Akzo Nobel Annual Report 2010

Plain-text annual report

A year of delivering Tomorrow’s Answers Today Key performance indicators Statement of income Dividend and earnings per share Cash flows Ratios Revenue in € millions 2009 2010 EBITDA in € millions 2009 2010 Adjusted earnings per share in € Net debt in € millions Moving average ROI in % 13,028 14,640 +12% 2009 2010 2.06 3.71 +80% 2009 2010 1,744 936 -46% 2009 2010 Dividend per share in € Operating working capital % of revenue Operating ROI % of revenue 1,690 1,964 +16% 2009 2010 1.35 1.40 +4% 2009 2010 13.7 13.9 +0.2 2009 2010 9.2 10.8 23.2 27.7 +1.6 +4.5 EBITDA margin % of revenue Net income attributable to shareholders in € millions Net cash from operating activities in € millions Research and development expenses in € millions 2009 2010 13.0 13.4 +0.4 2009 2010 285 754 2009 2010 1,220 519 -57% 2009 2010 327 334 +2% EBIT in € millions 2009 2010 Earnings per share from continuing operations in € 1,131 1,374 +21% 2009 2010 1.09 2.85 Capital expenditures in € millions 2009 2010 513 534 Research and development major projects % of R&D expenses 4% 2009 2010 41 46 +5 Shareholders’ equity and EBITDA per common share in € Operating cash flows in € millions Net debt and group equity in € millions Shareholders’ equity per common share EBITDA per common share Net capital expenditure Operating cash flows Group equity Net debt EBIT and EBITDA in € millions EBIT EBITDA Operating ROI 3500 2800 2100 1400 700 0 23.5 23.2 1,785 1,234 1,690 1,131 27.7 1,964 1,374 30 24 18 12 6 0 60 48 36 24 12 0 7.70 7.28 32.21 33.48 8.41 38.47 10 8 6 4 2 0 2008 2009 2010 2008 2009 2010 1,220 (513) 2009 519 (534) 2010 7,913 8,245 9,509 2,084 1,744 936 2008 2009 2010 Sustainability Specialty Chemicals Performance Coatings Decorative Paints Total reportable rate of injuries per million hours 2009 2010 3.7 3.6 -0.1 Eco-premium solutions % of revenue 2009 2010 20 25 +5 Revenue in € millions 2009 2010 EBITDA in € millions 2009 2010 Revenue in € millions Revenue in € millions 4,359 4,943 +13% 2009 2010 4,112 4,786 +16% 2009 2010 4,573 4,968 +9% EBITDA in € millions EBITDA in € millions 738 939 +27% 2009 2010 Key value chains carbon footprint assessment EBITDA margin % of revenue EBITDA margin % of revenue 2009 2010 158 286 +81% 2009 2010 16.9 19.0 +2.1 2009 2010 594 647 14.4 13.5 +9% 2009 2010 487 548 +13% EBITDA margin % of revenue -0.9 2009 2010 10.6 11.0 +0.4 Total waste in kilotons 2009 2010 Total reportable rate of injuries per million hours Total reportable rate of injuries per million hours = Total reportable rate of injuries per million hours 249 258 +4% 2009 2010 2.8 3.5 +0.7 2009 2010 3.3 3.3 2009 2010 4.7 4.0 -0.7 Total reportable rate of injuries per million hours 5.3 4.6 3.7 3.6 2007 2008 2009 2010 Eco-premium solutions % of revenue 18 18 20 25 2007 2008 2009 2010 Revenue breakdown in % Revenue breakdown in % Revenue breakdown in % D C E A B D E C A B C B A A Functional Chemicals 36 A Marine and Protective Coatings B Industrial Chemicals C Pulp and Paper Chemicals D Surface Chemistry E Chemicals Pakistan 21 20 17 6 B Car Refinishes C Industrial Coatings D Powder Coatings E Wood Finishes and Adhesives A Europe B Americas C Asia Pacific 28 21 18 17 16 52 31 17 Total revenue high growth markets vs mature Total revenue high growth markets vs mature Total revenue high growth markets vs mature > 30% 100% > 45% 100% > 35% 100% AkzoNobel at a glance in 2010 Our geo-mix and employees 20% North America 10,400 39% Mature Europe 22,300 6% Emerging Europe 2,600 Geo-mix revenue by destination Employees by region 10% Latin America 4,300 21% Asia Pacific 14,500 4% Other countries 1,500 Revenue (in € billions) €14.6 55,590 Employees Decorative Paints 34% 33% Total revenue €14.6 billion Specialty Chemicals Performance Coatings 33% 3% Other Specialty Chemicals 20% Decorative Paints 39% Total employees 55,590 38% Performance Coatings Revenue by Business Area Employees by Business Area A year of delivering Tomorrow’s Answers Today 2010 was a successful year for AkzoNobel, the world’s largest coatings and specialty chemicals company. Our financial performance was strong; we completed a number of significant acquisitions; introduced a wide range of innovative and more sustainable products; and launched a new accelerated growth strategy. More information on all these developments can be found in this 2010 Report, which takes a detailed look at how we are continuing to deliver Tomorrow’s Answers Today. AKZONOBEL AND... Throughout this Report you will find various case studies highlighting just part of our contribution to the world around us. 17 HIGH GROWTH REGIONS 25 THE MID-MARKET 30 PAPER TECHNOLOGY 34 BRIGHT IDEAS 40 FASTER INNOVATION 44 MEETING CUSTOMER NEEDS 50 HEALTHY LIVING 54 NATURAL RESOURCES 144 ECO-PREMIUM SOLUTIONS 146 INVENTIVE THINKING 158 COOL COATINGS 162 SUPPLYING IKEA 164 CUTTING OUT CARBON Contents Strategy Chairman’s statement Our Board of Management Report of the Board of Management Statement of the Board of Management Achieving our medium-term ambitions Improving our performance levels Executive Committee Business performance AkzoNobel Specialty Chemicals AkzoNobel Performance Coatings AkzoNobel Decorative Paints Governance and compliance Our Supervisory Board Report of the Supervisory Board Corporate governance statement Remuneration report Risk management AkzoNobel on the capital market Additional information Financial summary Index Glossary Financial calendar Disclaimer 170 170 174 175 177 inside back cover 5 6 8 10 16 18 20 27 29 30 40 50 59 60 61 63 69 75 80 Financial statements Consolidated statement of income Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of cash flows Consolidated statement of changes in equity Segment information Notes to the consolidated financial statements Company financial statements Other information Sustainability facts and figures 2010 key figures Managing our values Stakeholder activity Sustainability framework Invent Manage Improve Reporting principles Independent assurance report Sustainability performance summary 85 86 87 87 88 89 90 91 129 134 137 138 139 141 142 145 149 152 166 167 168 AkzoNobel Report 2010 | Contents 3 This section provides an overview of our strategic priorities, highlights key performance areas and gives details of the medium- term ambitions targets to which we aspire. You will also find the Chairman’s statement and the Report of the Board of Management. Chairman’s statement Our Board of Management Report of the Board of Management Statement of the Board of Management Achieving our medium-term ambitions Improving our performance levels Executive Committee 6 8 10 16 18 20 27 Delivering Tomorrow’s Answers Today For AkzoNobel, 2010 was something of a landmark year. We still faced many challenges due to the ongoing uncertainty surrounding the economic climate. But our financial vigilance and swift response to the global downturn enabled us to launch a new accelerated growth strategy soon after markets began to recover. Our aim all along had been to emerge from the crisis an even stronger company, and we succeeded. 6 Page title | Strategy | AkzoNobel Report 2010 I’ll come to our new growth ambitions in a moment, but the milestone nature of the year – and the essence of our strategic vision – was in many ways typified by November’s inauguration of our new multi-site in Ningbo, China. The €275 million facility is AkzoNobel’s largest ever investment outside of an acquisi- tion and underlines the increasing importance of the world’s high growth markets as we look to establish ourselves as the world’s leading coatings and specialty chemicals company. Regions such as Asia and Latin America are fundamental to our future plans and Ningbo is representative of all our ambi- tions as we strive to push ahead and seize opportunities to accelerate profitable growth. Value and Values The announcement of our new Value and Values strategy was certainly one of the year’s most important developments. It was significant because it signaled the end of the transfor- mation of our portfolio – a complex period of integration and restructuring – and the dawn of a new era. One of accelerated and sustainable growth. The details are explained elsewhere in this 2010 Report, but essentially our new strategy sets out a number of mid-term financial targets, including increas- ing revenue to €20 billion, growing EBITDA each year while maintaining a 13 to 15 percent margin and paying a stable to rising dividend. These “Value” ambitions are underpinned by strategic “Values”, which ensure that growth will be achieved responsibly and sustainably. The foundations for our new strategic vision were completed during 2010, when we turned in a solid financial performance, with revenue growing 12 percent. Delivering on our 14 percent EBITDA target ahead of schedule was also a significant achievement and emphasized the success of our employees in focusing on customers, costs and cash. This disciplined approach enabled us to grow revenue across all businesses and paved the way for us to drive forward with fresh impetus and renewed energy. Our markets have not yet fully returned to pre-recessionary levels and raw material prices are still volatile, so discipline remains key. But we are financially robust and are committed to realizing further benefits from both our scale and our pipeline of innovative products. In order to help us deliver on our new strategic ambitions, we decided that an important change was needed at the very top of the organization. We therefore broadened our leader- ship team and established a nine-strong Executive Committee (explained in further detail elsewhere), comprising the current Board of Management and four new leaders. I’m confident that this new set-up will help to better drive common agendas, build capabilities across the company and develop a leader- ship group, culture and structure that will bring AkzoNobel to the next level of substantially higher performance and growth. During 2010, we continued with our strategy of consolidating our industries with a number of bolt-on acquisitions. Among the most significant was the finalization of the deal in which we took over the powder coatings activities of the former Rohm & Haas from the Dow Chemical Company. This saw us become market leader in the US and helped to significantly improve volumes. Another deal involved the purchase of Changzhou Prime Automotive Paint Co. Ltd. in China. This not only gives us strong representation in one of China’s most promising growth segments, but also gives our Car Refinishes business the opportunity to become the clear leader in the attractive vehicle refinish mid-market. Another important acquisition was that of Lindgens Metal Decorating Coatings and Inks by our Industrial Coatings business. It enables us to serve custom- ers with a more complete range of inks and has improved our position in high growth areas of EMEA (such as Turkey and Russia), as well as in the Asia Pacific region, notably Austra- lia. The key divestment during 2010 involved the sale of our National Starch activities to Corn Products International, which completed the final stage of our portfolio transformation. Aside from acquisitions, the year was also notable for a number of strategically important agreements. Perhaps the most signifi- cant was the deal signed by our Decorative Paints business to become the primary paint supplier to Walmart, which involves supplying multiple paint brands to the retailer’s 3,500-plus stores in the US. Excellent performance Sustainability continued to be a high priority during 2010, emphasized by the integral role it has to play in our new growth strategy. We maintained our excellent performance and were again ranked as one of the leaders in our industry, demonstrat- ing our commitment not just to growing, but to growing in the right ways. Our innovative pipeline also continued to produce a wide range of eco-premium solutions that have made an immediate impact, such as Dulux Weathershield SunReflect, a paint which lowers the temperature of external walls and reduces the need for air conditioning. We also realize that there are areas where we need to improve. For example, we know we can do even better when it comes to safety and are making a concerted effort to achieve a top quartile performance. Similarly, our employee programs are being stepped up to improve engagement and encourage talent development. Creating an engaged workforce is central to our new strategy and we are working hard to stimulate a climate of confidence, cooperation and co-creation. I must stress that while not as severe as the previous year, 2010 did present its fair share of challenges. The fact that we made such solid progress and have entered a new era of accelerated and sustainable growth says much about our underlying strength and our firm financial footing. In line with our new strategy, we will therefore propose an increased dividend to shareholders at the forthcoming Annual General Meeting. In 2011, we expect to experience volume challenges in many established markets and will continue to face raw material price pressure. Although there is ongoing uncertain- ty about the overall economic conditions, particularly in the mature markets, for 2011 we are aiming for more than five percent revenue and EBITDA growth. My colleagues on the Board of Management and Executive Committee are extremely proud to be leading our great company at such an exciting period in its long history and would like to express our gratitude to the many colleagues around the world who are helping to lead AkzoNobel into a future full of so many possibilities. Hans Wijers CEO and Chairman of the Board of Management AkzoNobel Report 2010 | Strategy | Chairman’s statement 7 Our Board of Management Tex Gunning Board member responsible for Decorative Paints (1950, Dutch) Keith Nichols Chief Financial Officer (1960, British) Tex Gunning holds a degree in economics from the Erasmus University Rotterdam. His business career has included more than 25 years at Unilever, where his final position was as Busi- ness Group President Asia Foods. Keith Nichols joined AkzoNobel in December 2005 from Corus Group plc, where he held the position of Group Trea- surer. Prior to joining Corus in 2004, he held a number of senior finance positions within TNT N.V., bringing extensive international finance experience. In September 2007, he was appointed CEO of Vedior, a global company in HRM services. After a successful merger with Randstad, he joined AkzoNobel in 2008 as Managing Director of Decorative Paints. Mr. Nichols played a key senior role in the sale of Organon BioSciences to Schering Plough and in the structuring, financ- ing and completion of the acquisition of ICI. He is a member of the Association of Corporate Treasurers and holds the MCT Advanced Diploma. 8 Our Board of Management | Strategy | AkzoNobel Report 2010 Hans Wijers Chief Executive Officer and Chairman of the Board of Management (1951, Dutch) Rob Frohn Board member responsible for Specialty Chemicals (1960, Dutch) Leif Darner Board member responsible for Performance Coatings (1952, Swedish) A graduate of the University of Groningen and Assistant Profes- sor of Economics at the Erasmus University of Rotterdam in the Netherlands (where he received his PhD in economics). A former Minister for Economic Affairs in the Dutch govern- ment, prior to joining AkzoNobel, he was senior partner and chairman of the Dutch office of The Boston Consulting Group. He is a non-executive director at Royal Dutch Shell. In addi- tion, Mr. Wijers is a member of the Board of Directors of the Concertgebouw N.V. and a member of the European Round Table of Industrialists. Rob Frohn joined AkzoNobel as a business analyst in 1984. Following several General Manager positions, in 2004 he was appointed CFO and member of the Board of Management of AkzoNobel. Mr. Frohn assumed responsibility within the Board of Management for Specialty Chemicals as of May 1, 2008. After graduating from Gothenburg University, Leif Darner held several management positions before being appointed General Manager of Powder Coatings Scandinavia at Cour- taulds in 1985. He is a non-executive director at Nutreco N.V., and Delta N.V. He is a Board member of CEFIC (European Chemical Industry Council) and Hogeschool van Arnhem en Nijmegen (HAN). In 1993, he was appointed Chief Executive of Coatings North- ern Europe. Then in 1997 he served as Worldwide Director of Yacht Paint and Protective Coatings. In 1998, Courtaulds became part of AkzoNobel and Mr. Darner was appointed Business Unit Manager of AkzoNobel Marine and Protective Coatings, a post he held from 1999 until 2004, when he was appointed to the Board of Management of AkzoNobel as the member responsible for Chemicals, a posi- tion he held until April 2008. AkzoNobel Report 2010 | Strategy | Our Board of Management 9 Report of the Board of Management • 2010 revenue growth at 12 percent in line with medium-term ambitions • 2010 EBITDA before incidentals 16 percent higher • Operating return on invested capital: 27.7 percent (2009: 23.2 percent) • Net income: €754 million (2009: €285 million) • Total dividend for 2010: €1.40 (2009: €1.35) proposed • Outlook: aiming for more than 5 percent revenue and EBITDA growth in 2011, in line with medium-term ambitions Financial highlights Continuing operations before incidentals In € millions Revenue EBITDA EBITDA margin (in %) EBIT EBIT margin (in %) Moving average ROI (in %) Operating ROI (in %) After incidentals In € millions Operating income Net income from continuing operations Net income from discontinued operations Net income total operations Earnings per share from continuing operations (in €) Earnings per share from total operations (in €) Capital expenditures Net cash from operating activities Interest coverage Invested capital Net debt Number of employees 2009 2010 ∆% 13,028 14,640 1,690 13.0 1,131 8.7 9.2 23.2 1,964 13.4 1,374 9.4 10.8 27.7 12 16 21 2009 2010 ∆% 855 253 32 285 1.09 1.23 513 1,220 2.1 11,732 1,744 54,740 1,219 43 664 90 754 2.85 3.23 534 519 3.7 12,718 936 55,590 10 Report of the Board of Management | Strategy | AkzoNobel Report 2010 Revenue Revenue was up 12 percent for the year. During 2010, demand recovered and volumes increased, notably in the high growth markets. returned to pre-crisis levels. Revenue increased 13 percent for the year, driven by the volume improvement, stable pricing and favorable currency effects. Acquisitions and divestments The acquisition and divestment effect on individual Business Area revenue during the year was due to the following: • In Performance Coatings, we consolidated the acquired former Dow Chemical powder coatings activities as of June. We acquired the Lindgens Metal Decorating and Inks business in Q3 and on October 1, we acquired Changzhou Prime Automotive Paint Co., Ltd to grow our Car Refinishes business in China. • In Specialty Chemicals, we divested PTA Pakistan in September 2009. This impacted 2010 revenue in Specialty Chemicals by 4 percent. During 2010, National Starch was classified as a discontinued operation and was sold on October 1, 2010, at a gain of €53 million. Decorative Paints Decorative Paints full-year revenue growth was 9 percent. Demand in the high growth markets showed a robust recov- ery in 2010 after a challenging 2009. Our growth strategy of investing in brands, distribution and people, and expanding into mid-tier markets in high growth regions, is progressing well. Growth rates achieved in China and South East Asia have significantly outpaced markets, while demand in most of the mature markets declined during the year. As a result, our revenue in mature markets declined, apart from the UK, where we continued to strengthen the Dulux market position and gained share in the trade segment. Performance Coatings Performance Coatings had a good year, with revenue up 16 percent. Volume increases were seen in all businesses and all geographic regions, especially in Eastern Europe, Latin America and Asia. Powder Coatings showed the largest increase due to an acquisition, followed by Industrial Coatings, driven by good performances in Coil and Packaging Coat- ings. Wood Finishes and Adhesives and Marine and Protective Coatings had slower volume growth due to continued weak demand in the US housing market and lower investment levels in the European and US markets. Specialty Chemicals A broad recovery in demand, combined with the success of our strategic growth platforms, led to a volume increase across nearly all business lines in our Specialty Chemicals portfolio. In particular, volumes in the Americas and Asia Decorative Paints Performance Coatings Specialty Chemicals Total Revenue in € millions Revenue development in % versus 2009 Decorative Paints Performance Coatings Specialty Chemicals 4,905 4,635 4,820 4,573 4,112 4,359 4,968 4,786 4,943 Decrease Increase 12 10 8 6 4 2 0 +6% +12% +6% 0% 0% 4,356 2008 2009 2010 Volume Price Acquisitions/ divestments Exchange rates Total Revenue development in % versus 2009 Volume Price Acquisitions/ divestments Exchange rates Total 2 7 11 6 1 (1) – – – 3 (4) – 6 7 6 6 9 16 13 12 AkzoNobel Report 2010 | Strategy | Report of the Board of Management 11 EBITDA AkzoNobel 2008 – 2010 in € millions Decorative Paints Performance Coatings Specialty Chemicals 598 566 767 487 594 738 548 647 939 2008 2009 2010 EBITDA EBITDA was up 16 percent. During the second half of the year we were impacted by higher raw material costs, which we partly offset by pricing. Decorative Paints In Decorative Paints, we continued to invest in the future of the business, with absolute A&P spending increasing by 30 percent and A&P spending as percentage of revenue increasing to 6 percent (2009: 5 percent). During the year, we maintained our focus on costs, margin improvement and oper- ating working capital efficiency. We continued the restructur- ing programs in our European business to counter soft market demand, while our margin management programs enabled us to maintain overall margins, despite higher raw material prices. EBITDA increased 13 percent and the EBITDA margin improved from 10.6 percent in 2009 to 11.0 percent in 2010. Performance Coatings Full-year EBITDA increased 9 percent, where the positive currency impact was 7 percent, and ended at €647 million. The EBITDA margin was 13.5 percent (2009: 14.4 percent). Costs were kept under control, however, margins were impacted by higher raw material prices. 12 Report of the Board of Management | Strategy | AkzoNobel Report 2010 Specialty Chemicals Improved volume, firm margins and limited cost growth in Specialty Chemicals resulted in an EBITDA growth of 27 percent to €939 million for 2010, surpassing all previous performance levels for the portfolio. With the National Starch divestment having been completed and our Ningbo site in China operational, the business area was even better posi- tioned at the close of the year. Raw materials Raw material prices increased in 2010, particularly in the second half of the year. We expect 2011 prices to increase further. Pricing and cost reduction actions are ongoing and AkzoNobel is confident that it will be able to compensate for these increases during 2011. Incidental items included in operating income During 2010, we continued to restructure: • In Decorative Paints, mainly in Continental Europe and the US Incidentals included in operating income In € millions 2009 2010 Restructuring costs Results related to major legal, antitrust and environmental cases Results on acquisitions and divestments Other incidental results Incidentals included in operating income (349) (38) 48 63 (276) (120) (49) 33 (19) (155) EBIT in “other” Corporate costs ended below the previous year. The pension cost impact compared with the previous year is completely due to IAS 19 corridor accounting. We saw fewer insurance claims in 2010, leading to a better result this year in insur- ance. Other costs are higher than the previous year, mainly due to increased project activity in line with our strategy to drive functional excellence. • In Performance Coatings, we closed several sites EBIT in “other” in connection with the acquired powder coatings activities • In Specialty Chemicals, we closed an incinerator in Rotterdam. Apart from restructuring costs, we took a €32 million provision for environmental clean-up costs at a site in Sweden. In addi- tion, we reported gains in connection with the acquisition of the acquired powder coatings activities and the divestment of a capitve insurance company. In € millions 2009 2010 Corporate costs Pensions Insurances Other EBIT in “other” (99) 29 (9) (70) (149) (96) (7) 2 (87) (188) Tax The year-to-date tax rate is 19 percent (2009: 30 percent). The tax rate is low because of several adjustments to previ- ous years, partly related to settlements with tax authori- ties. Furthermore, there were tax-exempt gains related to acquisitions and divestments. Excluding these and other incidental items, the year-to-date tax rate would have been 28 percent (2009: 30 percent). Net financing expenses Net financing charges for the year decreased by €78 million from €405 million to €327 million, due to decreased financ- ing expenses on pensions (€71 million mainly due to higher returns on plan assets). In addition: • Interest on provisions decreased by €15 million due to lower discount rates • Interest on net debt increased by €11 million due to higher cost of refinanced bonds in 2009 and lower rates on our cash position during 2010. Net financing expenses In € millions 2009 2010 Financing income Financing expenses Net interest on net debt Financing expenses related to pensions Interest on provisions Other items Net other financing expenses Net financing expenses 58 (236) (178) (171) (54) (2) (227) (405) 51 (240) (189) (100) (39) 1 (138) (327) Discontinued operations On October 1, we completed the divestment of National Starch with a gain of €53 million. The operating results for 2010 were €74 million. In 2010, we also incurred €37 million related to further settlements and tax-related costs from the divestments of the businesses sold to Henkel in 2008. In total, we reported a gain from discontinued operations of €90 million for 2010. Earnings per share Net income from total operations amounted to €754 million (2009: €285 million), including €90 million attributable to discontinued operations. Earnings per share from total oper- ations increased from €1.23 to €3.23. Earnings per share from continuing operations also more than doubled from €1.09 to €2.85. Economic Value Added (EVA) EVA is calculated by deducting from net operating profit after tax (NOPAT) a capital charge representing the cost of capital calculated on the basis of an average return inves- tors expect. EVA for 2010 totaled a negative amount of €142 million (2009: €390 million negative, restated to exclude National Starch). Earnings per share total operations (in €) Returns on invested capital We monitor our return on investments (ROI) by two measures: 1.23 2009 3.23 2010 (4.38) 2008 • By (moving average) ROI, being EBIT divided by average invested capital • By (moving average) operating ROI, being EBIT before amortization of intangibles divided by average invested capital excluding intangibles. Both measures developed positively during 2010. Dividend proposal We have announced a simplified dividend policy and intend to pay a stable to rising dividend, whereby a cash interim and final dividend will be paid. We will propose a 2010 final dividend of €1.08 per share, which would make a total 2010 dividend of €1.40 (2009: €1.35). Returns on invested capital in % Moving average ROI Operating ROI Dividend (in €) 1.80 1.35 1.40 20 16 12 8 4 0 23.5 23.2 9.4 9.2 27.7 10.8 30 24 18 12 6 0 2008 2009 2010 2008 2009 2010 AkzoNobel Report 2010 | Strategy | Report of the Board of Management 13 Invested capital Invested capital at year-end 2010 totaled €12.7 billion, €1 billion higher than at year-end 2009. Invested capital was impacted by the following items: • Foreign currency effects on intangibles and property, plant and equipment, due to the weakening euro. In total, equity increased by €0.8 billion due to the currency translation impact • An increase of €269 million of long-term receivables related to pension funds in an asset position • Acquisitions, primarily the acquired powder coatings activities • An increase of operating working capital due to currencies and increased business activities. Expressed as a percentage of revenue, operating working capital was 13.9 percent (year-end 2009: 13.7 percent) • Payments of accrued interest of €159 million in January 2010, being the first payment under bonds refinanced in late 2008 and the first half of 2009. The normalized cash outflow for these bonds is €148 million. We intend to accelerate growth and expand our investments in high growth regions. In 2011, we aim to invest 4 percent of revenue in capital expenditures. Condensed consolidated balance sheet In € millions 2009 2010 Intangible assets Property, plant and equipment Other financial non-current assets 7,388 3,474 1,783 7,308 3,384 1,977 Total non-current assets 12,645 12,669 Inventories Trade and other receivables Cash and cash equivalents Other current assets Total current assets Total assets Total equity Provisions and deferred tax liabilities Long-term borrowings Total non-current liabilities Short-term borrowings Trade and other payables Other short-term liabilities Total current liabilities 1,441 2,564 2,128 102 6,235 1,678 2,788 2,851 108 7,425 18,880 20,094 8,245 2,593 3,488 6,081 384 2,866 1,304 4,554 9,509 2,444 2,880 5,324 907 3,305 1,049 5,261 Total equity and liabilities 18,880 20,094 Invested capital in € millions 11,770 11,732 12,718 2008 2009 2010 Net debt Net debt decreased from €1,744 million at year-end 2009 to €936 million at year-end 2010, mainly due to: • The divestment of National Starch, generating €1 billion of cash • Operating cash inflows of €519 million • Dividend payments of €403 million (including to non-controlling interests) • Capital expenditures of €534 million. A bond totaling €539 million will mature in June 2011 and is recorded under short-term borrowings. In August, our credit ratings were confirmed at BBB+/Baa1 with outlook improved to stable. The proceeds from the disposal of National Starch will fund growth and will potentially partly be used to realize our growth plans, strengthen the company’s capital structure by, for example, repaying the 2011 €539 million debt maturity or de-risking pensions where possible. Shareholders’ equity Shareholders’ equity as at December 31, 2010, increased to €9.0 billion, due to the net effect of: • Net income of €754 million • Increased cumulative translation reserves by €734 million due to the weakening euro • Payment of the final 2009 dividend of €245 million and the 2010 interim dividend of €75 million. Pensions The funded status of the pension plans at year-end 2010 was estimated to be a deficit of €1.0 billion (year-end 2009: €1.9 billion). The movement is due to lower discount rates increasing the pension obligation, compensated by: • Increased asset values • Lower inflation expectations • Top-up payments of €375 million into certain defined benefit pension plans. 14 Report of the Board of Management | Strategy | AkzoNobel Report 2010 2008 2009 2010 Condensed consolidated cash flow statement In € millions 2009 1 2010 Operating working capital in € millions Cash flows Operating activities in 2010 resulted in a cash inflow of €519 million (2009: €1,220 million). The change compared with 2009 is due to €0.4 billion higher operating results offset by the following changes in working capital and changes in provisions: Operating working capital in % of revenue 4,000 3,200 16.4 • During 2009, we released €0.5 billion cash from operating 2,400 working capital, whereas during 2010 we invested €0.1 billion in operating working capital to facilitate growth 1,600 2,185 • During 2009, we incurred high costs for restructuring, resulting in higher restructuring payments during 2010 • In 2009, we received €75 million from tax authorities on a 800 0 13.7 13.9 1,691 2,016 20 16 12 8 4 0 contingent basis for ongoing tax litigation, and, in 2010 we paid an additional amount to tax authorities. In addition, in early 2010 we made the first payment of accrued interest of bonds refinanced in 2009. Workforce At year-end 2010, we employed 55,590 staff for ongoing activities (year-end 2009: 54,740 employees). The net increase was due to: • A net increase of 870 due to acquisitions and divestments, mainly from the acquired powder coatings activities (670 employees) • A decrease of 1,770 employees due to ongoing restructuring • An increase of 1,750 employees due to new hires and other changes. Cash and cash equivalents opening balance Profit for the period from continuing operations Amortization, depreciation and impairments Changes in working capital Changes in provisions Other changes Net cash from operating activities Capital expenditures Acquisitions and divestments 2 Other changes Net cash from investing activities Changes from borrowings Our growth ambitions will entail hiring new employees, in particular in high growth regions. Dividends Other changes Net cash from financing activities Net cash used from continuing operations Cash flows from discontinued operations Net change in cash and cash equivalents of total operations Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at December 31 1 Restated to present National Starch as a discontinued operation. 2 Net of cash. 1,449 1,919 330 622 650 (493) 111 1,220 (513) (55) 39 (529) 175 (454) 4 (275) 416 19 435 35 1,919 747 640 (95) (651) (122) 519 (534) 2 53 (479) (33) (403) (45) (481) (441) 1,095 654 110 2,683 AkzoNobel Report 2010 | Strategy | Report of the Board of Management 15 Statement of the Board of Management The Board of Management’s statement on the financial statements, the management report and on internal controls We have prepared the 2010 Report of AkzoNobel and the undertakings included in the consolidation taken as a whole in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and additional Dutch disclosure requirements for annual reports. To the best of our knowledge: 1. The financial statements in this 2010 Report give a true and fair view of our assets and liabilities, our financial position at December 31, 2010, and of the result of our consolidated operations for the financial year 2010. 2. The management report in this 2010 Report includes a fair review of the development and performance of the busi- nesses and the position of AkzoNobel and the undertak- ings included in the consolidation taken as a whole, and describes the principal risks and uncertainties that we face. The Board of Management is responsible for the establishment and adequate functioning of internal controls in our company. Consequently, the Board of Management has implemented a broad range of processes and procedures designed to provide control by the Board of Management over the company’s oper- ations. These processes and procedures include measures regarding the general control environment, such as a Code of Conduct including business principles, corporate directives and authority schedules, as well as specific measures, such as a risk management system, a system of controls and a system of letters of representation by responsible management at various levels within our company. All these processes and procedures are aimed at a reason- able level of assurance that we have identified and managed the significant risks of our company and that we meet our operational and financial objectives in compliance with appli- cable laws and regulations. The individual components of the above set of internal controls are in line with the COSO Enter- prise Risk management framework. With respect to support to, and monitoring of, compliance with laws and regulations including our business principles, a compliance committee has been established. Internal Audit provides assurance to the Board of Management whether our internal risk manage- ment and control systems, as designed and represented by management, are adequate and effective. While we routinely work towards continuous improvement of our processes and procedures regarding financial reporting, the Board of Management is of the opinion that, as regards financial reporting risks, the internal risk management and control systems: • Provide a reasonable level of assurance that the financial reporting in this 2010 Report does not contain any errors of material importance • Have worked properly in the year 2010. For a detailed description of the risk management system with regard to the strategic, operational and compliance risks and the principal risks identified, reference is made to the Risk management section. We have discussed the above opinions and conclusions with the Audit Committee, the Supervisory Board and the external auditor. Medium-term ambitions We have the aspiration to be the world’s leading Coatings and Specialty Chemicals company. On September 28, we announced our medium-term ambitions to grow to €20 billion revenue, increase EBITDA each year while main- taining a 13 to 15 percent margin, reduce OWC percent of revenue year-on-year by 0.5 percent towards a 12 percent level, and pay a stable to rising dividend. The sustainability ambitions are to remain a top three leader in our industry, to be top quartile in our peer group in terms of safety performance, diversity, employee engagement and development, and eco-efficiency improvement rates. Outlook We are aiming for more than 5 percent revenue and EBITDA growth in 2011, in line with medium-term ambitions. Amsterdam, February 16, 2011 The Board of Management Hans Wijers Leif Darner Rob Frohn Tex Gunning Keith Nichols 16 Statement of the Board of Management | Strategy | AkzoNobel Report 2010 AKZONOBEL AND HIGH GROWTH REGIONS Asia has a fundamental role to play in our accelerated growth strategy. China in particular is integral to our strategic focus on the world’s high growth regions, highlighted by our inten- tion to achieve a $3 billion revenue target in China by 2015 – doubling the previous target. The Ningbo multi-site, which we inaugurated in Novem- ber 2010, perfectly illustrates the scale of our ambitions. The €275 million facility represents our biggest ever invest- ment outside of an acquisition and emphasizes the extent of our commitment to fuelling accelerated growth in China and beyond. AkzoNobel’s Functional Chemicals business is already produc- ing chelates, ethylene amines and ethylene oxide at the Ningbo site and is adding an organic peroxides plant, which is expected to come on stream in late 2011. The 50-hectare plot also offers room for expansion and further investment in organic growth as we look to significantly boost our presence and capabilities. We currently employ around 6,500 people in China and have close to 30 production sites located there. These facilities enable us to optimize our global supply chain and respond to growing demand for our products. Being located close to our growing customer base in China also gives us a competitive advantage. Achieving our medium-term ambitions Strategic ambitions Value Outgrow our markets: Delivered • Improved market share in many key mature and high EBITDA margin > 14 percent: Delivered early • Continued to manage gross margin percentage through growth markets • Opened our new €275 million Specialty Chemicals site in Ningbo, China • In Performance Coatings, acquired the powder coatings activities of the Dow Chemical Company, and Changzhou Prime Automotive Paint Co., Ltd (to support our mid-market car refinishes business in China) • In Decorative Paints, signed an agreement to become the primary paint supplier to Walmart in the US. Revenue growth in % pricing and procurement actions, despite challenging raw materials environment • Completed delivery of €340 million of ICI synergies and almost all initiatives in our broader €200 million restructuring plan • Achieved our 14 percent EBITDA margin target on an annual rolling basis in the second quarter of 2010. EBITDA margin as a % of revenue annual rolling basis OWC improvement of 0.5 p.a: Delivering • Delivered strong credit control, despite the financial crisis • Continued to consolidate suppliers and harmonize terms and conditions to ensure sustainable improvement in days of payables • Continued roll-out of SAP in Decorative Paints, which will enable further substantial improvements in inventory management • Implemented a best practices reference guide to enable future reductions in OWC levels. Operating working capital as a % of revenue 20 15 10 5 0 9 16 13 12 32 24 16 8 0 12.0 12.1 12.6 13.0 13.6 14.0 13.9 13.4 14.7 15.4 11.9 12.3 15.7 14.8 10.4 9.4 16 12 8 4 0 20 16 12 8 4 0 16.4 13.7 13.9 Decorative Paints Performance Coatings Specialty Chemicals Total Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 2010 2009 2010 18 Achieving our medium-term ambitions | Strategy | AkzoNobel Report 2010 The next chapter in leadership In 2008, following the acquisition of ICI, we outlined a strategic vision to become the world’s leading Coatings and Specialty Chemicals company. We also defined both value and values ambitions to support this overall vision, which are shown across this spead. These defined what we meant by leadership in value and values during a time when internally we were integrating ICI, and externally the market environment was uncertain at best. Now that the market environment is improving, and we have completed the ICI integration, we have defined a new set of medium-term strategic ambitions, appropriate for the next chapter of our leadership story. These ambitions were announced in September 2010 and will form the basis for our reporting going forward. They are strongly oriented towards profitable growth and are outlined to the right. Values Value Accelerated growth Value Accelerated growth • Grow to €20 billion in revenue • Increase EBITDA each year, maintaining a 13 to 15 percent margin • Reduce OWC percent of revenue by 0.5 per annum towards a 12 percent level • Pay a stable to rising dividend Values Sustainable growth Values Sustainable growth • Top quartile safety performance • Top three position in sustainability • Top quartile performance in diversity, employee engagement and talent development • Top quartile eco-efficiency improvement rate Top quartile safety: Continued improvement required • Demonstrated improvement, but not enough to reach Top three Dow Jones Sustainability Index: Delivered • Ranked in the top three in the Chemicals index for our target the fifth year Step change in people development: Continued • Implemented a full and reinvigorated training schedule • Set stretching targets for executive diversity; will roll-out • Continued to roll-out behavior-based safety (BBS) • Demonstrated continued strong performance in risk diversity and inclusion training for all employees from 2011 program in a disciplined manner • Implemented a full roll-out of safety leadership training. and crisis management, Code of Conduct and environmental policy and management systems • Improved in innovation management • Future improvement required in operational eco-efficiency (i.e., carbon, water, waste) and people development aspects. • Launched an externally benchmarked employee engagement survey to assess baseline performance • Began to implement HR country organizations to harmonize procedures and facilitate intra-company capability transfer. Total reportable injuries per million hours DJSI position Chemicals sector Employee engagement performance as percentile 10 8 6 4 2 0 5.3 4.6 3.7 3.6 2007 2008 2009 2010 2.0 2015 ambition 2006 2007 2008 2009 2010 2nd 1st 2nd 2nd 2nd 100 80 60 40 20 0 75 2015 ambition 23 2010 AkzoNobel Report 2010 | Strategy | Achieving our medium-term ambitions 19 Improving our performance levels Context Over the last few years, there have been two major phases in AkzoNobel’s corporate strategy. The first, from 2003 to 2007, was strongly focused on portfolio transformation. This phase included a series of divestments designed to transform our position in Specialty Chemicals, as well as the sale of our human and animal healthcare businesses, the acquisition of ICI and the on-sale of the ICI Adhesives and Electronic Mate- rials business to Henkel. We completed the final step in this process in 2010 with the sale of National Starch to Corn Prod- ucts International. The second phase, which ran from 2008 to 2010, was focused on integration and restructuring. During this period, we were primarily occupied with improving efficiency in the business for two main reasons – to capture the synergy potential from the ICI acquisition and to respond to the global economic downturn. Both of these agenda items were essen- tially completed in 2010. Specifically: • With regard to the ICI integration, we have now completed almost all actions. We delivered €340 million in synergy savings by the end of 2010. This exceeds, and was achieved faster, than our initial ambition of €270 million by 2011. Beyond the top line numbers, within Decorative Paints, we have reduced: • Brands from 100 to 75 and will reduce to less than 50 by the end of 2012 • Stock keeping units (SKUs) from more than 90,000 to 75,000 and will reduce to less than 60,000 by the end of 2012 • Factories from 80 to 58 and will reduce to less than 50 by the end of 2012. 20 Improving our performance levels | Strategy | AkzoNobel Report 2010 • With regard to restructuring, from 2008 to 2009, we Strategic agenda promised €200 million in savings in partial response to the financial crisis. We over-achieved on this target, delivering €350 million by the end of 2009. During 2010, we contin- ued our restructuring efforts in mature markets. We have now started the next chapter of our strategy devel- opment, one of accelerated and sustainable growth. As has been the case throughout the two previous phases, the focus is on true leadership in Coatings and Specialty Chemicals. We continue to strongly believe that, to be the true leader, we must be the leader in terms of both value and values. The strategic agenda today Our new strategic agenda is firmly focused on delivering growth. This will be supported by a renewed emphasis on functional excellence and will continue to be balanced by a disciplined approach to cash management. These agenda items will be supported by continued focus on building and leveraging our Talent Factory, living the AkzoNobel values and embedding safety and sustainability in everything we do. A description of 2010 activities and plans for 2011 for each strategic agenda item follows. Innovate more to respond to global mega-trends and deliver on solution promises Accelerate profitable growth through market share gain, margin management and industry consolidation, particularly in high growth countries Deliver business models that serve the needs of the mid-markets Drive functional and operational excellence, with focus on RD&I, supply chain, finance and HR Manage capital and cash in a disciplined manner Build and leverage our industry-leading Talent Factory Live the AkzoNobel values by creating a culture of confidence, cooperation and co-creation Embed safety and sustainability in everything we do Innovate more To achieve our growth ambitions, we need to focus our effors more on projects that yield bigger and better innovations – delivered faster. In 2010, we spent time developing a more focused portfolio of innovation projects and are already redi- recting our investment to support these bigger innovations. Increasingly, our innovation portfolio will be aimed at deliver- ing solution promises that address global mega-trends. These concepts are explained below. Global mega-trends We are now completely aligned on the key underlying changes in the world that will drive our business, and indeed all businesses: • Population growth: from 6.8 billion people today to more than 9 billion in 2050 is a strong driver for global demand. • Quality of life: will improve for a new middle class of around 3 billion people emerging over the next 20 years • Climate change: will increase the need for energy efficiency and for low carbon and renewable energy resources • Scarcity of natural resources: will drive innovation; today we use the replenishment capacity of 1.4 planets. Solution promises These are conceptual responses to the challenges posed by the global mega-trends. They provide a framework which guides and energizes our innovation portfolio. For example, the combination of population growth and improved quality of life will mean that the world’s population grows and wealth increases, with significant mid-market development in high growth economies. The solution promise that addresses this is “Serving the needs of the mid-market.” To do this, we will need to deliver innovations that will provide customers with affordable, high quality products – at much lower cost. Throughout this 2010 Report, you will find a series of case studies highlighting some of the innovations that we have already commercialized that make good on these solution promises. We are confident that we will continue to deliver exciting innovations that deliver increased market share and/ or improved margins as we continue to redirect investment in R&D towards bigger innovation projects. We’re pleased with the progress we’re making, but we also recognize that no one company or individual has a monopoly on the best ideas. That’s why we’re also open to the best ideas to grow our business – whether they’re our own or someone else’s. To find and access those ideas, we’ve developed a structured approach to open innovation which encourages outside parties to help us with solutions where we don’t have the in-house knowledge, capabilities, or technology. We have already started to establish strategic partnerships in specific areas of mutual interest with key suppliers. Solution promises Serving the needs of the mid-market Developing products for well-being and identity Achiieving zero footprint Saving you time and effort Creating new horizons in functionality AkzoNobel Report 2010 | Strategy | Improving our performance levels 21 Accelerate profitable growth It is safe to say that we face a wealth of growth opportunities in all parts of our business using our existing value propositions and business models. This is true in both mature markets and high growth markets. • In mature markets, there is still considerable room for organic growth and even market share gain. A perfect example of this is our deal with Walmart in the US to become their primary paint supplier (see separate case study). A portfolio of interior and exterior paints has been developed which will be available in more than 3,500 Walmart stores nationwide. The agreement builds on our existing relationship with Walmart for paints in Puerto Rico and Canada, and for Liquid Nails adhesives in the United States. There is also room for industry consolidation. A good example of this was our acquisition of the former Rohm & Haas powder coatings activities from the Dow Chemical Company, which has significantly strengthened our global leadership in this market. Building this strong leadership position is important because powder coatings have an excellent sustainability profile, with lower water use and no VOC emissions. • The growth picture is even brighter in the high growth markets of Asia, Latin America and Eastern Europe. We experienced strong top line growth in these markets in 2010, but even more encouragingly, also strong growth in market share and absolute EBITDA (earnings before interest, tax, depreciation and amortization). t e k r a m f o % This growth is based largely on strong domestic growth in these markets. Capitalizing on the strong domestic growth potential in China was the main reason behind our major investment (€275 million) in our multi-site facility in Ningbo (see separate case study). 