Every year, management identifies the most important corporate risks for the company. Identification of these risks is done with an assessment where risks are scored on probability and impact (impact on EBITA for the coming three years). Both endogenous and exogenous risks are considered. Each of the most important risks have been assigned to Members of the Executive Council who are accountable for mitigation.
When we started our corporate risk assessment, the risk of a pandemic was scored as low probability and high impact and as such had not been identified as one of the important corporate risks before COVID-19. However, we had our crisis management policies in place, including a well-trained and experienced Corporate Crisis Management Team as well as a fully-staffed back-up team for alternating shifts. In countries where we are operating, Country Crisis Management Teams are also well established. These teams advised the Executive Board and Management Teams at various levels about risks and measures to be taken. The risks that were identified were of a broad nature and included amongst others scenario planning (impact on revenues, costs and sales), continuity of our operations, information security and health and safety of our employees. They continue doing so as long as COVID-19 is among us and impacts our business.
COVID-19 has accelerated our digital approach for environmental projects. Instead of meeting in person, we have a digital platform where stakeholders can share comments 24/7, which has prevented project delays. (Video in Dutch.)
To reduce the cost of failure, which in our industry is largely related to flaws in project management, we spent much time and effort on implementing two robust project management tools and training. One of these tools supports the proposal manager in the risk assessment and processing of tenders. The other is the Project Health Check which supports the Project Manager and directors in their monthly project reviews. They have already resulted in reduced project losses. We see further opportunities in strengthening our project management and commercial way of working.
The core principles of UN Global Compact in the areas of human rights, labour, environment and integrity are incorporated in our Global Business Principles, Global Code of Conduct and Integrity Management System. We continue to review what is happening in the world around us and discuss our response. Discussions included risks in relation to Brexit, which were perceived to be limited so far but require monitoring. Countries going through political uncertainty are also assessed on a regular basis to evaluate what the related risks are and what our policy should be.
Disruptive technologies and other trends will have a significant impact on our knowledge-intensive business. We are monitoring these developments and are actively engaging with partners on innovation and digitalisation. An important development has been establishing a specific Business Line Digital where experience and knowledge are centralised to support our clients. As part of our strategy Strong22, we have embraced the digital way of working which is actively used throughout the company.
Project risk management procedures are integrated in our Management System to ensure consistency throughout the organisation. Control measures include the authorisation matrix and the risk and approval matrix defining who can approve commitments and transactions. Project proposals with the highest risk for the company are reviewed by the Risk Assessment Board (consisting of Executive Board, Corporate Director Project Excellence, Corporate Director Legal and Risk Manager). Each prequalification and proposal undergo a risk assessment. Those with higher risks are analysed by our Risk Managers, advised by Finance & Control, Legal, HR and Compliance. Depending on the outcome of this assessment, the authority to approve such risks is defined in our risk and approval matrix. The Project Manager documents the result in a Risk Mitigation Plan which is updated throughout the project. The Drive2Win approach, guiding the Proposal Manager during the proposal preparation, has been implemented company wide. This resulted in a more efficient and effective consideration of risk mitigation and reward.
The Project Health Check tool supports monthly project reviews with the goal of improving our project results. Based on the key variables of a project (including risk, which can change over time) projects are reviewed and discussed up to Executive Board level to support Project Managers taking the right actions. Finance and Project Excellence Managers are also involved in those reviews, each bringing their own expertise. In this way we ensure that client demands are met, adequate progress is made, and risks are identified, sufficiently mitigated and reflected correctly in our accounting systems.
Our liabilities are defined within each contract. Most of these will fall within our standard conditions for what we consider acceptable risk. If conditions do not comply, additional approvals are required. Legal counsel reviews and provides recommendations to limit liability when possible. In addition, we are covered to a significant level by Professional Indemnity insurances.
Two main controls help ensure sufficient funding is available for our operations: control over our working capital (mainly work in progress positions and debtors) and securing our bank facilities. Before submitting a proposal, we assess the client’s ability to settle our invoices over the duration of the project and monitor our credit risk continuously during project execution. In addition, for each proposal, a cash flow forecast must be prepared and we aim to negotiate a positive cumulative cash position during the project. We have agreed facilities with our banks where loan covenants are applicable. Our Corporate Treasury monitors that these are met.
Fluctuations in commonly traded currencies like USD and GBP and in less-traded currencies represent a risk on part of our turnover. Our treasury policy aims to cover the currency risk as much as possible during execution of projects. Corporate Treasury monitors and advises on foreign currency exposures and the use of hedge instruments.
A few clients require us to issue corporate guarantees for the execution of a project. It is our policy to limit the issue of these guarantees. For this reason, we manage our balance sheets to ensure solvency of our companies is enough to operate independently in the market. Royal HaskoningDHV has stringent procedures to review and approve bank guarantees and bonds (like advance payment guarantees and performance bonds) before they are issued.
In principle, Royal HaskoningDHV operates pension plans under defined contribution pension schemes. However, at HaskoningDHV UK Limited there is a closed defined benefit scheme. This scheme has been closed for new entries and future accruals in 2005. The closed defined benefit members became deferred members. The Group does not and will not provide any guarantees to the United Kingdom defined benefit pension scheme. The defined benefit scheme deficit under Dutch GAAP as at December 31, 2020 is €21.7 million (2019: €24.8 million) with an associated deferred tax asset of €4.1 million (2019: €4.2 million).