The adidas AG Executive Board has the overall responsibility to operate an effective risk and opportunity management system that ensures comprehensive and consistent management of all significant risks and opportunities. ...
The adidas AG Executive Board has the overall responsibility to operate an effective risk and opportunity management system that ensures comprehensive and consistent management of all significant risks and opportunities. The adidas AG Supervisory Board has the responsibility to monitor the effectiveness of the Group’s risk management system. These duties are undertaken by the Supervisory Board’s Audit Committee. In addition, wherever relevant, our Global Internal Audit department also includes an assessment of Risk Owners’ compliance with the Group Risk Management Policy within the scope of their audit, as part of their regular auditing activities.
To facilitate effective risk and opportunity management, we have an integrated risk and opportunity management system in place, which focuses on the identification, evaluation, handling, monitoring and reporting of risks and opportunities. The key objective of this system is to protect and further grow shareholder value through an opportunity-focused, but risk-aware decision-making framework.
We believe that a key component of optimal risk and opportunity management is the identification and evaluation of risks, risk-mitigating actions and opportunities where they arise. In addition, a concerted approach to handling, monitoring and reporting is of key importance. Therefore, risk and opportunity management is a Group-wide activity which utilises critical day-to-day management insight from local business units.
The main components of our risk and opportunity management process are:
Risk and opportunity identification: The adidas Group continuously monitors the macroeconomic environment, developments in the sporting goods industry, as well as internal processes to identify risks and opportunities as early as possible. The Risk Owners have primary responsibility for the identification of risks and opportunities. The central Group Risk Management function has defined a catalogue of potential risks (Risk Universe) to assist and facilitate the Risk Owners in identifying and categorising risks and opportunities. On the one hand, the respective Risk Owners actively monitor the potential financial impact from changes in the overall macroeconomic, political and social landscape. On the other hand, they closely observe brand, distribution channel and price point developments.
A key element of the identification process is primary qualitative and quantitative research such as trend scouting, consumer surveys as well as feedback from our business partners and controlled space network. These efforts are supported by global market research and competitor analysis. Through this process we seek to identify the markets, categories, consumer target groups and product styles which show most potential for future growth at a local and global level. Equally, our analysis focuses on those areas that are at risk of saturation, or exposed to increased competition or changing consumer tastes.
Risk and opportunity evaluation: In order to manage risks and opportunities in an effective way, we evaluate identified risks and opportunities individually according to a systematic evaluation methodology, which is applied consistently and allows adequate prioritisation as well as allocation of resources. According to our risk management methodology, a risk and opportunity score is calculated by multiplying the potential financial impact with the likelihood of occurrence. The financial impact represents the biggest possible potential effect on contribution, with contribution being defined as operating profit before intra-Group royalties.
The financial impact is evaluated by utilising five categories: Marginal, Minor, Moderate, Significant and Major. Likelihood represents the possibility that a given risk or opportunity may occur. The likelihood of individual risks and opportunities is evaluated on a scale of 0% to 100%, using five classifications to represent an aggregate likelihood for various risk and opportunity categories: Unlikely, Possible, Likely, Probable and Highly Probable.
As risks and opportunities have different characteristics, we have defined separate methodologies for assessing the potential financial impact. For each individual risk, the gross risk score and the net risk score have to be evaluated. While the gross risk score reflects the worst-case negative financial impact before any mitigating actions, the net risk score reflects the expected financial impact after all mitigating actions. This approach on the one hand allows for a good understanding of the impact of an individual mitigating action taken, and on the other hand provides the basis for scenario analysis and simulations. In addition, the respective Risk Owners are also required to assess each risk from a timing perspective in order to determine when the risk could materialise. In assessing the potential effect on contribution from opportunities, each opportunity is appraised with respect to viability, commerciality, potential risks and the expected profit contribution.
This approach is applied to longer-term strategic prospects but also to shorter-term tactical and opportunistic initiatives at both the Group and, more extensively, the brand and market level.
Risk and opportunity handling: Risks and opportunities are treated in accordance with the Group’s risk and opportunity management principles as described in the Group Risk Management Policy. Risk Owners are in charge of developing and implementing appropriate risk-mitigating actions and exploiting opportunities within their area of responsibility. In addition, the Risk Owners need to determine a general risk handling strategy for the identified risks, which is either risk avoidance, risk reduction with the objective to minimise financial impact and/or likelihood of occurrence, risk transfer to a third party or risk acceptance. The decision on the implementation of the respective risk handling strategy also takes into account the costs in relation to the effectiveness of any planned mitigating actions if applicable.
Risk and opportunity monitoring and reporting: Our integrated risk and opportunity management system aims to increase the transparency of Group risks and opportunities. As both risks and opportunities are subject to constant change, Risk Owners not only monitor developments, but also the adequacy and effectiveness of the current risk handling strategy on an ongoing basis. Risk reporting consists of two separate regular reporting streams:
On the one hand, Risk Owners are required to report to Group Risk Management gross risks with a possible impact on contribution above the threshold of € 50 million regardless of their likelihood of materialising and net risks with a possible impact over € 1 million on contribution and the likelihood of materialising. Material changes in previously reported risks and/or newly identified risks with a potential net impact on contribution of more than € 5 million are reported on an ad-hoc basis. Opportunities are aggregated separately with Risk Owners reporting all opportunities with a net impact of above € 1 million on contribution.
On the other hand, Group Risk Management provides the adidas AG Executive Board with a quarterly report based on the Risk Owners’ input. Any issues identified that, due to their material nature, require immediate reporting to the Executive Board are reported outside the regular reporting stream on an ad-hoc basis.