22 Improving our performance levels | Strategy | AkzoNobel Report 2010 In 2011, our plan is to continue to grow through a combination of organic growth and bolt-on acquisitions in all parts of our business. In essence, our major challenge is to prioritize and ensure we constantly modulate our growth program to respond to somewhat uncertain market conditions. Doing this should allow us to move forward on our accelerated growth ambition, while still delivering appropriate levels of cash in the business. Serve the needs of the mid-markets Beyond growth opportunities that draw on our traditional strengths and value propositions, we see a significant addi- tional opportunity in the mid-market. Traditionally, we have entered high growth markets with a premium positioning (as we did, for example, with our Dulux brand in India) and/or on the basis of existing mature market relationships (our Wood Finishes and Adhesives business in China, for instance). Given the fact that the large and growing markets in these high growth economies still have a different profile in terms of absolute level of income, we recognize that we need to think differently with regard to mid-market value propositions. In particular, we need to ensure that we are able to provide product/service combinations that provide appropriate price and quality levels for our customers and reasonable margins for AkzoNobel. This goes beyond the specific product – in many cases it also means that we need to think differently about distribution and technical service levels. This mid-market is hotly contested, with multinational competitors moving “down” and local competition moving “up” into this space. However, we recognize that in many of the high growth markets the mid-market is the market and ignoring it is not an option. India market relevant for AkzoNobel, 2009 Decorative Paints Performance Coatings Specialty Chemicals 100 80 60 40 20 0 Market size Premium ~20% Typical focus for AkzoNobel (and other multinationals) Mid-tier ~50% Intense battle between global multinationals “moving down” and local companies “moving up” Low price ~30% Low cost local value propositions, low-end technology, and “service-lite” business models We will be pursuing the mid-market opportunity through both organic growth and small to medium bolt-on acquisitions. For example, we are currently aggressively pursuing the mid- market in Decorative Paints in China. We are doing this by extending our Dulux brand and building our controlled stores network by approximately 700 stores per year in tier two and tier three cities to support this growth. Our position in the Chinese mid-market will be further strengthened through small to medium acquisitions, such as the Changzhou Prime Automotive Paint Co., Ltd deal which we completed in 2010 (see separate case study). Sourcing program over the last few years, with strong results in terms of both cost control and security of supply. We are now stepping up to take a company-wide approach to the supply chain. This does not mean that we will be centralizing all of our sourcing, manufacturing and distribution activities. Instead, it means that we will be leveraging our expertise and scale to achieve both our value and values ambitions. Specific areas of focus in 2010 and going forward in terms of supply chain have been around delivering on our safety ambi- tions and improving our eco-efficiency levels. Drive functional and operational excellence Throughout our integration and restructuring period, we pursued a series of projects to incrementally increase efficien- cy in our support functions. This has undoubtedly improved our cost position and will stand us in good stead as volumes recover, but we recognize that further improvements in effec- tiveness and efficiency will require a different approach. Historically, we have focused on a business unit structure and run both our front office and support functions in a fragmented manner. This has led to considerable market focus and success, but it has also led to sub-optimization of support activities. To reach the next level of performance, we now see the need and potential for more integration of these support functions. We will therefore be taking an approach which allows us to fully benefit from our scale. We have decided to focus on four key areas for building func- tional excellence – Supply Chain (including Sourcing), Finance and Information Management (IM), Research Development and Innovation (RD&I) and Human Resources (HR) and Orga- nizational Development (OD). The RD&I approach was covered in the Innovation initiative described earlier, while the HR/OD approach is outlined in the following Talent Factory initiative. Below is a summary of achievements and plans in the two remaining areas of Supply Chain/Sourcing and Finance/IM. Supply Chain (including Sourcing) We have successfully built the basics of an AkzoNobel-wide • While we know we must do better with regard to improving our safety performance, we are proud of what we have achieved so far. The implementation of a company-wide behavioral-based safety program is nearing completion and our safety leadership training program has now been completed for all managers. The latter is focusing on understanding risks, leadership, individual responsibility and the need for visibility or “walking the talk” for all our managers. In addition, local employee safety programs and training have been supplemented by a global e-learning module for all employees and new starters. Furthermore, a global AkzoNobel Safety Day was held in October, which included encouraging our employees to submit a pledge in which they promised to implement a simple solution to improve the safety of themselves or those around them. More than 14,000 responded. Despite these efforts, the total recordable injury rate remained around 3.6 in 2010, compared with 3.7 in 2009. We are still not at industry-leading levels and did not reach our target of 2.0 in 2010. This will continue to be an area of special focus in 2011. • An additional area of focus will continue to be operational eco-efficiency, or using less resources to make and distribute our products. An example of the type of improvement we have made, and will continue to make, is the innovative use of energy at one of our Pulp and Paper Chemicals facilities in Sweden. Heated cooling water generated by the chlorate electrolysis process is now being used for district heating in the nearby municipality of Ånge. This displaces oil and biomass combustion in our business and reduces the CO2 emissions at the municipal burners by 1.8 tons of CO2 per capita in Ånge. It also reduces the heat load on the local river where the cooling water is discharged. Another example is that of our Surface Chemistry plant at Forth Worth in the US. We have reduced calcium sulfate waste from filter cake by 2,000 tons by improving the control of the neutralization process – which creates the calcium sulfate – and optimizing the filtration process. The improvements we have made are not limited to our Specialty Chemicals businesses. For example, an online energy management system at Decorative Paints’ Wapenveld site in Germany has helped to identify improvements in heating, lighting and compressed air use which have resulted in a 30 percent reduction in gas consumption in eight years, and a 12 to 15 percent reduction in electricity consumption in four years. Beyond safety and operational eco-efficiency, additional areas of focus for 2011 in the Supply Chain function will be on process safety, product stewardship, raw material strategies and development of repeatable models to drive continuous improvement aimed at further optimization of the company’s overall manufacturing footprint. Finance and Information Management (IM) Over the last few years, we have invested significantly in both improving the control environment and increasing efficiency through restructuring and the integration of ICI. While this has led to a strong performance on governance and compliance in the Dow Jones Sustainability Index, as well as some incre- mental performance improvement, we still have significant opportunities for increased efficiency and effectiveness. AkzoNobel Report 2010 | Strategy | Improving our performance levels 23 With this in mind, we launched a OneFinance initiative, which is designed to simplify our processes and systems, as well as focusing strongly on people and organization. We have already made some progress. In 2010, we successfully implemented a new SAP ERP system across many parts of the Decora- tive Paints organization and have completed the scoping for a similar single ERP approach in Car Refinishes. We are also working on several standardized enabling processes as we increasingly reduce multi-local complexity. Manage capital and cash We are keenly aware that while pursuing a growth agenda we must continue to carefully manage our balance sheet and cash position. This means we must ensure that we: • Carefully prioritize and control investment, both in terms of fixed assets and acquisitions • Control our absolute operating working capital growth, so that as we grow, the ratio of operating working capital to revenue continues to drop • Provide a stable to growing dividend • Examine all opportunities for improvement in “other” items, such as pensions and legacies. In 2010, we had a good year in terms of cash management. Specifically, we completed our €275 million Ningbo invest- ment on time and on budget, while still generating significant operating cash flow in our Specialty Chemicals business. We continued to improve our operating working capital manage- ment by developing a best practices toolkit. In addition, we sold our National Starch business for $1.3 billion, providing us with significant financial headroom going forward. Finally, we clarified our position with regard to dividends. Build and leverage our industry-leading Talent Factory We continue to believe it is just as important for us to attract, develop and retain great people as it is for us to develop, produce and distribute great products and services. We there- fore continue to believe in the concept of a Talent Factory, which is every bit as important to us as our more traditional production factories. Our Talent Factory agenda includes a set of initiatives aimed at better people development and – to enable this – a series of activities designed to deliver improved human resources (HR) capabilities. In 2010, we made signifi- cant progress in both these areas. In terms of people development, a particular area of improve- ment was in career development and training programs. With regard to our leadership pipeline, major developmental progress was achieved which involved several senior manag- ers making cross-BU and/or cross-functional moves in both Performance Coatings and Specialty Chemicals. We also announced a number of changes in Specialty Chemicals that will take effect in 2011. These changes will grow our leaders as we grow our business. With regards to HR capabilities, 2010 was an important year for us in terms of implementation of country organizations. Historically, our HR organization has been fragmented, with all business units and even many sub-business units having their own HR organization, which handled all activities from recruit- ment to development to compensation and benefits. We are now in the process of consolidating all activities within key countries to one shared AkzoNobel organization, beginning in the Netherlands and Sweden. Once all activities have been brought together in each of the key countries, we will create a tri-partite organization, with centers of expertise, HR services centers, and HR “business partners”. The centers of expertise will provide best practice knowledge to support HR “business partners”, who apply this as required to support implementation of business-based strategies. HR services centers provide additional support as they carry out HR transactional activities in an efficient and effective manner. These efficient and effective HR country organizations are required to support all key countries. However, they are argu- ably most important in the high growth markets. In 2010, we developed AkzoNobel country strategies for the key growth markets of Brazil, India and China. In early 2011, we will be developing a strategy for Russia. In each case, having an industry-leading Talent Factory in place is one of the most fundamental enablers to strategic success. Creating a culture of confidence, cooperation and co-creation As indicated earlier, AkzoNobel has historically been success- ful on the basis of having a strong entrepreneurial, custom- er-centric approach. However, this has had a downside in terms of creating an independent, fragmented culture which has been exacerbated by the large number of acquisitions over time. As we move beyond our restructuring and inte- gration agenda into our accelerated and sustainable growth agenda, we recognize that this culture will not allow us to achieve our aspirations. To facilitate the creation of a culture of confidence, coop- eration and co-creation, we announced in 2010 that we will change our managerial approach and run the business through an Executive Committee. By having representatives of four of the key functional areas, the Executive Committee will drive common agendas and build capabilities while allow- ing the businesses to capture growth. Below the level of the Executive Committee, in each Business Area, we will take a much more operational management team approach to ensure that we are able to make good decisions with regard to prioritization of different activities. The Executive Committee is not the only initiative in terms of culture change. In 2010, we also took a substantial step forward in terms of employee engagement. We fully rolled out our first ViewPoint Employee Engagement survey (in conjunction with Gallup), which allows us to benchmark our performance against a large number of other major business organizations. The results of our first survey indicated that we have significant room for improvement to get to a top quartile performance level. We are fully committed to improving and are in the process of carrying out meetings at all levels in the organization to determine what our next steps will be. An additional important step in terms of cultural develop- ment is our Diversity and Inclusion initiative. We recognize that 24 Improving our performance levels | Strategy | AkzoNobel Report 2010 AKZONOBEL AND THE MID-MARKET The growing mid-market in China offers major investment opportunities in a key geographic region. Which is why our Car Refinishes business made a strategic move during 2010 to acquire Changzhou Prime Automotive Paint Co., Ltd. Acquiring Prime not only gives us strong representation in one of China’s most promising growth segments, but also gives Car Refinishes the opportunity to become the clear market leader in the attractive vehicle refinish mid-market. Prime was one of China’s largest vehicle refinish suppliers and a leader in the fast-growing mid-market segment. This sector is estimated to double in size within the next five years, during which time AkzoNobel plans to double its revenue in China to $3 billion. The acquisition gives us access to superior products and new technologies – supported by strong brands and a loyal distributor base – enabling us to gain a competitive advantage in a market with sizeable potential where we previously had limited presence. Most of all, the addition of the new team in China underscores our commitment to serving our customers with the best people available. Prior to the Prime acquisition, AkzoNobel was mainly active in China’s premium and commercial vehicle refinish sector, represented by our Sikkens, Lesonal and Miluz brands. with our growth aspirations, we must have more executives who are female, and who come from the high growth econo- mies. This will be important to us going forward. We have set improvement targets in this area and have held our first series of workshops to develop action plans to achieve these targets. We also recognize that in order to deliver the best of AkzoNo- bel all day every day, we must create an environment which is inclusive. We have therefore developed an online training program which will be rolled out to everyone in the organi- zation in 2011. This course makes it clear that we have set targets in terms of executive representation, but it will not deliver the required cultural change. To do that, we have to ensure that the environment brings out different points of view and ideas, and that we work collaboratively to deliver on these. Embedding sustainability and safety For many years, we have recognized that becoming the true leader in Coatings and Specialty Chemicals requires us to achieve leadership both in terms of value and values. Increas- ingly, we are recognizing that these things are not separate, nor are they separable. Achieving our growth aspirations means that we must produce and market products that use less of the Earth’s resources throughout the full value chain. To achieve these growth aspirations, we must have a strong Talent Factory and diversity and inclusion levels that enable us to have the leadership we need in the high growth markets. Furthermore, top quartile operational effectiveness is based on top quartile performance in terms of cost, quality, service and safety levels, and in most cases, performance on these four metrics is inter-related. Our current view on how safety and sustainability are embed- ded in all parts of the strategic agenda is explained on the right. Embedding sustainability and safety Innovate more: Value propositions for a resource constrained world Accelerate profitable growth: Eco-premium solutions that deliver eco-footprint reduction across the value chain Serve the needs of the mid-market: Solutions for people demanding both higher living standards and affordability Drive functional and operational excellence: Safety, operational eco-efficiency, product stewardship, supplier visits Manage capital and cash: Process safety and sustainable investment evaluation Build and leverage our industry-leading Talent Factory: Employee engagement, development and training Create a culture of confidence, cooperation and co-creation: Diversity and inclusion, partnerships, Community Program How we embed sustainability and safety in the strategic agenda 26 Improving our performance levels | Strategy | AkzoNobel Report 2010 Executive Committee We have broadened our leadership team in order to accelerate sustainable growth. A nine-strong Executive Committee has been established (see page 24), which comprises the five Board of Management members and these four leaders with functional expertise. Graeme Armstrong Executive Committee member responsible for Research, Development & Innovation (1962, British) Marjan Oudeman Executive Committee member responsible for HR and Organizational Development (1958, Dutch) Sven Dumoulin Member of the Executive Committee and AkzoNobel General Counsel (1970, Dutch) Werner Fuhrmann Executive Committee member responsible for Supply Chain/Sourcing (1953, German) Mr. Armstrong joined AkzoNobel in 2008 following the acquisition of ICI, where he led the company’s Research, Development & Innovation function. Prior to joining ICI, he spent 19 years in the detergents industry working for Unilever and JohnsonDiversey. He also served as Regional President for JohnsonDiversey in EMEA. He is a Chartered Chemist, a Fellow of the Royal Society of Chemistry and a member of their Science Policy Board. Chairman of Chemistry Innovation PLC, and a former non-executive Director of the UK government Technology Strategy Board. Mrs. Oudeman joined AkzoNobel in October 2010 from Corus Group, where she was a member of the Executive Committee, as well as being Divisional Director of Strip Products and a board member of Corus Nederland B.V. and Corus UK Ltd. Prior to joining Corus in 2000, she held various roles at Hoogovens Group, including that of Managing Director. Among others, she is also is a non-executive Director of Nederlandse Spoorwegen and ABN Amro Group. Mr. Dumoulin joined AkzoNobel as General Counsel in 2010 and is responsible for legal, compliance, intellectual property and legacy management. Previously he worked as a lawyer and then Group Secretary for Unilever. From 2003 to 2007, he held professorships in company law at the Universities of Groningen and Tilburg in the Netherlands. Outside AkzoNobel, he is a member of various Legal Professional Associations in both the Netherlands and abroad. After graduating from Johannes Gutenberg University Mainz in Germany in 1979, Mr. Fuhrmann held various roles within the AkzoNobel Fibers division, and was Business Area Controller Chemicals, before being appointed General Manager of Chelates & Sulfur Products in 2000. He became Managing Director of AkzoNobel Industrial Chemicals in 2005. He is Chairman of the Dutch Chemicals Industry Association (VNCI). AkzoNobel Report 2010 | Strategy | Executive Committee 27 The following chapter gives a detailed summary of how each of our Business Areas performed during 2010. Information on market characteristics, key brands and revenue comparisons is also provided. AkzoNobel Specialty Chemicals AkzoNobel Performance Coatings AkzoNobel Decorative Paints 30 40 50 AKZONOBEL AND PAPER TECHNOLOGY Paper manufacturers are always looking for products and inno- vations with a better environmental profile which also make their processes more cost efficient. One of the latest breakthroughs – in an area known as surface sizing – has been achieved by our Pulp and Paper Chemicals business, Eka Chemicals. Paper sizing is a process designed to reduce paper’s ability, when dry, to absorb water both as moisture and liquid. So in other words, it improves the water resistance of paper. Two methods are commonly used (surface and internal sizing). The main difference is that internal sizing – added to fibers at the wet end of the process – gives paper with evenly distributed chemicals an “effect”. Whereas surface sizing chemicals are added to dry paper to give an effect directly related to improv- ing the surface of the paper. Internal sizing is widely used in a large variety of papers, while surface sizing is added during the production of higher grade papers. One effect of surface sizing chemicals is to ensure that printing ink stays on the surface and dries there, rather than being absorbed into the paper itself. Eka Chemicals’ success means it has seen what was once a side business grow into a core discipline in a reasonably short space of time. Much of this expansion is down to the success- ful product Eka SP 50, a polymeric surface sizing product which has helped to gain many new customers. The major benefits for the paper makers include greater cost efficiency, partly because Eka SP 50 can be used at lower dosages. AkzoNobel Specialty Chemicals “Our success during the year was a combination of cost control, favorable market conditions and our own hard work.” Rob Frohn Board member responsible for Specialty Chemicals Our performance in high growth markets was particularly good, but we also did well in the Americas, and while Europe proved more challenging, we were still able to improve on 2009. Europe remains a low growth area, however, and the formal closure of our Skoghall plant in Sweden was another step towards us rebalancing our production foot- print to the high growth areas, where demand is develop- ing much more strongly. This was further reflected by two key events in China, namely the official opening of our Ningbo multi-site and the expansion of Industrial Chemi- cals’ Taixing plant. The Ningbo inauguration in particu- lar was a major milestone, bringing new chelates, ethyl- ene amines and ethylene oxide capacity to the market. Sustainability, of course, remained high on the agenda and several products continued to make good progress, notably our Dissolvine GLDA chelate and our next generation anti- caking agent for salt (mTA) for chemical transformation. We also conducted an eco-efficiency study early in the year which involved carrying out a quick scan of 75 sites where most of our footprint is in terms of waste, energy and CO2. This forms part of a program we have embarked on to reduce our footprint by 10 percent by 2015 and we have identified a great number of opportunities to make savings. The progress on our safety performance, on the other hand, was slightly disappointing and we will continue to increase awareness throughout the organization. There can be no doubt that 2010 was a good year for Special- ty Chemicals. Emerging strongly from the recession, we not only reaped the benefits of our restructuring efforts, but were also boosted by robust demand during the first half of the year due to restocking. In addition, various outages within the industry enabled us to supply customers when others couldn’t. We therefore increased market share because of our reputation and reliability in supply in a market that quickly recovered. So our success during the year was a combina- tion of cost control, favorable market conditions and our own hard work. It was a busy year, and our employees should be commended for their efforts. Another important development was the National Starch transaction. Like the rest of the Specialty Chemicals portfolio, the business suffered as a result of the recession, but we were able to take effective measures to recover much of the lost ground before transferring ownership to Corn Products Inter- national. 2010 was also the first full year of operation following the merger of Polymer Chemicals into Functional Chemicals. The timing was just right, as it was implemented before the market picked up again and we were able to fully benefit from the recovery. This resulted in our polymer activities having an excellent year, particularly the High Purity Metalorganics (HPMO) business, which supplies the booming LED market. The focus continues to be on growth, with each of our busi- nesses well positioned to make a contribution to both the top and bottom line. We see great possibilities and oppor- tunities to contribute to the accelerated growth agenda of the company, while maintaining a healthy cash flow. To facilitate this, and to keep our leadership suitably chal- lenged, the Managing Directors of four of our business activi- ties are being rotated. As well as bringing a fresh perspec- tive, we feel that this will benefit the company and enable each of the senior leaders to continue to learn and develop themselves while bringing their experience to new markets and businesses. AkzoNobel Report 2010 | Business performance | AkzoNobel Specialty Chemicals 31 Specialty chemicals market overview We are a major supplier of specialty chemicals with leading positions in selected market segments. Market and business characteristics The chemicals industry can be described as a value chain. Our businesses serve customers throughout the value chain with different products. Pulp and Paper Chemicals is a global business, with a specific emphasis on serving one industry. Surface Chemis- try and Functional Chemicals are also global businesses, and primarily pursue a customer intimacy model for each specific product group. Chemicals Pakistan, on the other hand, is a national business with a broad product offering within areas such as chemicals, coatings, fibers and pharmaceuticals. Some key raw materials Price drivers • Energy, oil and raw materials • Salt • Energy • Ammonia and ethylene • Ethylene oxide • Acetic acid • Polymers • Sulfur Our Industrial Chemicals business, for example, mines salt through vacuum extraction. It’s used as a raw material for our own activities, as well as being an end product found in grocery stores under brand names such as Jozo and Nezo. Customers Our products are used in a wide variety of everyday prod- ucts such as ice cream, soups, disinfectants, plastics, soaps, detergents, cosmetics, paper and asphalt. There are more than 2,000 items in our portfolio. Base chemicals are chemicals produced from raw materi- als. For us, this means products such as chlorine (Industrial Chemicals) or chlorate (Pulp and Paper Chemicals). Derived from these base chemicals are chemical intermediates, such as the ethylene amines supplied by our Functional Chemi- cals business. Performance chemicals offer specific functionality to a product or process, examples being the surfactants used in fabric care softeners (Surface Chemistry), and the Compozil retention systems (Pulp and Paper Chemicals) used to make paper. Few of the products we supply are actual end products, with salt (Functional Chemicals) being the most prominent. The strategy for each of our businesses varies depending on where they are in the value chain and which customers they serve. For example, in terms of geographic focus, Industrial Chemicals is mainly focused on Western Europe, with an emphasis on operational effectiveness. Global market drivers and developments • Growing populations and GDP growth • Infrastructure developments • Building activities • Global paper and board production • Environmental regulations • Sustainability High growth markets Projected industry growth is strong, particularly in Asia Pacific and Brazil. More than 30 percent of revenue is in high growth markets. Innovations • Biodegradable, aqueous cleaning formulations reducing use of organic solvents • Polymer based on renewable feedstock, improving the efficiency of fabric softeners • Green alternative to EDTA, NTA, phosphonates and phosphates Market leadership positions Functional Chemicals 1st Chelates Cross-linking peroxides, thermoset chemicals and polymer additives Sulfur derivatives Ethylene amines High polymers 2nd Redispersible polymer powders, additives for mortar application Salt specialties (North West Europe) 3rd Cellulosic specialties Industrial Chemicals 1st Caustic merchant (Europe) Chlorine merchant (Europe) Monochloroacetic acid (MCA) Salt (chemical transformation Europe) Pulp and Paper Chemicals 1st Bleaching chemicals Surface Chemistry Raw materials Base chemicals Chemical intermediates Performance/ functional chemicals End products • Sustainable breakthrough in corrosion protection and chrome replacement in automotive industry 1st Industrial applications Agricultural applications • One Grain technology – full salt replacement which brings 3rd Home and personal care Industrial Chemicals Pulp and Paper Chemicals Functional Chemicals Surface Chemistry Chemicals Pakistan pure NaCl and salt replacers into a single salt grain • More sustainable anti-caking agent for salt • Nanoparticle retention systems for high speed paper machines • CID technology to help increase PVC reactor capacity • Water treatment technology replacing traditional biocides. 32 AkzoNobel Specialty Chemicals | Business performance | AkzoNobel Report 2010 Key developments 2010 • Official inauguration of Ningbo multi-site in China Key figures in € millions Employees by region at year-end • National Starch divested to Corn Products International 2009 2010 2009 2010 • Expansion of MCA facility in Taixing • Salt capacity boosted at Delfzijl in the Netherlands, making it the largest vacuum salt plant in the world • Compozil Fx concept now being used by seven of the eight largest fine paper machines in Asia • Merger of Polymer Chemicals activities into Functional Chemicals completed Revenue EBITDA EBITDA margin (in %) EBIT EBIT margin (in %) Operating income Moving average ROI (in %) 4,359 4,943 US and Canada 738 16.9 490 11.2 422 15.6 939 19.0 679 13.7 604 19.9 Latin America China Other Asian countries The Netherlands Germany Sweden Other European countries 1,700 800 1,000 1,900 1,900 1,000 2,000 800 1,700 900 1,000 1,900 1,900 1,000 1,900 800 Total 11,100 11,100 Revenue breakdown by business unit in % Geo-mix revenue by destination 21% North America 44% 3% Emerging Europe Mature Europe 20% Asia Pacific 3% Rest of the world 9% Latin America A Functional Chemicals B Industrial Chemicals C Pulp and Paper Chemicals D Surface Chemistry E Chemicals Pakistan 36 21 20 17 6 100 Product: Eco-premium solutions % of revenue A 23 21 20 23 E D C B 2007 2008 2009 2010 Key value chains with carbon footprint assessment 74 2009 118 2010 Total reportable rate of injuries per million hours 6.0 3.7 2007 2008 2.8 2009 3.5 2010 AkzoNobel Report 2010 | Business performance | AkzoNobel Specialty Chemicals 33 AKZONOBEL AND BRIGHT IDEAS As the world continues to rapidly embrace energy efficiency and the need to source alternative resources, a quiet revolu- tion has been taking place in the electronics industry. LED market is growing at more than 25 percent a year and the technology behind it relies heavily on several products supplied by AkzoNobel Functional Chemicals. lighting, LEDs are used in many other applications, such as car lights, traffic lights, TV backlighting and computer monitors. It’s been happening all around us for many years, but some people may not have noticed. Our lighting is changing. Tradi- tional bulbs and filaments are dying out and light emitting diodes (LEDs) are taking over. They can offer energy savings of up to 90 percent compared with conventional bulbs. The The products in question are produced by our High Purity Metal- organics (HPMO) business and are needed to manufacture the LEDs themselves (our products are used to coat a very thin layer of semiconductor material on a wafer and this is the active layer which emits the light). As well as being used for general Our manufacturing strengths mean we can help customers ramp up their production to meet the continuously growing demand for LEDs, while our unique packaging helps custom- ers to maximize their output and improve the consistency of their production. With LEDs rapidly finding new applications, the future is bright. AkzoNobel Functional Chemicals “All eight of our businesses performed better than 2009 volume-wise, with six also picking up market share.” Bob Margevich Managing Director Overview We experienced a notable drop in our volumes in 2009 but we recovered most of that back in 2010. During most of the year, sales exceeded pre-crisis levels – partly due to the volume effect and partly because of improved margins and currency exchange rates. When combined with cost savings gener- ated through restructuring in mature markets, we were able to achieve record results for a fourth consecutive year. Analysis All eight of our businesses performed better than 2009 volume-wise, and most of them improved cost-wise, with six of the eight also picking up market share. Some of this increased market share was achieved through planned actions, but we also benefited from outages or delayed start- ups suffered by our competitors. As a result, most of our product lines were sold out during the year, with the strongest performers being the two businesses we took over as part of the integration of Polymer Chemicals at the start of the year (High Polymers and Crosslinking, Thermoset Chemicals and Polymer Additives), along with Ethylene Amines and Chelates. Our Sulfur Derivatives business also did well, while the slow construction market meant that our Elotex, Cellulosic Special- ties and Polysulfides activities in that market were only able to recover about half the volumes they lost in 2009. However, Cellulosic Specialties was still able to achieve much improved year-on-year results. Highlights The performance of our High Purity Metalorganics business – which supplies the LED lighting industry – was particularly notable. It really took off during 2010 to the extent that we are now expanding on the go with several new projects planned and each expansion will be fully utilized from virtually the first day. A number of additional expansions in other product lines are also planned. Along with the continued excellent perfor- mance of our Dissolvine GLDA readily biodegradable chelat- ing agent, another significant highlight was the official opening of our Ningbo multi-site in China, which was attended by more than 600 guests. The facility began producing dry powdered chelates in late 2009 and in May 2010 the liquid chelates section started production. Towards the end of the year, the ethylene amines and ethylene oxide plants in Ningbo came on stream. It was also pleasing to see how smooth and effective the merger of Polymer Chemicals into Functional Chemicals has been. The process was extremely successful and both the business and AkzoNobel as a whole have benefited. Developments We began to test market our One Grain lower sodium salt replacement in the Benelux, which has been going very well so far. We received the green light for our BU strategic plan and we created an organizational model which is helping us to support our sustainability drive. Good progress was also made in our safety performance and in the switch to more sustainable technologies in our main product lines. This enables us to look at things like raw materials and energy supply across the whole value chain and identify areas where we can improve. Revenue in € millions 1,668 1,479 1,813 2008 2009 2010 Geo-mix revenue by destination in % C B A A EMEA B Americas C Asia Pacific Main products 46 28 26 • Cellulosic additives • Chelates • Additives for the mortar industry • Ethylene amines • Salt specialties • Sulfur derivatives • Polymer chemicals Key markets • Detergents • Personal care • Crop protection • Micronutrients Key brands • Building materials • Paint • Pharmaceutical • Food AkzoNobel Report 2010 | Business performance | AkzoNobel Specialty Chemicals 35 AkzoNobel Industrial Chemicals “We utilized the full capacity of all our plants for virtually the entire year, with both our Salt and MCA businesses sold out.” Werner Fuhrmann Managing Director (Member of AkzoNobel’s Executive Committee as of January 1, 2011) ethylene amines joint venture in Delfzijl to meet customer demand. All of this extra capacity was fully utilized as of day one. Another highlight was the formal launch of our mTA (meso-Tartrate) next generation anti-caking agent for salt. It’s our intention to develop this product into a new value chain for salt and we see substantial growth opportunities in Europe, the Americas and Asia. Its potential was underlined when it was recognized as one of the top three innovations by the Association of the Dutch Chemical Industry (VNCI). It also received a commendation from the European Chemical Industry Council (CEFIC). Developments We launched a comprehensive, business-wide Lean SixSig- ma program in order to make a step-change in operational excellence. This will not only help us to run improvement proj- ects in a much more focused manner across the value chain, but will also add a new dimension to our efforts in developing our people up to their potential. As part of a program to build up strategic national energy reserves, we signed a binding agreement to store gas oil at our salt caverns in Hengelo. This will be in addition to the natural gas and nitrogen which is stored in our Delfzijl caverns. We continued our efforts to develop new bio-based products based on renewables and were delighted to win the company’s internal BU Sustainability Award for our carbon footprint work. Overview Our businesses recovered more sharply than anticipated following last year’s economic downturn, which resulted in 2010 exceeding expectations. Volumes bounced back very close to pre-crisis levels and this helped to lift sales to record levels. Analysis It was a strong recovery, based on high volumes, improved margins, more focus on sustainability and acquiring addi- tional business. We utilized the full capacity of all our plants for virtually the entire year, with both our Salt and MCA busi- nesses sold out. Chlor-alkali was sold out from the summer onwards and our Energy business had a successful year. Also crucial was the fact that although we remained focused on customers, costs and cash, we stuck to our growth strategy and continued to maintain and invest in our plants during the crisis. Our competitors often didn’t, which meant we were able to take advantage of the overall economic tailwind and benefit from the demand which accompanied the recovery. The Salt business really set the tone by getting off to a head start due to the severe wintry conditions, especially in Europe. We were also able to attract income from the secondary use of salt caverns for the storage of oil and gases. Highlights We stepped up our manufacturing footprint for MCA in China by bringing total capacity at our Taixing plant up to 60kt. We are also working on substantially increasing this capac- ity further in order to satisfy growing demand. In the Nether- lands, we boosted salt capacity at our Delfzijl facility by 350kt, increasing it to 2,700kt. It is now the largest vacuum salt plant in the world. We also added capacity at our Delamine higher 36 AkzoNobel Specialty Chemicals | Business performance | AkzoNobel Report 2010 Revenue in € millions 966 949 1,070 2008 2009 2010 Geo-mix revenue by destination in % B C A 93 4 3 • Caustic lye • Monochloroacetic acid (MCA) • Food • Pulp and paper • Plastic industries A EMEA B Americas C Asia Pacific Main products • Salt • Energy • Chlorine Key markets • Chemical • Detergent • Construction Key brand AkzoNobel Pulp and Paper Chemicals “We achieved strong growth and gained market share in both Asia and Latin America.” Jan Svärd Managing Director Overview It was a good year, especially given the fact that 2009 was our best year ever. The business environment was very competitive and we lost some margin, but we gained substantial volume and as a result our bottom line improved. So although we faced different dynamics, our results held up well. Analysis We achieved strong growth and gained market share in both Asia and Latin America. In North America – which is still the biggest individual market for pulp and paper – our position remained stable and even grew slightly. Our focus has been more on restructuring in Europe, but we rebounded from the demand drop in 2009 and took market share as the demand returned. Many customers also began to start up projects they originally launched in 2008, but were then forced to put on hold due to the recession. This was particularly notable during the second half of 2010, when many of these projects were restarted. All these developments have helped to ensure that we are emerging from the economic crisis in a much stronger position than when we came into it. Highlights Many business activities made excellent progress during 2010. The packaging board industry is growing – which has obvious benefits for us as we can provide attractive chem- istries in this area – and our Compozil Fx concept is now being used by seven of the eight largest fine paper machines in Asia. This concept helps our customers achieve extremely high speeds and reduces fiber and energy consumption and is firmly established as the start-up technology of choice for large paper manufacturing machines. In addition, our Eka NP 2180 silica sol – which helps improve efficiency and machine speed – has really started to take off, while we have also developed a unique line of surface sizing products which has helped us to gain many new customers. So we are now in a position where we can really start talking about growth. High growth regions such as China and Latin America obviously remain important, but we have also been achieving good success in mature markets such as Germany and Japan. Expancel in particular had a very good year, while the product is being widely used in Asia and Latin America, where growth has really speeded up. Our Purate product for water treat- ment achieved solid growth, especially in Europe. Developments We strengthened our internal sizing business by investing in a new chemicals plant in Germany. This has enabled us to intro- duce a new process which provides higher quality products. The paper coatings business we took over from the former ICI also grew substantially in North America and Europe. Our focus in terms of sustainability, innovation and business growth remains very much on fiber, energy and water. We’re working hard to help customers cut down on the amount of fiber they use, while energy consumption is also something we are reducing at our own sites and those of our customers. In addition, we are continuing to put a lot of effort and resources into water management, which has particular significance for us in the southern hemisphere, where it is very important for our customers. Safety continues to be the number one prior- ity, and in addition to having BBS implemented at all our facili- ties, we introduced a zero incident mindset program which has been going well. Our diversity agenda also progressed. In Europe, for example (where 25 percent of our workforce is female), 35 percent of our managers are now women. Revenue in € millions 1,008 935 1,044 2008 2009 2010 Geo-mix revenue by destination in % C B A 39 45 16 A EMEA B Americas C Asia Pacific Main products • Pulp and paper chemicals Key markets • Pulp and paper Key brand AkzoNobel Report 2010 | Business performance | AkzoNobel Specialty Chemicals 37 AkzoNobel Surface Chemistry “Sales volumes were up significantly, revenue rose 20 percent and progress was also made in implementing our growth strategy.” Frank Sherman Managing Director Overview The demand recovery which began in mid-2009 continued throughout 2010, particularly in the personal care, mining and oilfield market segments. Sales volumes were up signifi- cantly over the previous year, although not back to the 2008 peak. Revenue rose 20 percent, driven by increased volume, better product/market mix, escalating raw material prices and currency impact. Significant progress was also made in imple- menting our growth strategy based on new product introduc- tions, expansion in developing regions, exploring adjacent growth opportunities and disciplined cost control. Analysis The consumer market segments (fabric, home and personal care) were not significantly impacted by the recession and continued to grow in 2010, including some share gains. Our sales to the mining market experienced significant recov- ery, notably in potash and iron ore. Despite the moratorium on deep well drilling in the Gulf of Mexico, oilfield chemical demand was also strong, driven by growing chemical additive demand for land-based natural gas drilling and well fracturing. The asphalt road paving market was affected by raw material shortages, weak construction markets and the disappointing impact from government stimulus spending. Additive demand grew considerably in the organoclay market. The agrochemi- cal value chain worked through an inventory overhang from 2009, although favorable weather conditions resulted in good growth in both North and Latin America. Fabric care sales also experienced strong growth in Latin America. Asia continued to achieve double digit growth supported by new products for the asphalt, oilfield and animal feed additives markets. We are developing products for the local mid-tier market by intro- ducing eco-premium, cost-effective products that are unique to Asia. In Europe, the recovery generally trailed behind the other regions. Demand slowed down in most regions during the fourth quarter as customers drew down inventories and consumers became more conservative. Raw material prices remain volatile and in some cases have escalated back to 2008 peaks. Our production was curtailed during the first half year due to some supplier force majeure declarations. Highlights We are starting to demonstrate the synergies across our three technology platforms – surfactants, synthetic polymers and biopolymers. Sustainability remains the key driver. In fact, 45 percent of our current sales and 80 percent of our innovation pipeline are based on products that provide eco- premium solutions to our customers. We continue to reduce VOC emissions and solid wastes from our operations and are implementing several energy efficiency projects. Finally, a sales excellence program has been introduced to improve our ability to determine customers’ unmet needs and capture value from innovation. Developments New product introductions picked up throughout the year in tandem with customer interest to reformulate or increase their process efficiency. New launches included Adsee 766, a nonylphenol ethoxylate-free agrochemical adjuvant; DynamX H20, a biopolymer ingredient for styling hair prod- ucts; Armocare G113 and G114, hair conditioning based on renewable guar; and a number of new Agrilan agrochemical dispersants based on renewable feedstocks. We are also introducing hybrid polymers based on renewable monomers to several market segments, providing better eco properties and high performance. 