of the main risk areas at present. A weighting used in the scores is the probability of occurrence of the risk and the consequences if it does.

The main risks, mostly inferred from the strategy as set out, are explained in more detail below in relation to Batenburg Beheer N.V.'s activities. Spreading the activities to groups of customers and sub-markets somewhat limits their cyclical sensitivity. The early-cyclical nature of the Trading group and the late-cyclical nature of the Installation group have a mitigating effect. Should there be a general recession with its disrupting effects on consumers' and producers' investment behaviour as we are now seeing in the Benelux, it will impact on Batenburg Beheer N.V. as well. The shortages of technically and commercially trained personnel will continue in the years ahead. In the operational sphere, hiring and supplying temporary manpower may provide some relief, but for key positions this is not an option. Especially the limited inflow of technically trained personnel (the "rejuvenation" of the sector) is cause for concern. It is important that young people join the workforce to facilitate the transfer of knowledge and to limit the rise in average hourly wages. Frequent contacts with schools, offering work-placements and on-the-job training, and attractive career prospects are highly important for the recruitment and retention of employees. Project control is especially important for the installation companies and to a lesser degree for some trading companies operating in a production environment. We see an increase in larger, complex contracts, including design and construction contracts secured and carried out in the past year. It is becoming increasingly important to carefully define the risks and liabilities of contracting parties before the work starts.

This applies to both the demarcation of the work to be carried out and to the consequences if one of the parties fails in its duties. Supplementary contract management training has been organised in the past months for the project managers of Batenburg Beheer N.V. operating companies. In day-to-day activities many employees depend on the proper operation of ICT systems. Much has been invested in recent years in curbing ICT risks by the implementation of new ERP systems and the central storage and management of data. The tightening of procedures aimed at a high degree of integrity, confidentiality and availability of electronic data is receiving constant attention.

Significant financial risks include the working capital (particularly accounts receivable and inventories) and the buffer capital of contract partners. Especially in times of economic uncertainty, the management of accounts receivable and inventories is of considerable importance. Inventories purchased for customers can then only be delivered on call later or not at all, and are subject to economic obsolescence, especially if they concern parts for customers' product lines that are not doing so well. In terms of the inventory risk, the volatility of raw material prices also affects the Trading group. Due to annual arrangements, price increases can often not be passed on to customers except in phases. If the price of the raw material falls, however, the customer wants to see this reflected in the price immediately, whereas trading companies still hold inventories at relatively higher purchase prices. Another significant working capital element is the management of accounts receivable. The economic downturn means financial problems for more businesses. Accounts receivable risks are closely monitored and where necessary covered by insurance.

The buffer capital of contract partners refers to the financial strength of big suppliers and customers, as well as partners in large contracts. Mitigation of these risks consists in obtaining as much information as possible and giving detailed attention to the form of contract.

As a general rule, exposure to risk has to be proportionate to the scale of the activities concerned and the return achieved. We examine on a case-by-case basis whether it is meaningful to mitigate the risk, by insuring it or bearing it ourselves for instance, and identifying it beforehand as much as possible.

Risk management and control systems

At Batenburg Beheer N.V. risk management has different facets. The risks relating to strategy, compliance and financial reporting are regular topics of discussion in consultations attended by varying representatives of the Supervisory Board, the Executive Board of the holding company, and the managements of the operating companies. Supervisory Directors also pay yearly visits to a number of operating companies to keep abreast of developments in their business operations. The managements of the operating companies are responsible for the operation of their own risk management systems and report their findings to the holding company through the Batenburg Enterprise Risk Management system (BERM). It is based on the premises of the COSO model, and has been tailored to the specific activities of the two segments Installation engineering and Technical trading of the Batenburg Group. The findings are discussed with the managements of the operating companies. The outcome is then discussed in a meeting between the Executive and Supervisory Boards.

The Batenburg Beheer N.V. financial management system includes overseeing the realisation of the operating companies' policy plans. The holding company verifies beforehand whether the proposed approach is compatible with group objectives. After jointly adopting the plans, the managements of the operating companies are accountable and report through a fixed reporting structure, by means of interim meetings with the holding company, financial statements and a formal meeting of shareholders per operating company. Other elements of the management system include involvement of the Executive Board of the holding company in substantial capital expenditure decisions, the contracting of large contracts, appointments and dismissals of key staff members and the financing and insurance of the operations.

Using a risk-focused approach, the auditor reviews each year the main aspects of the design and operation of the accounting system and embedded internal controls. In planning his audit, he makes use of the BERM records. His findings are reported to the managements of the operating companies, the Executive Board of the holding company and the Supervisory Board. Both the Executive Board of the holding company and the managing directors of the operating companies issue a Letter of Representation by reference to the financial statements.

The Executive Board is aware that despite all the efforts to that effect the management systems in place cannot provide absolute assurance that the objectives will be attained, nor that these systems can entirely prevent material misstatements, loss, fraud and acts in breach of laws and regulations. The purpose of the systems is to enable the Batenburg Group to continue doing business in a responsible and controlled manner. Risk management is used in a positive manner to ensure that it contributes to a better management of processes and to calculated and responsible risk-taking.

In Control Statement

The Executive Board is responsible for the design and effectiveness of the risk management and internal control systems. The Executive Board of Batenburg Beheer N.V., to the best of its knowledge and with due regard for the foregoing, is of the opinion:

• that the risk management and internal control systems provide reasonable assurance that the financial reporting does not contain any material misstatements and that the organisation complies with applicable laws and regulations;
• that the risk management and internal control systems have operated properly in the year under review;
• and that there are no indications that the risk management and internal control systems will not operate properly in the current year.