38 AkzoNobel Specialty Chemicals | Business performance | AkzoNobel Report 2010 Revenue in € millions 821 701 847 2008 2009 2010 Geo-mix revenue by destination in % C B A A EMEA B Americas C Asia Pacific 34 55 11 Main products • Surfactants • Synthetic and natural specialty polymers Key markets • Agriculture • Asphalt • Personal care • Oilfield chemicals Key brands • Coating additives • Fabric softeners • Household cleaning • Mining Armeen Arquad Berol Morwet Amphomer Naviance Alcogum Alcosperse Chemicals Pakistan “Pakistan faced a major setback due to the devastating floods, but our continued focus on customers, costs and cash helped our business regain momentum.” Waqar A Malik Chief Executive ICI Pakistan Overview Despite a difficult business environment, our 2010 results (adjusted for the PTA divestment) showed double digit growth in the top and bottom line in local currencies. This was underpinned by aggressive margin management and volume growth in all major segments of our portfolio. Analysis A serious cause for concern during the year was the contin- ued energy crisis. The increasing gap in supply and demand resulted in more frequent shortages of gas for the indus- trial sector. Pakistan also faced a major setback due to the devastating floods which left 20 million people homeless and destroyed crops and livestock, as well as damaging infra- structure, which resulted in a general slowdown of economic activity. Continued focus on customers, costs and cash helped the business regain momentum. Developments We continued to integrate our product portfolio with the AkzoNobel portfolio. Our Refinish business launched Dyna- coat for the trade market in Pakistan, along with a strong focus on the services portfolio targeted towards industry development. We also established a new line of marine and protective coatings, with the first commercial orders being received this year. Our Decorative business expanded its mid-tier portfolio and launched three new Paintex products to offer a wider range of solutions for customers. Soda Ash was able to expand its export base in international markets, where we are now established as a reliable supplier of quality products. We also introduced Dissolvine, a chelate which can help improve farm productivity by making sure that essential nutrients are fully absorbed by plants, benefiting farmers. Revenue in € millions 497 405 2008 2009 305 2010 Main products • Polyester fiber • Soda ash • Life sciences • Chemicals • Paints Key brands AkzoNobel Report 2010 | Business performance | AkzoNobel Specialty Chemicals 39 AkzONOBEL AND FASTEr INNOVATION Helping provide your customers with improved performance and a competitive edge is valuable in any industry, but in the world of motorsport, it can literally make the difference between winning and losing. Our Car Refinishes business, through its Sikkens brand, is the official supplier of paint solutions to the Vodafone McLaren Mercedes Formula 1 team. The 2011 season will be the third year of the partnership. During that time, we have been working closely with their technical experts to develop supe- rior lightweight coatings with unique functionality and striking color attributes. A key element of the coatings system on the cars driven by former world champions Jenson Button and Lewis Hamilton is the spectacular chrome effect. But equally important is the fact that ongoing improvements to the unique high gloss system mean that one less coat is now required during appli- cation. This results in potentially vital weight savings, while the paint process time has been further reduced. The shared knowledge we have gained from the partnership has already enabled us to translate 80 percent of the tailor- made solution supplied to McLaren into a commercial value proposition for AkzoNobel customers within the car industry. AkzoNobel Performance Coatings “As most of our end markets continue to recover, the focus is now very much on growth, which includes capturing market share in high growth regions.” Leif Darner Board member responsible for Performance Coatings In 2010 we were able to take advantage of a sharp increase in activity in high growth markets – notably in Asia and particu- larly in China – in all our market segments. So there has been healthy top line growth across the board, while maintaining profit margins in the target range and further improving the return on investment. The recovery was particularly good in our more industrial and OEM-related businesses, such as Coil and Powder Coatings, which were hit hard during the recession. Our automotive- related businesses also bounced back, while Marine and Protective Coatings experienced flatter market conditions. During the first half of 2010, our businesses were aided by relatively stable raw material prices. But as the year progressed, prices went up and shortages became an issue. However, we were able to maintain supplies to our customers and gradually compensated for the increases through careful margin management. As most of our end markets continue to recover – and with a portfolio strategically aligned to create a better balance in terms of technologies and markets, size and complex- ity – the focus is now very much on growth, which includes capturing market share in high growth regions. We have identified clear opportunities and are looking to acceler- ate in the world’s high growth regions. Notable highlights during 2010 which signaled our clear intention to continue growing our business were the opening of a new Powder Coatings plant in Wuhan, China, and important acquisi- tions within both Powder and Industrial Coatings and Car Refinishes. Acquiring Changzhou Prime Automotive Paint Co. Ltd in China has opened up the Chinese mid-market for refinish products, while the deal to secure the former Rohm & Haas powder activities from the Dow Chemical Company has given us access to some exciting technology for wood and plastic applications and boosted our product offer to the automotive industry. Meanwhile, the acquisition of Lind- gens Metal Decorating Coatings and Inks improved our posi- tion in a number of high growth markets, including the Asia Pacific region. Innovation also remained high on the agenda throughout the year and we made excellent progress in this area. A new world- wide marine testing lab was opened in Singapore, while in the UK we broke ground on a new global fire protection center of excellence. Elsewhere, Wood Finishes and Adhesives started building a new plant in Vietnam and Powder Coatings is estab- lishing a resin polymer lab which is due to open in April 2011. A number of new technologies were also introduced into the marketplace, such as our Vitalure 740 can liner, stickerfix auto repair system and Intershield 803+ cargo hold coating. There is still underlying uncertainty in the marketplace, but we will continue to invest, adding people, setting up techni- cal service centers, establishing warehousing and distribution and making bolt-on acquisitions where appropriate, in order to support our strategy of capturing accelerated, sustainable growth. This will be combined with a continued focus on oper- ational excellence and rationalization in the mature markets to ensure that we strike the right balance as we move forward. AkzoNobel Report 2010 | Business performance | AkzoNobel Performance Coatings 41 Performance coatings market overview Our Performance Coatings business is represented in most market segments of this industry, holding many leading positions. Wood coatings and adhesives Wood coatings beautify and protect anything made from wood, including home and office furniture, flooring, kitchen and bath cabinetry, windows and doors. Adhesives are the bonding agents for wood composites and laminates used in these applications. Innovations • Automobile scratch repair systems • Low-bake powder coatings • Self-repairing clearcoat • Foul release coatings • Waterborne coatings technology. Market and business characteristics The size of the global market for performance coatings is around €40 billion. Marine coatings, including yacht Coatings for deep sea and inland marine vessels, super yachts and leisure craft, which provide corrosion protection and resistance to organic fouling. General industrial coatings Metal and plastic coatings for a wide range of applications – from huge industrial equipment to the latest mobile phones and music players, computers, espresso machines and sporting goods. Protective coatings Corrosion and fire protection across a range of industries includ- ing upstream and downstream oil and gas facilities, chemi- cal and petrochemical installations, high value infrastructure such as airports and stadia and power generation stations. Automotive Vehicle refinishes Refinishing or recoating of automobile bodies when vehicles are repaired. OEM Coatings for commercial vehicles (trucks and buses) and automotive plastic components. Aerospace coatings Coatings for small and large aircraft. Primers for structural components and coatings for high performance exterior finishes. Powder coatings Powder technology involves a coating being applied electro- statically. It is sprayed and then subsequently cured by apply- ing heat, either in an oven or by using infrared or UV light irradiation. Coil and extrusion coatings Coil coatings are applied to coiled steel for HVAC and appli- ances, and in commercial and residential construction to protect metal roofs and building components. Extrusion coat- ings give aluminum lasting beauty when used on metal build- ing fascias and window frames and provide protection from the elements. Packaging coatings Coatings for packaging which are applied to the internal and external surfaces for food and drink cans, caps and closures and cardboard and plastic packaging. Customers We serve a large range of customers including ship and yacht builders and architects, consumer electronics and appliance companies, steel manufacturers, the construction industry, furniture makers, aircraft, bus and truck producers, bodyshops and can makers. Global market drivers • Growing populations and GDP growth • Steel production • Consumer confidence • Infrastructure development • Housing market activities. High growth markets Projected industry growth is strong, particularly in Asia Pacific. Around 45 percent of our Performance Coatings revenue is in high growth markets. Market leadership positions Marine and Protective Coatings 1st Marine Protective Yacht Car Refinishes 2nd 3rd 5th Aerospace Refinish Commercial vehicle OEM Automotive plastic coatings Industrial Coatings 1st Coil and extrusion coatings Specialty plastics coatings 2nd Packaging coatings Powder Coatings 1st Powder Wood Finishes and Adhesives 1st 3rd Finishes Adhesives 42 AkzoNobel Performance Coatings | Business performance | AkzoNobel Report 2010 Key developments 2010 • Acquisitions of Changzhou Prime Automotive Paint Co., Ltd. and Lindgens Metal Decorative Coatings and Inks • Completion of acquisition of the former Rohm & Haas powder activities from the Dow Chemical Company • Powder Coatings inauguration of a new plant in Wuhan, China, and a lab in Ningbo, China • Official opening of new, worldwide marine testing lab in Singapore • Investment in expansion of capacity for Coil Coatings and Specialty Plastics in Bangalore, India • Work underway on the new Wood Finishes and Adhesives plant in Vietnam • Merger of Aerospace Coatings activities into Car Refinishes • Marine and Protective Coatings investment in UK-based global fire protection center of excellence Geo-mix revenue by destination 20% North America 30% Mature Europe 9% Emerging Europe 25% Asia Pacific 7% Rest of the world 9% Latin America Key figures in € millions Employees by region at year-end 2009 2010 2009 2010 Revenue EBITDA EBITDA margin (in %) EBIT EBIT margin (in %) Operating income Moving average ROI (in %) 4,112 4,786 US and Canada 594 14.4 492 12.0 433 25.3 647 13.5 540 11.3 487 26.5 Latin America China Other Asian countries The Netherlands Germany Sweden UK Revenue breakdown by business unit in % Other European countries Other regions Total 3,100 1,700 3,800 3,000 1,000 1,000 900 1,400 2,900 1,100 3,300 1,700 4,100 3,000 1,000 1,200 900 1,500 3,200 1,100 19,900 21,000 D E C A B Product: Eco-premium solutions % of revenue 17 19 18 22 2007 2008 2009 2010 A Marine and Protective Coatings B Car Refinishes C Industrial Coatings D Powder Coatings E Wood Finishes and Adhesives 28 21 18 17 16 100 Key value chains with carbon footprint assessment 52 60 2009 2010 Total reportable rate of injuries per million hours 5.7 4.8 3.3 3.3 2007 2008 2009 2010 AkzoNobel Report 2010 | Business performance | AkzoNobel Performance Coatings 43 AKZONOBEL AND MEETING CUSTOMER NEEDS The modern shipbuilding industry is fiercely competitive, demanding high quality, high productivity and fast turn- around times. When it comes to using shop primers, most shipyards still rely on solvent-based zinc silicate products. However, with legislation tightening and customers demand- ing more sustainable products and services, manufacturers of marine coatings face an increasingly pressing environ- mental challenge. Our Marine and Protective Coatings busi- ness has already taken up the gauntlet, having supplied an award-winning, highly innovative, water-based zinc silicate shop primer (Interplate Zero) to the industry for several years. Containing no VOCs or soluble salts, it can be over- coated with a range of approved topcoat schemes, even in critical vessel areas such as water ballast tanks and the underwater hull, while reducing shipyard solvent emissions by more than 20 percent. Now, an improved version of the product has been intro- duced which is just as effective as the solvent-based prod- ucts, but has the added advantage of being far more envi- ronmentally and user-friendly. The improved Interplate Zero offers enhanced resistance to white rust, has a longer pot life and can be applied using standard airless spray equipment, as used by most shop primer application facilities worldwide. While retaining all of the original Interplate Zero benefits, these improvements make the new product even more attractive when compared with solvent-based products on the market. AkzoNobel Marine and Protective Coatings “Our product launches during 2010 are an indication of the strong focus we have on innovation and our robust pipeline.” Bob Taylor Managing Director Overview The year proved to be more challenging than anticipated as the impact of the global economic downturn was felt in our traditionally late-cycle businesses. Volume and revenue was up overall, but our portfolio shifted as market dynamics changed, and pressure was felt on prices in most sectors. In this context, the business has continued to perform well, delivering another strong set of results. Analysis Uncertain trading conditions have been prevalent in the marine market, with volatile freight rates impacting earnings for owners. This has resulted in a tight maintenance and repair market as owners look to delay and minimize their outlays. However, given the large world fleet size and increasing number of vessels entering the market, we anticipate increas- ing levels of demand over the coming years. In marine new construction, output has continued to grow, driven primarily by China, where additional new building capacity has come on line together with good demand from Korea. While volumes in this area are up, margins have been impacted by raw material cost increases. In protective coatings, the earlier part of the year saw a number of major projects put on hold as finance proved difficult to secure, which resulted in a slower start to 2010 than expected in many parts of the world. However, as the year progressed, there were some signs of encourage- ment with projects starting to be released. Our Yacht business put in a solid performance in what was essentially a flat market. Highlights Investment in technology remains high and we broke ground on our new UK-based global fire protection center of excel- lence, which is expected to be fully operational by mid-2011. This will help reinforce our leading position in the fire protection market and allow us to more quickly bring to market products such as the waterborne Interchar 1120, which we launched during the year. We also officially opened our new worldwide marine testing laboratory in Singapore, which is focused on developing the next generation of marine antifouling paints. Product introductions in marine included a revitalized biocidal antifouling range, along with our Intershield 803+ cargo hold coating, specifically designed to meet the increasing demands of fast loading of cargos. An improved Interplate Zero (a zero VOC, water-based shop primer) was also launched during the year, responding to the increasing demand for environ- mentally aware products within the marine industry. In yacht we launched Awlcraft SE, a high performance metallic finish system, developed using both yacht and car refinish technol- ogies. These launches are an indication of the strong focus we have on innovation and our robust pipeline. Developments We are continuing to invest in geographic growth in our Protective Coatings business, particularly within China and India, as well as the Middle East, Russia and Brazil. In North America, we successfully integrated the Devoe product line into our portfolio, which continues to add value, as does its extensive stores network. We demonstrated step change improvement in safety performance throughout the year, achieving record low TRR rates, and took extensive steps to launch sustainability as our core management philoso- phy, developing carbon mitigation plans and increasing the proportion of eco-premium products within our portfolio. Revenue in € millions 1,340 1,260 1,345 2008 2009 2010 Geo-mix revenue by destination in % C A B 28 25 47 • Protective coatings A EMEA B Americas C Asia Pacific Main products • Marine coatings • Yacht paints Key markets • Ship building • Oil and gas facilities • High value infrastructure (airports, stadia, bridges) • Power generation installations • Mining and minerals • Water and waste water Key brands AkzoNobel Report 2010 | Business performance | AkzoNobel Performance Coatings 45 AkzoNobel Car Refinishes “We continued to focus on the key elements of our strategy and once again we achieved a very high customer retention rate.” Jim Rees Managing Director Overview Growth in most of our market segments and regions began to turn positive towards the end of 2009 and that continued during 2010. This led to a robust recovery and strong revenue performance across our business, with volumes almost returning to pre-recessionary levels. Analysis The work that we did during the recession to retain customers really paid off. We continued to focus on the key elements of our strategy – improving our distribution footprint, advancing the use of color technology, strengthening our brands, building our pipeline of innovative products and solutions – and once again we achieved a very high customer retention rate, which we think is the best in class. So we were well positioned in the market both from a geographic and segment perspective. Consequently, we came out of the recession even stronger than we went into it. Turkey, Brazil and Russia bounced back, our Asian activities are growing at twice the rate of the rest of the business, we steadily outperformed the market in North America and our position in the premium segment in Eastern Europe is growing. Western Europe was essentially steady, with volume up on a flat market. Our Automotive Plastics busi- ness benefited from a combination of restructuring and robust volume increase on the strength of our new business model. Highlights Our Process Centered Environment solution, which we believe is the most sustainable way to run a bodyshop, continued its success and has really caught on in China, India and Asia, having proved its value in North America. It helps us to attract new customers and ensures we don’t lose any customers. We also entered the trade segment in North America with our Wanda brand (which was previously only available in Latin America) and further sharpened our focus on the mid-market by acquiring Changzhou Prime Automotive Paint Co., Ltd in China. In Aerospace – which we took over from Marine and Protective Coatings at the beginning of the year – we won a number of contracts with Airbus and have several technology approvals pushing the business ahead, primarily basecoat/ clearcoat systems for aircraft refinishing. Developments We secured a number of exciting new contracts during 2010, including an exclusive deal with General Motors in Brazil and a partnership with Sterling, one of the largest collision repair- ers in the US. We are also supplying Volkswagen and GM in Shanghai. Our stickerfix easy repair system clinched its first two approvals from key auto makers, and we began the introduction of our Wanda waterborne basecoat into the trade segment in North America – our first entrance into this particular market with this type of product. Elsewhere, our focus on eco-efficiency and our drive to reduce VOCs contin- ued to receive a lot of attention. We rolled out our sustain- ability strategy for the business (based on the three pillars of marketing, operations and people), and towards the end of the year we changed the name of our business to Automotive and Aerospace Coatings to better reflect the composition of our global activities. 46 AkzoNobel Performance Coatings | Business performance | AkzoNobel Report 2010 Revenue in € millions 983 872 994 2008 2009 2010 Geo-mix revenue by destination in % C B A A EMEA B Americas C Asia Pacific Main products 49 36 15 • Primers, basecoats, • Automotive plastic topcoats and clearcoats for vehicle refinishes coatings • Customer service technology • Aerospace coatings Key markets • Collision repairers and commercial vehicle refinishers • Bus, truck, specialty vehicle OEMs • Automobile insurer networks Key brands • Fleet owners and operators • Automotive OEM aftermarkets • Aircraft industry AkzoNobel Industrial Coatings “It was a year of strong recovery and business growth in all regions, with volume, turnover and EBITDA all significantly above 2009.” Conrad Keijzer Managing Director Overview It was a year of strong recovery and business growth in all regions, with volume, turnover and EBITDA all significantly above 2009. However, our margin improvements were coun- tered by increasing raw material prices in all regions and we experienced issues with the supply of certain raw materials. Analysis Our Packaging Coatings business returned to above pre- recessionary levels after outgrowing its markets, mainly in Eastern Europe, Latin America, the Middle East and South East Asia. Our Specialty Plastics and Coil Coatings activities didn’t quite reach pre-crisis status, but the underlying trend has been a significant bounce-back in many of our mature markets – coil coatings in Europe and North America – where there has been restocking and a restart of construction activ- ity. We saw patches of very strong growth in the BRIC coun- tries and upcoming markets in EMEA, such as Turkey and Russia, where our coil coatings sales increased significantly. Highlights As a new business unit formed at the beginning of 2010, we were very pleased to announce the acquisition of Lindgens Metal Decorating Coatings and Inks. The deal brings us an experienced team and the ability to serve customers with a more complete range of inks. It also gives us an improved position in high growth areas of EMEA (Turkey, Russia and Tunisia) and in the Asia Pacific region, notably Australia. In keeping with the company’s growth ambitions, we contin- ued to invest during 2010, consolidating our position in coil coatings gained through our Petrokom acquisition in Lipetsk, Russia; investing in extended production capacity at our Bangalore site in India for coil coatings and specialty plastics; and further improving our capabilities at our research center in Songjiang, China. Sales of our “soft touch” technology continued to increase on the back of strong growth in high- end smart phones. These coatings give both the tactile and aesthetic feel that consumers are looking for in such devices. We also launched Vitalure 740 in Brazil, a product line which consists of an interior coating and side seam stripe for paint cans. The can liner protects the steel can from corrosion by the paint and extends the “best by” date by 50 percent. In the US, our Cool Chemistry line of coil coatings continued to see strong sales, mainly due to the federal tax credit, favoring energy efficient building projects. Developments We took over the EvCote technology from the company’s Specialty Chemicals operation. It’s a resin system based on recycled PET and materials from renewable bio-sources and is now part of our Packaging Coatings activities. The technol- ogy can provide moisture resistance and oil and grease barri- ers to paper goods used in food contact, such as fast food restaurant packing for sausages, sandwiches and French fries. We have also set out to develop a much simpler alterna- tive process and eco-premium solution for applying an attrac- tive metal finish to computers and laptops. The current manu- facturing process is facing some environmental pressure and is relatively burdensome. We can create the same “anodizing” effect using a special thin film developed in our laboratories, which is cleaner and more efficient. We’ve also been able to call on several techniques that we have learned from supply- ing similar products to the automotive industry. Our custom- ers are very pleased with this process simplification and we believe that we can now provide a number of new variants to help our customers develop this even further. Revenue in € millions 822 725 882 2008 2009 2010 Geo-mix revenue by destination in % C B A 44 30 26 • Coil and extrusion coatings • Specialty plastics coatings • Construction industry A EMEA B Americas C Asia Pacific Main products • Beer, beverage and food can coatings • Coatings for caps, closures and general line cans Key markets • Beer, beverage and food can markets • Consumer electronics such as cell phones and laptops Key brand AkzoNobel Report 2010 | Business performance | AkzoNobel Performance Coatings 47 AkzoNobel Powder Coatings “As well as helping to strengthen our operations in the US, integrating the former Rohm & Haas activities has also given us access to key technologies.” Rob Molenaar Managing Director Overview Finalizing the acquisition of the former Rohm & Haas powder coatings activities from Dow Chemical Company – which saw us become market leader in the US – had a major bearing on our 2010 performance. For example, volumes improved significantly and our revenue was boosted to record levels. We also strengthened our existing leadership positions in Asia, Europe and Africa during the year. Analysis The market continued to pick up, and while the mature economies did not rebound as quickly as some of the high growth regions, we grew significantly, notably in the US. We continued to expand in Asia – highlighted by the opening of a new plant in Wuhan in October – while major growth was also achieved in Russia. We are the only international powder coatings manufacturer in Russia and demand was very strong during the year. As well as helping to strengthen our opera- tions in the US, integrating the former Rohm & Haas activi- ties has also given us access to key technologies which have enabled us to better penetrate certain markets. For example, we secured major approvals in the agricultural construction equipment sector and are now better placed to accelerate into the wood, plastics and automotive segments, which are the next platforms for future growth. Highlights Major construction activity is continuing in Felling in the UK, where we are establishing a resin polymer lab. This is due to open in April 2011 and will play a crucial role in helping us to innovate and further develop sustainable technologies. We reached agreements to take over our joint venture partners in Dubai, Mexico and Vietnam, which will help us to become further established in those regions. In Mexico, we are also building a new factory in Monterrey which will start up in July 2011. One excellent example of our intention to accelerate into new markets came in Asia, where as part of a joint devel- opment project, we produced the first vehicle in China with a powder-coated exterior body. We are also working with other manufacturers around the world to gain further experi- ence of applying powder to vehicle exteriors. Another excit- ing segment where we made good progress was in providing coating solutions for laptops, including a soft-touch effect. Developments Integrating the former Rohm & Haas activities dominated much of the year. The acquisition has truly delivered on the strategic objectives we had for the deal – to help us consolidate our position as the number one powder coatings manufacturer in the world; to significantly strengthen our operations in the US; and to maintain innovation and technology leadership in the industry. Exchanging best practices also brought in excellent HSE programs, which are being introduced throughout the business, while it was pleasing to receive an internal award for a major safety initiative which we have implemented. 48 AkzoNobel Performance Coatings | Business performance | AkzoNobel Report 2010 Revenue in € millions 727 2008 573 2009 804 2010 Geo-mix revenue by destination in % C B A 60 11 29 • Furniture • General industrial A EMEA B Americas C Asia Pacific Main products • Powder coatings Key markets • Appliances • Architectural • Automotive Key brands AkzoNobel Wood Finishes and Adhesives “We maintained a strong focus on cost control and strengthened our number one position as the world’s leading supplier of wood finishes and wood adhesives.” John Wolff Managing Director Overview It was our first year operating as a stand-alone business unit, focused on the industrial wood industry. We achieved strong double digit revenue growth in 2010 as we emerged from the economic crisis. Although we are not yet back to pre-crisis levels, we maintained a strong focus on cost control and strengthened our number one position as the world’s leading supplier of wood finishes and wood adhesives. Analysis We maintained strong positions in the mature economies, but these markets remained sluggish during 2010, primar- ily due to the slow recovery of the construction and housing markets. Our growth has come in the high growth regions such as China and Turkey, where the local economies recov- ered quickly and export volumes in wood finishes increased. Our wood adhesives business also benefitted from increased export activity as a result of the weaker euro. Our strategy of selective bolt-on acquisitions and expansion in high growth regions is delivering results. The strategic acquisitions we finalized in 2009 to support our expansion in Eastern Europe have now been fully integrated and contributed to our overall performance during 2010. However, the price and availability of raw materials continued to challenge our efforts. Highlights It was a year of change for our employees, who adapted quickly to the new focus of our business and worked togeth- er to bring about improvements in our results. One of our accomplishments was our improved sales volume in Asia, where we continued our drive into the domestic markets and expanded our customer base. We broke ground on a new plant in Vietnam – our fourth major plant in the region – to support our growth strategy in the Asian export and domestic markets. The new facility will be completed in 2011. Developments We are excited to be part of the wood industry, which is inher- ently sustainable. Not only is wood a renewable resource, but trees actually reduce CO2 in the atmosphere, since one cubic meter of wood absorbs about one ton of CO2. Our strategy is to positively contribute to the sustainability of this indus- try by developing products and technologies that reduce our impact on the environment, while delivering positive perfor- mance attributes for our customers. To achieve this we are moving beyond product development to a broader systems approach, including integrated line application and monitor- ing, waste reduction and yield improvement concepts. Our new automated putty system, for example (see separate case study), transforms poor quality wood into viable wood substrates for flooring, cabinets and furniture. And for our wood adhesives customers, we are working on systems that significantly reduce the volume of glue applied while optimiz- ing performance. Revenue in € millions 816 684 776 2008 2009 2010 Geo-mix revenue by destination in % C B A A EMEA B Americas C Asia Pacific 48 37 15 Main products • Wood coatings • Wood adhesives and board resins Key markets • Furniture • Cabinets • Flooring Key brands • Windows • Doors • Building products AkzoNobel Report 2010 | Business performance | AkzoNobel Performance Coatings 49 AkzONOBEL AND HEALTHY LIVING Improving the functionality of the coatings we make is one of the key focus areas of our research, development and innova- tion. Because it’s not enough for paint to simply look good or add color. It can do so much more. It can also offer protection, reflect heat, add texture, or help to completely transform the surface it’s being applied to. One of the latest products to be launched by our Decora- tive Coatings business, under its Sikkens brand, is a perfect example of how a coating can offer enhanced functionality. Known as Alpha SanoProtex, the new product is a water- borne wall paint developed especially for the healthcare sector. It has been specifically designed to prevent bacteria from multiplying and is ideal for use in hospitals, clinics, social service buildings or other locations where hygiene is crucial and the risk of infection needs to be controlled at all times. Based on silver ions, when combined with appropriate clean- ing practices, the interior emulsion can contribute to lower infection rates for the MRSA bacteria, as well as contributing to effective infection prevention programs. The new product not only highlights the potential for where coatings functional- ity can go, but also emphasizes the success of our innovation strategy and RD&I pipeline. AkzoNobel Decorative Paints “We will use our scale, competencies and strong brands to accelerate growth, particularly in the high growth markets.” Tex Gunning Board member responsible for Decorative Paints In 2010 we were able to put more effort into developing the business. This included further strengthening our US activi- ties, accelerating growth in high growth markets, developing a strategy which is sustainable for the planet and building the people, brands and competencies that we need in order to win globally. It proved to be a particularly good year for us in South East Asia, especially Indonesia and Vietnam, as well as in China, where we achieved substantial growth, assisted by our network of close to 4,000 stores. We increased our market share and have significantly strengthened our brand health and brand presence in that part of the world. We also enjoyed major success in the US, where the impactful relaunch of our Glidden brand helped us to secure the contract as the primary paint supplier to Walmart, putting us ahead in the retail channel. We are establishing a strong number two posi- tion in the US and are striving to win new business there. We also continued to build a leadership position in South America, where we saw steady growth. Our presence in Brazil in particular has been significantly enhanced due to the effectiveness of our global Let’s Color campaign, which is adding color to people’s lives by transforming grey spaces and revitalizing local neighborhoods and communities. It is also a key step in establishing Dulux as a truly global brand and has helped us to gain considerable market share in Brazil. In Europe, 2010 started off very well, but the slow housing market and lack of newbuilding gradually had an impact, which resulted in most of our markets in Continen- tal Europe declining. However, our performance in Eastern Europe – mainly Poland and Russia – was good, and our UK and Turkish businesses also had a strong year. Other highlights included a landmark agreement with the Forest Stewardship Council and our continued global efforts to train thousands of people as Dulux professional painters. Despite the challenging trading conditions in some geog- raphies, the decorative paints sector remains an attrac- tive market, and as the world’s largest decorative paints company, we will use our scale, competencies and strong brands to accelerate growth, particularly in the high growth markets. Asia, South America and Eastern Europe, for example, will continue along their strong growth curve and I am optimistic about our opportunities and our ability to build our global organization. As well as investing in the development of our people, we are continuing to invest in innovation. We have set up a separate innovation organization – with its own global director – which is rooted in business and customer needs. It is dedicated to driving our agenda to develop more sustainable products, such as Ecosure, Dulux Weathershield and Sikkens Alpha SanoProtex antibacterial paint for hospitals and clinics, which have been very successful. This focus on strong organiza- tional development, combined with our global approach to building people, brands and competencies, will play a crucial role as we move forward. AkzoNobel Report 2010 | Business performance | AkzoNobel Decorative Paints 51 Decorative paints market overview Our Decorative Paints business supplies a full range of interior and exterior decoration and protection products for both the professional and do-it-yourself (DIY) markets, including paints, lacquers and varnishes, as well as products for surface preparation (pre-deco products). are served through a variety of outlets ranging from big box chains such as The Home Depot, Walmart, B&Q and Leroy Merlin (serving mainly homeowners) to independent dealers (serving both homeowners and professionals) and company- owned stores focused on serving professionals. • The Dulux Trade Environmental Wash System and DDC (Dulux Decorator Centers) Paint Can Recycling – professional paint waste management systems • Herbol Façade Certification Program • Glidden SpeedWall – highly efficient interior wall paint with Global market drivers and developments • Growing populations and GDP growth • Activity of residential and commercial new-build and home sales superior properties for the professional painter. Eco-premium portfolio Recent initiatives: • Dulux Trade Ecosure – water-based, high performance • Global increase in importance of home and professional paint interior decoration • Sikkens rubbol XD – VOC-reduced, ultra durable • rise of middle class in high growth markets • Legislative/regulatory pressures on environmental and health issues (VOC, rEACH) driving innovation professional trimpaint • The Freshaire Choice – zero-VOC consumer wall paint • Dulux Light & Space – highly light reflective, energy-saving Market and business characteristics The size of the global market for decorative paints is around €30 billion. • Increasing importance of large-scale outlets • Growth of importance of women as decision-makers • Increasing importance of internet. Architectural coatings Interior and exterior wall paints and trim paints (lacquers) for consumers and professionals. Woodcare and specialty products • Lacquers and varnishes for wood protection and decoration • Specialty coatings for metal, concrete and other critical building materials. Pre-deco products Fillers, wall treatments, sealants and putties for consumers and professionals. Building adhesives • Tile and floor adhesives and floor leveling compounds Drivers for buying decision Retailers • Strong brands that attract customers • Innovation that drives demand and basket spend • Category management capability. Trade customers • Product quality, consistency and innovation • Product availability and service • Technical and business support • Strong brands supporting loyalty. Innovations Consumer market • Dulux Weathershield keep Cool – heat-reflective exterior paint with energy-saving properties used in the building and renovation industry • Dulux All round Guard – absorbs harmful elements from • Supplied for professional workers such as tile, floor and the air to create a safer home environment parquet layers, interior decorators and painters • Direct to medium-sized enterprises, wholesalers, • New Glidden paint – reformulated and now includes less VOCs and better hide, durability and washability. specialized retailers. Customers Our end-users can broadly be segmented into homeown- ers (either DIY or BIY – buy it yourself), professional paint- ers serving homeowners and commercial contractors. They Support professional painters with tailor-made products and services • Sikkens object analysis, design support and marketing programs for painters wall paint. Key raw materials • Binders/resins • Titanium dioxide • Packaging materials Price drivers • Energy, oil and raw material prices • Steel prices Market leadership positions Europe 1st Continental Europe Northern and Eastern Europe UK, Ireland and South Africa Americas 1st 2nd Asia 1st 2nd Canada United States Latin America South East Asia and Pacific India and South Asia China and North Asia 52 AkzoNobel Decorative Paints | Business performance | AkzoNobel Report 2010 Key developments 2010 • Signed a deal with Walmart to become the retailer’s primary paint supplier in the US • Dulux Trade won contract to paint the London 2012 Olympic Games site • Leading coatings supplier for the Commonwealth Games in India • Signed a landmark agreement with the Forest Stewardship Council • Let’s Color campaign continued to gather momentum • Presence in China increased to more than 600 cities Geo-mix revenue by destination 20% North America 42% Mature Europe 7% Emerging Europe 17% Asia Pacific 3% Rest of the world 11% Latin America Key figures in € millions Employees by region at year-end 2009 2010 2009 2010 Revenue EBITDA EBITDA margin (in %) EBIT EBIT margin (in %) Operating income Moving average ROI (in %) 4,573 4,968 US and Canada 487 10.6 298 6.5 133 4.7 548 11.0 343 6.9 275 5.2 Latin America China Other Asian countries The Netherlands Germany Sweden UK Revenue breakdown by business unit in % Other European countries Other regions Total 5,100 1,700 1,200 2,000 1,000 1,600 600 2,200 5,400 1,100 5,100 1,800 1,500 2,200 1,100 1,300 600 2,200 5,100 1,100 21,900 22,000 C B Product: Eco-premium solutions % of revenue A 15 15 29 22 2007 2008 2009 2010 A Decorative Paints Europe B Decorative Paints Americas C Decorative Paints Asia 52 31 17 Key value chains with carbon footprint assessment 32 2009 108 2010 Total reportable rate of injuries per million hours 5.7 4.9 4.7 4.0 2007 2008 2009 2010 AkzoNobel Report 2010 | Business performance | AkzoNobel Decorative Paints 53 AKZONOBEL AND NATURAL RESOURCES We understand the importance of wood stewardship and the risk of not looking after our natural resources. Which is why we have signed a landmark agreement with the Forest Stewardship Council. The agreement makes AkzoNobel the FSC’s first global partner outside of products that are FSC certified. Both parties are cooperating to increase understand- ing of the organization’s work in promoting responsible forest management, and to boost awareness of FSC certification being a label for wood and paper from well- managed forests. Many of our businesses – particularly our woodcare brands – are already committed to the responsible sourcing of forest products. But under the terms of the agreement, AkzoNobel’s woodcare brands, Cuprinol, Pinotex, Xyladecor, CetaBever, Sparlack, Flood and Sadolin, will now work more closely with the FSC to further promote forest stewardship and drive demand for responsible products. The agreement includes setting up a global partner- ship fund with the FSC to support agreed social policy projects; educating customers about the FSC and its objectives; and helping to drive demand for FSC certi- fied products. A new partnership logo has also been developed which will be used extensively on all branded material, including packaging. Developing partnerships such as the one we have agreed with the FSC is a clear illustration of our willing- ness to achieve transformational change, take positive action and help to protect the source of wood for future generations. AkzoNobel Decorative Paints Europe From left to right: Ruud Joosten Managing Director Northern and Eastern Europe Richard Stuckes Managing Director UK, Ireland and South Africa, Building Adhesives Antoine Fady Managing Director Continental Europe (until December 1, 2010) Revenue in € millions 2,711 2,531 2,585 2008 2009 2010 Key brands Overview It was generally a challenging year for our European activi- ties, which experienced low levels of activity in housing and construction markets. A tight supply situation for several key raw materials also had an impact. However, while trading conditions were mostly unfavorable, growth was achieved in some regions, along with increases in market share. Analysis Revenue and volumes were up slightly in the UK, where the trade market performed better than expected. We also increased our share of the UK trade market, despite aggres- sive competition. Conditions proved to be more challeng- ing in Ireland and South Africa, while in Building Adhesives, we increased share in the key markets of Germany, Austria, Switzerland and the Benelux. Performance was also strong in the Nordics and France. In Northern and Eastern Europe, we were able to increase sales and significantly improve the profitability of the business compared with the previous year. The Turkish market in particular showed healthy growth, while we consolidated our leadership positions in both Russia and Greece. The launch of Dulux in Egypt delivered strong sales, together with good growth from sub-Saharan Africa. Condi- tions stabilized in Continental Europe, where simplification of our brand portfolio and a number of successful product launches put us in a strong position to compete in the existing economic climate. Although the paint market slowed down in Belgium, the Netherlands and France – mainly on the profes- sional side – a number of valuable acquisitions in the trade area in France have enhanced our position significantly. Highlights We continued to simplify and streamline our business in order to make it more efficient and reduce costs. We also made significant progress with building a global marketing organi- zation, and in aligning brands with different names and local heritage to one common positioning platform. Our innova- tive capabilities led to the launch of strong concepts in line with customer needs, such as Dulux Architect and Sikkens Healthcare. In the UK, Dulux Trade won a contract to paint the £7.3 billion London 2012 Olympic Games site. We also established a team in the Middle East to help drive growth in the region. Developments Dulux Ecosense (which has a 50 percent lower carbon foot- print) was launched in the UK, where sales of Dulux Trade Ecosure and our waste paint solidifier also continued to grow. Towards the end of the year, the UK launched a consumer waste recycling trial. The Let’s Color campaign proved to be a big success across the region, notably in Turkey, Russia and the Nordics, significantly boosting brand awareness. In Continental Europe, we introduced a high quality Sikkens water-based wall paint regarded as a benchmark product in sustainability. Our business-wide commitment to sustainability also continued, which includes focusing on eco-efficiency and reductions in waste and energy. Towards the end of the year, we announced the merger of our three Decorative Paints businesses in Europe into one Deco- rative Paints EMEA business. This will strengthen our leader- ship positions in this key region. AkzoNobel Report 2010 | Business performance | AkzoNobel Decorative Paints 55 AkzoNobel Decorative Paints Americas From left to right: Pierre Dufresne Managing Director Canada Erik Bouts Managing Director United States Jaap Kuiper Managing Director Latin America Revenue in € millions 1,541 1,413 1,547 2008 2009 2010 Key brands Overview AkzoNobel’s Decorative Paints activities in the Americas experienced mixed fortunes as the industry attempted to pull clear of the lingering impact of the economic downturn. The US business continued to face depressed conditions as any sign of recovery failed to materialize, while in Canada, stimulus initiatives such as the government infrastructure program helped generate more demand, notably during the first quarter. Conditions were more buoyant in Latin America, where the Coral brand in Brazil outgrew the market and the businesses in Argentina and Uruguay both achieved double digit growth. Analysis US paint market volume continued to decline throughout the year. Home sales, unemployment, sluggish GDP figures and lack of consumer confidence all contributed to the econom- ic slide. Raw material supplies were also disrupted, which impacted financial performance. This shortage of raw materi- als also affected the Canadian business, which saw demand levels fall in the second half of the year as economic growth slowed. As a result, volumes were flat in a market which showed slight overall improvement. The slow US recovery is also impacting Canada’s economy, which relies heavily on exports to the US. In Latin America, however, the recession failed to dent the business’ continued growth, which was significantly boosted in Brazil by the Coral brand’s Tudo de Cor Para Você (All the Colors For You) program. The initiative – which involves painting deprived neighborhoods in order to add color to people’s lives – is gaining major momentum and has helped propel Coral to unequalled heights. Highlights September’s announcement that AkzoNobel has become the primary paint supplier to Walmart was one of 2010’s major highlights in the Americas. We are supplying multiple brands to Walmart’s 3,500-plus stores in the US. The Glidden Profes- sional brand was also formally launched nationwide in the US in Q2. In Canada, our Montreal Distribution Center obtained Silver LEED (Leadership in Energy and Environmental Design) certification from the Canadian Green Building Council. A number of new VOC compliant products were also intro- duced, ahead of new Canadian VOC regulations which came into effect in September. The most significant highlight in Latin America centered on the continued success of the Tudo de Cor Para Você program, which has now been rolled out to trade partners. By year-end, a total of more than 600 local painting events had been staged, benefiting 300,000 families. The initiative, which includes the participation of employees, also involves training local people to become painters, further boosting engagement with the company and the Coral brand. Developments After being relaunched in 2009, the Glidden brand has seen year-on-year market share growth, while household penetra- tion and repeat purchases jumped by double digits. Sales of the Ralph Lauren Paint brand in the US Independent Paint Dealer channel increased, while the Flood woodcare brand boosted its presence in large-scale outlets. In Canada, eight new paint stores were opened during the year, Liquid Nails was introduced in the fourth quarter and supply agreements with two major customers were renewed. The spotlight in Latin America is now falling on Brazil and the forthcoming soccer World Cup (2014) and Olympic Games (2016), which will offer significant opportunities. 56 AkzoNobel Decorative Paints | Business performance | AkzoNobel Report 2010 AkzoNobel Decorative Paints Asia From left to right: Jeremy Rowe Managing Director South East Asia & Pacific (SEAP) Amit Jain Managing Director India and South Asia (ISA) Revenue in € millions 655 632 841 2008 2009 2010 Richard Stuckes Responsible for China & North Asia (as of March 1, 2010) Key brand Overview The Decorative Paints business achieved significant growth throughout Asia during 2010, capturing market share in many regions while maintaining strong profitability. It was the best year on record for the company’s South East Asia & Pacific activities – which strengthened its number one position – and it was a similar story in the increasingly important markets of India and South Asia, where growth was robust and most regions booked record sales. Growth also soared in China, where we considerably outpaced the market, even though the Chinese market decelerated in the second half of the year due to unprecedented measures introduced by the central government to curb rising property prices. distribution footprint. We continued to launch a series of eco-premium products throughout 2010, notably our Dulux Weathershield Keep Cool heat reflective exterior paint with energy-saving and greenhouse-lessening properties, which was introduced throughout South East Asia & Pacific. A similar product, Dulux Weathershield SunReflect, was named Green Innovation of the Year in India. Along with the continued roll-out of the Singapore Green Label standard throughout our Dulux portfolio in South East Asia, this contributed to a very high percentage of eco-premium products in the business. Another highlight was the teaming up of Decorative Paints and Marine and Protective Coatings as the leading coatings suppliers to the Commonwealth Games in Delhi. Analysis We benefited from an aggressive growth strategy for Asia, which included improving distribution channels and making significant investments to build the Dulux brand. In India and South Asia, a revival in the real estate sector on the back of GDP growth and a record performance by the Dulux Pro insti- tutional business helped drive double digit volume growth. In China – where we increased brand awareness and now have a presence in more than 600 cities – we successfully penetrated more tier two and tier three cities, with the mid-tier product range enjoying the highest growth rate among all product segments. A healthy economy in South East Asia & Pacific kept the paint market buoyant and we took full advantage. Highlights The global Let’s Color campaign was launched in selected cities in China, which helped to further extend our color lead- ership. We also opened and upgraded close to 1,000 stores this year to accelerate the expansion of our controlled Chinese Developments In India, AkzoNobel took the lead in driving sustainability by partnering with government, industry bodies, media and the artisan community. This was done by conducting workshops and heading panel discussions and forums. We also teamed up with Women on Wings, an organization dedicated to creat- ing employment for a million low income women in rural areas of India before 2017. AkzoNobel will look for ways that paint can be used to help create some of these much-needed jobs. In China, we have continued to build the capability of our new Dulux Easy Paint service, a total service solution designed to unlock the potential of repainting millions of old homes in China. The Chinese business has also been focusing on build- ing organizational and system capabilities to facilitate future growth. A relaunched mid-tier offering was successfully intro- duced in Indonesia under the Dulux brand, while consumers continued to be actively engaged through initiatives such as the I Love My City campaign in Vietnam and the Dulux Paint Bank safe paint disposal system in Malaysia. AkzoNobel Report 2010 | Business performance | AkzoNobel Decorative Paints 57 In this section we introduce our Supervisory Board and present their Report for 2010, as well as describing our remuneration and risk management policies. Details of our corporate governance structure can also be found, along with information about AkzoNobel on the capital market. Our Supervisory Board Report of the Supervisory Board Corporate governance statement Remuneration report Risk management AkzoNobel on the capital market 60 61 63 69 75 80 Karel Vuursteen (1941, Dutch) Chairman Initial appointment 2002 Current term of office 2010 – 2014 Uwe-Ernst Bufe (1944, German) Deputy Chairman Initial appointment 2003 Current term of office 2007 – 2011 Virginia Bottomley (1948, British) Initial appointment 2000 Current term of office 2008 – 2012 Dolf van den Brink (1948, Dutch) Initial appointment 2004 Current term of office 2008 – 2012 Former CEO of Heineken; Deputy Chairman and member of the Board of Directors of Heineken Holding; Chairman of the Supervisory Board of TOMTOM N.V.; member of the Supervisory Board of Henkel AG. • Chairman of the Nomination Committee as of March 5, 2009 • Member of the Remuneration Committee Former CEO of Degussa AG; member of the Supervisory Board of Umicore SA and non-executive director of SunPower Inc. Former Secretary of State for Health and member of the British Cabinet; former Secretary of State for National Heritage; member of the House of Lords; Chancellor of the University of Hull; Governor of the London School of Economics; Governor of the Ditchley Foundation; non-executive director of BUPA; executive director of Odgers Berndtson; Trustee of the Economist newspaper. • Member of the Remuneration Committee • Member of the Nomination Committee Former member of the Managing Board of ABN AMRO Bank; Professor Financial Institutions University of Amsterdam; Chairman of the Supervisory Board of Nyenrode University. • Chairman of the Audit Committee as of January 1, 2006 Peggy Bruzelius (1949, Swedish) Initial appointment 2007 Current term of office 2007 – 2011 Peter Ellwood (1943, British) Initial appointment 2008 Current term of office 2008 – 2012 Antony Burgmans (1947, Dutch) Initial appointment 2006 Current term of office 2010 – 2014 Louis Hughes (1949, American) Initial appointment 2006 Current term of office 2010 – 2014 Former CEO ABB Financial Services; former Executive Vice-President SEB; Vice-Chairman AB Electrolux; non-executive director of Axfood AB, Syngenta AG, Husqvarna AB and Diageo plc; Chairman of Lancelot Holding AB; Governor of the Stockholm School of Economics. Former Chairman of ICI plc; former Group Chief Executive of Lloyds TSB Group; Chairman of Rexam plc. • Member of the Remuneration Committee • Member of the Nomination Committee Former Chairman and CEO of Unilever N.V. and plc.; non-executive director of BP plc.; member of the Supervisory Boards of SHV Holdings N.V. and AEGON N.V. • Member of the Nomination Committee • Chairman of the Remuneration Committee Former President and COO of Lockheed Martin; Former Executive Vice-President of General Motors; Chairman and CEO of In ZeroSystems LLC; member of the Boards of Directors of ABB Group and Alcatel-Lucent SA; executive advisor of Wind Point Partners. • Member of the Audit Committee as of March 5, 2009 • Member of the Audit Committee 60 Our Supervisory Board | Governance and compliance | AkzoNobel Report 2010 Report of the Supervisory Board The Supervisory Board hereby submits to shareholders the financial statements and the report of the Board of Management of Akzo Nobel N.V. for the financial year 2010, as prepared by the Board of Management and approved by the Supervisory Board in its meeting of February 2011. Main 2010 activities • Strategic discussions at company, Business Area, business unit and country level • The Research, Development and Innovation strategy • The introduction of an Executive Committee • Human resources and succession planning • Board visit to the UK The 2010 financial statements were audited by KPMG Accountants N.V. and the Auditor’s report appears on page 134. The financial statements were discussed extensively with the auditors by the Audit Committee, and in the presence of the Chairman of the Board of Management (CEO) and the Chief Financial Officer (CFO). In addition, the 2010 financial statements were discussed by the full Supervisory Board with the full Board of Management, in the presence of the audi- tors. Based on these discussions, the Supervisory Board is of the opinion that the 2010 financial statements of Akzo Nobel N.V. meet all requirements for correctness and transparency, and that they form a good basis to account for the supervision provided. We recommend that the Annual General Meeting of shareholders adopts the 2010 financial statements as present- ed in this 2010 Report. We recommend the Annual General Meeting of shareholders to resolve that the total dividend for 2010 on each of the common shares outstanding will be €1.40, and that this amount, less the interim dividend of €0.32 – which was paid in November 2010 – will be payable on May 10, 2011. In addition, we request that shareholders discharge the members of the Board of Management of their responsibil- ity for the conduct of business in 2010 and the members of the Supervisory Board for their supervision of management. Supervisory Board activities The Supervisory Board met six times during 2010, including a one-day meeting fully dedicated to the company’s strate- gy. All meetings were plenary sessions with the full Board of Management present. With the exception of two meetings, all Supervisory Board members attended all the Supervisory Board meetings. In addition, a separate meeting was held – attended in part by the CEO – during which the Supervi- sory Board conducted a self-assessment and appraised its committees, working methods, procedures and performance, as well as evaluating the functioning of the Board of Manage- ment and its members. The Supervisory Board also assessed its relationship with the Board of Management and discussed the composition of the Supervisory Board and its committees. For this purpose, questionnaires were sent to the Supervi- sory Board. The answers were used as a framework for the evaluation discussion. This discussion was minuted and the conclusions and actions were discussed and confirmed at the next meeting of the Supervisory Board. The Chairman of the Supervisory Board prepared the meetings with the assistance of the CEO. During 2010, the Supervisory Board again devoted consider- able time to discussing the company’s strategy and reviewing strategic options with the Board of Management. This includ- ed detailed discussions on objectives, associated risks and the mechanisms for controlling financial risks. Furthermore, the Supervisory Board discussed sustainability on a number of occasions, in the broader sense, but also specifically in relation to the Values part of the company’s medium-term strategy (for example safety) and the significant effort being put into talent development. Other topics included: • The new medium-term strategy for the company • Additional cost savings at the company • Governance of the company • The introduction of an Executive Committee • Risk management • A detailed review of certain business unit strategies • The company’s strategy in certain high growth economies • Information Management strategy • Research, Development and Innovation strategy • Operating working capital management • Human resources and succession planning • Diversity and inclusion • Sustainability (including HSE) • Remuneration policy • Approval of major investments, acquisitions and divestments. Regular agenda items included financial and operational performance, share price development, operational plan- ning, course of business and the annual financing and investment plan. Business unit Managing Directors and Staff Directors are regularly invited to give presentations to the Supervisory Board. AkzoNobel Report 2010 | Governance and compliance | Report of the Supervisory Board 61 In September 2010, the full Supervisory Board and Board of Management met in the UK. The visit included meetings with local management, customers and other stakeholders, as well as a tour of AkzoNobel’s Slough site. The Board of Management keeps the Supervisory Board regularly informed of intended organizational changes and appointments of senior managers. One of the main topics for the Supervisory Board meeting in November 2010 was human resources, including succession planning. Composition and profile of the Supervisory Board The Supervisory Board – which currently consists of eight members – aims for an appropriate level of experience among its members in marketing, manufacturing, finance, econom- ics, sustainability, human resources and other aspects of international business. Consequently, the current members have a diverse and appropriate mix of knowledge and experi- ence of the markets in which AkzoNobel operates, as well as insights from different markets and non-operational areas. A further aim of the Supervisory Board – which its members believe is currently being met – is that at least one-third of the membership should meet the diversity criteria of gender (female) and/or nationality (outside of the European Union). This is in compliance with provision III.3.1 of the Dutch Corporate Governance Code, which ensures that its compo- sition better reflects both society at large and the markets in which the company operates. In the Supervisory Board’s view, the Code’s provision III.2.1 (regarding independence) has been fulfilled. The terms of office of Mr. Bufe and Mrs. Bruzelius expire on May 1, 2011. Mr. Bufe and Mrs. Bruzelius are available for reappointment. It will be proposed at the 2011 Annual that Mr. Bufe and General Meeting of shareholders Mrs. Bruzelius be reappointed for a third and second term of four years respectively. Audit Committee The Audit Committee consists of three members and is chaired by Mr. Van den Brink. Six meetings were held during 2010. As a rule, the CEO, the CFO, the Corporate Director Control, the internal auditor and the lead partner of the external auditor, KPMG, attend all regular meetings. After every Audit Commit- tee meeting, the three members hold a separate meeting with only the internal auditor present, and one meeting with only the external auditor present. In addition, the Audit Commit- tee met once without members of the Board of Manage- ment being present to conduct a self-evaluation and appraise performance. Discussions regularly focus on financial state- ments, internal and external control procedures, risk manage- ment, internal auditing reports, planning, tax, pensions and the external auditor’s performance and independence. Before each announcement of the company’s quarterly results, the Audit Committee was informed of the figures and consulted on the reports and press releases to be published. The Audit Committee also discussed topics including: Remuneration Committee The Remuneration Committee consists of four members and is chaired by Mr. Burgmans. Four meetings were held in 2010. Recommendations were made on the remuneration and remuneration policy for members of the Board of Manage- ment and Executive Committee, including personal targets. Information on the remuneration of the Board of Management and the Supervisory Board can be found in the Remuneration report and in note 23 of the Financial statements. Nomination Committee The Nomination Committee consists of four members and is chaired by Mr. Vuursteen. Three meetings were held in 2010. During the year, proposals were made for the reappointment of Mr. Bufe and Mrs. Bruzelius to the Supervisory Board. The Supervisory Board wishes to thank the Board of Manage- ment, as well as all employees, for their dedication and hard work for the company in 2010. • The quality of internal audit • Internal audit strategy • KPMG’s approach to auditing the company, engagement Amsterdam, February 16, 2011 The Supervisory Board letter, fees and audit plan • Operating working capital management • Compliance at the company • Environmental liabilities • Pensions strategy • Treasury department transformation. Issues discussed in Audit Committee meetings are reported back to the full Supervisory Board in subsequent meetings of this Board. 62 Report of the Supervisory Board | Governance and compliance | AkzoNobel Report 2010 Corporate governance statement Shareholders External auditors Supervisory Board Board Committee Pensions Board of Management Corporate Executive Committee Business Area Board Decorative Paints Business Area Board Performance Coatings Business Area Board Specialty Chemicals Business units Business units Business units Major external regulations Major internal regulations • Dutch Civil Code • Dutch Act on financial supervision • NYSE Euronext listing rules • Dutch Corporate Governance Code • Articles of Association • Code of Conduct • Rules of Procedure for the Supervisory Board • Rules of Procedure for the Board of Management/ Executive Committee • Corporate directives and policies • Authority schedules Akzo Nobel N.V. is a public limited liability company (“Naam- loze Vennootschap”) established under the laws of the Neth- erlands. Its common shares are listed on NYSE Euronext Amsterdam. The company’s management and supervision structure is organized in a so-called two-tier system, compris- ing a Board of Management, solely composed of executive directors, and a Supervisory Board, solely composed of non- executive directors. The two Boards are independent of each other and are accountable to the Annual General Meeting of shareholders for the performance of their functions. Our corporate governance structure is based on the require- ments of the Dutch Civil Code, the company’s Articles of Association and the rules and regulations applicable to companies listed on the NYSE Euronext Amsterdam stock exchange, complemented by several internal procedures. These procedures include a risk management and control system, as well as a system of assurance of compliance with laws and regulations. Over the last decade, we have been consistently enhancing and improving our corporate governance standards in accor- dance with applicable laws and regulations. Most notable were the Dutch Corporate Governance Code adopted in 2003 and amended in 2008 (the “Code”) and the US Sarbanes-Oxley Act of 2002 and its implementation rules. Although we have delisted from NASDAQ and deregistered from the SEC, we continue to build on the improvements we have been making to our corporate governance. The Code contains principles and best practices for Dutch companies with listed shares. We agree with both the general approach and the vast majority of its principles and best practice provisions. Corporate governance at AkzoNobel was placed on the agenda at our Annual General Meeting of shareholders in 2004 and 2005 as a separate item for discus- sion. This specifically included a number of aspects where our corporate governance deviates from the Code, as explained in our 2004 Annual Report. The Board of Management and the Supervisory Board have taken these discussions into account in formulating a position on AkzoNobel’s corporate AkzoNobel Report 2010 | Governance and compliance | Corporate governance statement 63 governance. One of the outcomes was an amendment to the Articles of Association, which was approved by the Annual General Meeting of shareholders in 2005. The company agrees with all amendments introduced in the revised Code of 2008. To the extent necessary, all changes to the Code have been implemented through an amendment to the Rules of Procedure of the Board of Management and Supervisory Board respectively, as well as through additions to the text of the Annual Report, and the introduction of a claw back provision in the remuneration policy in 2010. This chapter describes AkzoNobel’s corporate governance. Any deviations from the Code are explained, in accordance with the Code’s “apply or explain” principle. The Board of Management and the Supervisory Board are of the opinion that the company’s corporate governance struc- ture, as described in this chapter and which includes the intro- duction of an Executive Committee as of January 1, 2011, is the most appropriate for AkzoNobel at this point in time. With the exception of those aspects of our governance structure which can only be amended with the approval of the Annual General Meeting of shareholders, the Board of Management and the Supervisory Board may make adjustments to the way the Code is applied as described below, if this is considered to be in the interest of the company. If adjustments are made, they will be published and reported in the annual report for the relevant year. Board of Management General The Board of Management is entrusted with the management of the company. As of January 1, 2011, the Board of Manage- ment operates in the context of an Executive Committee. The members of the Executive Committee are the five members of the Board of Management, together with four senior execu- tives who are delegated responsibilities for Human Resources and Organizational Development; Legal; Purchasing and Supply Chain; and Research, Development and Innovation respectively. Among other responsibilities, the members of the Executive Committee define the strategic direction, establish the policies and manage the company’s day-to-day opera- tions. The members of the Board of Management remain jointly and individually accountable for all decisions made by the Executive Committee. All Executive Committee decisions require the consent of a majority of the members of the Board of Management. The Board of Management can decide to reserve decisions for the Board of Management. chairs the Board Committee Pensions. The authority of the Business Area Boards and the Board Committee Pensions is laid down in an internal authority schedule. Business Area Board meetings are held once a fortnight. The Business Area Boards provide a forum for a more in-depth discussion on all possible subjects relevant to that Business Area. All major investments, all acquisitions and all major functional initiatives are discussed and decided, if applicable, subject to Supervisory Board approval. In performing its duties, the Executive Committee is guided by the interests of the company and its affiliated enterprise, taking into consideration the relevant interests of the company’s stakeholders. Execu- tive Committee meetings are held once a fortnight. The Chief Executive Officer (CEO) leads the Executive Committee in its overall management of the company to achieve its performance goals and ambitions. He is the main point of liaison with the Supervisory Board. The Chief Finan- cial Officer (CFO) is specifically responsible for the company’s financial affairs. Members also have specific responsibilities for the company’s main Business Areas: Decorative Paints, Performance Coatings and Specialty Chemicals. The Managing Directors of our businesses, and the Staff Directors in charge of the different functions, report to indi- vidual Executive Committee members with specific responsi- bility for their activities and performance. To safeguard consis- tency and coherence for the total organization, the Executive Committee has established corporate directives. To effectively steer the strategy of our businesses and their operations, the Executive Committee has established Busi- ness Area Boards for each of our Business Areas: Decorative Paints, Performance Coatings and Specialty Chemicals. In addition, a Board Committee Pensions oversees the general pension policies (to be) implemented in the various pension plans of the company. Business Area Boards are chaired by the member of the Exec- utive Committee responsible for that Business Area. The CFO Representative authority, including the signing of documents, is vested in at least two members of the Executive Committee jointly. Corporate agents may be appointed, whose powers of attorney will be determined by the Executive Committee. The tasks and responsibilities, as well as internal procedur- al matters for the Executive Committee, are addressed in the Rules of Procedure for the Board of Management and Executive Committee. These Rules of Procedure have been approved by the Supervisory Board and are available on our corporate website. Appointment, conflicts of interest Board of Management members are appointed to, and removed from, office by the Annual General Meeting of share- holders. The remaining members of the Executive Commit- tee are appointed by the CEO subject to the approval of the Supervisory Board. As of 2004, members of the Board of Management are appointed for four-year terms, with the possibility of reap- pointment at the expiry of each term. This is in line with the Code’s provision II.1.1. However, the contract of Mr. Wijers – who was appointed before 2004 – was not renegotiated, as this was not felt to be in the interest of the company. The Meeting of Holders of Priority Shares has the right to make binding nominations for the appointment of members of the Board of Management and the Supervisory Board. The priority shares are held by the Foundation Akzo Nobel. The Board of the Foundation Akzo Nobel consists of members of the Super- visory Board who are not members of the Audit Committee. According to the Code’s recommendation (provision IV.1.1), the Annual General Meeting of shareholders should be able 64 Corporate governance statement | Governance and compliance | AkzoNobel Report 2010 to pass a resolution to cancel the binding nature of a nomi- nation for the appointment of the Supervisory Board or the Board of Management. Under the Articles of Association, the binding nature of the nominations by the holders of priority shares cannot be canceled by the Annual General Meeting of shareholders. The company subscribes to the Code’s principle in general. Therefore (as described in the 2004 Annual Report and discussed at the Annual General Meeting of shareholders in 2005) it has been decided that in normal circumstances, Supervisory Board and Board of Management members will be appointed on the basis of a non-binding nomination by the Supervisory Board. The Board of the Foundation Akzo Nobel has confirmed its intention to use its binding nomination rights only in the case of exceptional circumstances, such as in the event of a (threatened) hostile takeover. (Reference is made to the description of anti-takeover provisions and control, see page 68). In normal circumstances, resolutions to appoint a member of the Supervisory Board or Board of Management will therefore require a simple majority of the votes cast. Share- holders meeting the requirements laid down in the Articles of Association are also entitled to nominate Supervisory Board or Board of Management members. According to the Articles of Association, such appointments will require a two-thirds majority, representing at least 50 percent of the outstanding share capital. Although a deviation from provision IV.1.1. of the Code, the Supervisory Board and the Board of Management are of the opinion that these provisions will enhance the continuity of the company’s management and policies. As of January 1, 2011, members of the Executive Commit- tee are allowed to hold not more than one supervisory board membership or non-executive directorship in another listed company. This is more stringent than the Code (provision II.1.8), which allows two such supervisory board member- ships or non-executive directorships. The exception to this rule is that in the 18 months prior to their retirement, Execu- tive Committee members are allowed to hold more than one supervisory board membership or non-executive directorship in order to allow them to prepare for retirement. But only if this does not interfere with the performance of their tasks as members of the Executive Committee. Furthermore, an exception can be made for an executive joining the Execu- tive Committee. However, a maximum of two supervisory board memberships or non-executive directorships will apply. Acceptance of external supervisory board memberships or non-executive directorships by members of the Executive Committee in other listed companies is subject to approval by the Supervisory Board, with authority having been delegated to the Chairman of the Supervisory Board. With respect to the members of the Board of Management, Mr. Wijers is a non- executive Board Member of Royal Dutch Shell plc, while Mr. Frohn is a member of the Supervisory Board of Nutreco N.V. The main elements of the employment contracts of Board of Management members are available on our corporate website. For appointments starting from 2004, the maximum remuneration in the event of dismissal is in principle one year’s base salary. In the event of the dismissal of the Board member appointed before 2004, the Supervisory Board will determine a severance payment upon the advice of the Remuneration Committee. Since it is not believed to be in the interest of the company to renegotiate the existing contracts of the members of the Board of Management, the company decided in 2004 not to follow Code provision II.2.8 for appointments made before 2004. However, the Supervisory Board intends to take the provisions of the Code as guidance for establishing sever- ance payments. The contracts of the members of the Board of Management do not contain change of control provisions. The handling of (potential) conflicts of interest between the company and members of the Board of Management or Exec- utive Committee is governed by the Rules of Procedure for the Board of Management and Executive Committee. Decisions to enter into transactions under which Board of Management members have conflicts of interest that are of material signifi- cance to the company, and/or to the relevant Board of Manage- ment member, require the approval of the Supervisory Board. Mention will also be made in the annual report for the relevant year. In 2010, no transactions were reported under which a member of the Board of Management has had a conflict of interest that is of material significance to the company. Remuneration In line with the remuneration policy adopted by the Annual General Meeting of shareholders, the remuneration of the members of the Board of Management is determined by the Supervisory Board on the advice of its Remuneration Commit- tee. The Supervisory Board will also decide on the remunera- tion of the remaining members of the Executive Committee on the proposal of the CEO. The composition of the remunera- tion of Board of Management members, and the remunera- tion policy itself, are described in the Remuneration report and the Financial statements (see note 23). Risk management and (financial) reporting Internal risk management and control systems are in place. Our risk management system is explained in more detail in the Risk management chapter, (see page 75). We have strict procedures for internal and disclosure controls and auditor independence. The Disclosure Committee moni- tors the procedures established by the company and advises the Executive Committee to ensure adequate and timely disclosure of material financial and non-financial information. A separate internal control function is operational to secure compliance with the company’s internal control requirements. The further enhancement of the internal controls was one of the 2010 spearheads. The company-wide internal control self- assessment was strengthened and aligned with a number of other internal representation and compliance processes. An extensive training and communication program was part of this endeavor. Reference is made to the Report of the Board of Management in the Strategy section for the statements in respect of the internal risk management and control systems. AkzoNobel Report 2010 | Governance and compliance | Corporate governance statement 65 Supervisory Board General The Supervisory Board’s overall responsibility is to exer- cise supervision over the policies adopted by the Board of Management and the Executive Committee and over the general conduct of the business of the company. This specifi- cally includes supervision of the achievement of the compa- ny’s operational and financial objectives, the corporate strat- egy designed to achieve the objectives and the main financial parameters and risk factors. The Supervisory Board also provides the Board of Management and Executive Commit- tee with advice. In fulfilling their duties, members are guided by the interests of AkzoNobel and its affiliated enterprise, taking into consideration the relevant interests of the compa- ny’s stakeholders. Appointment, independence, conflicts of interest and composition Members of the Supervisory Board are nominated, appoint- ed and dismissed in accordance with procedures which are the same as those previously outlined for the members of the Board of Management (see page 64). As a general rule, based on the rotation schedule, a Supervisory Board member’s tenure is four years. In principle, members are eligi- ble for re-election twice. However, in deviation from the Code (provision III.3.5), a member can be nominated for re-election more often if, in a specific case, this is considered to be in the company’s interest. The composition of the Supervisory Board is such that members are able to act with due objectivity and indepen- dently of one another and of the Board of Management and Executive Committee. All members meet the independence requirements as stated in Code provisions III.2.1 and III.2.2, as confirmed in the Supervisory Board’s report in accordance with provision III.2.3. No member of the Supervisory Board holds more than five supervisory board memberships in Dutch listed companies. The Supervisory Board is governed by its Rules of Procedure, which include detailed provisions on how to deal with conflicts of interest and potential conflicts of interest between members of the Supervisory Board and the company. In 2010, no trans- actions were reported under which a member had a conflict of interest which was of material significance to the company. The Supervisory Board Rules of Procedure, encompassing the Profile and the Charters of the Committees, reflect the tasks and responsibilities of the Supervisory Board and are available on our corporate website. The Chairman of the Supervisory Board determines the agenda, chairs the meetings of the Supervisory Board, moni- tors the proper functioning of the Supervisory Board and its committees, arranges for the adequate provision of informa- tion to its members and acts on behalf of the Supervisory Board as the main contact for the Board of Management. He also initiates the evaluation of the functioning of the Super- visory Board and the Board of Management and chairs the Annual General Meeting of shareholders. The Chairman of the Supervisory Board is Mr. Vuursteen. The Supervisory Board is assisted by the Secretary. All members have access to the advice and services of the Secretary, who is responsible for ensuring that procedures are followed and that the Supervisory Board acts in accordance with its statutory obligations under the Articles of Association. Remuneration Supervisory Board members receive a fixed annual remunera- tion and attendance fee, which is determined by the Annual General Meeting of shareholders. More information on the remuneration of the members of the Supervisory Board can be found in note 23 in the Financial statements. Board appointments 2010: • Mr. Vuursteen (Chairman) was reappointed as a member of the Supervisory Board • Mr. Hughes was reappointed as a member of the Supervisory Board • Mr. Burgmans was reappointed as a member of the Supervisory Board Committees The Supervisory Board has established three committees: the Audit Committee, the Nomination Committee and the Remu- neration Committee. Each committee has a charter describ- ing its role and responsibilities and the manner in which it discharges its duties and reports to the full Supervisory Board. These charters are included in the Supervisory Board Rules of Procedure, published on our corporate website. The committees report on their deliberations and findings to the full Supervisory Board. The Audit Committee assists the Supervisory Board in over- seeing the quality and integrity of the accounting, auditing, reporting and risk management practices of the company, as well as on a number of other subjects, as included in its charter. The Chairman of the Audit Committee is Mr. Van den Brink. One area of particular focus in corporate governance is the independence of the auditors. The Audit Committee has been delegated direct responsibility for the compensation and monitoring of the auditors and the services they provide to the company. The auditors are prohibited from providing the company with certain non-audit services. In order to anchor this in our procedures, the Supervisory Board adopted the “AkzoNobel Auditors Independence Policy” and the related “AkzoNobel Audit Committee Pre-approval Procedure on Audit, Audit-Related and Non-Audit Services”. All these docu- ments and policies are available on our corporate website. The Nomination Committee, chaired by Mr. Vuursteen, focuses on drawing up selection criteria and appointment procedures for Supervisory Board and Board of Management members. The committee assesses the size and composi- tion of both Boards, evaluates the functioning of the individual members, makes proposals for appointments and reappoint- ments and supervises the Board of Management on the selection of senior management. When selecting candidates for appointment to the Supervisory Board, account is taken of the need for a balanced representation of knowledge of the markets in which the company operates, as well as the need for insight from different markets and non-operational 66 Corporate governance statement | Governance and compliance | AkzoNobel Report 2010 areas. The Remuneration Committee is responsible for draft- ing proposals to the Supervisory Board on the remuneration policy for the Board of Management, for overseeing the remu- neration of its individual members, the remaining members of the Executive Committee and for the remuneration schemes for AkzoNobel executives involving the company’s shares. The committee also prepares Supervisory Board proposals to the Annual General Meeting of shareholders concerning the remuneration of the members of the Supervisory Board. The Remuneration Committee is chaired by Mr. Burgmans. Baroness Bottomley and Messrs. Vuursteen, Burgmans and Ellwood are all members of both the Nomination Committee and the Remuneration Committee. Auditors The external auditor is appointed by the Annual General Meeting of shareholders on the proposal of the Supervisory Board. The appointment is for an indefinite period of time and is reviewed every four years by the Audit Committee. The same committee advises the Supervisory Board, which communicates the results of this assessment to the Annual General Meeting of shareholders. The Audit Committee and the Board of Management annually report their dealings with the external auditor to the Supervisory Board and discuss the auditor’s independence. The lead auditor in charge of the AkzoNobel account is changed every seven years. KPMG’s current lead partner, Mr. Weusten, has held this position since July 2007. The lead auditor is present at the Annual General Meeting of shareholders and may be questioned with regard to his statement on the fairness of the financial statements. The external auditor attends all meetings of the Audit Commit- tee, as well as the meeting of the Supervisory Board at which the financial statements are approved. He receives the finan- cial information underlying reports of the quarterly figures and is given the opportunity to respond to this information. Inside information and insider trading, Code of Conduct, Code of Financial Ethics and complaints procedure Members of the Board of Management, Executive Committee and Supervisory Board are subject to the AkzoNobel Code on Insider Trading, which limits their opportunities to trade in AkzoNobel – and in certain circumstances – other company shares. Transactions in AkzoNobel shares carried out by Board of Management or Supervisory Board members are notified to the Dutch Authority for Financial Markets in accordance with Dutch law and, if necessary, to other relevant authorities. The AkzoNobel Code on Insider Trading states that carrying out transactions in AkzoNobel securities – as well as securities other than AkzoNobel securities – is prohibited if the person concerned has inside information regarding such securities. Furthermore, the Compliance Officer may determine that Board of Management, Executive Committee and Superviso- ry Board members, and certain designated employees, may not carry out transactions in AkzoNobel securities, or other securities, both during and outside a closed period. Shares in the company and the options of Board of Management and the other Executive Committee members, as well as certain senior executives, may be held in an account administered by the “Stichting Executive Management Beheer”. This founda- tion acts as an independent portfolio manager for the relevant AkzoNobel participants. A comprehensive Code of Conduct, followed by officers and employees committed to individual and corporate integrity, is one of the critical foundations of good corporate governance. AkzoNobel’s Code of Conduct, which incorporates our busi- ness principles, sets out the company’s position. It guides all our employees in their daily work. We have established several procedures to arrange for company-wide dissemi- nation of the Code of Conduct and training. We have also established procedures and a Compliance Committee to monitor compliance with the code in general, and certain of its provisions in particular, and to provide for its enforcement. A complaints procedure enables employees to file complaints concerning practices that violate any internal or external rules or regulations. This so-called Speak Up! procedure ensures that employees have the opportunity to report alleged irregu- larities without jeopardizing their legal position. Relations with shareholders and other investors AkzoNobel has three classes of shares: common shares, cumulative preferred shares and priority shares. Common shares are traded on the Euronext Amsterdam stock exchange. Common shares are also traded over-the-counter on OTCQX (organized by Pink Sheets) in the US in the form of American Depositary Receipts. On December 31, 2010, a total of 233,530,454 common shares and 48 priority shares had been issued, amounting to 99.996 percent and 0.004 percent respectively of the total issued and outstanding capital. By December 31, 2010, AkzoNobel had been notified by Massachussetts Financial Services Company and Paulson & Co that their participation in the company’s share capital was more than 5 percent. The priority shares are held by the Foundation Akzo Nobel. The Foundation’s Board consists of members of AkzoNobel’s Supervisory Board who are not members of the Audit Committee. The Meeting of Holders of Priority Shares has the nomination rights for the appoint- ments of members of the Board of Management and of the Supervisory Board (see page 60) and the right to approve amendments to the Articles of Association of the company. No cumulative preferred shares have been issued to date. It has been communicated that the cumulative preferred shares merely have a financing function, which means that if neces- sary, they will be issued at or near to the prevailing quoted price for common shares. The Annual General Meeting of shareholders held on April 27, 2010, authorized the Board of Management for a period of 18 months after that date – subject to approval from the Supervisory Board – to issue shares in the capital of the company up to a maximum of 10 percent of the issued share capital, to restrict or exclude the pre-emption rights for existing shareholders for those shares, and to purchase shares of the company. At the same meeting, the Board of Management was given a mandate to acquire up to a maximum of 10 percent of the issued share capital of the company. General Meetings of shareholders are held at least once a year. The Annual General Meeting of shareholders is convened by public notice. The agenda, the notes to the agenda and the procedure for attendance – including the record date and the AkzoNobel Report 2010 | Governance and compliance | Corporate governance statement 67 procedure for granting a proxy to a third party – are published in advance and posted on our corporate website. Holding shares in the company on the record date determines the right to exercise voting rights and other rights relating to the Annual General Meeting of shareholders, notwithstanding the subsequent sale of shares thereafter. The notes to the agenda contain all relevant information with respect to the proposed resolutions. All resolutions are made on the basis of the “one share, one vote” principle. All resolutions are adopted by absolute majority, unless the law or the company’s Articles of Association stipulate otherwise. The Annual General Meeting of shareholders reviews the annual report and decides on adoption of the financial state- ments and the dividend proposal, as well as on the discharge of the members of the Supervisory Board and the Board of Management. Holders of common shares in aggregate representing at least 1 percent of the total issued capital may submit proposals for the Annual General Meeting agenda. These proposals must be sent in writing, or electronically, to the company’s head office in Amsterdam at least 60 calen- dar days in advance. Such requests shall be granted and shareholders will be provided with all relevant information, unless the Supervisory Board and the Board of Manage- ment are of the opinion that the request is not reasonable in the given circumstances. The minutes of the Annual General Meeting of shareholders (in Dutch) are made avail- able on our corporate website within three months of the meeting date. The Annual General Meeting of shareholders approves or adopts, as the case may be, among other matters: • The annual accounts • Dividends (not interim dividends) • The election of Board members • Material changes to the remuneration policy of the Board of Management • Other important matters such as major acquisitions or the sale of a substantial part of the company • The issue of new shares. The company attaches great value to shareholder relations. We use the Shareholders’ Communication Channel to distrib- ute the agenda of the Annual General Meeting, and to allow shareholders who hold their shares through an associated bank participation in the proxy voting at the said meeting. In line with relevant laws and regulations, we provide all share- holders and other parties in the financial markets with equal and simultaneous information about matters that could have a significant influence on the price of our listed securities, thereby taking into account possible exceptions permitted by those laws and regulations. This information can be found on our corporate website, to the extent required by law. We actively communicate our strategy and the developments of our businesses to the financial markets. Members of the Board of Management and business managers regularly attend analyst meetings in Europe and the US. The quarterly results, press conferences and the analysts’ conference calls – as well as the presentations at analyst meetings organized by the company – are all announced in advance and are avail- able as webcasts and accessible online. Presentations to (institutional) investors are held at regular intervals and, in prin- ciple, are announced on our corporate website or via press releases. Other meetings with analysts or investors are not normally announced in advance, nor can they be followed by webcast or any other means. Discussions at such meetings are always limited to information which is already in the public domain. This is in line with the requirement to ensure that all shareholders and other parties in the financial market have equal and simultaneous access to information that may influ- ence the share price. In this respect, the company complies with applicable laws and regulations. In principle, analyst meetings, presentations to (institutional) investors and direct meetings with investors are not held shortly before the publi- cation of our quarterly or annual results. AkzoNobel’s outline policy on general and bilateral contacts with shareholders can be found on our corporate website. Anti-takeover provisions and control According to provision IV.3.11 of the Code, the company is required to provide a survey of its actual or potential anti- takeover measures, and to indicate in what circumstances it is expected that they may be used. The priority shares may be considered to constitute a form of anti-takeover measure. In relation to the right of the Meeting of Holders of Prior- ity Shares to make binding nominations for appointments to the Board of Management and the Supervisory Board (see page 60), the Foundation Akzo Nobel has confirmed that it intends to make use of such rights in exceptional circum- stances only. These circumstances include situations where, in the opinion of the Board of the Foundation, the continuity of the company’s management and policies is at stake. This may be the case if a public bid for the common shares of the company has been announced, or has been made, or the justified expectation exists that such a bid will be made without any agreement having been reached in relation to such a bid with the company. The same shall apply if one shareholder, or more shareholders acting in a concerted way, hold a substantial percentage of the issued common shares of the company without making an offer. Or if, in the opinion of the Board of the Foundation Akzo Nobel, the exercise of the voting rights by one shareholder or more shareholders, acting in a concerted way, is materially in conflict with the interests of the company. In such cases, the Supervisory Board and the Board of Management, in accordance with their statutory responsibility, will evaluate all available options with a view to serving the best interests of the company, its shareholders and other stakeholders. In order to allow for sufficient time to conduct such an evaluation, the Board of the Foundation Akzo Nobel reserves the right to make use of its binding nomi- nation rights for the appointment of members of the Supervi- sory Board and of the Board of Management in such circum- stances. In the event of a hostile takeover bid, in general the Supervisory Board and the Board of Management reserve the right to use all powers available to them in the interests of the company and its affiliated enterprise, taking into consideration the relevant interests of the company’s stakeholders. 68 Corporate governance statement | Governance and compliance | AkzoNobel Report 2010 Remuneration report This report describes our remuneration policy and remuneration paid to individual members of the Board of Management in 2010, including amendments proposed for 2011. The remuneration policy and the individual service contracts of the members of the Board of Management are determined by the Supervisory Board within the framework of the remu- neration policy, as adopted by the Annual General Meeting of shareholders in 2005 and most recently amended in 2010. Our remuneration policy, including all structures and policies related to the remuneration and employment contracts of the Board of Management, is in line with the Dutch Corporate Governance Code. In valuing our incentive plans, we are assisted by independent external advisors. Remuneration policy Our remuneration policy has a clear objective, namely to provide remuneration in a form which will attract, retain and motivate the members of the Board of Management as top managers of a major international company, while protect- ing and promoting its objectives. Both the policy itself, and the checks and balances that are applied in its execution, are designed to avoid incidents where members of the Board of Management – and senior executives for whom similar incen- tive plans apply – act in their own interest, take risks that are not in line with our strategy and risk appetite, or where remu- neration levels cannot be justified in any given circumstance. To ensure that remuneration is linked to performance, a significant proportion of the remuneration package is variable and dependent on the short and long-term performance of the individual Board member and the company. It is our policy to maintain overall remuneration levels that are at the median level of the external benchmark of a peer group of companies which, as of January 1, 2009, consists of: In 2010, the value of fixed and variable cash components at target levels breaks down as follows: • Clariant • Heineken • Royal Philips • Randstad • Reed Elsevier • Rhodia • Royal Ahold • Royal DSM • Royal KPN • Solvay • Royal TNT • Wolters Kluwer CEO in % A Base salary 36 B Variable compensation 64 The Remuneration Committee of the Supervisory Board consults professional independent remuneration experts to ensure an appropriate comparison. Remuneration elements The total remuneration package of the members of the Board of Management consists of: Board members in % • Base salary • Performance-related short-term incentive • Performance-related shares • Pension provisions. A Base salary 43 B Variable compensation 57 B B A A Furthermore, all members of the Board of Management are entitled to other benefits – such as a company car and representation allowance – which are needed for carrying out their duties and which are in line with market norms. For communication purposes, the table on page 70 presents a summarizing overview of the remuneration of the current members of the Board of Management. Reference is made to note 23 of the Financial statements for more details. Base salary The objective of the base salary is to enable recruitment and retention of top managers of a major international company. The base salaries of members of the Board of Management increased by 0.75 percent in 2010. AkzoNobel Report 2010 | Governance and compliance | Remuneration report 69 Compensation overview members of the Board of Management 2008 – 2010 In € Year Hans Wijers Chief Executive Officer Leif Darner Board member Performance Coatings Rob Frohn Board member Specialty Chemicals Tex Gunning 3 Board member Decorative Paints Keith Nichols 4 Chief Financial Officer 2008 2009 2010 2008 2009 2010 2008 2009 2010 2008 2009 2010 2008 2009 2010 Base salary 760,000 760,000 765,700 570,000 570,000 574,300 570,000 570,000 574,300 Short-term incentive 1 700,000 464,000 1,284,200 340,000 339,300 513,000 340,000 339,300 513,000 Share awards 2 Option awards 2 485,900 678,400 981,900 325,500 481,500 724,500 325,500 481,500 724,500 161,500 99,200 25,100 105,900 65,100 16,500 105,900 65,100 16,500 Pension premium paid 565,600 458,400 722,500 291,400 208,600 272,200 156,200 146,000 206,900 Other emoluments 4,500 4,100 4,400 4,600 4,100 4,400 7,200 6,900 7,100 Other compensation – – – 169,300 147,800 147,400 – 47,500 – Total remuneration 2,677,500 2,464,100 3,783,800 1,806,700 1,816,400 2,252,300 1,504,800 1,656,300 2,042,300 – – – – – – – – 380,000 574,300 380,000 570,000 574,300 226,200 513,000 226,700 339,300 513,000 277,600 628,700 131,300 382,500 704,200 – – 25,000 18,200 4,800 88,900 277,200 57,600 124,700 204,400 2,700 4,400 45,200 112,700 162,200 – – 36,900 58,700 51,100 975,400 1,997,600 902,700 1,606,100 2,214,000 1 Actual short-term incentive disclosed relates to the performance in the financial year and the deferred payments over 2009 (50 percent for the CEO and 25 percent for the other members). 2 Costs are non-cash and relate to the expenses following IFRS 2. 3 As from May 1, 2009. 4 Other emoluments relate to employer’s contribution in the UK. The table summarizes the remuneration package of the members of the Board of Management of AkzoNobel. The elements of the remuneration package are addressed in more detail in the paragraphs on the following pages. Total remuneration package Fixed Variable Base salary Short-term incentive Long-term incentive Element Vehicle Cash Cash Performance measure Not applicable Pay-out at minimum performance Target pay-out as % of base salary Maximum pay-out as % of base salary 100% 100% 100% EVA: 35% EBITDA: 35% Personal: 30% 0% CEO: 100% Member: 65% CEO: 150% Member: 100% 70 Remuneration report | Governance and compliance | AkzoNobel Report 2010 Performance-related restricted shares Relative total shareholder return: 50% DJSI ranking: 50% 0% CEO: 75% Member: 69% CEO: 113% Member: 104% Short-term incentive (annual bonus) The objectives of the short-term incentive are to reward economic value creation (EVA) and EBITDA growth for our shareholders and other stakeholders, to measure individual and collective performance and to encourage progress in the achievement of long-term strategic objectives. As of 2009, the performance-related short-term incentive is linked to the EBITDA of the company, in addition to EVA and the individual and qualitative personal targets of the members of the Board of Management. More specifically, 35 percent of the short-term incentive opportunity is linked to EBITDA, 35 percent is linked to EVA and 30 percent remains linked to individual and qualitative personal targets, including non- financial targets. EVA and EBITDA are based on the finan- cials of the company in constant currencies. EVA is seen as a measure for creating long-term value. The variable remu- neration components of the remuneration policy (including the long-term incentives) will therefore continue to be predomi- nantly of a long-term nature. On the outcome of the three short-term incentive elements (EVA, EBITDA and personal targets), the Supervisory Board applies an overall rating based on the principles of the Perfor- mance and Development Dialog, AkzoNobel’s appraisal system. For the Board of Management, the rating includes a reasonableness test, in which the Supervisory Board criti- cally assesses the actual ambition level of the performance targets in light of the assumptions made at the beginning of the year. It also includes an assessment of the progress made in achieving long-term strategic objectives. This method for short-term incentive determination is also the basis of the compensation framework for executives in the company. The EVA performance measure is used in order to encour- age the Board of Management to create long-term value for the company’s shareholders and other stakeholders. EVA is calculated by deducting from net operating profit after taxes (NOPAT) a capital charge representing the cost of capital calculated on the basis of an average return investors expect. Please refer to the Report of the Board of Management chapter in the Strategy section for the actual 2010 EVA and EBITDA performance used in the short-term incentive. The EVA of the sum of the business units is used as the basis for calculating the EVA element of the short-term incentive for the Board of Management. The EVA and EBITDA elements of the short-term incentive have a performance threshold level of 80 percent and a maximum performance level of 120 percent of the targeted EVA and EBITDA respectively. The target EVA and EBITDA are determined annually by the Supervisory Board. The pay-out of the short-term incentive will never exceed 100 percent of base salary for members of the Board of Management and 150 percent of base salary for the CEO (see page 70). Quali- tative individual and collective targets are set in the context of the medium-term objectives of the company and qualify as commercially sensitive information. AkzoNobel will not disclose all the targets. However, the targets for 2010 includ- ed goals set with respect to operational and functional excel- lence, delivering on the strategic plans, talent development and delivering on the ICI synergies. The Supervisory Board assesses the progress made in achiev- ing long-term strategic objectives and the actual ambition level of the performance targets in light of the assumptions made at the beginning of the year. The Supervisory Board ensures that targets are realistic and sufficiently stretching. In accordance with the requirements of the Dutch Corporate Governance Code, the Remuneration Committee, before setting the targets to be proposed for approval by the Supervisory Board, carried out a scenario analysis of the possible financial outcome of meeting target levels, as well as maximum performance levels. In late 2009, the Board of Management and the Superviso- ry Board considered the company’s 2009 results in light of the economic climate and the need to find the right balance between short and long-term incentives. As a result, they decided to strengthen the link between the remuneration of the Board of Management and the medium and long-term targets of the company by deferring receipt of 50 percent of the short-term incentive for 2009 in the case of Mr. Wijers, CEO, and 25 percent of the short-term incentive for 2009 in the case of the other members of the Board of Manage- ment. Receipt of this deferred payment was made subject to the company achieving its medium-term target of an EBITDA margin of 14 percent. The company achieved this EBITDA margin target ahead of planning in mid-2010. This was shared with the financial markets and a new growth strategy was announced which focuses more on an absolute EBITDA increase than an EBITDA margin percentage. As a result, the Supervisory Board decided that this justifies the pay-out of the deferred short-term incentive for 2009 in February 2011. Long-term incentives The objectives of our long-term incentive plan are to encour- age long-term sustainable economic and shareholder value creation – both absolute and relative to our competitors – to align the interests of the Board of Management with those of shareholders and to ensure retention of the members of the Board of Management. The long-term incentive plan consists of performance-relat- ed shares. The stock option plan was discontinued as of January 1, 2008. Performance-related shares are considered to provide a stronger alignment with shareholders’ interests. Stock option plan Stock options were conditionally granted for the last time in 2007 and vested for the last time in 2010. The actual number of options which the Board of Management received depend- ed on the company’s performance during a three-year vesting period. The total option term is seven years. The performance measure used to determine the number of options that vest was the average of the results of the comparison between planned and realized EVA on Invested Capital (EOI), or economic value created in relation to invest- ed capital during the period of three consecutive years. This measure was used to encourage EVA performance over a longer period of time. The exercise price of the stock options is the NYSE Euronext Amsterdam opening price on the first day after the Annual General Meeting of shareholders that the AkzoNobel share is quoted ex-dividend in the year in which the options were conditionally granted. Based on the EOI performance over the period 2007 to 2009, 100 percent of the stock options (conditionally) granted to the members of the Board of Management in 2007 became unconditional: (19,800 to the CEO and 13,000 to the other Board members, except for Mr. Nichols, who was appointed to the Board of Management on May 1, 2008, and received 3,750 stock options in respect of the conditional grant in 2007). Mr. Gunning did not receive stock options as he became an employee of the company after January 1, 2008. Performance share plan Under the performance share plan, shares are condition- ally granted to the members of the Board of Management. AkzoNobel Report 2010 | Governance and compliance | Remuneration report 71 Vesting of these shares is conditional on the achievement of certain performance targets during a three-year period and a continuation of the contract of employment. Achievement of the performance targets is determined by the Supervisory Board in the first quarter of the year following the three-year period. The number of vested shares is increased by the divi- dend paid over the three-year performance period. Because sustainability is considered key to our long-term future, 50 percent of the conditional grant of shares is linked to the average ranking of the company in the relevant Dow Jones Sustainability Index (DJSI) during the three-year perfor- mance period. In respect of the conditional grant in 2009, the vesting schedule has been determined by the Supervisory Board as follows: Average position in DJSI during performance period % Number of vested shares (DJSI part) 1 2 3 4 – 6 7 – 10 11 – 15 Below 15 150% (= 75% of total conditional grant) 125% (= 62.5% of total conditional grant) 100% (= 50% of total conditional grant) 75% (= 37.5% of total conditional grant) 50% (= 25% of total conditional grant) 25% (= 12.5% of total conditional grant) 10 – 13 0% 1 2 3 4 5 6 7 8 9 The relative TSR performance is compared with the following peer group: • Arkema group • DuPont • Kansai Paint • Nippon Paint • Rhodia • Kemira OYJ • PPG Industries • RPM Industrial • Sherwin-Williams • Valspar Corporation The following vesting scheme applies as of 2009 for the conditional grants: As from 2007 2009 onwards Rank Vesting (as % of conditional grant) Rank Vesting (as % of half of conditional grant) 1 2 3 4 5 6 7 8 – 11 150% 135% 120% 100% 75% 50% 25% 0% 150% 135% 120% 100% 85% 70% 55% 40% 25% 0% It is noted that a takeover would not influence the ranking of the company on the DJSI and therefore dilutes any share- based remuneration to be received by the Board members as a result of a takeover. AkzoNobel ranked second in the relevant DJSI in 2010. The remaining 50 percent of the conditional grant of shares is linked to AkzoNobel’s Total Shareholder Return (TSR) compared with the performance of the companies in our peer group. Independent external specialists will conduct an analy- sis to calculate the number of shares that will vest according to the TSR ranking. The determination of the final ranking (and thus the vesting of shares) will be reviewed by the compa- ny’s auditors at the end of the performance period. In order to adjust for changes in exchange rates, all local currencies are converted into euros. The retention period for the shares expires five years after the conditional grant. AkzoNobel’s TSR performance over the period 2008 through 2010 resulted in an 11th position within the ranking of the peer group companies. Consequently, the final vesting percentage of the 2008 grant equaled zero percent, resulting in no defini- tive grant of shares. The number of performance-related shares conditionally granted in 2010 amounted to 24,400 for the CEO and 18,300 for the other members of the Board of Management. In accordance with provision II.2.13d) of the Dutch Corpo- rate Governance Code, the schedule on page 74 sets out for 2005 onwards (i) the number of at target shares conditionally granted; (ii) the number of shares which have vested; (iii) the number of shares held by members of the Board of Manage- ment at the end of the lock up period; (iv) the face value at the conditional share grant, at vesting and at the end of the lock up period respectively. 72 Remuneration report | Governance and compliance | AkzoNobel Report 2010 In accordance with the company’s Articles of Association, the Dutch Corporate Governance Code and the rules of the performance share plan, the number of shares to be condi- tionally granted to members of the Board of Management is determined by the Supervisory Board using the face value method. The number of shares is set within the limits of the remuneration policy as adopted by the shareholders. The face value method means that the number of conditionally granted shares is set by dividing the policy level of shares by the share price at the beginning of the year of the conditional grant. The Supervisory Board has decided that where, in the event of a takeover, the pay-out under the performance share plan is between 100 percent and 150 percent, the Supervisory Board will, taking into account the performance of the company prior to the takeover bid, at its discretion decide whether the projected outcome is fair and may decide to adjust the pay upwards or downwards within the bandwidth mentioned. This undertaking does not affect the discretion the Supervisory Board has to correct the variable remuneration of the Board of Management upwards or downwards as provided in provision II.2.10 of the Dutch Corporate Governance Code. The 2010 Annual General Meeting of shareholders approved a claw back provision in the remuneration policy for the Board of Management. This provision provides the Supervisory Board with the option to claw back variable pay components paid to members of the Board of Management in the event that such variable pay components were based on financial information which is shown within a certain period of time to be materially incorrect. During the course of 2010, the Remuneration Committee reflected further on current policy and the balance between short and long-term compensation and the company’s targets. As a result, the Supervisory Board will propose to the Annual General Meeting of shareholders for 2011 to amend the remuneration policy. As of 2011, the CEO of the company will be required to build up, over a five-year period from the date of appointment, and then hold, at least three times his or her gross base salary in AkzoNobel shares for the duration of his or her tenure as CEO. The other members of the Board of Management will be required to build up, over a five-year period from the date of appointment, and then hold, at least one time their gross base salary in AkzoNobel shares for the duration of their tenure. The CEO and other Board members are expected, for these purposes, to use both their long-term incentive and their short-term incentive in the manner set out below. The proposed amendment to the remuneration policy entails introducing a requirement that Board members who have not yet achieved this minimum holding requirement invest one third of the short-term incentive they receive (net after tax and other deductions) in AkzoNobel shares. As further encour- agement to build up the minimum holding requirement, Board members who invest a second third of their short-term incen- tive in shares will have such shares matched by the company, one on one, after three years from the date of purchase of the shares (up to a maximum of one third of the short-term incentive), on condition that the Board member showed a sustained performance during the three-year period. The Supervisory Board will use its discretion to decide whether this condition has been met. Board members who continue to invest their short-term incentives in whole, or in part, in shares after the minimum holding requirement has been reached will have the opportu- nity to have such shares matched subject to the same condi- tions, except that such shares will be matched with one share to every two shares thus acquired up to a maximum of two thirds of the short-term incentive. The Supervisory Board will propose a further amendment to the remuneration policy at the Annual General Meeting of shareholders for 2011. As a further improvement to the way in which the sustainability performance of the company is measured for the purposes of the performance share plan, the proposal is to use the percentile score of the company in the SAM ranking instead of the ranking in the Dow Jones Sustainability Index. This change will increase the transpar- ency and robustness of the system applied. Pensions The pension plan for all members of the Board of Manage- ment is based on an income and age-related defined contri- bution plan. The available premium is invested with a pension fund. The pension payment at pension age depends on the premiums received and the investment results during the period. The premium percentages to be paid for the Board member concerned are fixed by the Supervisory Board. The premiums are paid over the base salary in the current year and the short-term incentive of the previous year. The premiums will therefore vary depending on the performance during the previous year. External reference data can be used in deter- mining market competitive levels of pension arrangements. If applicable, pension rights built up in the period preceding Board membership can be taken into account to limit the premiums to be paid to the relevant Board member. In addi- tion, members of the Board of Management pay a personal contribution. Employment agreements Employment agreements for members of the Board of Management appointed in 2004 and subsequent years are concluded for a period of four years in accordance with the Dutch Corporate Governance Code. After this initial term, reappointments may take place for consecutive periods of four years each or, if applicable, up until their date of retire- ment if less than four years from their reappointment. The notice period by the Board member is subject to a term of three months; notice by the company shall be subject to a six-month term. If reappointment does not take place and the employment agreement between the Board member concerned and Akzo Nobel N.V. is not continued, the Board member will be entitled to a severance payment, established in accordance with the Dutch Corporate Governance Code. The employ- ment agreement for Mr. Wijers, who was appointed before 2004, has not been adjusted in this respect (see page 65). However, the Supervisory Board has the intention to take the provisions of the Code as guidance for establishing severance payment if that were to occur. Members of the Board of Management normally retire in the year that they reach the age of 62. The employment contracts allow the Supervisory Board to request a Board member to resign between the age of 60 and the regular retirement age for effective succession planning within the Board. In such an exceptional situation, the Board member concerned will be entitled to fixed salary payments until the date of retirement. Loans The company does not grant any personal loans to its Board members. AkzoNobel Report 2010 | Governance and compliance | Remuneration report 73 Valuation 1 shares Board of Management Unconditional shares, vested Series 2005 – 2007 Series 2006 – 2008 Conditional share grant Number of vested shares End of lock up period (2010) Conditional share grant Number of vested shares End of lock up period (2011) Number of shares Number Value at grant Number Value at vesting Hans Wijers Leif Darner Rob Frohn Keith Nichols 33,000 22,000 22,000 – 1,035,540 690,360 690,360 – 35,898 23,932 23,932 – 1,966,851 1,311,234 1,311,234 – Number 26,548 20,342 11,794 – Value Number Value at grant Number Value at vesting 1,231,827 943,869 547,242 – 23,000 15,100 15,100 4,198 900,450 591,165 591,165 164,352 17,536 11,531 11,531 3,055 516,260 339,473 339,473 89,939 Number 8,656 7,470 11,531 1,943 Value 402,417 347,280 536,076 90,330 Series 2007 – 2009 Series 2008 – 2010 Conditional share grant Number of vested shares End of lock up period (2012) Conditional share grant Number of vested shares Number of shares Number Value at grant Number Value at vesting Hans Wijers Leif Darner Rob Frohn Keith Nichols Tex Gunning 23,000 15,100 15,100 4,250 – 1,062,140 697,318 697,318 196,265 – 34,680 22,768 22,768 6,408 – 1,609,152 1,056,435 1,056,435 297,331 – Number 17,090 14,689 11,220 3,626 – Value NA NA NA NA – Number Value at grant Number 16,800 11,600 11,600 8,733 3,867 920,472 635,564 635,564 478,481 211,873 – – – – – Conditional shares, not vested Series 2009 – 2011 Conditional share grant at target Series 2010 – 2012 Conditional share grant at target Number of shares Number Value at grant Number of shares Number Value at grant Hans Wijers Leif Darner Rob Frohn Keith Nichols Tex Gunning 36,600 27,400 27,400 27,400 27,400 1,077,504 806,656 806,656 806,656 806,656 Hans Wijers Leif Darner Rob Frohn Keith Nichols Tex Gunning 24,400 18,300 18,300 18,300 18,300 1,132,160 849,120 849,120 849,120 849,120 Overview performance-related stock options Board of Management 2006 – 2013 2007 – 2014 Conditional stock option grant Fair value at grant Number of vested stock options Intrinsic value at vesting 2 Conditional stock option grant Fair value at grant Number of vested stock options Intrinsic value at vesting 2 19,800 13,000 13,000 3,000 195,200 128,200 128,200 29,600 19,800 13,000 13,000 3,000 – – – – 19,800 13,000 13,000 3,750 235,224 154,440 154,440 44,550 19,800 13,000 13,000 3,750 – – – – Number of shares Hans Wijers Leif Darner Rob Frohn Keith Nichols 1 Values based on the share price on January 1 of the relevant financial year (face value). 2 Share price at moment of vesting minus exercise price. 74 Remuneration report | Governance and compliance | AkzoNobel Report 2010 Risk management Doing business inherently involves taking risks, and by taking measured risks we strive to be a sustainable company. Risk management is a key strategic process and an essential element of our corporate governance. A k z oNobel Policy onitoring, evelop m e nt and supp ort d M AkzoNobel risk management framework e c n a r u s s A R eporting A c c o u n t a P r o c e s s e g a u g n a b ilitie s L We foster a high awareness of business risks and internal control, geared to safeguarding our risk appetite and providing transparency in our operations. The Board of Management (as of January 1, 2011, supported by the other members of the Executive Committee, see Stategy section) is responsible for managing the risks associated with our activities and, hence, for the establishment and adequate functioning of appropriate risk management and control systems (see Statement of the Board of Management in the Stategy section). AkzoNobel risk management framework Through our risk management framework, shown on this page, we want to provide reasonable assurance that our business objectives can be achieved and our obligations to customers, shareholders, employees and society can be met. Our risk management framework is in line with the Enterprise Risk Management – Integrated Framework of COSO and the Dutch Corporate Governance Code. The Board of Manage- ment reviews our risk management and control systems and our major business risks, which are also discussed by the Supervisory Board. Risk appetite Clarity on risk appetite and boundaries that determine the freedom of action or choice in terms of risk taking and risk acceptance is provided to all managers. Risk boundaries are set by our strategy, our Company Statement, business princi- ples, Code of Conduct, company values, authority schedules, policies and corporate directives. Our risk appetite differs by objective area and type of risk: • Strategic: In the pursuit of our strategic ambitions we are prepared to take considerable risk related to growth and innovation. Returns on investment in the development of innovative products and solutions are never certain. Yet, considerable amounts and efforts are spent on research, development and innovation, also in less certain economic circumstances. Candidates for acquisitions are carefully selected and investigated while making sure that the price to be paid is reasonable and affordable. AkzoNobel Report 2010 | Governance and compliance | Risk management 75 • Operational: With respect to operational risks, we contin- uously strive to minimize these risks. Our risk appetite is very limited, governed by our ambition to strive for top quartile safety performance, top quartile performance in diversity, employee engagement and talent development, top quartile eco-efficiency rates and a top three position in the relevant Dow Jones Sustainability Index. was performed by the Board of Management, business unit Managing Directors and Corporate Directors, in association with the risk management function. Besides the focus on coverage of our organization, emphasis is put on organization- al changes, key strategic projects and high growth regions. In 2010, process improvements were made with respect to use of risk knowledge for trend detection and reporting. • Financial: With respect to financial risks we have a prudent financing strategy and a strict cash management policy and are committed to maintaining strong investment grade credit ratings. Our financial risk management and risk appetite for several financial risks are explained in more detail in note 24 in the Financial statements. • Compliance: AkzoNobel has a “zero tolerance” policy in relation to breaches of our Code of Conduct. Risk management in 2010 The Enterprise Risk Management process provides top-down coverage of the organization and ensures that we focus on what we consider to be the areas of major risk exposure. Therefore, scoping of our 2010 risk management activities During 2010, we held more than 120 facilitated Enter- prise Risk Management workshops. More than 5,000 risk scenarios were identified and prioritized by the responsible managers, their management teams and functional experts. In addition, in selected areas with low risk tolerance, dedi- cated risk assessments were performed to safeguard our risk appetite. All major risks were responded to by the unit that identified them. The outcome of all risk assessments was reported to the next higher management level as part of our Business Planning & Review cycle. Risk profiles and trends were shared by managers across the company. In the bottom-up consolidation process, approximately 20 percent of the risks were taken to the next management level, where they were re-assessed, either because of the materiality of the risk exposure and/or because of the accumulated effect. The major risk factors for our company, identified through risk consolidation and the subsequent risk assessment by the Board of Management, are presented in the following para- graph. As a result of market conditions, the risk related to sourcing of raw materials increased in 2010. Furthermore, in view of our accelerated growth ambitions and competitive conditions in the relevant labor markets, attraction and reten- tion of talent has become a top five risk. Major risk factors Under the explicit understanding that this is not an exhaus- tive enumeration, the major risk factors that may prevent full achievement of our objectives are listed in detail from the next page onwards. There may be current risks that the company has not fully assessed, or that are currently identified as not having a significant impact on the business, but which could at a later stage develop a material impact on our business. The company’s risk management systems endeavor the timely discovery of such incidents. An overview of our major risk factors is provided below, where the five risks that we do currently assess as the most signifi- cant for the forthcoming five years are indicated. Major risk factors assessed by AkzoNobel (top five risks indicated) Strategic Operational Financial Compliance Internal • Implementation of strategic agenda • Identification of major transforming technologies Internal • Attraction and retention of talent • Management of change • Production process risks External • Adapting to economic conditions • International operations • Ensuring stakeholder support External • Sourcing of raw materials • Energy pricing and emission trading rights • Product liability • Environmental liabilities External • Access to funding • Contribution to pension funds • Decline of asset values • Fluctuations in exchange rates External • Complying with laws and regulations All of the risks listed above are explained in more detail in the following pages. 76 Risk management | Governance and compliance | AkzoNobel Report 2010 Internal risks Strategic Strategic Operational Top five risk Implementation of strategic agenda Identification of major transforming technologies Attraction and retention of talent A failure to properly and fully implement our strategic agenda could adversely affect our company and its businesses. We may not be able to identify major transforming technologies in a timely manner, which could lead to loss of our leadership positions. Our ambitious growth plans may not be achieved if we fail to attract and retain the right people. Risk corrective actions The appropriateness of our strategic agenda, our performance against this agenda and our governance structure is continuously monitored by the Executive Committee and the Supervisory Board. Specific attention is paid to areas such as macro-economic developments, general and financial market developments, competitive situation, performance improvement potential, sustainability, geographical spread, emerging markets, political risks, acquisition and divestment opportunities. Risks are minimized as we operate in attractive industries, have global leading positions and have strong executive leadership in place. As per January 2011, we strengthened our decision-making process and implementation monitoring by implementing an Executive Committee structure which allows us to better manage the strategic agenda. Remuneration systems are tied to performance against key strategic agenda items. For example, our long- term executive remuneration is partly linked to the relevant Dow Jones Sustainability Index (see Remuneration report chapter in this section). Risk corrective actions The risk of missing relevant technology developments is mitigated in three ways. Firstly, we adequately support research and development with a spend level at 2.3 percent of revenue, with more than 45 percent spent on major projects and technology developments. Secondly, our key projects have detailed technology roadmaps which assess the most appropriate routes. Thirdly, we are actively developing our open (external) innovation capability to identify and utilize the most promising external technologies. Risk corrective actions Growing our business calls for the need to grow our people. Therefore, AkzoNobel – in the context of the company’s Talent Factory initiative – puts emphasis on attracting, retaining, motivating and educating staff. These efforts are supported by a strong Human Resources function and HR instruments such as performance appraisals, the employee survey and leadership identification and review, as well as leadership development, to optimize support to our business. We provide clarity in the working environment through information and communication programs. Special focus is dedicated to high growth markets. Remuneration packages may include long and short-term incentives. However, the Excecutive Committee ensures that employees are not incited to act in their own interest and take risks that are not in keeping with the company’s strategy and risk appetite. Operational Operational Management of change Production process risks If our management of change is not adequate, this could have a negative impact on productivity and customer focus. Risks in production processes can adversely affect our results of operations. Risk corrective actions We undertake various restructuring and investment projects that require significant change management and project management expertise. Risk management is an integral part of project management excellence. Senior management is involved in the management of critical projects that are prioritized and supervised by the Executive Committee to ensure an aligned and integrated vision and thrust from the top for the company’s change agenda. To drive human resources/organizational development and supply chain/sourcing operational excellence, two dedicated members were appointed on the newly established Executive Committee. Risk corrective actions We mitigate production risks by spreading out production and operating an adequate inventory policy. This is combined with business continuity planning and appropriate risk transfer arrangements (for example insurances). To achieve our sustainability ambitions, during 2010 we carried out a comprehensive global operational eco-efficiency review at 75 sites. This represented more than 80 percent of the AkzoNobel ecological footprint and focused on four crucial areas: waste management, water consumption, volatile organic compounds (VOCs) and energy. We also raised our safety ambitions in 2010 and want to achieve top quartile safety performance. To achieve this target, we have increased management attention on safety, implemented enhanced process safety, asset integrity and occupational health standards and improved the Health, Safety, Environment & Security audit process. AkzoNobel Report 2010 | Governance and compliance | Risk management 77 External risks Strategic Top five risk Strategic Top five risk Strategic Adapting to economic conditions Failure to adapt adequately and in time to economic conditions can have a harmful impact on our business and results of operations. Risk corrective actions One of the principal uncertainties facing our company is the development of the global economy. Economic recovery remains fragile and it continues to be difficult to predict customer demand. Construction and housing markets might remain soft in mature markets, while in high growth markets there is potential for bubble formation. On the positive side, we have seen evidence of sustained industrial demand beyond re-stocking in 2010. For planning and budgeting we apply various scenarios to be best prepared for further changes in economic conditions. We have a strong balance sheet to fund growth. To help drive our growth agenda, we are focusing on EVA and cash, delivering further operating working capital improvement, disciplined capital allocation for organic growth, selective acquisitions, building capabilities and processes to support our “leading” ambition and a prudent financing policy in still challenging capital markets. International operations Because AkzoNobel conducts international operations, we are exposed to a variety of risks, many of them beyond our control, which could adversely affect our business. Risk corrective actions We spread our activities geographically and serve many sectors to benefit from opportunities and reduce the risk of instability. Our aspirations to fuel growth in high growth markets – double revenue in China, create a significant footprint in India, outgrow competition in Brazil and expand in the Middle East and sub-Saharan Africa – will further expose us to this risk. Unfavorable political, social or economic developments and developments in laws, regulations and standards could adversely affect our businesses and results of operations. Political, economic and legislative conditions are carefully monitored. The Executive Committee decides on all significant investments and the countries and industry segments in which AkzoNobel conducts its business. Ensuring stakeholder support Failure to maintain the support of our stakeholders for our strategy and its execution could adversely affect our company and its businesses. Risk corrective actions We endeavor to define and implement a clear strategy and continuously seek dialog with stakeholders. As an organization we are committed to helping our customers make their business a success, enhancing relationships with our suppliers, providing competitive returns to our investors by paying a stable to rising dividend, creating an attractive working environment for our people and conducting all our activities in the most socially responsible manner. Operational Top five risk Operational Operational Sourcing of raw materials Inability to access sufficient raw materials, growth in cost and expenses for raw materials, energy and changes in product mix may adversely influence the future results and growth of our company. Risk corrective actions We may be impacted by business interruption or product discontinuation at some of our key suppliers. We aim to use our purchasing power and long-term relationships with suppliers to acquire raw materials and safeguard their constant delivery in a sustainable manner, to secure volumes and to cooperate on innovation and sustainability. We have inventoried single and sole sourced raw materials and are actively pursuing plans to improve this situation. We have diversified contract length and supplier base. Our strengthened global sourcing strategy enables us to bundle the purchasing power both in product related and non-product related requirements. We continuously monitor the markets in which we operate for developments and opportunities and adapt our purchasing strategy accordingly. Energy pricing and emission trading rights Differences in energy prices pose a risk to the competitiveness of several of our chemical businesses. Risk corrective actions We operate some energy intensive businesses. A non-level playing field for energy and emission trading rights can affect the competitive position of these businesses. We are pro-actively managing energy usage and costs. We operate several cogeneration units which enable us to make efficient use of combined heat and power. We are implementing our carbon policy, working on energy efficiency programs and investing in energy from waste and biomass. Carbon management plans are closely monitored and strategically managed. We have policies for energy contracts and have long-term purchase contracts in place (see note 24 in the Financial statements). Product liability Product liability claims could adversely affect our company’s business and results of operations. Risk corrective actions Currently, we are involved in a number of product liability cases. However, we believe that any unexpected costs and liabilities will not have a material adverse effect on our consolidated financial position. We have a central policy to optimize insurance coverage. 78 Risk management | Governance and compliance | AkzoNobel Report 2010 External risks Operational Financial Top five risk Financial Environmental liabilities Access to funding We continue to be exposed to the risk of environmental liabilities from past and current businesses. Risk corrective actions We use, and have used in the past, hazardous materials and biological compounds in several product development programs and manufacturing processes, including waste thereof. We have been, and can be, exposed to risks of accidental contamination or past practices that give rise to current liabilities. We could be exposed to events of non-compliance with environmental laws, regulatory enforcement, property damage and possible personal injury and damage claims resulting therefrom. Regulations and standards are becoming increasingly stringent. We are committed to conducting all our activities in the safest and most responsible manner. Contingency plans and assignment arrangements are in place to mitigate known risks and regular reviews are conducted to monitor progress and assess financial and reputational exposure. Our policy is to accrue and charge against earnings environmental clean-up costs, damages or indemnifications when it is probable that a liability has materialized and an amount can be estimated (see also note 21 in the Financial statements). Inability to have access, control and visibility of liquidity by AkzoNobel and/or its partners in the value chain may limit our growth rate and have an adverse affect on our business and results. Risk corrective actions Our balance sheet and debt profile are strong. We are monitoring financial markets, critical suppliers and customers closely. We have a prudent financing strategy and a strict cash management policy, which are managed by our centralized treasury function (see note 24 in the Financial statements). We are committed to maintaining strong investment grade credit ratings. Ratings at year-end were Standard & Poor’s BBB+ (stable outlook) and Moody’s Baa1 (stable outlook). Contributions to pension funds Various external developments may affect assets and liabilities of pension funds, causing higher post-retirement charges and pension premiums payable. Risk corrective actions We practice pro-active pension risk management. Our pension policy is to offer defined contribution schemes to new employees and, where appropriate, to existing employees. Our biggest defined benefit schemes have been closed to new entrants since 2001 for ICI, and 2004 for AkzoNobel. We measure and monitor our pension risks frequently and adopt investment strategies designed to reduce financial risks. In 2010, cash pension top-ups were around €375 million and a similar amount is expected for 2011. We are committed to further de-risking over time. Pension activities are overseen by the Board Committee Pensions (see note 17 in the Financial statements). Financial Financial Compliance Decline of asset values Impairments and book losses could adversely affect our financial results. Fluctuations in exchange rates Complying with laws and regulations Risk corrective actions In view of the current financial market conditions, asset value decline offers both opportunities and threats to our company. We are actively participating in industry consolidation. As such we may perform selective acquisitions and may hold assets for sale. Acquisition and divestment opportunities and the management of assets held for sale are continuously monitored by the Executive Committee. We do impairment tests for intangibles with indefinite lives (goodwill, some brands) every year and whenever an impairment trigger exists. For tangibles and other fixed assets, we do impairment tests whenever an impairment trigger exists (see note 1 in the Financial statements). Exchange rate fluctuations can have a harmful impact on our financial results. We may be held responsible for any liabilities arising out of non-compliance with laws and regulations. Risk corrective actions We have operations in more than 80 countries and report in euros. We are particularly sensitive to the relation between the euro and US dollar, pound sterling, Swedish krona and Latin American and Asian currencies. We have centralized treasury and a hedging policy is in place for certain currency exchange rate risks (see note 24 in the Financial statements). At a more operational level, risks are reduced by the prevalence of local-for-local production, which is the norm in many of our businesses. Risk corrective actions We are monitoring and adapting to significant and rapid changes in the legal systems, regulatory controls and customs and practices in the countries in which we operate. These affect a wide range of areas. For instance, with respect to antitrust laws, we are defending civil damage claims in relation to alleged antitrust violations in the European Union and the US (see note 21 in the Financial statements). We are dedicated to minimizing such risks with special emphasis on the application of our Code of Conduct. We operate under a comprehensive competition law compliance program including training, monitoring and assessment. We advertise the use of our company- wide corporate complaints procedure called Speak Up!, which enables all our employees to report irregularities in relation to our Code of Conduct. AkzoNobel Report 2010 | Governance and compliance | Risk management 79 AkzoNobel on the capital market • Proposed dividend of €1.40 per share, a 4 percent increase • Net income per share €3.23, up 163 percent • Two Capital Market Days were held during 2010 Close dialog with the capital markets We attach great value to maintaining an open dialog with the financial community in order to promote transparency. Management gave presentations at a number of industry conferences, as well as during meetings with investors and analysts. In 2010, we organized two Capital Market Days. In September we presented the Value and Values medium- term growth ambitions for AkzoNobel, followed by the Perfor- mance Coatings Teach-in in November. In the Netherlands, AkzoNobel uses the Shareholders’ Communication Channel to distribute the agenda of the Annual General Meeting of shareholders and to allow share- holders who hold their shares through an associated bank to participate in proxy voting at the AGM. Dividend policy AkzoNobel’s dividend policy changed in 2010. Subject to shareholder approval, we want to pay a stable to rising dividend each year, following our expected growth in cash generation. Proposed dividend of €1.40 per share The Board of Management proposes a dividend of €1.40 per common share. AkzoNobel’s shares will be trading ex-dividend as of April 29, 2011. In compliance with the listing require- ments of Euronext Amsterdam, the record date will be May 3, 2011. The dividend as proposed to the 2011 Annual General Meeting of shareholders will be payable as of May 10, 2011. The dividend paid over the last five years is shown in the graph below. Dividend paid in € per share Interim dividend Final dividend 1.40 1.40 1.05 1.08 0.40 2007 0.40 2008 0.30 2009 0.32 2010 0.90 0.30 2006 Share price performance Our share price increased 0.2 percent in 2010, underperform- ing both the DJ Stoxx Chemicals and AEX indices. The share price performance relative to these indices for a one-year and a five-year period is shown in the graphs on the opposite page. Analyst recommendations At year-end 2010, AkzoNobel was covered by 31 equity brokers and the following analyst recommendations were applicable: Analyst recommendations in % A Buy B Hold C Sell 55 26 19 C B A Listings listed on the stock AkzoNobel’s common shares are exchange of Euronext Amsterdam. AkzoNobel is included in the AEX Index, which consists of the top 25 listed companies in the Netherlands, ranked on the basis of their turnover in the stock market and free float. The AkzoNobel weight in the AEX index was 3.7 percent at year-end 2010. In 2010, 311 million AkzoNobel shares were traded on Euronext Amster- dam (2009: 312 million). In 2007, the company decided to delist from the NASDAQ stock exchange and deregister from the SEC. AkzoNobel has a sponsored level 1 ADR program and ADRs can be traded on the international OTCQX platform in the US. See the table below for stock codes and ticker symbols: Euronext ticker symbol AKZA ISIN common share OTC ticker symbol ISIN ADR NL0000009132 AKZOY US0101993055 80 AkzoNobel on the capital market | Governance and compliance | AkzoNobel Report 2010 Share price performance 2010 AkzoNobel share price in € Key share data AkzoNobel AEX index DJ Stoxx Chemicals index 60 55 50 45 40 35 9 0 c e D 1 3 0 1 n a J 0 1 b e F 0 1 r a M 0 1 r p A 0 1 y a M 0 1 n u J 0 1 l u J 0 1 g u A 0 1 t p e S 0 1 t c O 0 1 v o N Year-end (share price in €) Year-high (share price in €) Year-low (share price in €) Year-average (share price in €) Average daily trade (in € millions) Average daily trade (in millions of shares) Number of shares outstanding at year-end (in millions) Market capitalization at year-end (in € billions) Net income per share (in €) Dividend per share (in €) Dividend yield (in %) Price-earnings ratio (P/E ratio) 0 1 c e D 1 3 1 The 2008 net income per share includes the non-cash impairment of ICI intangibles of €1.2 billion after tax and incidental charges of €0.6 billion. 2008 2009 2010 29.44 57.11 22.85 42.57 94.0 2.2 231.7 6.8 (4.38) 1 1.80 4.2 (6.7) 1 46.40 46.52 26.01 35.92 43.4 1.2 232.2 10.8 1.23 1.35 3.8 37.7 Share price performance 2006 – 2010 AkzoNobel share price in € AkzoNobel AEX index DJ Stoxx Chemicals index 65 55 45 35 25 15 5 0 c e D 1 3 6 0 n u J 0 3 6 0 c e D 1 3 7 0 n u J 0 3 7 0 c e D 1 3 8 0 n u J 0 3 8 0 c e D 1 3 9 0 n u J 0 3 9 0 c e D 1 3 0 1 n u J 0 3 0 1 c e D 1 3 Distribution of shares 2009 at year-end in % Distribution of shares 2010 at year-end in % A North America B UK/Ireland C The Netherlands D Rest of Europe E Rest of world F Undisclosed 44.6 19.9 12.1 11.4 1.4 10.6 E D C F B A North America B UK/Ireland A C The Netherlands D Rest of Europe E Rest of world F Undisclosed 45.4 17.2 11.9 10.6 1.2 13.7 E F D C B 46.49 47.70 37.18 43.39 52.1 1.2 233.5 10.9 3.23 1.40 3.2 14.4 A AkzoNobel Report 2010 | Governance and compliance | AkzoNobel on the capital market 81 Broad base of international shareholders AkzoNobel, which has a 100 percent free float, has a broad base of international shareholders. An analysis of the share- holder structure carried out in August 2010 showed that at 45 percent, the US and Canada make up the largest regional group of institutional investors, followed by investors from the UK and Ireland, with 17 percent. Shareholders from the Netherlands hold 12 percent of AkzoNobel shares, while a further 11 percent are held by institutional investors from the rest of Europe. Around 7 percent of the company’s share capital is held by private investors, most of whom are resident in the Netherlands. Major shareholders Both Paulson & Co. and MFS Investment Management noti- fied the Netherlands Authority for the Financial Markets (AFM) that they held more than 5 percent of the issued shares in Akzo Nobel N.V. by December 31, 2010. This information was provided in line with the Netherlands Financial Markets Supervision Act (“Wet op het financieel toezicht”). The most recent information can be found on the website of the AFM under notifications substantial hold- ings. The Financial Markets Supervision Act imposes a duty to disclose percentage holdings in the capital and/or voting rights in the company when such holding reaches, exceeds or falls below 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 percent. Such disclosure must be made to the AFM without delay, which then notifies the company. Credit rating and outlook AkzoNobel is committed to maintaining a strong investment grade rating. Regular review meetings are held between rating agencies and AkzoNobel senior management. See table for present rating and outlook. Rating agency Long-term rating Outlook Moody’s 1 Baaa1 Standard & Poor’s 2 BBB+ stable stable 1 Rating affirmed September 3, 2010; outlook changed from negative to stable. 2 Rating affirmed August 27, 2010, outlook changed from negative to stable. Bonds During 2010, no new bonds were issued. We redeemed $40 million in floating rate loan notes that matured during the year. For a full overview of our bonds, please visit the Bond & Credit information section of our corporate website: www.akzonobel.com/investor_relations Debt maturity in millions € Bonds $ Bonds £ Bonds 1,000 975 648 99 2011 2012 55 375 41 2013 290 2014 2015 2016 Investor relations policy We provide shareholders and other parties in the financial markets with equal and simultaneous information about matters that may influence our share price. The contacts between the Board of Management on the one hand, and investors and analysts on the other, are carefully handled and structured, and the company will not engage in any acts that compromise the independence of analysts in relation to the company or vice-versa. AkzoNobel communicates with its investors and analysts by organizing or attending meetings such as the Annual General Meetings of shareholders, its Capital Market Days, roadshows and broker conferences. More information on these meetings, as well as the presentation materials, can be found on our corporate website. Furthermore, AkzoNobel publishes an annual report, quarterly reports, the AkzoNobel Fact File and press releases, which are also available on the company’s corporate website. Briefings are given to update the market after each quarterly announcement via group meetings or teleconferences, and are accessible by telephone or via the corporate website. Meetings with investors (bilateral and general) are held to ensure that the investment community receives a balanced and complete view of the company’s performance and the issues faced by the business, while always observing appli- cable rules concerning selective disclosure, equal treatment of shareholders and insider trading. In the period preceding the publication of the results of that quarter, AkzoNobel will be in a so-called “closed period”. During this time, we will not hold meetings with analysts or investors, make presentations at broker conferences, or hold discussions/conference calls with investors and analysts. These “closed periods” are published in our event calendar available on www.akzonobel.com/investor_relations Analysts’ reports and valuations are not assessed, comment- ed upon or corrected, other than factually, by the company. AkzoNobel does not pay any fee(s) to parties for carrying 82 AkzoNobel on the capital market | Governance and compliance | AkzoNobel Report 2010 out research for analysts’ reports, or for the production or publication of analysts’ reports, with the exception of credit rating agencies. Contacts with the capital markets are dealt with by the members of the Board of Management, AkzoNobel’s investor relations professionals and, from time to time, other AkzoNobel personnel specially mandated by the Board of Management. Contact information Our corporate website www.akzonobel.com provides all infor- mation which is required to be published. If you have ques- tions or comments about investor relations matters, please contact us: AkzoNobel Investor Relations Strawinskylaan 2555 1077 ZZ Amsterdam The Netherlands www.akzonobel.com/investor_relations T +31 20 502 7854 F +31 20 502 7605 E investor.relations@akzonobel.com Holders of ADRs in the US can contact our Transfer and Register Agent: Deutsche Bank Trust Company Americas c/o American Stock Transfer & Trust Company Peck Slip Station P.O. Box 2050 New York, NY 10272-2050 www.adr.db.com T +1 800 749 1873 (toll-free number) T +1 718 921 8137 E DB@amstock.com AkzoNobel Report 2010 | Governance and compliance | AkzoNobel on the capital market 83 Consolidated statement of income Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of cash flows Consolidated statement of changes in equity Segment information Notes to the consolidated financial statements Note 1 Summary of significant accounting policies Note 2 Acquisitions and divestments Note 3 Incidentals Note 4 Other operating income/(expenses) Note 5 Financing income and expenses Note 6 Income tax Note 7 Discontinued operations Note 8 Employee benefits Note 9 Intangible assets Note 10 Property, plant and equipment 86 87 87 88 89 90 91 98 99 99 99 100 102 103 105 107 Note 11 Investments in associates and joint ventures 108 Note 12 Other financial non-current assets Note 13 Inventories Note 14 Trade and other receivables Note 15 Cash and cash equivalents Note 16 Equity Note 17 Provisions Note 18 Long-term borrowings Note 19 Short-term borrowings 109 109 109 110 110 112 116 117 Note 20 Trade and other payables Note 21 Contingent liabilities and commitments Note 22 Related party transactions Note 23 Remuneration of the Supervisory Board and the Board of Management Note 24 Financial risk management and financial instruments Company financial statements Note a General information Note b Net income from subsidiaries, associates and joint ventures Note c Financial non-current assets and provision for subsidiaries Note d Trade and other receivables Note e Cash and cash equivalents Note f Long-term borrowings Note g Short-term debt Note h Financial instruments Note i Contingent liabilities Note j Auditor’s fees Other information Independent auditor’s report Profit allocation and distributions 117 118 119 120 124 129 131 131 131 132 132 132 132 132 132 133 134 135 Consolidated statement of income for the year ended December 31 (3,341) (1,103) (334) 29 In € millions Note 2009 1 2010 Continuing operations Revenue Cost of sales Gross profit Selling expenses General and administrative expenses Research and development expenses Other operating income/(expenses) Operating income Financing income Financing expenses related to pensions Other financing expenses Results from associates and joint ventures Profit before tax Income tax Profit for the period from continuing operations Discontinued operations Profit for the period from discontinued operations Profit for the period Attributable to Shareholders of the company Non-controlling interests Profit for the period Earnings per share, in € Continuing operations: – Basic – Diluted Discontinued operations: – Basic – Diluted Total operations: – Basic – Diluted 1 Restated to present National Starch as a discontinued operation. 4 5 5 5 11 6 7 16 16 16 16 16 16 (3,086) (1,024) (327) 52 13,028 (7,788) 5,240 (4,385) 855 58 (171) (292) 21 471 (141) 330 32 362 285 77 362 1.09 1.08 0.14 0.13 1.23 1.21 14,640 (8,672) 5,968 (4,749) 1,219 51 (100) (278) 25 917 (170) 747 90 837 754 83 837 2.85 2.83 0.38 0.38 3.23 3.21 86 Consolidated statement of income | Financial statements | AkzoNobel Report 2010 Consolidated statement of comprehensive income for the year ended December 31 Consolidated balance sheet at end of year, before allocation of profit In € millions Profit for the period 2009 2010 In € millions Note 2009 2010 362 837 Assets Other comprehensive income Exchange differences arising on translation of foreign operations Cash flow hedge reserve Revaluation reserve related to step acquisitions Tax relating to components of other comprehensive income Other comprehensive income for the period (net of tax) Comprehensive income for the period Comprehensive income attributable to Shareholders of the company Non-controlling interests Comprehensive income for the period 383 48 7 (38) 400 762 688 74 762 827 50 – (35) 842 1,679 1,523 156 1,679 Non-current assets Intangible assets Property, plant and equipment Deferred tax assets Investment in associates and joint ventures Other financial non-current assets Total non-current assets Current assets Inventories Current tax assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Shareholders’ equity Non-controlling interests Total equity Non-current liabilities Provisions Deferred tax liabilities Long-term borrowings Total non-current liabilities Current liabilities Short-term borrowings Current tax liabilities Trade and other payables Current portion of provisions Total current liabilities Total equity and liabilities 9 10 6 11 12 13 6 14 15 16 17 6 18 19 6 20 17 7,388 3,474 793 175 815 1,441 102 2,564 2,128 7,775 470 1,919 674 3,488 384 507 2,866 797 7,308 3,384 794 175 1,008 12,645 12,669 6,235 18,880 8,245 6,081 1,678 108 2,788 2,851 8,984 525 1,855 589 2,880 907 456 3,305 593 7,425 20,094 9,509 5,324 4,554 18,880 5,261 20,094 AkzoNobel Report 2010 | Financial statements | Consolidated statement of comprehensive income 87 Consolidated statement of cash flows for the year ended December 31 In € millions Profit for the period Income from discontinued operations Adjustments to reconcile earnings to cash generated from operating activities Amortization/depreciation Impairment losses Financing income and expenses Results from associates and joint ventures Pre-tax result on divestments Income tax Changes in working capital 2 Changes in provisions Interest paid Income tax paid Net cash from operating activities Capital expenditures Interest received Dividends from associates and joint ventures Acquisition of consolidated companies 3 Proceeds from sale of interests 3 Other changes Net cash from investing activities Proceeds from borrowings Borrowings repaid Acquisition of non-controlling interests Issue of shares for stock option plan Dividends Net cash from financing activities Net cash used for continuing operations Cash flows from discontinued operations Net change in cash and cash equivalents of continued and discontinued operations Cash and cash equivalents at January 1 Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents year-end 4 1 Restated to present National Starch as a discontinued operation. 2 Comprises an increase of €216 million in trade and other receivables (2009: decrease of €355 million), an increase of €256 million in inventories (2009: decrease €356 million) and an increase of €377 million in trade and other payables (2009: decrease of €61 million). 3 Net of cash and cash equivalents acquired or disposed of. 4 Consists of €2,851 million cash and cash equivalents (2009: €2,128 million) and €168 million debt to credit institutions (2009: €209 million). 88 Consolidated statement of cash flows | Financial statements | AkzoNobel Report 2010 2009 1 2010 362 (32) 559 63 405 (21) (48) 141 650 (493) (170) (196) (513) 52 17 (78) 23 (30) 1,391 (1,216) – 4 (454) 837 (90) 590 50 327 (25) (52) 170 (95) (651) (265) (277) (534) 81 19 (143) 145 (47) 179 (212) (54) 9 (403) 519 (479) (481) (441) 1,095 654 1,919 110 2,683 1,220 (529) (275) 416 19 435 1,449 35 1,919 Consolidated statement of changes in equity Attributable to shareholders of the company In € millions Subscribed share capital Additional paid-in capital Cash flow hedge reserve Revaluation reserve Cumulative translation reserve Share- holders’ equity Other (statutory) reserves and undistributed profit Non-control- ling interests Total equity Balance at January 1, 2009 Profit for the period Other comprehensive income Reclassification into the statement of income Tax on other comprehensive income Comprehensive income Dividend paid Equity-settled transactions Issue of common shares Acquisitions and divestments 463 – – – – – – – 2 – Balance at December 31, 2009 465 Profit for the period Other comprehensive income Reclassification into the statement of income Tax on other comprehensive income Comprehensive income Dividend paid Equity-settled transactions Issue of common shares Acquisitions and divestments – – – – – – – 2 – Balance at December 31, 2010 467 – – – – – – – – 2 – 2 – – – – – – – 7 – 9 (49) – 8 40 (5) 43 – – – – (6) – 47 3 (15) 35 – – – – 29 – – 7 – – 7 – – – – 7 – – – – – – – – – 7 (1,130) – 388 (2) (33) 353 – – – – 8,179 285 – – – 285 (395) 15 – – 7,463 285 403 38 (38) 688 (395) 15 4 – 450 77 (3) – – 74 (59) – – 5 7,913 362 400 38 (38) 762 (454) 15 4 5 (777) 8,084 7,775 470 8,245 – 774 (20) (20) 734 – – – – 754 – – – 754 (320) 27 – (30) 754 821 (17) (35) 1,523 (320) 27 9 (30) (43) 8,515 8,984 83 73 – – 156 (83) – – (18) 525 837 894 (17) (35) 1,679 (403) 27 9 (48) 9,509 AkzoNobel Report 2010 | Financial statements | Consolidated statement of changes in equity 89 Segment information Our Decorative Paints businesses supply a full range of interior and exterior decoration and protection products for both the professional and do-it-yourself markets. Our Performance Coatings businesses are represented in most markets of this industry and we serve a large range of customers including ship and yacht builders and architects, consumer electronics and appliance companies, steel manufacturers, the construction industry, furniture makers, aircraft, bus and truck producers, bodyshops and can makers. Our Specialty Chemicals products are used in a wide variety of everyday products such as ice cream, soups, disinfectants, plastics, soaps, detergents, cosmetics, paper and asphalt. Information per Business Area In € millions Revenue from third parties Group revenue EBITDA 1 Amortization and depreciation Incidentals Operating income 2009 2 133 433 422 (133) 855 2010 275 487 604 (147) 1,219 2010 (68) (53) (75) 41 (155) 2010 19 5 16 10 50 Decorative Paints Performance Coatings Specialty Chemicals Corporate and other Total 2009 2 4,546 4,082 4,336 64 2010 4,931 4,752 4,915 42 2009 2 4,573 4,112 4,359 (16) 2010 4,968 4,786 4,943 (57) 2009 2 487 594 738 (129) 13,028 14,640 13,028 14,640 1,690 2010 548 647 939 (170) 1,964 2009 2 (189) (102) (248) (20) (559) 2010 (205) (107) (260) (18) (590) 2009 2 (165) (59) (68) 16 (276) In € millions Invested capital Total assets Total liabilities Capital expenditures Impairment Decorative Paints Performance Coatings Specialty Chemicals Corporate and other Total Regional information In € millions The Netherlands Germany Sweden UK Other European countries US and Canada Latin America China Other Asian countries Other regions Total 2009 2 6,206 1,817 3,106 603 2010 6,404 2,122 3,457 735 2009 2 7,630 2,969 4,100 4,181 2010 8,167 3,550 4,618 3,759 11,732 12,718 18,880 20,094 2009 2 2,042 993 953 6,647 10,635 2010 2,222 1,242 1,110 6,011 10,585 2009 2 112 61 319 21 513 2010 154 87 273 20 534 2009 2 13 4 37 9 63 Revenue by region of destination Intangible assets and property, plant and equipment Capital expenditures 2009 2 792 1,088 423 768 3,095 2,600 1,147 997 1,585 533 2010 803 1,160 468 798 3,398 2,954 1,394 1,249 1,780 636 2009 1,079 885 422 1,242 2,174 2,265 765 1,013 905 112 2010 1,035 710 461 1,250 2,290 1,993 778 1,238 821 116 13,028 14,640 10,862 10,692 2009 2 104 19 37 22 69 55 30 143 27 7 513 2010 84 22 19 28 83 63 30 147 48 10 534 1 EBITDA is operating income before incidentals and amortization/depreciation. 2 Restated to present National Starch as a discontinued operation. 90 Segment information | Financial statements | AkzoNobel Report 2010 Notes to the consolidated financial statements Note 1 Summary of significant accounting policies General information Akzo Nobel N.V. is a company headquartered in the Nether- lands. The address of our registered office is Strawinskylaan 2555, Amsterdam. We have filed a list of subsidiaries and associated companies, drawn up in conformity with sections 379 and 414 of Book 2 of the Netherlands Civil Code, with the Trade Registry of Amsterdam. We have prepared the consolidated financial statements of Akzo Nobel N.V. in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. They also comply with the financial reporting require- ments included in Section 9 of Book 2 of the Netherlands Civil Code, as far as applicable. On February 16, 2011, the Board of Management authorized the financial statements for issue. The financial statements as presented in this report are subject to the adoption by the Annual General Meeting of shareholders. Consolidation The consolidated financial statements include the accounts of Akzo Nobel N.V. and its subsidiaries. Subsidiaries are compa- nies over which Akzo Nobel N.V. has directly and/or indirectly the power to control the financial and operating policies so as to obtain benefits. In assessing control, potential voting rights that are presently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Non- controlling interests in equity and in results are presented separately. Transactions between consolidated companies and intercompany balances are eliminated. Accounting poli- cies, as set out below, have been applied consistently for all periods presented in these consolidated financial statements and by all subsidiaries. Change in accounting policies and reclassification We adopted the IFRS 3 (revised) “Business Combinations” and the consequential amendment to IAS 27 “Consolidated and Separate Financial Statements”, IAS 28 “Investments in Associates” and IAS 31 “Interests in Joint Ventures” prospec- tively for business combinations for which the acquisition date is on or after January 1, 2010. These standards introduced changes in the accounting for business combinations that will impact the amount of goodwill recognized and the results reported in the period of acquisition and thereafter: consequence, the statements of income and cash flows have been restated. • Acquisition related costs are expensed as incidental item on the line other operating income/(expenses) in the statement of income and no longer form part of the acquisition cost • For each business combination, the non-controlling interest is now measured either at fair value or at the proportionate share in the identifiable assets of the acquired company. Under the old IFRS 3, the non-controlling interest (formerly known as minority interest) was measured at the proportionate share in the identifiable assets of the acquired company • If a business combination is achieved in stages, the acquisition date fair value of the previously held equity interest in the acquired company (still an associate or joint venture before this acquisition date) is remeasured to fair value at the acquisition date through the statement of income. Previously, business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect earlier recognized goodwill • Any contingent consideration to be transferred will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the consideration, which is deemed to be an asset or a liability, will be recognized in accordance with IAS 39, generally in the statement of income. Under the old IFRS 3, contingent consideration was recognized, if and only if, the company had a present obligation and the economic outflow was probable and a reliable estimate was determinable. Subsequent adjustments were recognized as part of goodwill • The effects of all transactions with non-controlling interests are recorded in equity if there is no change in control; these transactions will no longer result in goodwill. We made reclassifications in the 2009 figures to align to our 2010 structure and presentation. This resulted in limited reclassifications between the Business Areas which did not impact profit for the period. We divested National Starch and reclassified its results into discontinued operations. As a Discontinued operations (note 7) A discontinued operation is a component of our business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative statement of income and the statement of cash flows are reclassified as if the operation had been discontinued from the start of the comparative period. Assets and liabilities are classified as held for sale if it is highly probable that the carrying value will be recovered through a sale transaction within one year rather than through continuing use. When reclassifying assets and liabilities as held for sale, we recognize the assets and liabilities at the lower of their carrying value or fair value less selling costs. Assets held for sale are not depreciated but tested for impairment. Impairment losses on assets and liabilities held for sale are recognized in the statement of income. Use of estimates The preparation of the financial statements in compliance with IFRS requires management to make judgments, estimates and assumptions that affect amounts reported in the financial statements. The estimates and assumptions are based on experience and various other factors that are believed to be reasonable under the circumstances and are used to judge the carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised or in the revision period and future periods, if the changed estimates affect both current and future periods. AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 91 The most critical accounting policies involving a higher degree of judgment and complexity in applying principles of valua- tion are described below. Changes in the assumptions and estimates as described could result in significantly different results than those recorded in the financial statements. Business combinations (note 2) In business combinations, identifiable assets and liabilities, and contingent liabilities are recognized at their fair values at the acquisition date. Determining the fair value requires signifi- cant judgments on future cash flows to be generated. The fair value of brands, patents and customer lists acquired in a busi- ness combination is estimated on generally accepted valua- tion methods. These include the relief-from-royalty method, the incremental cash flow method and the multi-period excess earnings method. The fair value of property, plant and equipment acquired in a business combination is based on estimated market values. The fair value of inventories acquired in a business combination is determined based on its esti- mated selling price in the ordinary course of business less the estimated costs of completion and sale and a reasonable profit margin, based on the effort required to complete and sell the inventories. Impairment of intangible assets and property, plant and equipment (notes 9, 10) We assess whether the carrying values of intangible assets and property, plant and equipment are recoverable. In this assessment, we make significant judgments and estimates to determine if the future cash flows expected to be generated by those assets are less than their carrying value (value in use). The data necessary for the impairment tests are based on our strategic plans and our estimates of future cash flows, which require estimating revenue growth rates and profit margins. The estimated cash flows are discounted using a net present value technique with business-specific discount rates. Accounting for income tax (note 6) As part of the process of preparing consolidated financial statements, we estimate income tax in each of the jurisdic- tions in which we operate. This process involves estimating actual current tax expense and temporary differences between carrying amounts of assets and liabilities for tax and financial reporting purposes. Temporary differences result in deferred tax assets and liabilities, which are included in the consoli- dated balance sheet. We assess the likelihood that deferred tax assets will be recovered from future taxable income. Provisions (note 17) By their nature, provisions and contingent liabilities are depen- dent upon estimates and assessments as to whether the criteria for recognition have been met, including estimates of the probability of cash outflows. Estimates related to provi- sions for environmental matters are based on the nature and seriousness of the contamination, as well as on the technolo- gy required for clean-up. The provisions for antitrust cases are based on an estimate of the costs, fines, and civil damages, taking into account legal advice and the current facts and circumstances. Provisions for other litigation are also based on an estimate of the costs, taking into account legal advice and information currently available. Provisions for termina- tion benefits and exit costs also involve management’s judg- ment in estimating the expected cash outflows for severance payments and site closures or other exit costs. Accounting for pensions and other post-retirement benefits (note 17) Post-retirement benefits represent obligations that will be settled in the future and require assumptions to project obli- gations and fair values of plan assets. The accounting requires us to make assumptions regarding variables such as discount rate, rate of compensation increase, return on assets, mortality rates and future healthcare costs. Periodically, we consult with external actuaries regarding these assumptions. Changes in key assumptions can have a significant impact on the projected benefit obligations, funding requirements and periodic costs incurred. Statement of cash flows We have used the indirect method to prepare the statement of cash flows. Cash flows in foreign currencies have been trans- lated at transaction rates. Exchange rate differences affect- ing cash items are presented separately in the statement of cash flows. Receipts and payments with respect to income tax are included in cash from operating activities. Interest payments are included in cash from operating activities while interest receipts are included in cash from investing activities. The costs of acquisition of subsidiaries, associates and joint ventures, and other investments, as long as paid in cash, are included in cash from investing activities. Acquisitions or divestments of subsidiaries are presented net of cash and cash equivalents acquired or disposed of, respectively. Acqui- sition of non-controlling interests are reported in cash from financing activities. Cash flows from derivatives are recog- nized in the statement of cash flows in the same category as those of the hedged items. Earnings per share We present basic and diluted earnings per share (EPS) for our common shares. Basic EPS is calculated by divid- ing the profit or loss attributable to holders of our common shares by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by dividing the profit or loss attributable to shareholders of common shares by the weighted average number of common shares outstanding, including the effects for potentially dilu- tive common shares, which comprise of stock options and performance-related shares granted to employees. Operating segments We determine and present operating segments (“Business Areas”) on the information that internally is provided to the Board of Management, the body that was our chief operating decision maker during 2010. A Business Area is a component that engages in business activities from which it may earn revenue and incur expenses, including revenue and expenses that relate to transactions with other Business Areas within the company. Operating results of a Business Area have been reviewed regularly by the Board of Management to make deci- sions about resources to be allocated to the Business Area and assess its performance, and for which discrete financial information is available. Business Area results reported to the Board of Management include items directly attributable to a Business Area as well as those items that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets and corporate costs and are reported in Business Area “Corporate and other”. Translation of foreign currencies Transactions in foreign currencies are translated into the func- tional currency using the foreign exchange rate at transaction date. Monetary assets and liabilities denominated in foreign 92 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 currencies are translated into the functional currency using the exchange rates at the balance sheet date. Resulting foreign currency differences are included in the statement of income. Non-monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at acquisition date. The assets and liabilities of entities with other functional currencies are translated into the functional currency of the parent entity, using the exchange rates at the balance sheet date. The income and expenses of entities with other functional currencies are translated into the functional currency, using the exchange rates at transaction date. Foreign exchange differences resulting from translation into the functional currency of investments in subsidiaries and of intercompany loans of a permanent nature with other functional currencies are recorded as a separate component (cumulative translation reserves) within income. These other comprehensive cumulative translation adjustments are reclassified (either fully or partly) to the statement of income upon disposal (either fully or partly) or liquidation of the foreign subsidiary to which the investment or the intercompany loan with a per manent nature relates to. Before being consolidated, the financial statements of subsidiaries established in hyperinflationary countries are adjusted for the effects of changing prices of the local currency. Foreign currency differences arising on the re-translation of a financial liability designated as a hedge of a net investment in a foreign operation are recognized in the cumulative translation reserves (in other comprehensive income), to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in the statement of income. When the hedged part of a net investment is disposed of, the associated cumulative amount in other comprehensive income is reclassified to the statement of income as an adjustment to the transaction result. Exchange rates of key currencies The principal exchange rates against the euro used in preparing the balance sheet and the statement of income are: Balance sheet Statement of income US dollar Pound sterling Swedish krona CNY 2009 1.440 0.893 10.268 9.832 2010 1.333 0.861 8.972 8.785 2009 1.394 0.890 10.608 9.526 2010 1.328 0.858 9.537 8.982 Revenue recognition Revenue is defined as the revenue from the sale and delivery of goods and services and royalty income, net of rebates, discounts and similar allowances, and net of sales tax. Revenue is recognized when the significant risks and rewards have been transferred to a third party, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably and there is no continuing management involvement with the goods. For revenue from sales of goods these conditions are generally met at the time the product is shipped and delivered to the customer, depending on the delivery conditions. Service revenue is generally recognized as services are rendered. Pensions and other post-retirement benefits (note 17) Contributions to defined contribution plans are recognized in the statement of income as incurred. Most of our defined benefit pension plans are funded with plan assets that have been segregated in a trust or foundation. Valuations of both funded and unfunded plans are carried out by independent actuaries based on the projected unit credit method. Pension costs primarily represent the increase in the actuarial present value of the obligation for projected pension benefits based on employee service during the year and the interest on this obligation with respect to employee service in previous years, net of the expected return on plan assets. The discount rate used in determining the present value of the obligations is the yield at reporting date of AA corporate bonds that have maturity dates approximating the terms of our obligations. consideration is given to any minimum funding requirements that apply to any plan. An economic benefit is available if it is realizable during the life of the plan, or on the settlement of the plan liabilities. In certain countries we also provide post-retirement benefits other than pensions to our employees. These plans are generally not funded. Valuations of the obligations under these plans are carried out by independent actuaries based on the projected unit credit method. The costs related to such plans primarily consist of the present value of the benefits attributed on an equal basis to each year of service and the interest on this obligation with reference to employee service in previous years. Actuarial gains and losses that arise in calculating our obligation with reference to a plan, are recognized to the extent that any cumulative unrecognized actuarial gain or loss exceed 10 percent of the greater of the present value of the defined benefit obligation and the fair value of plan assets. That portion of the actuarial gains and losses is recognized in the statement of income over the expected average remaining working lives of the employees participating in the plan. When the benefits of a plan improve, the portion of the increased benefits related to past service by employees is recognized as an expense in the statement of income on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in the statement of income. We recognize gains and losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs. The gain or loss on curtailment comprises any resulting change in the fair value of plan assets, change in the present value of defined benefit obligation and any related actuarial gains and losses and past service cost that had not previously been recognized. When the calculation results in a benefit to AkzoNobel, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, Other long-term employee benefits (note 17) Other long-term employee benefits include long-service or sabbatical leave, jubilee or other long-service benefits, and other employee benefits payable more than 12 months after the related service is rendered. These provisions are measured at present value, using actuarial assumptions. The AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 93 discount rate is the yield at reporting date of AA corporate bonds that have maturity dates approximating the terms of our obligations. The calculation is performed using the projected unit credit method. Any actuarial gains and losses are recognized in the statement of income in the period in which they arise. An accrual is recognized for the amounts expected to be paid under short-term bonus or profit sharing plans if a present legal or constructive obligation as a result of past services provided exists and the obligation can be estimated reliably. Share-based compensation (note 8) We have a performance-related share plan, under which shares are conditionally granted to certain employees. These performance-related shares vest in three years. The number of shares which the employees will receive depends on our relative Total Shareholder Return (TSR) performance over a three-year period compared with the peer group. As from 2009, the conditional grant of shares is linked 50 percent to the ranking of the company in the Dow Jones Sustainability Indexes (DJSI) and 50 percent to the relative TSR performance of the company. The fair value of the performance-related shares granted is recognized as an expense with a corresponding increase in shareholders’ equity. The fair value is measured at grant date and amortized over the period during which the employees become unconditionally entitled to the performance-related shares. The fair value for the TSR-linked vesting condition is measured using the Monte Carlo simulation model. The fair value of the performance-related shares for which vesting is based on the company’s ranking in the DJSI, is the value of the Akzo Nobel N.V. common share on the date of the grant. This Monte Carlo model takes into account expected dividends, as well as the market conditions expected to impact our TSR performance in relation to selected peers. The amount recognized as an expense is adjusted to reflect the actual number of performance-related shares that vest, except when forfeiture or extra vesting of performance-related shares is due to a TSR performance that differs from the performance anticipated at the grant of the performance-related shares, because this is a market performance condition. Income tax (note 6) Income tax expense comprises both current and deferred tax, including effects of changes in tax rates. Income tax is recognized in the statement of income, unless it relates to items recognized in other comprehensive income. In the balance sheet, current tax includes the expected tax payable and receivable on the taxable income for the year, using tax rates enacted or substantially enacted at reporting date, as well as any adjustments to tax payable and receivable with respect to previous years. Current tax assets and liabilities have been offset in cases where there is a legally enforceable right to set off current tax assets against current tax liabilities and when the intention exists to settle on a net basis or to realize the assets and liabilities simultaneously. Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amount used for taxation purposes. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. We recognize deferred tax assets, including assets arising from losses carried forward, to the extent that future probable taxable profit will be available against which the deferred tax asset can be utilized. We do not recognize deferred tax for the following temporary differences: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit; and differences related to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The income tax consequences of dividends are recognized when a liability to pay the dividend is recognized. Deferred tax assets are offset only when there is a legally enforceable right to offset tax assets against tax liabilities and when the deferred tax assets and liabilities relate to the same tax authority. Measurement of deferred tax assets and liabilities is based upon the enacted or substantially enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be reversed. Non-refundable dividend tax is taken into account in the determination of deferred tax liabilities to the extent of earnings expected to be distributed by subsidiaries in the foreseeable future. If separate tax rates exist for distributed and undistributed profit, the current and deferred taxes are measured at the tax rate applicable to undistributed profit. Deferred tax is not discounted. Research cost and preparation and start-up expenses Research cost and preparation and start-up expenses are charged to the statement of income as incurred. Government grants Government grants related to costs are deducted from the relevant cost to be compensated in the same period. Emission rights granted by the government are recorded at cost. A provision is recorded if the actual emission is higher than the emission rights granted. Government grants to compensate for the cost of an asset are deducted from the cost of the related asset. Intangible assets (note 9) Intangible assets are valued at cost less accumulated amortization and impairment charges. All intangibles assets are tested for impairment whenever there is an indication that the intangible asset may be impaired. In addition, intangible assets with an indefinite useful life, such as goodwill and certain brands, are not amortized, but tested for impairment annually. In cases where the carrying value of the intangibles exceeds the recoverable amount, an impairment charge is recognized in the statement of income. Goodwill in a business combination represents the excess of the consideration paid over the net fair value of the acquired identifiable assets, liabilities and contingent liabilities. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. For acquisitions before January 1, 2010, the cost of an acquisition also included expenses directly attributable to the acquisition. Contingent consideration was recognized only if the company had a present obligation and the economic outflow was probable and a reliable estimate was determinable. For acquisitions made on or after January 1, 2010, acquisition related costs are expensed as incidental items on the line other 94 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 operating income/(expenses) in the statement of income. Any contingent consideration to be transferred will be recognized at fair value at the acquisition date. In addition, the effects of all transactions with non-controlling interests are recorded in equity if there is no change in control; these transactions will no longer result in goodwill. If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of income. Goodwill related to an investment in associates and joint ventures is included in the carrying value of that investment. Intangible assets with a finite useful life, such as certain licenses, know-how and brands, customer relationships and intellectual property rights, are capitalized at historical cost and amortized on a straight-line basis over the estimated useful life of the assets, which generally ranges from 10 to 40 years. Development costs are capitalized if the costs can be measured reliably, the related product or process is technically and commercially feasible, sufficient future economic benefits will be generated and sufficient resources are available to complete the development. The expenditures capitalized include the cost of materials, direct labor and overhead costs that are directly attributable to preparing the asset for its intended use. Capitalized development costs are amortized on a straight-line basis over the estimated useful life of related assets, which generally is up to five years. Amortization methods, useful lives and residual values are reassessed annually. Property, plant and equipment (note 10) Property, plant and equipment are valued at cost less accumulated depreciation and impairment charges. Costs include expenditures that are directly attributable to the acquisition of the asset, including financing expenses of capital investment projects under construction. Government grants to compensate for the cost of an asset are deducted from the cost of the related asset. Depreciation is calculated using the straight-line method, based on the estimated useful life. In the majority of cases the useful life of plant equipment and machinery is ten years, and for buildings ranges from 20 to 30 years. Land is not depreciated. In the majority of cases residual value is assumed to be insignificant. Depreciation methods, useful lives and residual values are reassessed annually. goodwill and then to the carrying amount of the other assets on a pro rata basis. Parts of property, plant and equipment that have different useful lives are accounted for as separate items of property, plant and equipment. Cost of major maintenance activities is capitalized as a separate component of property, plant and equipment, and depreciated over the estimated useful life. Maintenance costs which cannot be separately defined as a component of property, plant and equipment are expensed in the period in which they occur. Gains and losses on the sale of property, plant and equipment are included in the statement of income. We have identified conditional asset retirement obligations at a number of our facilities that are mainly related to plant decommissioning. We recognize these conditional asset retirement obligations in the periods in which sufficient information becomes available to reasonably estimate the cash outflow. Impairments of intangible assets and property, plant and equipment (notes 9, 10) We assess the carrying value of intangible assets and property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, for goodwill and other intangible assets with an indefinite useful life, we review the carrying value annually in the fourth quarter. The recoverable amount of an asset or its cash-generating unit is the greater of its value in use and its fair value less costs to sell, whereby estimated future cash flows are discounted to their present value. The discount rate used reflects current market assessments of the time value of money and, if appropriate, the risks specific to the assets. If the carrying value of an asset or its cash-generating unit exceeds its estimated recoverable amount, an impairment loss is recognized in the statement of income. The assessment for impairment is performed at the lowest level of assets generating largely independent cash inflows. For goodwill and other intangible assets with an indefinite life, we have determined this to be at business unit level (one level below segment). We allocate impairment losses in respect of cash-generating units first to Except for goodwill, we reverse impairment losses if and to the extent we have identified a change in estimates used to determine the recoverable amount. We only reverse to the extent that the carrying value of the asset does not exceed the carrying value that would have been determined, net of amortization or depreciation, if no impairment loss had been recognized. Reversals of impairment are recognized in the statement of income. Leases (notes 10, 21) Lease contracts in which we have substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at the lower of its fair value and the present value of minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset. Minimum lease payments made under finance leases are apportioned between the financing expenses and the reduction of the outstanding liability. The financing expenses are recognized as interest over the lease term. Payments made under operating leases are recognized in the statement of income on a straight-line basis over the term of the lease. Lease incentives received are recognized over the term of the lease. Inventories (note 13) Inventories are measured at the lower of cost and net realizable value. Costs of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition. The costs of conversion of inventories include direct labor and fixed and variable production overheads, and take into account the stage of completion. The costs of inventories are determined using the weighted average cost formula. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. Equity (note 16) When share capital recognized as equity is repurchased, the AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 95 amount of the consideration paid, which includes directly attributable cost, is net of any tax effects, and is recognized as a deduction from equity. Dividends are recognized as a liability in the period in which they are declared. Provisions (note 17) We recognize provisions when a present legal or constructive obligation as a result of a past event exists, and it is probable that an outflow of economic benefits is required to settle the obligation. Provisions are measured at net present value and take into account legal fees. The expected future cash outflows are discounted at appropriate pre-tax interest rates, reflecting current market assessments of the time value of money and, if applicable, the risks specific to the liability. The increase of provisions as a result of the passage of time is recognized in the statement of income under financing expenses. Provisions for restructuring are recognized when a detailed and formal restructuring plan has been approved, and the restructuring has either commenced or has been announced publicly. We do not provide for future operating costs. Termination benefits for voluntary redundancy are recognized if we have made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted and the number of acceptances can be estimated reliably. A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. In accordance with our environmental policy and applicable legal requirements, we recognize a provision for environmental clean-up cost when it is probable that a liability has materialized and the amount of cash outflow can be reasonably estimated. Financial instruments Regular purchases and sales of financial assets and liabilities are recognized on trade date, which is the date we commit to purchase or sell the asset. The initial measurement of all financial instruments is fair value. Except for derivatives, the initial measurement of financial instruments is adjusted for directly attributable transaction costs. Below, the accounting policies for financial instruments are explained, relating to the following categories: • Derivative financial instruments • Associates and joint ventures • Other financial non-current assets • Trade and other receivables • Cash and cash equivalents • Long-term and short-term borrowings • Trade and other payables. Derivative financial instruments (note 24) Derivative financial instruments include forward exchange contracts, interest rate derivatives and commodity contracts, as well as embedded derivatives included in normal business contracts. All derivative financial instruments are recognized at fair value on the balance sheet. Fair values are derived from market prices and quotes from dealers and brokers, or are estimated using observable market inputs. Forward exchange and commodity contracts are reported under trade and other receivables, or under trade and other payables. Changes in the fair value of forward exchange and commodity contracts are recognized in the statement of income, unless cash flow hedge accounting or net investment hedge accounting is applied. In that case, the effective part of the fair value changes is deferred in other comprehensive income and released to the related specific lines in the statement of income or balance sheet at the same time as the hedged item. Interest rate derivatives are reported under other financial non-current assets or long-term borrowings. The changes in fair value of interest derivatives are recognized in financing income and expenses, where the effective part is offset by the fair value changes of the underlying fixed rate bond, in the event fair value hedge accounting is applied. Both at the hedge inception and at each reporting date, we assess whether the derivatives used are highly effective in offsetting changes in fair values or cash flows of hedged items. When a derivative is not highly effective, we discontinue hedge accounting prospectively. In the event a fair value hedge relationship is terminated, amortization of fair value hedge adjustments is included in financing income and expense. When a cash flow hedge relationship is terminated, the fair value changes deferred in other comprehensive income (in equity) are released to the statement of income only when the hedged transaction is no longer expected to occur. Otherwise these will be released to the statement of income at the same time as the hedged item. Associates and joint ventures (note 11) Associates are those entities in which we have significant influence, but no control, over the financial and operational policies. Joint ventures are those entities over whose activities we have joint control, established by contractual agreement and requiring unanimous consent for strategic, financial and operating decisions. Associates and joint ventures are accounted for using the equity method and are initially recognized at cost. The consolidated financial statements include our share of the income and expenses of the associates and joint ventures for the period that we have significant influence or joint control, whereby the result is determined using our accounting principles. When the share of losses exceeds the interest in the investee, the carrying amount is reduced to nil and recognition of further losses is discontinued, unless we have incurred legal or constructive obligations on behalf of the investee. Loans to associates and joint ventures are carried at amortized cost less impairment losses. The results from associates and joint ventures consist of our share in the results of these companies, interest on loans granted to them and the transaction results on divestments of associates and joint ventures. Unrealized gains and losses arising from transactions with associates and joint ventures are eliminated to the extent of our interest in the investee. Other financial non-current assets (note 12) Loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Long-term receivables are discounted to their net present value. Interest receivable is included in financing income. 96 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Trade and other receivables (note 14) Trade and other receivables are measured at amortized cost, using the effective interest method, less any impairment loss. An allowance for impairment of trade and other receivables is established if the collection of a receivable becomes doubtful. Such receivable becomes doubtful when there is objective evidence that we will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter into bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. An impairment loss is recognized in the statement of income, as are subsequent recoveries of previous impairments. Cash and cash equivalents (note 15) Cash and cash equivalents include all cash balances and short- term highly liquid investments that are directly convertible into cash. Cash and cash equivalents are measured at fair value. Long-term and short-term borrowings (notes 18, 19, 24) Long-term borrowings are measured at amortized cost, applying the effective interest rate method unless fair value interest rate hedging is applied. In that case the carrying amount is adjusted for the fair value changes caused by the hedged risk. Short-term borrowings are measured at amortized cost, using the effective interest method. The interest payable on borrowings is included in other financing expenses. The fair value of borrowings, used for disclosure purposes, is determined on the basis of listed market price, if available. If a listed market price is not available, the fair value is calculated based on the present value of principal and interest cash flows, discounted at the market rate of interest at the reporting date. Trade and other payables (note 20) Trade and other payables are measured at amortized cost, using the effective interest method. New IFRS accounting standards Several new accounting pronouncements were issued. We assessed whether our consolidated financial statements for 2010 and beyond may be affected. • An amendment to IFRS 2, “Share-based Payment” which clarifies how an individual subsidiary in a group should account for share-based payment arrangements in its own financial statements became effective in 2010. This amendment is not applicable to our consolidated financial statements • IFRS 3, “Business Combinations” and IAS 27, “Consolidated and Separate Financial Statements” were revised and are effective as from 2010. For information on the effect of this adoption, reference is made to the section Change in accounting policies and reclassifications in this note • IFRS 9, “Financial Instruments” (replacement of IAS 39) will become effective as from 2013, with earlier adoption permitted. IFRS 9 introduced new requirements for classifying and measuring financial assets and liabilities. This standard encompasses an overall change of accounting principles for financial instruments and will eventually replace IAS 39 – the current standard on financial instruments. As its scope will be further expanded during 2011, we will review the effects of a comprehensive standard on financial instruments and consider adoption when appropriate • IASB’s annual improvements project 2009 resulted in many smaller amendments to several IFRSs effective as from 2010. They did not materially impact our consolidated financial statements • IASB’s annual improvements project 2010 will result in many smaller amendments to several IFRSs, mostly effective as from 2011. They are not expected to materially impact our consolidated financial statements. • An amendment to IAS 24, “Related Party Disclosures” clarifies the definition of a related party and provides a partial exemption from the disclosure requirements for government-related entities. The revised standard also clarifies that disclosure is required for any commitments of a related party to do something if a particular event occurs or does not occur in the future. The revised standard is effective as from 2011, with earlier application permitted. We do not expect that our financial statements will be materially affected by this amendment • An amendment to IAS 32, “Financial Instruments: Presentation” addressing the accounting for rights issues such as options and warrants, denominated in a currency other than the functional currency of the issuer became effective in 2010. Our financial statements are not affected by the amendment as we have not issued such financial instruments.An amendment to IAS 39, “Financial Instruments: Recognition and Measurement” addresses two separate hedge accounting issues. It clarifies the requirements when options are used for hedging and it regulates inflation-linked hedge relationships. The amendment to IAS 39 is effective as from 2010. As we commonly use forward contracts for hedges and do not have inflation-linked hedge relationships, there is no material impact from adopting this amendment • An amendment to IFRIC 14 on minimum funding requirements corrects an unintended consequence of the originally issued interpretation. The amendment is effective as from 2011, with earlier application permitted. As we currently have no pension asset on our balance sheet that falls in the scope of this amendment, we do not expect that our financial statements will be materially affected • IFRIC 17 “Distribution of Non-cash Assets to Owners” will apply prospectively as from 2010. There is no impact on our financial statements as no proposal to distribute non-cash assets to shareholders has been made • IFRIC 19, “Extinguishing Financial Liabilities with Equity Instruments” applies when a debtor extinguishes a liability fully or partly by issuing equity instruments to the creditor. The interpretation will be effective as from 2011. As there currently do not exist such agreements within our businesses, we do not expect that our financial statements will be affected. AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 97 Note 2 Acquisitions and divestments In 2010, we completed several acquisitions, mainly in Perfor- mance Coatings. The largest acquisition was related to the powder coatings activities of the Dow Chemical Company. We also acquired the Lindgens Metal Decorating Coatings and Inks business and Changzhou Prime Automotive Paint Co., Ltd to grow our Car Refinishes business in China. During 2010, National Starch was classified as a discontin- ued operation and was sold on October 1, 2010, at a gain of €53 million. For more information, see note 7. The acquisitions in 2010, both individually and in total, were deemed immaterial in respect of the IFRS 3 disclosure require- ments. Pre-acquisition carrying amounts were not gathered. The acquisitions in 2010 contributed €155 million to revenue. Recognized values at acquisition In € millions Goodwill Other intangible assets Property, plant and equipment Other non-current assets Inventories Trade and other receivables Cash and cash equivalents Provisions Deferred tax liabilities Long-term borrowings Trade and other payables Net identifiable assets and liabilities Recognized in the statement of income Consideration paid Cash and cash equivalents acquired To be paid in 2011 and later years Net cash outflow Powder coatings activities Other acquisitions Total – 9 38 2 32 43 2 (3) (3) – (6) 114 (16) 98 (2) – 96 7 50 1 – 5 8 1 – (6) (1) (9) 56 – 56 (1) (8) 47 7 59 39 2 37 51 3 (3) (9) (1) (15) 170 (16) 154 (3) (8) 143 98 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Note 3 Incidentals Note 4 Other operating income/(expenses) Note 5 Financing income and expenses Incidental gains and losses included in operating income In € millions 2009 2010 Restructuring costs Results on acquisitions and divestments Results related to major legal, antitrust and environmental cases Other incidental results Total (349) 48 (38) 63 (276) (120) 33 (49) (19) (155) During 2010, we continued to restructure: • In Decorative Paints, mainly in Continental Europe and the US In € millions 2009 2010 In € millions 2009 2010 Incidental gains and losses Results on sale of redundant assets Currency exchange differences: – Derivatives – Loans and receivables – Other financial liabilities Other items Total 42 2 37 (43) 6 8 52 19 3 55 (82) (4) 38 29 In 2010, the incidental gains and losses relate to the acquired powder coatings activities, the divestment of a captive insurance company and environmental costs for a site in Sweden. Interest income: Loans and receivables Interest expenses: – Net financing expenses on pensions and other post-retirement benefits – Interest rate derivatives – Other financial liabilities – Interest on provisions Fair value changes: – Interest rate derivatives – Other financial liabilities – Other Total 58 51 (171) 10 (245) (54) (14) 12 (1) (405) (100) 14 (253) (39) 16 (15) (1) (327) The net financing charges for the year decreased by €78 million from €405 million to €327 million, due to decreased financing expenses on pensions (€71 million mainly due to higher returns on plan assets). In addition: • Interest on provisions decreased by €15 million due to lower discount rates • Interest on other financial liabilities increased by €8 million due to higher cost of bonds refinanced in 2009. A reduction of €10 million (2009: €6 million) was included in the interest expenses due to the capitalization of financing expenses of capital investment projects under construction. The average interest rate, used for capitalization of borrowing cost was 6.4 percent. • In Performance Coatings, we closed several sites in connection with the acquired powder coatings activities • In Specialty Chemicals, we closed an incinerator In 2009, the incidental gains reported in other operating income/(expenses) related mainly to results from acquisitions and divestments (PTA Pakistan, LII Europe). in Rotterdam. Apart from restructuring costs, we incurred €32 million environmental costs for a site in Sweden. We reported gains in connection with the acquired powder coatings activities and the divestment of a captive insurance company. Restructuring costs In € millions 2009 2010 Decorative Paints Performance Coatings Specialty Chemicals Other Total (158) (55) (99) (37) (349) Incidentals per cost category In € millions 2009 2010 Cost of sales Selling expenses Research and development expenses General and administrative expenses Other operating income/(expenses) (144) (94) (8) (63) 33 (65) (37) (24) 6 (120) (126) (43) (1) (13) 28 Total (276) (155) AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 99 Note 6 Income tax Pre-tax income (including the share in profit of associates and joint ventures) amounted to a profit of €917 million (2009: profit €471 million). Tax benefits/(charges) are included in the statement of income as follows: The 2010 net tax charge of €170 million (2009: €141 million) related to continuing operations only. The total tax charge, including discontinued operations was €193 million (2009: €140 million). Classification of current and deferred tax result In € millions 2009 2010 Current tax expense for: – The year – Adjustments for prior years Deferred tax expense for: – Origination and reversal of temporary differences – Changes in tax rates – Tax losses recognized or unrecognized Total (188) 23 (165) 16 14 (6) 24 (141) (245) 59 (186) (12) 6 22 16 (170) The impact of the non-refundable withholding tax is depen- dent on the relative share of our profit from countries that levy withholding tax on dividends. This relative share is expected to increase in the coming years. Based on the Dutch tax system there is only a limited credit for such taxes. Income tax recognized directly in equity In € millions 2009 2010 Current tax for: – Currency exchange differences on intercompany loans of a permanent nature Deferred tax for: – Share-based compensation – Hedge accounting – Other Total (33) (16) (33) (8) (5) (1) (14) (47) (16) (3) (15) (4) (22) (38) Effective consolidated tax rate in % 2009 2010 Corporate tax rate in the Netherlands Effect of lower tax rates in certain countries Tax exempt income/non-deductible expenses Non-taxable income from investment in associates and joint ventures Changes in enacted tax rates (reductions in tax rate) Recognition of previously unrecognized tax losses Current year losses for which no deferred tax asset was recognized Current year profits compensated with losses for which no deferred tax asset was recognized Under/(over)-provided in prior years Non-refundable withholding taxes Other Effective consolidated tax rate 25.5 (0.2) 9.3 (1.1) (3.1) – 1.7 (0.3) (5.0) 3.7 (0.6) 29.9 25.5 (1.0) 2.7 (0.7) (0.7) (1.0) 0.5 (2.0) (6.4) 2.0 (0.4) 18.5 In 2010 the effective tax rate was 18.5 percent (2009: 29.9 percent). The tax rate is low because of several adjustments to previous years, partly related to settlements with tax authorities. Furthermore, there were tax-exempt gains related to acquisitions and divestments and part of a not recognized capital loss was used. In 2009, the tax rate was impacted by several adjustments on previous years, tax exempt income items and non- deductible expenses. The worldwide trend of decreasing tax rates has a diminish- ing impact on the long-term tax burden. Decreases in tax rates, however, also have a direct impact on the tax burden, because of a change in the measurement of the deferred tax positions. The relevant changes in this respect included the decrease of the tax rate in several countries as of 2011 and/or later. In addition, changes in the geographical mix of taxable income affected the tax burden. 100 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Tax in the balance sheet Current tax assets of €108 million (2009: €102 million) repre- sent the amount of income taxes recoverable in respect of current and prior periods. Current tax liabilities of €456 million (2009: €507 million) relate to the amount of taxes payable for current and prior periods. In the deferred tax asset for other provisions (€360 million), an amount of €210 million (2009: €194 million) is related to interest expense carried forward. In assessing the recognition of the deferred tax assets, management considers whether it is probable that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which unused tax losses can be carried forward, unused tax credits can be used and temporary differences become deductible. The nature of the evidence supporting the recognition of the deferred tax assets is the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. The amount of deferred tax assets considered realizable, however, could change in the near term if future estimates of projected taxable income during the carry forward period are revised. From the total amount of recognized deferred tax assets, €515 million (2009: €652 million) is related to entities that have suffered a loss in either 2010 or 2009 in the tax jurisdiction to which a deferred tax asset relates, and where utilization is dependent on future taxable profit in excess of the profit arising from the reversal of existing taxable tempo- rary differences. At December 31, 2010, the loss carryforwards expire as follows: Loss carryforwards recognized in the balance sheet Breakdown of deferred tax assets and liabilities In € millions Assets Liabilities Assets Liabilities Intangible assets Property, plant and equipment Inventories Trade and other receivables Share-based compensation Provisions: – Pensions and other post-retirement benefits – Restructuring – Other provisions Other items Net loss carryforwards Deferred tax assets not recognized Tax assets/liabilities Set-off of tax Net deferred taxes 51 72 33 29 15 346 30 457 156 685 (376) 1,498 (705) 793 2009 755 261 8 21 – 103 2 175 54 – – 1,379 (705) 674 68 64 33 22 11 292 17 360 143 809 (408) 1,411 (617) 794 2010 781 160 5 20 – 158 3 29 50 – – 1,206 (617) 589 The deferred tax assets not recognized in the balance sheet are related to the following items: Unrecognized deferred tax assets In € millions Capital losses Tax losses Deductible temporary differences Total 2009 2010 220 43 113 376 257 29 122 408 In € millions 2011 2012 2013 2014 2015 Later Unlimited Total Total loss carryforwards Loss carryforwards not recognized in deferred tax assets Total 16 (7) 9 15 (8) 7 787 (746) 41 36 (16) 20 29 (18) 11 461 (14) 447 1,330 (27) 2,674 (836) 1,303 1,838 AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 101 Note 7 Discontinued operations On October 1, 2010, we completed the divestment of National Starch at a gain of €53 million. The operating results for 2010 were €74 million. For 2010, we also incurred €37 million related to further settlements and tax-related costs from the divest- ments of the businesses sold to Henkel in 2009. In total, we reported a gain from discontinued operations of €90 million. Profit from discontinued operations In € millions Revenue Expenses Results from operating activities Income tax Results from operating activities after tax Gain on the sale of National Starch Income tax on the sale Results related to discontinued operations in previous years Tax on results related to discontinued operations in previous years Profit for the period 1 Net cash form operating activities Net cash from investing activities 2 Net cash from financing activities Net cash from discontinued operations 2009 2010 878 (866) 12 13 25 – – 41 (34) 32 777 (667) 110 (36) 74 56 (3) (53) 16 90 2009 2010 19 – – 19 40 1,051 4 1,095 1 All attributable to the shareholders of the company. 2 Proceeds divestment National Starch included for €1,076 million. Deferred tax assets not recognized on the balance sheet are partly related to capital losses which cannot be offset against operational taxable profits. Movement in deferred tax in 2009 In € millions Net balance January 1, 2009 Changes in exchange rates Acquisitions/ divestments Recognized in income Recognized in equity Net balance December 31, 2009 Intangible assets Property, plant and equipment Inventories Trade and other receivables Share-based payments Provisions: – Pension liabilities and other post-retirement benefits – Restructuring – Other provisions Other items Net operating loss carryforwards Deferred tax assets not recognized Tax assets/liabilities (810) (184) 29 16 15 448 31 388 102 517 (377) 175 (33) (10) – (2) – 12 1 10 (1) (7) 9 (21) 5 6 (2) – – – – 1 (1) 1 1 11 134 (1) (2) (1) 8 (217) (4) (117) 3 174 (9) (32) – – – (5) (8) – – – (1) – – (14) (704) (189) 25 8 15 243 28 282 102 685 (376) 119 Movement in deferred tax in 2010 In € millions Net balance January 1, 2010 Changes in exchange rates Acquisitions/ divestments Recognized in income Recognized in equity Net balance December 31, 2010 Intangible assets Property, plant and equipment Inventories Trade and other receivables Share-based payments Provisions: – Pension liabilities and other post-retirement benefits – Restructuring – Other provisions Other items Net operating loss carryforwards Deferred tax assets not recognized Tax assets/liabilities (704) (189) 25 8 15 243 28 282 102 685 (376) 119 (64) (15) 1 – – 16 1 23 7 36 (31) (26) 85 9 2 – – (1) – 23 – – – 118 (30) 99 – (2) (1) (124) (15) 3 (1) 88 (1) 16 – – – (4) (3) – – – (15) – – (22) (713) (96) 28 2 11 134 14 331 93 809 (408) 205 102 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Note 8 Employee benefits Balance National Starch at divestment date Salaries, wages and other employee benefits In € millions 2010 In € millions 2009 2010 Intangible assets Property, plant and equipment Financial non-current assets Inventories Receivables Non-current liabilities and provisions Current liabilities Net assets and liabilities Cash received Cash disposed of Net cash inflow Deal result National Starch In € millions 2010 Net cash inflow Net assets and liabilities Liabilities assumed and costs allocated to the deal Realization cumulative translation reserves Deal result 563 401 8 157 198 (189) (169) 969 1,133 (57) 1,076 1,076 (969) (73) 19 53 Salaries and wages Pension and other post- retirement cost Other social charges Total Employees (2,176) (320) (459) (2,955) (2,204) (316) (460) (2,980) Average number during the year 2009 2010 Decorative Paints Performance Coatings Specialty Chemicals Corporate and other Total 22,900 20,200 11,400 1,800 56,300 21,800 20,600 11,100 1,600 55,100 At year-end 2010, we employed 55,590 staff for ongoing activities (year-end 2009: 54,740 employees). The net increase was due to: • A net increase of 870 due to acquisitions and divestments, mainly from the acquired powder coatings activities (670 employees) • A decrease of 1,770 employees due to ongoing restructuring • An increase of 1,750 employees due to new hires and other changes The average number of employees working outside the Netherlands was 50,100 (2009: 51,200). Performance-related shares Salaries, wages and other employee benefits per cost category In € millions 2009 2010 Cost of sales Selling expenses Research and development expenses General and administrative expenses Net financing expenses related to pensions and other post-retirement benefits (850) (1,035) (201) (698) (171) (978) (1,109) (206) (587) (100) Total (2,955) (2,980) Share-based compensation Share-based compensation relates to the performance- related share plan as well as the performance-related stock option plan. Charges recognized in the 2010 statement of income for share-based compensation amounted to €30 million and are included in salaries and wages (2009: €23 million). Performance-related share plan Under the performance-related share plan, a number of conditional shares are granted to the members of the Board of Management and executives each year. The number of participants of the performance-related share plan at year- end 2010 was 589 (2009: 579). The actual number of shares that will vest depends on our Total Shareholder Return (TSR) performance over a three-year period, compared with the TSR performance of a specified peer group. Our TSR perfor- mance over the period January 1, 2008, until December 31, 2010, resulted in an 11th position within the ranking of Series 2007 – 2009 2008 – 2010 2009 – 2011 2010 – 2012 Total Balance at January 1, 2010 Granted in 2010 Vested in 2010 Forfeited in 2010 Dividend in 2010 1 Balance at December 31, 2010 Vested on January 1, 2011 943,654 554,640 1,172,691 – 2,670,985 – – – 742,274 742,274 (943,654) – – – – (554,640) (30,728) (9,441) – – – – 33,270 1,175,233 22,351 755,184 (943,654) (594,809) 55,621 1,930,417 – – – – – 1 Equivalent in shares related to accumulated dividend, which is included in the balances on balance sheet date. AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 103 the peer group companies. The vesting percentage of the 2008 grant amounted to zero percent (series 2007-2009: 150,78 percent including dividend shares). As from 2009 the conditional grant of shares is linked for 50 percent to the ranking of the company in the Dow Jones Sustainability Indexes and the remaining 50 percent to the relative TSR performance of the company compared with the peer group. The fair value of the performance-related share plan at grant date is amortized as a charge against income over the three- year vesting period. The average fair value was calculated by external specialists and amounted to €46.24 per perfor- mance-related shares conditionally granted in 2010 (2009: €26.39). The 2010 charge recognized for performance-relat- ed shares aggregated €29 million (2009: €21 million). The shares of the series 2007 – 2009 have vested and were delivered to the participants in 2010. The share price of a common AkzoNobel share at December 31, 2010, amounted to €46.49 (2009: €46.40). For further details on our performance-related share plan, see page 71. Outstanding unconditional stock options 1 Year of issue Exercise price in € Outstanding per January 1, 2010 Exercised in 2010 Forfeited in 2010 Expiry date Outstanding at December 31, 2010 2001 2002 2003 2004 2005 2006 2007 Total 46.75 46.53 19.51 31.45 31.98 46.46 58.89 51,322 107,250 91,751 279,900 406,487 458,771 502,369 – – (91,751) (77,700) (109,531) (450) – – – – – (375) (6,862) 51,322 April 30, 2011 107,250 April 25, 2012 – April 22, 2010 202,200 April 25, 2011 296,581 April 24, 2012 451,459 April 26, 2013 – 502,369 April 26, 2014 1,897,850 (279,432) (7,237) 1,611,181 Number and weighted average exercise price stock options Number of options Weighted average exercise price in € Balance at January 1, 2009 2,259,618 Forfeited during the period Expired Exercised during the period (29,155) (196,040) (136,573) Balance at December 31, 2009 1,897,850 Forfeited during the period Exercised during the period (7,237) (279,432) Balance at December 31, 2010 1,611,181 42.37 43.93 46.53 25.37 43.14 45.71 27.76 45.80 1 Including the Board of Management. Stock option plans Prior to 2008, performance-related stock options were granted to members of the Board of Management and exec- utives. 2007 was the last year in which stock options were granted. We currently do not purchase own shares in connec- tion with the stock option plan. No financing facilities exist for option rights or tax payable thereon. One option entitles the holder thereof to buy one Akzo Nobel N.V. common share with the nominal value of €2. The exercise price is the Euronext Amsterdam opening price on the first day that the AkzoNobel share was quoted ex-dividend in the year of conditional grant. For American Depositary Receipts (ADR’s) a total of 23,000 option rights, to exchange for Akzo Nobel N.V. shares, remain outstanding at year-end (2009: 51,540). The stock options are equity-settled and all exercisable. The employee buys the shares upon exercise of the options. The fair value is measured at grant date and amortized over the period during which the employees become unconditionally entitled to the options. The total cost in 2010 for the stock options was € 1 million (2009: €2 million). For stock options exercised during 2010, the weighted average of the actual share price at date of exercise amounted to €44.00 (2009: €38.59). A number of 1.1 million outstanding stock options are antidilutive and could potentially dilute basic earnings per share in the future. 104 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Note 9 Intangible assets In € millions Goodwill Brands Customer lists Other intangibles Total Balance at January 1, 2009 Acquisition cost Cost of internally developed intangibles Accumulated amortization/impairment Carrying value Movements in 2009 Acquisitions through business combinations Other investments – including internally developed intangibles Amortization 1 Impairments 1 Changes in exchange rates Total changes Balance at December 31, 2009 Acquisition cost Cost of internally developed intangibles Accumulated amortization/impairment Carrying value at year-end 2009 Movements in 2010 Acquisitions through business combinations Other investments – including internally developed intangibles Divestments 2 Amortization 1 Changes in exchange rates Total changes Balance at December 31, 2010 Acquisition cost Cost of internally developed intangibles Accumulated amortization/impairment Carrying value at year-end 2010 1 Including amortization of National Starch. 2 Mainly National Starch. 4,822 2,247 1,253 – (1,258) 3,564 – (100) 2,147 – (139) 1,114 33 – – – 106 139 4 – (16) – 91 79 47 1 (106) – 28 (30) 5,063 2,338 1,334 – (1,360) 3,703 – (112) 2,226 7 – (84) – 193 116 3 1 (60) (20) 173 97 – (250) 1,084 40 1 (313) (102) 109 (265) 4,834 2,465 1,168 – (1,015) 3,819 – (142) 2,323 – (349) 819 345 32 (30) 347 10 41 (37) (9) 23 28 473 39 (137) 375 16 64 (107) (39) 38 (28) 452 46 (151) 347 8,667 32 (1,527) 7,172 94 42 (159) (9) 248 216 9,208 39 (1,859) 7,388 66 66 (564) (161) 513 (80) 8,919 46 (1,657) 7,308 AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 105 Other intangibles include licenses, know-how, intellectual property rights and development cost. Both at year-end 2010 and 2009, there were no purchase commitments for individ- ual intangible assets. No intangible assets were registered as security for bank loans. Impairment Goodwill and other intangibles with indefinite useful lives are tested for impairment per business unit (one level below segment level) in the fourth quarter or whenever an impair- ment trigger exists. In 2010, no impairment was recorded for any business unit (2009: no impairment). Amortization and impairment charges per cost category In € millions Amortization Impairment Total Cost of sales Selling expenses General and administrative expenses Research and development expenses Other operating income/(expenses) Discontinued operations Total 2009 (6) (99) (24) (6) – (24) (159) 2010 (7) (106) (36) (6) – (6) (161) 2009 2010 – – – – (8) (1) (9) – – – – – – – 2009 (6) (99) (24) (6) (8) (25) (168) 2010 (7) (106) (36) (6) – (6) (161) The impairment test is based on cash flow projections of the five-year plan. The key assumptions used in the projec- tions are: Goodwill and other intangibles per segment In € millions Goodwill Brands with indefinite useful lives 1 Other intangibles with finite useful lives • Revenue growth: based on actual experience, an analysis of market growth and the expected development of market share • Margin development: based on actual experience and management’s long-term projections. Decorative Paints Performance Coatings Specialty Chemicals Discontinued operations Total 2009 2,515 529 581 78 2010 2,556 621 642 – 2009 1,760 – – 56 2010 1,874 – 26 – 2009 798 213 464 394 2010 783 295 511 – 3,703 3,819 1,816 1,900 1,869 1,589 1 Mainly Dulux. Due to its global presence, high recognition and strategic nature, we have determined that the useful life of the Dulux brand is indefinite. Average revenue growth rates per forecast period per Business Area In %/year 2011 – 2015 2016 – 2020 Decorative Paints Performance Coatings Specialty Chemicals 7.7 5.8 3.6 5.1 3.6 2.7 Revenue growth and margin development projections are extrapolated beyond this five-year explicit forecast period for another five years with reduced growth rates. For virtually all business units, a terminal value was calcu- lated using a long-term average market growth rate that did not exceed 2 percent. The estimated pre-tax cash flows are discounted to their present value using a pre-tax weighted average cost of capital. The discount rates are determined for each business unit and range from 8.5 percent to 20.4 percent, with an average of 10.5 percent. The outcome of a sensitivity analysis of a 100 basis points adverse change in key assumptions (lower growth rates or higher discount rates respectively) did not result in a differ- ent outcome of the impairment test for the vast majority of our businesses. 106 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Note 10 Property, plant and equipment In € millions Buildings and land Other equipment Plant, equipment and machinery Total Construction in progress and prepayments on projects Assets not used in the production process Balance at January 1, 2009 Cost of acquisition Accumulated depreciation/impairment Carrying value Movements in 2009 Acquisitions through business combinations Divestments Capital expenditures 1 Transfer between categories Depreciation 1 Impairment 1 Changes in exchange rates Total changes Balance at December 31, 2009 Cost of acquisition Accumulated depreciation/impairment Carrying value at year-end 2009 Movements in 2010 Acquisitions through business combinations Divestments 2 Capital expenditures 1 Transfer between categories Depreciation 1 Impairment 1 Changes in exchange rates Total changes Balance at December 31, 2010 Cost of acquisition Accumulated depreciation/impairment Carrying value at year-end 2010 2,146 (909) 1,237 4,875 (3,181) 1,694 15 (6) 65 13 (82) (18) 24 11 35 (19) 400 9 (327) (36) 40 102 2,243 (995) 1,248 5,303 (3,507) 1,796 19 (184) 114 (11) (81) (2) 92 (53) 19 (252) 381 11 (311) (26) 128 (50) 2,254 (1,059) 1,195 5,654 (3,908) 1,746 627 (458) 169 3 (3) 46 (26) (48) – 5 (23) 623 (477) 146 – (3) 54 3 (50) (1) 7 10 664 (508) 156 250 – 250 – (2) 22 – – – 4 24 274 – 274 – (10) 7 (2) – – 10 5 279 – 279 22 (15) 7 – (1) 1 4 (1) – – 3 32 (22) 10 – (1) – (1) – – – (2) 33 (25) 8 7,920 (4,563) 3,357 53 (31) 534 – (458) (54) 73 117 8,475 (5,001) 3,474 38 (450) 556 – (442) (29) 237 (90) 8,884 (5,500) 3,384 1 Including National Starch. 2 Mainly National Starch. . In 2010, impairment charges have been recognized for an amount of €29 million (2009: €54 million). The impairment charges have been recognized in the cost of sales. The impairment charges related to restructuring activities in, among others, the US, the Netherlands, Germany, France and Sweden. The carrying value of the property, plant and equip- ment financed by hire purchase and leasing and not legally owned by the company was €13 million (2009: €17 million), €9 million of which related to buildings and land, €1 million to plant and equipment and machinery and €3 million to other equipment. Purchase commitments for property, plant and equipment totaled €47 million (2009: € 60 million). Depreciation per cost category In € millions 2009 2010 Cost of sales Selling expenses General and administrative expenses Research and development expenses Discontinued operations Total (290) (67) (53) (14) (34) (306) (68) (48) (13) (7) (458) (442) AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 107 Note 11 Investments in associates and joint ventures At year-end 2010, the carrying value of investments in associ- ates amounted to €74 million (2009: €79 million) and in joint ventures €98 million (2009: €96 million). Summary of financial information on a 100 percent basis In € millions Associates Joint ventures In 2010, the results from associates and joint ventures amounted to a profit of €25 million (2009: €21 million). The most significant associates and joint ventures of AkzoNobel are: Metlac Holdings Brl (49 percent), Metlac Spa (44 percent), Delesto B.V. (50 percent), Eka Chile SA (50 percent), Fort Amanda Specialties LLC (50 percent) and I.C. Insurance Holdings Ltd (49 percent). Information on the statement of income: 2009 2010 2009 2010 Revenue Income before tax Net income Condensed balance sheet: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Shareholders’ equity Total liabilities and equity 95 17 6 185 25 210 71 29 110 210 121 17 11 113 124 237 44 29 164 237 600 43 32 60 205 265 – 74 191 265 594 47 34 182 218 400 115 88 197 400 108 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Note 12 Other financial non-current assets Note 13 Inventories Note 14 Trade and other receivables In € millions 2009 2010 In € millions 2009 2010 In € millions 2009 2010 Loans and receivables Interest rate derivatives Other than financial instruments Total 374 27 414 815 368 – 640 1,008 Raw materials and supplies Work in progress Finished products and goods for resale Inventory prepayments Total The loans and receivables include the subordinated loan of €83 million granted to the AkzoNobel Pension Fund (APF) in the Netherlands and the non-current part of an escrow account of the AkzoNobel (CPS) pension scheme in the UK amounting to €158 million, invested in bonds and cash. Under certain conditions, the minimum annual funding of this pension fund is £25 million (€28 million). Other financial non-current assets include an amount of €448 million related to pension plans in an asset position (2009: €218 million). Of the total carrying value of inventories at year-end 2010, €53 million is measured at net realizable value (2009: €83 million). In 2010, €22 million was recognized in the statement of income for the write-down of inventories (2009: €32 million), while €8 million of write-downs was reversed (2009: €10 million). There are no inventories subject to retention of title clauses. During 2010, an amount of €8.4 billion including direct employee benefits, depreciation and amortization was recognized as costs of goods sold, out of finished goods (2009: €7.6 billion). 407 73 957 4 1,441 481 80 Trade receivables Prepaid expenses 1,113 Tax receivables other than income tax 4 1,678 Receivables from associates and joint ventures Forward exchange and commodity contracts Other receivables Discounted portion Total 1,890 2,105 130 116 36 28 382 2,582 (18) 2,564 122 135 43 34 349 2,788 – 2,788 Trade receivables are presented net of an allowance for impair- ment of €114 million (2009: €133 million). In 2010, €33 million of impairment losses were recognized in the statement of income (2009: €46 million). Ageing of trade receivables In € millions 2009 2010 Performing accounts receivable 1,592 1,843 Past due accounts receivable and not impaired: < 3 months 3 – 6 months 6 – 9 months 9 – 12 months > 12 months Impaired accounts receivables Allowance for impairment Total trade receivables 262 19 6 2 6 136 (133) 1,890 226 14 4 2 2 128 (114) 2,105 With respect to the trade and other receivables that are neither impaired nor past due, there are no indications as of reporting date that the debtors will not meet their payment obligations. AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 109 Note 15 Cash and cash equivalents Note 16 Equity Allowance for impairment of trade receivables In € millions 2009 2010 In € millions 2009 2010 Opening balance Additions charged to income Release of unused amounts Utilization Acquisitions/divestments Currency exchange differences Closing balance 137 46 (17) (39) 1 5 133 133 33 (22) (40) – 10 114 The additions to and release of the allowance for impair- ment have been included in the statement of income under selling expenses. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above. We do not hold any collateral for impaired trade receiv- ables. We do not have a significant customer concentration. Short-term investments Cash on hand and in banks Included under cash and cash equivalents in the balance sheet Debt to credit institutions Total per cash flow statement 1,171 957 2,128 (209) 1,919 1,302 1,549 2,851 (168) 2,683 Short-term investments almost entirely consist of cash loans, time deposits, marketable private borrowings and marketable securities immediately convertible into cash. For more infor- mation on credit risk management, see note 24. At December 31, 2010, an amount of €143 million in cash and cash equivalents was restricted. Restricted cash is defined as cash that cannot be accessed centrally due to regulatory or contractual restrictions and mainly related to insurance. Subscribed share capital The holders of common shares are entitled to receive divi- dends as declared from time to time and are entitled to one vote per share at the Annual General Meeting of shareholders. The holders of the priority shares are entitled to dividend of 6 percent per share or the statutory interest in the Nether- lands, whichever is lower, plus any accrued and unpaid divi- dends. They are entitled to 200 votes per share (in accor- dance with the 200 times higher nominal value per share) at the Annual General Meeting of shareholders. In addition, the holders of priority shares have the right to draw up binding lists of nominees for appoint ment to the Supervisory Board and the Board of Management; amendments to the Articles of Association are subject to the approval of the Meeting of Holders of Priority Shares. Priority shares may only be transferred to a transferee desig- nated by a Meeting of Holders of Priority Shares and against payment of the par value of the shares, plus interest at the rate of 6 percent per annum or the statutory interest in the Netherlands, whichever is lower. There are no restrictions on voting rights of holders of common or priority shares. The Articles of Association set out procedures for exercis- ing voting rights. The Annual General Meeting of shareholders has in 2010 resolved to authorize the Board of Management for a period of 18 months (i) to issue shares (or grant rights to shares) in the capital of the company up to a maximum of 10 percent, which in case of mergers or acquisitions can be increased by up to a maximum of 10 percent, of the total number of shares outstanding (and to restrict or exclude the pre-emptive rights to those shares) and (ii) to acquire shares in the capital of the company, provided that the shares that will at any time be held will not exceed 10 percent of the issued share capital. The issue or repurchase of shares requires the approval of the Supervisory Board. 110 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Cumulative translation reserves comprise all foreign exchange differences arising from the translation of the financial state- ments of foreign operations, as well as from the translation of intercompany loans with a permanent nature and liabilities and derivatives that hedge the net investments in a foreign subsidiary. Tax related to exchange differences arising on translation of foreign operations were €20 million negative (2009: €33 million negative). Equity-settled transactions include the stock option program and the performance-related share plan whereby options or shares are granted to the Board of Management and other executives. For details of the performance-related stock option plan and the performance-related share plan for the Board of Management and other executives, see note 8. Dividend We have announced a simplified dividend policy and intend to pay a stable to rising dividend, whereby a cash interim and final dividend will be paid. We will propose to the Annual General Meeting on April 27, 2011, a 2010 final dividend of €1.08 per share, which would make a total 2010 dividend of €1.40 per share (2009:€1.35). During 2010, we paid the 2009 final dividend of €1.05 and the 2010 interim dividend of €0.32. Composition of share capital at year-end In € Authorized share capital Subscribed share capital Of the shareholders’ equity of €9.0 billion, an amount of €8.2 billion (2009: €7.1 billion) was unrestricted and available for distribution – subject to the relevant provisions of our Arti- cles of Association and Dutch law. 19,200 19,200 Unrestricted reserves at year-end 400,000,000 – In € millions 2009 2010 Priority shares (48 with nominal value of €400) Cumulative preferred shares (200 million with nominal value of €2) Common shares (600 million with nominal value of €2) 1,200,000,000 467,060,908 Total 1,600,019,200 467,080,108 Outstanding common shares Number of shares 2009 2010 Outstanding at January 1 231,664,187 232,253,633 Issued in connection to stock options exercised and performance-related shares granted 589,446 1,276,821 Balance at year-end 232,253,633 233,530,454 We held no common shares at year-end 2010 or 2009. Earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the year. Weighted average number of shares Number of shares 2009 2010 Issued common shares at January 1 231,664,187 232,253,633 Effect of: Issued common shares during the year Shares for basic earnings per share for the year Effect of dilutive shares: For stock options 405,258 974,699 232,069,445 233,228,332 264,013 191,601 For performance-related shares 2,484,787 1,189,146 Shares for diluted earnings per share 234,818,245 234,609,079 Shareholders’ equity at year-end Subscribed share capital Subsidiaries’ restrictions to transfer funds Statutory reserve due to capital reduction Revaluation reserve for step acquisitions Reserve for development costs Cash flow hedge reserve Unrestricted reserves 7,775 (465) (152) (77) (7) (8) – 8,984 (467) (149) (77) (7) (16) (29) 7,066 8,239 At the Annual General Meeting of shareholders of April 26, 2001, an amendment to the Articles of Association was approved whereby the par value of the priority shares was decreased to €400 and of the common shares and the cumu- lative preferred shares to €2. As the revised nominal values are somewhat lower than the original par values, in accor- dance with section 67a of Book 2 of the Netherlands Civil Code, we recognized a statutory reserve of €77 million for this reduction in subscribed share capital. Statutory reserves also include €16 million for capitalized development costs, as well as the reserves relating to earnings retained by subsidiar- ies, associates, and joint ventures after 1983. In 2009, we acquired 70 percent equity interest in a company which we already owned for 30 percent. The revaluation of the initital interest of 30 percent was recorded on a revaluation reserve. Statutory and revaluation reserves are non-distributable. Other components of shareholders’ equity Changes in fair value of derivatives comprise the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Tax related to cash flow hedges was €15 million negative (2009: €5 million negative). AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 111 Note 17 Provisions Movements in provisions In € millions Pensions and other post- retirement benefits Restructuring of activities Environmental costs Other Total Balance at January 1, 2010 Additions made during the year Utilization Amounts reversed during the year Unwind of discount Acquisitions/divestments Pension plans changing to net asset position Changes in exchange rates Balance at December 31, 2010 Non-current portion of provisions Current portion of provisions Balance at December 31, 2010 1,439 187 (555) – – (59) 229 40 1,281 1,066 215 1,281 226 94 (178) (15) 2 (1) – 9 137 23 114 137 352 59 (35) (4) 21 (1) – 27 419 374 45 419 699 70 (155) (42) 19 (6) – 26 611 392 219 611 2,716 410 (923) (61) 42 (67) 229 102 2,448 1,855 593 2,448 Provisions for pensions and other post-retirement benefits We have a number of defined benefit pension plans. The largest pension plans are the ICI Pension Fund and the AkzoNobel (CPS) Pension Scheme in the UK which together account for 78 percent of our pension plan obligations. The benefits of these and other plans are based primarily on years of service and employees’ compensation. The funding policy for the plans is consistent with local requirements in the coun- tries of establishment. Obligations under the defined benefit plans are systematically provided for by depositing funds with trustees or separate foundations, under insurance policies, or by balance sheet provisions. Plan assets principally consist of long-term interest-earning investments, quoted equity securi- ties and real estate. Valuations of the obligations under the pension and other post-retirement plans are carried out regu- larly by independent qualified actuaries. We also provide certain healthcare and life insurance benefits to retired employees, mainly in the US and the Netherlands. We accrue for the expected costs of providing such post- retirement benefits during the service years of the employees. The main change in 2010 related to our pension and other post-retirement obligations was the divestment of National Starch, which is included within the acquisition/divestment/ transfers line of the table on the next page. The figures included in relation to National Starch divestment were a €179 million reduction in the pension defined benefit obliga- tion, a €90 million reduction in pension plan assets and an €11 million reduction in the other post-retirement benefit defined benefit obligation. Together with €40 million of unrec- ognized actuarial losses that were recognized as part of the divestment, the net balance sheet liability reduction for pensions and other post-retirement benefits was therefore €60 million. 112 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Movements in defined benefit obligation and plan assets of pensions and other post-retirement benefits In € millions Pensions Other post- retirement benefits Defined benefit obligation Balance at beginning of year Acquisitions/divestments/transfers Curtailments Settlements Past service costs Current service costs Contribution by employees Interest costs Benefits paid Actuarial gains/(losses) Changes in exchange rates 2009 2010 2009 2010 (11,468) (13,688) (441) (32) 25 197 (28) (50) (5) (746) 943 (1,703) (821) 192 6 15 (8) (52) (3) (773) 936 (250) (546) – – – 48 (7) (3) (24) 40 (7) 1 (393) 16 – – 3 (7) (3) (20) 34 4 (28) Defined benefit obligation at year-end (13,688) (14,171) (393) (394) Plan assets Balance at beginning of year Acquisitions/divestments/transfers Settlements Contribution by employer Contribution by employees Benefits paid Expected return on plan assets Actuarial gains/(losses) Changes in exchange rates Plan assets at year-end Funded status Unrecognized net loss/(gain) Unrecognized past service costs Restriction on asset recognition Medicare receivable Net balance sheet provision Recorded under: Provisions for pensions and other post-retirement benefits Other financial non-current assets Total 10,480 11,821 31 (217) 414 5 (943) 596 614 841 (105) (14) 524 3 (936) 691 652 486 11,821 (1,867) 13,122 (1,049) 1,065 637 4 – – 4 – – – – – 37 3 (40) – – – – – – – 31 3 (34) – – – – (393) (394) (4) (20) – (5) (6) (19) – (6) (798) (408) (422) (425) (1,017) 219 (798) (856) 448 (408) (422) – (422) (425) – (425) AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 113 Funded and unfunded pension plans In € millions 2009 2010 Wholly or partly funded plans Unfunded plans Total 13,347 341 13,688 13,792 379 14,171 Funded status in earlier years at December 31 In € millions Pensions Other post-retirement benefits Defined benefit obligation Plan assets Funded status 2006 (5,760) 3,942 (1,818) 2007 (4,628) 3,502 (1,126) 2008 (11,468) 10,480 (988) 2006 (292) – (292) 2007 (286) – (286) 2008 (441) – (441) The actuarial gains and losses on the defined benefit obligation and plan assets over the period 2006 – 2010 break down as follows: Actuarial gains and losses In € millions Pensions Other post-retirement benefits 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2 (199) 214 17 90 166 (29) 227 (147) 1,624 (1,445) 32 331 (2,034) 614 (1,089) (92) (158) 652 402 74 19 – 93 (3) 6 – 3 (5) 5 – – 5 (12) – (7) 23 (19) – 4 Defined benefit obligations: Due to experience Due to change in assumptions Plan assets: Due to experience Total Net periodic cost In € millions Service costs for benefits earned during the period Interest costs on defined benefit obligations Expected return on plan assets Amortization of unrecognized gains/losses Amortization of past service costs Change of restriction of asset recognition Settlement/curtailment result Total Pensions Other post-retirement benefits 2009 (50) (746) 596 (12) (23) (1) 21 (215) 2010 (52) (773) 691 (36) (7) – 6 (171) 2009 (7) (24) – – 41 – – 10 2010 (7) (20) – – 5 – – (22) The remaining plans primarily represent defined contribution plans. This includes, among others, the AkzoNobel Pension Fund in the Netherlands. The ITP2 plan in Sweden is financed through insurance with the Alecta insurance company and is classified as a multi-employer defined benefit plan. AkzoNobel does not have access to sufficient information from Alecta to enable a defined benefit accounting treatment and hence it is accounted for as a defined contribution plan. Contributions in 2010 were €10 million. Alecta’s target funding ratio in 2010 was 140 percent. The expenses of plans classified as defined contribution plans in AkzoNobel totaled €136 million in 2010 (2009: €118 million). 114 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Weighted average assumptions In % Pensions Pension benefit obligation at December 31: – Discount rate – Rate of compensation increase Net periodic pension costs: – Discount rate – Rate of compensation increase – Expected return on plan assets Other post-retirement benefits 2009 2010 2009 2010 5.6 4.6 6.3 3.5 5.2 5.4 4.6 5.6 4.6 5.7 5.3 4.9 6.0 5.3 The table below illustrates the weighted average life expec- tancy of the persons participating in the defined benefit pension plans. on the basis of the outcome of these ALM studies, taking into account the national rules and regulations. Life expectancy In years At December 31 Currently aged 60: Male Female Currently aged 45, at age 60: Male Female 2009 2010 25.3 27.8 26.8 29.1 25.5 27.9 27.0 29.2 Plan assets The assumptions for the expected return on plan assets were based on a review of the historical returns of the asset classes in which the assets of the pension plans are invested. The historical returns on these asset classes were weighted based on the expected long-term allocation of the assets of the pension plans. The primary objective with regard to the investment of pension plan assets is ensuring that each indi- vidual scheme has sufficient funds available to satisfy future benefit obligations. For this purpose so-called asset and liabil- ity management (ALM) studies are made periodically at each pension fund under responsibility of the fund managers. For each of the pension plans an appropriate mix is determined Pension plan assets principally consist of long-term interest- earning investments, quoted equity securities and real estate. At year-end 2010 and 2009, plan assets did not include finan- cial instruments issued by the company, nor any property occupied or other assets used by it. The weighted average pension plan asset allocation at year-end 2010 and 2009 and the target allocation for 2011 for the pension plans by asset category are as follows: At year-end 2010, an amount of £160 million (€186 million; 2009: £174 million or €195 million) remained in an escrow account on behalf of the AkzoNobel (CPS) Pension Scheme in the UK. The present minimum annual funding of this pension fund from the escrow account is £25 million. The current portion is included in trade and other receivables, and the non-current part in other financial non-current assets. For the latter see also note 12. Weighted average assumptions for the other post-retirement benefit plans were as follows: Plan asset allocation Assumed healthcare cost trend rates at year-end In % Plan assets at December 31 Target In %/year 2009 2010 Equity securities Long-term interest earning investments Real estate Other Total 2009 17 72 2 9 100 2010 16 73 2 9 100 2011 15 – 18 72 – 75 0 – 3 6 – 9 100 Healthcare cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate 5.8 3.8 6.7 3.8 2015 – 2024 2019 – 2024 AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 115 Note 18 Long-term borrowings Provisions for restructuring of activities Provisions for restructuring of activities comprise accruals for certain employee benefits and for costs which are directly associated with plans to exit or cease specific activities and closing down of facilities. For all restructuring provisions a detailed formal plan exists and the implementation of the plan has started or the plan has been announced before the balance sheet date. Most restructuring plans are expected to be completed within two years from the balance sheet date. For more information, see note 3. In € millions Debt issued Debt to credit institutions Other borrowings Total 2009 2010 3,276 7 205 3,488 2,684 6 190 2,880 The amounts due within one year are presented under short- term borrowings. For details on the exposure to interest rate and foreign currency risk, see note 24. Provisions for environmental costs For details on environmental exposures, see note 21. During 2010, the average effective interest rate was 6.14 percent (2009: 5.87 percent). Other provisions Other provisions relate to a great variety of risks and commit- ments, including provisions for antitrust cases, claims, other long-term employee benefits such as long-service leave and jubilee payments. At year-end 2010, the provision for antitrust cases amounted to €158 million (2009: €188 million), see note 21. The majority of the cash outflows related to other provisions are expected to be within one to five years. In calculating the other provisions, a pre-tax discount rate of on average 5 percent has been used. Debt issued In € millions 2009 2010 4 1/4 % 2003/11 (€750/€539 million) 5 5/8 % 2003/13 ($500 million) 7 3/4 % 2008/14 (€1 billion ) 7 1/4 % 2009/15 (€750 million) 7 1/4 % 2009/15 (€225 million) 8 % 2009/16 (£250 million) Other Total 533 347 993 746 259 278 120 – 375 995 748 252 289 25 3,276 2,684 Aggregate maturities of long-term borrowings In € millions Debt issued Debt to credit institutions Other borrowings Total 2012 – 2015 After 2015 2,395 2 162 2,559 289 4 28 321 Assumed healthcare cost trend rates can have a significant effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have the following effects: Sensitivity healthcare cost trends In € millions (Increase)/decrease on total of service and interest cost (Increase)/decrease on post-retirement benefit obligations 1% point increase 1% point decrease (1) (12) 1 10 In the US, the Medicare Prescription Drug Improvement and Modernization Act of 2003 introduced prescription drug benefits for retirees, as well as a federal subsidy to spon- sors of post-retirement healthcare plans, which both began on January 1, 2006. We have recognized this reimburse- ment right as an asset under other financial non-current assets, measured at fair value amounting to €6 million at December 31, 2010 (December 31, 2009: €5 million). Cash flows We expect to contribute €525 million to our defined benefit pension plans in 2011. This includes additional top-up payments of £178 million (€206 million) for the ICI Pension Fund and £85 million (€99 million) for the AkzoNobel (CPS) Pension Scheme of which £25 million (€29 million) will be paid out of the escrow account. For other post-retirement benefit plans the contribution for 2011 is expected to be €32 million. Expected benefit payments In € millions 2011 2012 2013 2014 2015 Pensions Other post- retirement 953 937 941 948 953 32 32 32 32 32 2016 – 2020 4,875 154 116 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Note 19 Short-term borrowings Note 20 Trade and other payables On December 31, 2010 and 2009, the total amount of long- term credit facilities arranged by AkzoNobel was €1.5 billion, maturing in 2013. Both at year-end 2010 and 2009, this facil- ity had not been drawn. On December 31, 2010 and 2009, none of the borrowings was secured by collateral. Finance lease liabilities are included in other borrowings and aggregated €10 million. An amount of €2 million will mature within one year and €8 million will mature in the period 2012 through 2015. In € millions 2009 2010 In € millions 2009 2010 Debt to credit institutions Borrowings from associates and joint ventures Current portion of long-term borrowings Total 209 61 114 384 168 – 739 907 In June 2011, bonds totaling €0.5 billion will mature and are as such classified as short-term borrowings. AkzoNobel has a $1.0 billion commercial paper program in the US and a €1.5 billion euro commercial paper program. On December 31, 2010, the commercial paper programs were not used (2009: € nil). The commercial paper programs can only be used to the extent that the equivalent portion of the revolving credit facility is not used. See also note 24. Suppliers 1,522 1,807 Amounts payable to employees Derivatives Non-income taxes and social security contributions Prepayments by customers Dividends Payable to related parties Other liabilities Total 230 112 209 23 17 3 750 2,866 261 137 216 24 20 30 810 3,305 AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 117 Note 21 Contingent liabilities and commitments Environmental matters We are confronted with substantial costs arising out of envi- ronmental laws and regulations, which include obligations to eliminate or limit the effects on the environment of the disposal or release of certain wastes or substances at various sites. Proceedings involving environmental matters, such as the alleged discharge of chemicals or waste materials into the air, water, or soil, are pending against us in various countries. In some cases this concerns sites divested in prior years or derelict sites belonging to companies acquired in the past. It is our policy to accrue and charge against earnings environ- mental clean-up costs when it is probable that a liability has materialized and an amount is reasonably estimable. These accruals are reviewed periodically and adjusted, if neces- sary, as assessments and clean-ups proceed and additional information becomes available. Environmental liabilities can change substantially due to the emergence of additional information on the nature or extent of the contamination, the necessity of employing particular methods of remedia- tion, actions by governmental agencies or private parties, or other factors. Cash expenditures often lag behind the period in which an accrual is recorded by a number of years. EU General Court against decisions by the EU Commission to impose fines on the company for violations of EU competi- tion laws regarding the following products: Metacrylates and Heat Stabilizers. Both cases have been provided for. The total provision for the various antitrust cases at December 31, 2010, amounted to €158 million (2009: €188 million). It should be understood that, in light of possible future devel- opments, such as (a) potential additional lawsuits by (direct or indirect) purchasers, (b) possible future civil settlements, and (c) rulings or judgments in the appeals with the General Court or in related civil suits, the antitrust cases may result in additional liabilities and related costs. At this point in time, we cannot estimate any additional amount of loss or range of loss in excess of the recorded amounts with sufficient certainty to allow such amount or range of amounts to be meaningful. Moreover, if and to the extent that the contingent liabilities materialize, they are typically paid over a number of years and the timing of such payments cannot be predicted with confidence. The company believes that the aggregate amount of any additional fines and civil damages to be paid will not materially affect the company’s financial position. The aggregate amount, however, could be material to our results of operations or cash flows in any one accounting period. As stated in note 17, the provisions for environmental costs accounted for in accordance with the aforesaid poli- cies aggregated €419 million at year-end 2010 (2009: €352 million). The provision has been discounted using an average pre-tax discount rate of 4.1 percent (2009: 4.3 percent). While it is not feasible to predict the outcome of all pending environmental exposures, it is reasonably possible that there will be a need for future provisions for environmental costs which, in management’s opinion, based on information currently available, would not have a mate- rial effect on the company’s financial position but could be material to the company’s results of operations in any one accounting period. Antitrust cases AkzoNobel is – together with others – involved in civil proceed- ings initiated by Cartel Damages Claims HP SA/NV before the Dortmund court in Germany in relation to the Hydrogen Peroxide infringement in the 1990’s. These claims are disput- ed. Two cases are pending in appeal by the company with the Other claims and litigation In 1986, an ICI subsidiary acquired a business that manu- factured and sold paint in the US and Canada, and named the company the Glidden Company (“Glidden”). Glidden was renamed as Akzo Nobel Paints LLC and is an indirect subsid- iary of the company. The seller, a predecessor of Millennium Holdings LLC (the “Seller”), now a subsidiary of LyondellBa- sell Industries, continued to manufacture and sell pigment. An alleged predecessor of Glidden and the Seller manufactured lead pigment until the 1950s and lead pigment-based paint until the 1960s. Beginning in the late 1980s, both Glidden and the Seller were named as defendants along with former producers of lead pigment and lead pigment-based paint in a number of lawsuits in the United States. These lawsuits sought damages for alleged personal injury caused by lead pigment-based paint or the costs of removing lead pigment- based paint. As the suits progressed, the plaintiffs shifted their focus to manufacturers of lead pigment. As of 2010, Glidden has been dismissed from all of these lawsuits. Under the sale agreement by which Glidden was acquired, the Seller agreed to indemnify Glidden against claims relat- ing to certain pre-completion liabilities, and Glidden also gave certain indemnities to the Seller. While Glidden did not acquire any assets or liabilities relating to the manufacture or sale of pigments, the Seller has asserted that it is entitled to indemnification under the sale agreement for certain liabilities it may have relating to lead pigment and/or lead pigment- based paint litigation. In its public disclosures, the Seller has stated that it continues to defend against a number of lead- based lawsuits although it asserts that the claims are without merit. In 2008, the Seller filed suit against Glidden in New York Supreme Court seeking to establish the alleged indemnifica- tion obligation. Glidden believes that it has no such obliga- tion to indemnify the Seller and is defending against the claim. In 2009, the Seller filed for bankruptcy as part of the bank- ruptcy of its parent LyondellBasell. An issue has arisen in the bankruptcy proceeding that could impact the indemnification claim. Under the 1986 agreement, Seller agreed to indemnify Glidden for certain environmental obligations. In the bank- ruptcy proceeding, Seller tried to reject their environmental indemnification obligations but retain their right to sue under the alleged lead paint indemnification. In 2010, the bankrupt- cy judge ruled that the indemnification obligations are part of a single agreement and Seller must choose to reject or assume the entire agreement. Seller has appealed the bankruptcy ruling. We are unable to reliably estimate any possible loss. The US Army Pensions case reported in previous years was settled in 2010. A number of other claims are pending, all of which are contested. We are also involved in disputes with tax authori- ties in several jurisdictions. While the outcome of these claims and disputes cannot be predicted with certainty, we believe, based upon legal advice and information received, that the final outcome will not materially affect our consolidated finan- cial position but could be material to our results of operations or cash flows in any one accounting period. 118 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 • In recognition of a funding deficit in the J P McDougall Pension Scheme in the UK, the company has agreed to make top-up contributions of £2 million in each year to 2018. During 2010, we considered the members of the Board of Management and the Supervisory Board to be the key management personnel as defined in IAS 24 “Related parties”. For details on their remuneration, as well as on shares and options held, see note 23. In the ordinary course of business, we have transactions with various organizations with which certain of the members of the Supervisory Board or Board of Management are associated, but no related party transac- tions were effected in 2010. Likewise, there have not been any transactions with members of the Supervisory Board or Board of Management, any other senior management personnel or any family member of such persons. Also no loans have been extended to members of the Supervisory Board or Board of Management, any other senior management personnel or any family member of such persons. Note 22 Related party transactions Commitments Purchase commitments for property, plant and equipment aggregated €47 million at year-end 2010 (2009: €60 million). In addition, we have purchase commitments for raw materials and supplies incident to the ordinary conduct of business, for a total of €1.0 billion (2009: €1.2 billion). Long-term commitments contracted in respect of lease- hold, rental, operational leases, research, etc. aggregated €605 million at year-end 2010 (2009: €572 million), as follows: We purchased and sold goods and services to various related parties in which we hold a 50 percent or less equity interest (investment in associates and joint ventures). Such transac- tions were conducted at arm’s length with terms compara- ble to transactions with third parties. In 2010, a significant related party transaction was a €166 million gas supply (2009: €218 million) by the company to Delesto, a joint venture of AkzoNobel and Essent. Delesto transforms gas into steam and electricity. The steam is used in our production processes and the electricity is sold to the market. In € millions 2009 2010 We have contracts with several pension funds, for which the financial impact is disclosed in note 17. Payments due within one year Payments between one and five years Payments due after more than five years Total 169 289 114 572 168 305 132 605 Maturity of long-term commitments Guarantees related to investments in associates and joint ventures totaled €9 million (December 31, 2009: €12 million). In connection with the Organon BioSciences divestment to Schering-Plough, AkzoNobel has limited its maximum expo- sure to claims to €850 million. The provided guarantees and indemnities have varying maturity periods. We have not recognized a provision in relation to this exposure. • At year-end 2010, AkzoNobel had a loan to the AkzoNobel Pension Fund in the Netherlands of €83 million (2009: €90 million) • In recognition of a funding deficit in the ICI Pension Fund in the UK, the company has agreed to make top-up contributions of £178 million in the year 2011, £198 million in each year from 2012 to 2016 and of £195m in 2017. • A subsidiary of the company, Imperial Chemicals Industries Limited has provided an asset-backed guarantee, via another wholly owned subsidiary, ICI Receivables Funding Ltd (ICI RF), specifically incorporated to provide the guarantee, for £250 million to support its commitment for the ICI Pension Fund (also see note 17). The guarantee is backed by the cash balances of ICI RF of £201 million and the remainder by means of letters of credit • In recognition of a funding deficit in the AkzoNobel (CPS) Pension Scheme in the UK, the company has agreed to make top-up contributions of £60 million in the year 2011 and of £75 million in each year from 2012 to 2018. In addition, contributions of at least £25m will be paid each year from the escrow account (see notes 12 and 17) until 2017 or the earlier date on which the escrow account is exhausted • In recognition of a funding deficit in the ICI Specialty Chemicals Fund in the UK, the company has agreed to make top-up contributions of £11 million in the year 2011 and of £5 million in each year from 2012 to 2017 AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 119 Note 23 Remuneration of the Supervisory Board and the Board of Management Total compensation to key management personnel amount- ed to €12.9 million (2009: €9,2 million), €7.4 million relates to short term employee benefits (2009: €5,7 million); €1.7 million to post-employment benefits (2009: €1,0 million) and €3.8 million to share-based payments (2009: €2.5 million). Supervisory Board In € Karel Vuursteen, Chairman 1 Maarten van den Bergh 2 Uwe-Ernst Bufe, Deputy Chairman Virginia Bottomley 1 Dolf van den Brink Peggy Bruzelius Antony Burgmans 1 Peter Ellwood 1 Louis Hughes Total 1 Also member of the Nomination Committee. 2 Until March 5, 2009. Total remuneration Remuneration Attendance fee Audit committee Remuneration committee Nomination committee Employer’s charges Total remuneration Committee allowance fee 2009 115,500 100,000 2,500 19,200 85,500 82,200 77,200 84,700 69,200 80,500 117,200 731,200 – 60,000 50,000 50,000 50,000 50,000 50,000 50,000 460,000 – 15,000 12,500 2,500 17,500 2,500 10,000 30,000 92,500 – – – – 20,000 15,000 – – 15,000 50,000 – – – 10,000 – – 15,000 10,000 – 15,000 2,300 119,800 2010 – – – – – – – – – 2,300 2,300 – 2,300 – 2,300 2,300 – 77,300 74,800 72,500 84,800 67,500 72,300 97,300 35,000 15,000 13,800 666,300 Members of the Supervisory Board receive a fixed remu- neration: €100,000 for the Chairman, €60,000 for the Deputy Chairman and €50,000 for the other members. Members of committees receive an extra compensation. Members living outside the Netherlands receive an attendance fee dependent on the country of residence. Members who are resident in the Netherlands do not receive an attendance fee except for meetings held outside the Netherlands. We do not grant share-based compensation to our Super- visory Board members, neither do we extend loans. Travel expenses and facilities for members of the Supervisory Board are borne by the company and reviewed by the Audit Committee. The shares in the company owned by Supervisory Board members serve as a long-term investment in the company. In accordance with the Articles of Association and good corporate governance practice, the remuneration of Super- visory Board members is not dependent on the results of the company. Shares held by the members of the Supervisory Board Number of shares at year-end 2009 2010 Karel Vuursteen Uwe-Ernst Bufe Virginia Bottomley Dolf van den Brink Peggy Bruzelius Antony Burgmans Peter Ellwood Louis Hughes 400 – 1,758 – 500 – 500 – 400 500 1,758 500 500 500 500 500 120 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Board of Management Active members The individual contracts of the members of the Board of Management are determined by the Supervisory Board within the framework of the remuneration policy adopted by the Annual General Meeting of shareholders. For more detailed information on the decisions of the Supervisory Board with respect to the individual contracts of the members of the Board of Management, see the Remuneration report. Board remuneration In € Salary Short-term incentives Other short- term benefits Post- employment benefits Share-based compensation Total remuneration Hans Wijers Leif Darner Rob Frohn Tex Gunning 1 Keith Nichols Total 1 As from May 1, 2009. 2009 2010 2009 2010 760,000 570,000 570,000 380,000 570,000 765,700 574,300 574,300 574,300 574,300 464,000 1,284,200 339,300 339,300 226,200 339,300 513,000 513,000 513,000 513,000 2,850,000 3,062,900 1,708,100 3,336,200 2009 4,100 2010 4,400 151,900 151,800 2009 2010 2009 2010 2009 2010 458,400 208,600 146,000 88,900 7,100 4,400 213,300 124,700 722,500 272,200 206,900 277,200 204,400 777,600 1,007,000 2,464,100 3,783,800 546,600 546,600 277,600 400,700 741,000 1,816,400 2,252,300 741,000 1,656,300 2,042,300 628,700 975,400 1,997,600 709,000 1,606,100 2,214,000 381,000 1,026,600 1,683,200 2,549,100 3,826,700 8,518,300 12,290,000 54,400 2,700 171,400 384,500 Short-term incentive The Supervisory Board decided in late 2009 to defer the receipt of 50 percent of the short-term incentive for the CEO and 25 percent for the other members. This deferred payment was made subject to the company achieving its medium-term target of an EBITDA margin of 14 percent at the end of 2011. Because this target was achieved in 2010 the Supervisory Board justified the pay-out of the deferred short-term incentive of 2009 in February 2011. As a consequence, an amount of €464,000 will be paid to Mr. Wijers and €113,100 to the other members of the Board of Management. These amounts are included in the short- term incentives as mentioned above; the regular short-term incentive over 2010 amounted to €820,200 for Mr. Wijers and €399,900 for the other Board members. Post-employment benefits Pension premiums were incurred over the deferred short-term incentive over 2009. These amounts, together with the premi- ums over the 2010 remuneration, are included in the post- employment benefits as presented above. Share-based compensation The costs for share-based compensation are non-cash and related to the performance-related share plan following IFRS 2. Other short-term benefits Other short-term benefits include employer’s charges and other compensations. Employer’s charges refer to social contributions and healthcare contributions. The social charges of Mr. Nichols (€162,200) related to employer’s contribution in the UK. A compensation for living expenses and home leave allowances was paid to Mr. Darner (€147,400) and Mr. Nichols (€51,100). AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 121 Stock options As from 2008, no stock options were granted to the members of the Board of Management. The aggregate numbers of stock options held by the members of the Board of Manage- ment were as follows: Number of options Hans Wijers Value of outstanding options (in €) Leif Darner Value of outstanding options (in €) Rob Frohn Value of outstanding options (in €) Keith Nichols Value of outstanding options (in €) Year of issue Exercise price in € Outstanding at January 1, 2010 Exercised in 2010 Outstanding at December 31, 2010 Expiry date 2002 2003 2004 2005 2006 2007 2004 2005 2006 2007 2006 2007 2006 2007 46.53 19.51 31.45 31.98 46.46 58.89 31.45 31.98 46.46 58.89 46.46 58.89 46.46 58.89 14,850 29,700 23,000 23,000 19,800 19,800 15,000 15,000 13,000 13,000 13,000 13,000 3,000 3,750 – (29,700) – – – – (15,000) (15,000) – – – – – – 14,850 April 25, 2012 – April 22, 2010 23,000 April 25, 2011 23,000 April 24, 2012 19,800 April 26, 2013 19,800 April 26, 2014 1,013,400 – – April 25, 2011 April 24, 2012 13,000 April 26, 2013 13,000 April 26, 2014 171,100 13,000 April 26, 2013 13,000 April 26, 2014 171,100 3,000 3,750 44,300 April 26, 2013 April 26, 2014 122 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Performance-related shares With regard to the performance related shares granted to the members of the Board of Management in 2008, the final vesting percentage of the 2008 granted equaled zero (series 2007-2009: 150.78 percent). The shares of the series 2007 - 2009 have vested in 2010 and were delivered to the individual Board members in 2010. Shares in the company and options of the members of the Board of Management are held in an account, administered by the Stichting Executive Management Beheer. This Founda- tion acts as an independent portfolio manager for AkzoNo- bel participants. We do not provide loans to members of the Board of Management. Number of performance-related shares Hans Wijers Leif Darner Rob Frohn Tex Gunning Keith Nichols Series Balance at January 1, 2010 Granted in 2010 Vested in 2010 Forfeited in 2010 Dividend in 2010 Balance at December 31, 2010 Vested on January 1, 2011 2007 – 2009 2008 – 2010 2009 – 2011 2010 – 2012 2007 – 2009 2008 – 2010 2009 – 2011 2010 – 2012 2007 – 2009 2008 – 2010 2009 – 2011 2010 – 2012 2008 – 2010 2009 – 2011 2010 – 2012 2007 – 2009 2008 – 2010 2009 – 2011 2010 – 2012 34,680 18,352 38,463 – 22,768 12,672 28,795 – 22,768 12,672 28,795 – 4,224 28,795 – 6,408 9,540 28,795 – – – – 24,400 – – – 18,300 – – – 18,300 – – 18,300 – – – 18,300 34,680 – – – 22,768 – – – 22,768 – – – – – – 6,408 – – – – 18,352 – – – 12,672 – – – 12,672 – – 4,224 – – – 9,540 – – – – 1,175 744 – – 879 558 – – 879 558 – 879 558 – – 879 558 – – 39,638 25,144 – – 29,674 18,858 – – 29,674 18,858 – 29,674 18,858 – – 29,674 18,858 – – – – – – – – – – – – – – – – – – – Former members of the Board of Management In 2010, charges for former members of the Board of Manage- ment amounted to €382,000 (2009: €66,600), mainly due to pension expenses. Shares held by the Board of Management Number of shares at year-end 2009 2010 Hans Wijers Leif Darner Rob Frohn Keith Nichols 58,234 36,473 33,056 3,443 75,324 51,162 22,751 7,069 AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 123 Note 24 Financial risk management and financial instruments Our activities expose us to a variety of financial risks: market risk (including: currency risk, fair value interest rate risk and price risk), credit risk and liquidity risk. These risks are inherent to the way we operate as a multinational with a large number of locally operating subsidiaries. Our overall risk manage- ment program seeks to identify, assess, and – if necessary – mitigate these financial risks in order to minimize potential adverse effects on our financial performance. Our risk mitigat- ing activities include the use of derivative financial instruments to hedge certain risk exposures. The Board of Management is ultimately responsible for risk management. Day-to-day risk management activities are carried out by a central treasury department (Corporate Treasury) in line with clearly identified and formalized corporate policies and in line with the Treasury Statute. Corporate Treasury identifies, evaluates and hedges financial risks at a corporate level, and monitors compliance with the corporate policies approved by the Board of Manage- ment, except for commodity risks, which are subject to iden- tification, evaluation and hedging at business unit level rather than at corporate level. We have a Corporate Finance & Trea- sury Committee in place that advises the CFO in respect of the financial policy and evaluates the scope and performance of liquidity, interest, credit and currency risk management. The businesses play an important role in the process of iden- tifying financial risk factors. Within the boundaries set in the corporate policies, the subsidiaries perform the appropriate risk management activities. We have treasury hubs which provide treasury services on behalf of Corporate Treasury to subsidiaries in their region. These treasury hubs are located in Brazil (São Paulo), Asia (Singapore/Shanghai) and the United States (Chicago) and are primarily responsible for local cash management and short-term financing. The Treasury Statute does not allow for extensive treasury operations to be executed at subsidiary level directly with external parties. It is corporate policy that derivatives are entered into through Corporate Treasury. Hedged notional amounts at year-end In € millions US dollar Pound sterling Swedish krona Other Total Buy 2009 Sell 2009 Buy 2010 Sell 2010 241 848 270 296 1,474 144 91 252 214 659 390 304 977 158 51 302 1,655 1,961 1,567 1,488 robust set of internal controls over treasury operations. We use a well-known treasury management system to support our treasury activities. Foreign exchange risk management Trade and financing transactions Our subsidiaries operate in a large number of countries, and as such have clients and suppliers in many countries. Many of these subsidiaries have clients and suppliers that are outside of their functional currency environment. This creates curren- cy exposure which is partly netted out on consolidation. The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual functional curren- cy net cash flows resulting from trade or financing transac- tions are adversely affected by changes in exchange rates. Our policy defines that we hedge our transactional foreign exchange rate exposures above predefined thresholds from recognized assets and liabilities. Cash flow hedge accounting is applied by exception. Corporate Treasury enters into derivative transactions with external parties and is bound by overnight limits per currency. Where hedging through Corporate Treasury is not feasible under local legislation, local hedging may take place. Translation risk related to investments in foreign subsidiaries associates and joint ventures We have subsidiaries with a functional currency other than the euro. Therefore our consolidated financial statements are exposed to translation risk related to equity, intercompany loans of a permanent nature and earnings of foreign subsid- iaries and investment in associates and joint ventures. In prin- ciple, we do not use financial instruments to hedge this risk. In the following cases, we apply net investment hedge accounting. We have forward contracts to sell $780 million and buy £405 million, maturing in December 2011. This contract hedges the foreign currency risk on $780 million of net investments in foreign operations held by a pound sterling subsidiary. Net investment hedge accounting is also applied on hedges of pound sterling net investments in foreign opera- tions which were hedged by a £250 million bond. In 2010, both of the hedges were fully effective. In 2010, we applied cash flow hedge accounting for the acqui- sition of the acquired powder coatings activities. An amount of $130 million was hedged with forward contracts. The effec- tive hedge realized a gain of €10 million which is included in the amount recognized in the statement of income in note 2. Corporate Treasury is responsible for reporting to the Board of Management on company-wide exposures on a number of financial risks. This includes information regarding liquid- ity, foreign exchange, interest rate, capital and credit risk. In addition, Corporate Treasury is responsible for maintaining a In general, forward exchange contracts that we enter into have a maturity of less than one year. When necessary, forward exchange contracts are rolled over at maturity. Currency derivatives are not used for speculative purposes. The foreign exchange and interest rate risks on $800 million of the divestment of National Starch was hedged using forward contracts and cash flow hedge accounting was applied. A gain of €60 million was realized on the effective hedge and is included in the net cash inflow in note 7. 124 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Foreign currency transaction risk The table above presents a breakdown of the notional amounts of outstanding foreign currency contracts for entities with other functional currencies than the euro. Sensitivity analysis We perform foreign currency sensitivity analysis by applying an adjustment to the spot rates prevailing at year-end. This adjustment is based on observed changes in the exchange rate in the past and management expectation for possible future movements. We then apply the expected possible volatility to revalue all monetary assets and liabilities (includ- ing derivative financial instruments) in a currency other than the functional currency of the subsidiary in its balance sheet at year-end. At year-end 2010, if the euro had weakened/strengthened by 10 percent against the US dollar with all other variables held constant, post-tax profit for the year would have been €2 million (2009: €6 million) lower/higher. At year-end 2010, if the euro had weakened/strengthened by 10 percent against the pound sterling with all other variables held constant, post-tax profit for the year would have been €3 million (2009: €1 million) lower/higher. Price risk management Commodity price risk management We use commodities, gas and electricity in our produc- tion processes and we are particularly sensitive to energy price movements. Our Specialty Chemicals companies in the US hedge the price risk on natural gas through buying natural gas futures on the New York Mercantile Exchange. At year-end 2010, the notional amounts of these futures are 1.3 million dekatherms, spread over all 12 months of 2011 (2009: 1.7 million dekatherms, spread over all 12 months of 2010). The total fair value change of these futures is € nil at year-end (2009: € nil). No hedge accounting is applied to the changes of the fair value of these contracts. are located in Hengelo (80 MW), Rotterdam (20 MW) and Mariager, Denmark (20 MW). The power plants transform natural gas into steam and electricity. The steam is used in our production facilities and excess electricity is sold on the market. The price for natural gas in our purchase contracts is a fixed or floating price. In order to hedge the price risk of natural gas in these contracts, we have partly entered into option contracts for the underlying oil price. In 2010 the fair value changes of these contracts amounted to a €2 million loss net of taxes (2009: €1 million loss). Income volatility caused by energy prices of the unit in Denmark has been hedged by an electricity price swap. The fair value changes of this contract amounted to a €1 million gain net of taxes (2009: € nil). We do not apply hedge accounting to the changes of the fair value of the hedge contracts. To hedge the price risk of electricity that is used for the Specialty Chemicals plants in Sweden and Finland, we entered into future contracts on the power exchange Nord Pool Spot, based on expected use of electricity over the period 2011 – 2014. We apply cash flow hedge account- ing to these contracts in order to mitigate the accounting mismatch that would otherwise occur. The effective part of the fair value changes of these contracts amounted to a €29 million gain net of deferred taxes in equity (2009: €12 million net deferred loss). In 2010, nothing was record- ed in cost of goods sold due to ineffectiveness (2009: € nil loss). The amounts deferred in equity at year-end are expected to affect operational cost within the next four years. Sensitivity analysis We perform our commodity price risk sensitivity analysis by applying an adjustment to the forward rates prevailing at year-end. This adjustment is based on observed changes in commodity prices in the previous year and management expectations for possible future movements. We then apply the expected volatility to revalue all commodity-derivative financial instruments in the applicable commodity in our balance sheet at year-end. For the purpose of this sensitiv- ity analysis, the change of the price of the commodity is not discounted to the net present value at balance sheet date. To hedge the price risks related to energy supply in the Neth- erlands, we operate one power plant in joint venture with Essent/RWE in Delfzijl of 520 MW. AkzoNobel power plants At year-end 2010, if a parallel adjustment of the price curve of natural gas by €8,000 per 10,000 dekatherms up/down as compared with the market prices prevailing at that date had occurred, with all other variables held constant, post-tax profit would have been €1 million (2009: €2 million) higher/lower. This is due to the fair value changes of natural gas derivatives. At year-end 2010, if the price of oil had weakened/strength- ened by €7 per barrel (10 percent) as compared with the market prices prevailing at that date, with all other variables held constant, post-tax profit for 2010 would have been €2 million higher/lower (2009: € nil). Nevertheless over the full term of the (partially long-term) contracts, net impact on post- tax profit will be € nil. At year-end 2010, if the forward price of electricity on the Nord Pool exchange had weakened/strengthened by €5,66 per MWh (10 percent) as compared with the market prices prevailing at that date, with all other variables held constant, equity would have been €13 million (2009: €8 million) higher/ lower. This is due to the fair value changes of electric- ity futures which have been accounted for under cash flow hedge accounting. Cash flow and fair value interest rate risk management We are partly financed with debt in order to obtain more effi- cient leverage. Fixed rate debt results in fair value interest rate risk. Floating rate debt results in cash flow interest rate risk. The fixed/floating rate of our outstanding bonds shifted from 85 percent fixed at year-end 2009 to 80 percent fixed at year- end 2010. We have entered into a number of interest rate swap contracts. A total of $500 million fixed rate liabilities with an interest rate of 5.625 percent were swapped with a three-month floating rate US dollar Libor plus an average of 1.1056 percent liabili- ties maturing in 2013. We classified these interest rate swaps as fair value hedges and recorded them at fair value until the derivatives were closed out in Q3 2010. Fair value hedge accounting was applied to the above- mentioned interest rate swaps and fixed rate bond until close out date. During 2010, an amount of €16 million has been accounted for in the statement of income for fair value changes of the interest rate swaps and an amount of €15 million has been accounted for in the statement of income AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 125 Investments in cash and cash equivalents and transactions involving derivative financial instruments are entered into with counterparties that have sound credit ratings and good reputation. Derivative transactions are concluded mostly with parties with whom we have contractual netting agree- ments and ISDA agreements in place. In the Treasury Statute limits are set per counterparty for the different types of finan- cial instruments the company uses. We closely monitor the acceptable counterparty credit ratings and credit limits and revise where required in line with the market circumstances. We have no reason to expect non-performance by the coun- terparties for these financial instruments. Due to our geographical spread and the diversity of our customers, we were not subject to any significant concen- tration of credit risks at balance sheet date. Generally, the maximum exposure to credit risk is represented by the carrying value of financial assets, including derivative financial instru- ments, in the balance sheet. At year-end 2010, the credit risk on consolidated level was €6.0 billion (2009: €5.0 billion) for long-term borrowings given, trade and other receivables and cash. Our credit risk is well spread amongst both global and local counterparties. Our largest counterparty risk amounted to €299 million at year-end 2010. The credit risk from trade receivables is measured and analyzed at a local operating entity level, mainly by means of ageing analysis, see note 14. as an adjustment to the carrying amount of the hedged bond for fair value changes attributable to the hedged risk. The fully effective hedge relationship was discontinued following the close out of the interest rate swaps. Adjustments to the carrying amount of the hedged financial instrument have been amortized to profit and loss (interest). The effective interest rate (excluding hedge results) over 2010 was 6.64 percent. Combined with the hedge result (interest rate swaps), the effective interest rate was 6.14 percent. Sensitivity analysis At year-end 2010, if EURIBOR interest rates had been 100 basis points higher/lower with all other variables held constant, post-tax profit for the year would have been €5 million higher/lower (2009: €6 million higher/lower). At year-end 2010, if US LIBOR interest rates had been 100 basis points higher/lower, with all other variables held constant, post-tax profit for the year would have been €nil million higher/lower (2009: €3 million lower/higher) . At year-end 2010, if GBP LIBOR interest rates had been 100 basis points higher/lower, with all other variables held constant, post-tax profit for the year would have been €1 million higher/lower (2009: €2 million higher/lower). Credit risk management Credit risk arises from financial assets such as cash and cash equivalents, derivative financial instruments with a positive fair value, deposits with banks and financial institutions, and trade receivables. We have a credit risk management policy in place to limit credit losses due to non-performance of financial coun- terparties and customers. We monitor our exposure to credit risk on an ongoing basis at various levels. We only deal with counterparties that have a sufficiently high credit rating. Generally, we do not require collateral in respect of financial assets. 126 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Maturity of liabilities and cash outflows In € millions Less than 1 year Between 1 and 5 years Over 5 years At December 31, 2009: Borrowings Interest on borrowings Finance lease liabilities Trade and other payables Forward foreign exchange contracts (hedges): – Outflow – Inflow Interest rate swaps: – Outflow – Inflow Other derivatives: – Outflow – Inflow Total At December 31, 2010: Borrowings Interest on borrowings Finance lease liabilities Trade and other payables Forward foreign exchange contracts (hedges): – Outflow – Inflow Other derivatives: – Outflow – Inflow Total 381 236 3 2,866 2,372 (2,068) 12 (20) 103 (28) 3,857 905 238 2 3,305 2,350 (2,267) – 44 2,163 771 11 – 569 (477) 47 (68) 26 (18) 1,313 93 – – – – – – – – 3,024 1,406 2,531 673 322 12 8 – – – 1 – – – – – – – 4,577 3,213 334 Liquidity risk management The primary objective of liquidity management is to provide for sufficient cash and cash equivalents at all times and any place in the world to enable us to meet our payment obligations. We aim for a well-spread maturity schedule of our long-term borrowings and a strong liquidity position. At year-end 2010, we had €2.7 billion available as cash and cash equivalents (2009: €1.9 billion), see note 15. In addi- tion, we have a €1.5 billion multi-currency revolving credit facility expiring in 2013. Both at year-end 2010 and 2009, this facility had not been drawn. We have a commercial paper program in the US, which at both year-end 2010 and 2009 had a maximum of $1.0 billion and a euro commercial paper program, which at both year-end 2010 and 2009 ad a maximum of €1.5 billion. At December 31, 2010 and 2009, the commercial paper programs were not used. The commer- cial paper programs can only be used to the extent that the equivalent portion of the revolving credit facility is not used. The opposite table analyzes our cash outflows per maturity group based on the remaining period at balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Capital risk management Our objectives when managing capital are to safeguard our ability to satisfy our capital providers and to maintain a capital structure that optimizes our cost of capital. For this we maintain a conservative financial strategy, with the objective to remain a strong investment grade company as rated by the rating agencies Moody’s and Standard & Poor. The credit rating at year-end 2010 was Baa1/BBB+ (year-end 2009: Baa1/BBB+ with a negative outlook). The capital structure can be altered, among others, by adjusting the amount of divi- dends paid to shareholders, return capital to capital providers, or issue new debt or shares. Consistent with others in the industry, we monitor capital on the basis of funds from operations in relation to our net borrowings level (FFO/NB-ratio). The FFO/NB-ratio for 2010 at year-end amounted to 0.49 (2009: 0.23). Funds from oper- ations are based on net cash from operating activities, which AkzoNobel Report 2010 | Financial statements | Notes to the consolidated financial statements 127 Fair value per financial instruments category In € millions 2009 year-end: Other financial non-current assets Trade and other receivables Cash and cash equivalents Total financial assets Long-term borrowings Short-term borrowings Trade and other payables Total financial liabilities 2010 year-end: Other financial non-current assets Trade and other receivables Cash and cash equivalents Total financial assets Long-term borrowings Short-term borrowings Trade and other payables Total financial liabilities Carrying value per IAS 39 category Carrying amount Out of scope of IFRS 7 Loans and receivables/ other liabilities At fair value through profit or loss Total carrying value Fair value 815 2,564 2,128 5,507 3,488 384 2,866 6,738 1,008 2,788 2,851 6,647 2,880 907 3,305 7,092 414 246 – 660 – – 1,231 1,231 640 257 – 897 – – 1,361 1,361 374 2,290 – 2,664 3,488 384 1,523 5,395 368 2,497 – 2,865 2,880 907 1,807 5,594 27 28 2,128 2,183 – – 112 112 – 34 2,851 2,885 – – 137 137 401 2,318 2,128 4,847 3,488 384 1,635 5,507 368 2,531 2,851 5,750 2,880 907 1,944 5,731 416 2,318 2,128 4,862 3,848 384 1,635 5,867 386 2,531 2,851 5,768 3,266 914 1,944 6,124 is adjusted, among others, for the elimination of changes in working capital, additional payments for pensions and for the effects of the underfunding of pension and other post-retire- ment benefit obligations. Net borrowings is calculated as a total of long and short-term borrowings less cash and cash equivalents, adding an after-tax amount for the underfunding of pension and other post-retirement benefit obligations and lease commitments. Fair value of financial instruments and IAS 39 categories Loans and receivables and other liabilities are recognized at amortized cost, using the effective interest method. We esti- mated the fair value of our long-term borrowings based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt with similar maturities. The carrying amounts of cash and cash equivalents, receiv- ables less allowance for impairment, short-term borrowings and other current liabilities approximate fair value due to the short maturity period of those instruments. We have not applied the fair value option allowed under IFRS and reported certain energy purchasing contracts as held for trading. The only financial instruments accounted for at fair value through profit or loss are derivative financial instruments and the short-term investments included in cash. The fair value of foreign currency contracts, swap contracts, forward rate agreements, oil contracts and gas futures was deter- mined by valuation techniques using market observable input (such as foreign currency interest rates based on Reuters) and by obtaining quotes from dealers and brokers. The following valuation methods for financial instruments carried at fair value through profit or loss are distinguished: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities • Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable). 128 Notes to the consolidated financial statements | Financial statements | AkzoNobel Report 2010 Company financial statements Statement of income In € millions Note 2009 2010 Net income from subsidiaries, associates and joint ventures Other net income Total net income Balance sheet as of December 31, before allocation of profit In € millions Note Assets Non-current assets Financial non-current assets Loans to associates and joint ventures Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Subscribed share capital Additional paid-in capital Cash flow hedge reserves Revaluation reserve Other statutory reserves Cumulative translation reserves Other reserves Undistributed profit Shareholders’ equity Non-current liabilities Provision for subsidiaries Long-term borrowings Total non-current liabilities Current liabilities Other short-term debt Total current liabilities Total equity and liabilities b b c c d e c f g 355 (70) 285 723 31 754 2009 2010 15,418 11 201 775 465 2 (6) 7 237 (777) 7,632 215 481 7,744 16,874 – 15,429 16,874 265 1,459 976 16,405 1,724 18,598 467 9 29 7 242 (43) 7,594 679 289 8,245 8,984 7,775 8,225 8,534 405 1,080 405 16,405 1,080 18,598 AkzoNobel Report 2010 | Financial statements | Company financial statements 129 Movement in shareholders’ equity In € millions Subscribed share capital Additional paid-in capital Cash flow hedge reserve Revaluation reserve Other statutory reserves Cumulative translation reserves Other reserves Undistributed results Shareholders' equity Statutory reserves Balance at January 1, 2009 463 Changes in fair value of derivatives Revaluation related to step acquisitions Changes in exchange rates in respect of subsidiaries, associates and joint ventures Net income Comprehensive income Dividend paid Equity-settled transactions Issue of common shares Addition to other reserves Changes in statutory reserves – – – – – – – 2 – – Balance at December 31, 2009 465 Changes in fair value of derivatives Changes in exchange rates in respect of subsidiaries, associates and joint ventures Net income Comprehensive income Dividend paid Equity-settled transactions Issue of common shares Addition to other reserves Acquisition of non-controlling interests – – – – – – 2 – – Balance at December 31, 2010 467 – – – – – – – – 2 – – 2 – – – – – – 7 – – 9 (49) 43 – – – 43 – – – – – (6) 35 – – 35 – – – – – 29 – – 7 – – 7 – – – – – 7 – – – – – – – – – 7 236 (1,130) 9,122 (1,179) 7,463 – – – – – – – – – 1 – – 353 – 353 – – – – – 237 (777) – – – – – – – 5 – – 734 – 734 – – – – – – – – – – – 15 – (1,504) (1) 7,632 – – – – – 27 – (35) (30) 242 (43) 7,594 – – – 285 285 (395) – – 1,504 – 215 – – 754 754 (320) – – 30 – 679 43 7 353 285 688 (395) 15 4 – – 7,775 35 734 754 1,523 (320) 27 9 – (30) 8,984 130 Company financial statements | Financial statements | AkzoNobel Report 2010 Note a General information Note c Financial non-current assets and provision for subsidiaries The financial statements of Akzo Nobel N.V. have been prepared using the option of section 362 of Book 2 of the Netherlands Civil Code, meaning that the accounting prin- ciples used are the same as for the consolidated financial statements. Foreign currency amounts have been translated, assets and liabilities have been valued, and net income has been determined, in accordance with the principles of valua- tion and determination of income presented in note 1 to the consolidated financial statements. Subsidiaries of Akzo Nobel N.V. are accounted for using the equity method. As the financial data of Akzo Nobel N.V. are included in the consolidated financial statements, the statement of income of Akzo Nobel N.V. is condensed in conformity with section 402 of Book 2 of the Netherlands Civil Code. The remunera- tion paragraph is included in note 23 of the consolidated financial statements. Note b Net income from subsidiaries, associates and joint ventures For further details on net income from subsidiaries, associates and joint ventures, see note c. Movements in financial non-current assets In € millions Total Share in capital Loans 1 Subsidiaries Balance at January 1, 2009 Acquisitions/capital contributions Divestments/capital repayments Net income from subsidiaries, associates and joint ventures Equity-settled transactions Change in fair value of derivatives Loans granted Repayment of loans Changes in exchange rates Other changes Transfer to provision for subsidiaries 14,095 3,167 (3,769) 355 15 43 3,377 (2,210) 366 (47) 37 8,505 3,127 (3,769) 355 15 43 – – 271 (47) 37 5,481 – – – – – 3,377 (2,202) 104 – – Balance at December 31, 2009 15,429 8,537 6,760 Acquisitions/capital contributions Divestments/capital repayments Net income from subsidiaries, associates and joint ventures Equity-settled transactions Change in fair value of derivatives Loans granted Repayment of loans Changes in exchange rates Other changes Change to provisions for subsidiaries 2 111 (115) 723 27 31 3,406 (3,251) 816 (111) (192) 109 (68) 723 27 31 – – 686 (124) (192) – – – – – 3,406 (3,240) 130 – – Balance at December 31, 2010 16,874 9,729 7,056 1 Loans to these companies have no fixed repayment schedule. 2 At year-end 2010 the provisions for subsidiaries amounted to €289 million. Other financial non-current assets Loans to associates and joint ventures 90 40 – – – – – – (9) – – 121 2 (47) – – – – – – 13 – 89 19 – – – – – – (8) – – – 11 – – – – – – (11) – – – – AkzoNobel Report 2010 | Financial statements | Company financial statements 131 Note d Trade and other receivables In € millions 2009 2010 Receivables from subsidiaries Receivables from associates and joint ventures FX contracts Other receivables Total 47 – 110 44 201 63 16 134 52 265 Note e Cash and cash equivalents In € millions 2009 2010 Short-term investments Cash on hand and in banks Total 704 71 775 878 581 1,459 Note f Long-term borrowings In € millions 2009 2010 Debentures Debt to subsidiaries Other borrowings Total 1,842 5,752 150 7,744 1,289 6,916 40 8,245 At year-end 2010 and 2009, the total amount of long-term credit facilities arranged by AkzoNobel was €1.5 billion, maturing in 2013. Both at year-end 2010 and 2009, this facil- ity had not been drawn. At year-end 2010 and 2009, none of the borrowings was secured by collateral. Borrowings from subsidiaries have no fixed repayment schedule. Interest charged on these borrowings averaged 0.9 percent in 2010 (2009: 1.0 percent). Note g Short-term debt In € millions 2009 2010 Current portion of long-term borrowings Debt to subsidiaries FX contracts Borrowings from associates and joint ventures Short-term bank loans Debt related to pensions Debt to other suppliers Other liabilities Total 64 10 13 62 5 – 23 228 405 702 8 22 40 10 6 19 273 1,080 Akzo Nobel N.V. has a euro commercial paper program, which at year-end 2010 and 2009 had a maximum of €1.5 billion. At year-end 2010 and 2009, the commercial paper program was not used. Note i Contingent liabilities Akzo Nobel N.V. is parent of the group’s fiscal unit in the Neth- erlands, and is therefore liable for the liabilities of said fiscal unit as a whole. Akzo Nobel N.V. has declared in writing that it accepts joint and several liability for contractual debts of certain Dutch consolidated companies (section 403 of Book 2 of the Neth- erlands Civil Code). These debts, at December 31, 2010, aggregating €0.4 billion (2009: €0.5 billion), are included in the consolidated balance sheet. Additionally, at December 31, 2010, guarantees were issued on behalf of consolidated companies for an amount of €2.4 billion (2009: €2.8 billion), including a guarantee issued by Akzo Nobel N.V. in relation to the exemption of Dulux Paints (Ireland) Ltd, under section 5(c) of the companies (amendment) Act 1986 Ireland. The debts and liabilities of the consolidated companies underlying these guarantees are included in the consoli- dated balance sheet or in the amount of long-term liabilities contracted in respect of leasehold, rental, operational leases, research, etc. as disclosed in note 21 of the notes to the consolidated financial statements. Guarantees relating to associates and joint ventures amounted to €9 million (2009: €12 million). For the fair value of the debenture loans and the related inter- est-rate derivatives, see note 24 of the notes to the consoli- dated financial statements. Note h Financial instruments Debentures In € millions 2009 2010 4 1/4 % 2003/11 (€750/€539 million) 7 1/4 % 2009/15 (€750 million) 7 1/4 % 2009/15 (€225 million) 8 % 2009/16 (£250 million) Other Total 533 746 259 278 26 – 748 252 289 – 1,842 1,289 At December 31, 2010, Akzo Nobel N.V. had outstanding foreign exchange contracts to buy currencies for a total of €1.6 billion (December 31, 2009: €1.6 billion), while contracts to sell currencies totaled €1.5 billion (December 31, 2009: €1.6 billion). The contracts mainly related to US Dollars, Pound Sterling, Swedish Krona and Swiss Franc, and all have maturities within one year. These contracts offset the foreign exchange contracts concluded by the subsidaries, and the fair value changes are recognized in the statement of income to offset the fair value changes on the contracts with the subsidaries. For information on risk exposure and risk management, see note 24 of the notes to the consolidated financial statements. 132 Company financial statements | Financial statements | AkzoNobel Report 2010 In the Netherlands Network outside the Netherlands Total In the Netherlands Network outside the Netherlands Total 3.4 0.5 – – 3.9 6.9 0.1 0.4 0.3 7.7 2009 10.3 0.6 0.4 0.3 11.6 3.5 0.3 – 0.1 3.9 8.1 0.2 0.5 0.2 9.0 2010 11.6 0.5 0.5 0.3 12.9 Note j Auditor’s fees In € millions Audit Audit-related Tax Other services Total Amsterdam, February 16, 2011 The Board of Management Hans Wijers Leif Darner Rob Frohn Tex Gunning Keith Nichols The Supervisory Board Karel Vuursteen Uwe-Ernst Bufe Virginia Bottomley Dolf van den Brink Peggy Bruzelius Antony Burgmans Peter Ellwood Louis Hughes AkzoNobel Report 2010 | Financial statements | Company financial statements 133 Other information Independent auditor’s report To the Supervisory Board and the Annual General Meeting of shareholders of Akzo Nobel N.V. Report on the financial statements We have audited the accompanying financial statements 2010 of Akzo Nobel N.V., Amsterdam as set out on pages 85 to 133. The financial statements include the consolidated finan- cial statements and the company financial statements. The consolidated financial statements comprise the consolidated balance sheet as at December 31, 2010, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of the significant accounting policies and other explanatory information. The company financial statements comprise the company balance sheet as at December 31, 2010, the company statement of income for the year then ended and the notes, comprising a summary of the account- ing policies and other explanatory information. Management’s responsibility Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with part 9 of Book 2 of the Netherlands Civil Code, and for the preparation of the report of the Board of Management in accordance with part 9 of Book 2 of the Netherlands Civil Code. Furthermore, management is respon- sible for such internal control as it determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical require- ments and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 134 Other information | Financial statements | AkzoNobel Report 2010 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the audi- tor’s judgment, including the assessment of the risks of mate- rial misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circum- stances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as valuating the overall presentation of the financial statements. Report on other legal and regulatory requirements Pursuant to the legal requirements under section 2:393 sub 5 at e and f of the Netherlands Civil Code, we have no deficien- cies to report as a result of our examination whether the report of the Board of Management, to the extent we can assess, has been prepared in accordance with part 9 of Book 2 of this Code, and if the information as required under section 2:392 sub 1 at b - h has been annexed. Further, we report that the report of the Board of Management as set out on pages 1 to 84, to the extent we can assess, is consistent with the financial statements as required by section 2:391 sub 4 of the Netherlands Civil Code. Amsterdam, February 16, 2011 KPMG ACCOUNTANTS N.V. We believe that the audit evidence we have obtained is suffi- cient and appropriate to provide a basis for our audit opinion. E.H.W. Weusten RA Opinion with respect to the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of Akzo Nobel N.V. as at December 31, 2010 and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with part 9 of Book 2 of the Netherlands Civil Code. Opinion with respect to the company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of Akzo Nobel N.V. as at December 31, 2010 and of its result for the year then ended in accordance with part 9 of Book 2 of the Nether- lands Civil Code. Profit allocation and distributions Article 43 43.6 The Board of Management shall be authorized to determine, with the approval of the Supervisory Board, what share of profit remaining after application of the provisions of the fore- going paragraphs shall be carried to reserves. The remaining profit shall be placed at the disposal of the Annual General Meeting of shareholders, with due observance of the provi- sions of paragraph 7, it being provided that no further divi- dends shall be paid on the preferred shares. 43.7 From the remaining profit, the following distributions shall, to the extent possible, be made as follows: (a) to the holders of priority shares: 6 percent per share or the statutory interest referred to in paragraph 1 of article 13, whichever is lower, plus any accrued and unpaid dividends (b) to the holders of common shares: a dividend of such an amount per share as the remaining profit, less the aforesaid dividends and less such amounts as the Annual General Meeting of shareholders may decide to carry to reserves, shall permit. 43.8 Without prejudice to the provisions of paragraph 4 of this article and of paragraph 4 of article 20, the holders of common shares shall, to the exclusion of everyone else, be entitled to distributions made from reserves accrued by virtue of the provision of paragraph 7b of this article. 43.9 Without prejudice to the provisions of article 42 and para- graph 8 of this article, the Annual General Meeting of share- holders may decide on the utilization of reserves only on the proposal of the Board of Management approved by the Supervisory Board. Article 44 44.7 Cash dividends by virtue of paragraph 4 of article 20, article 42, or article 43 that have not been collected within five years of the commencement of the second day on which they became due and payable shall revert to the company. Proposal for profit allocation With due observance of Dutch law and the Articles of Associa- tion, €754 million of net income is carried to the other reserves. Furthermore, with due observance of article 43, paragraph 7, it is proposed that dividend on priority shares of €1,152 and on common shares of €326 million (to be increased by divi- dend on shares issued in 2011 before the ex-dividend date) will be distributed. Following the acceptance of this proposal, the holders of common shares will receive a dividend of €1.40 per share of €2, of which €0.32 was paid earlier as an interim dividend. The final dividend of €1.08 will be made available from May 10, 2011. Special rights to holders of priority shares The priority shares are held by “Stichting AkzoNobel” (Foundation Akzo Nobel), whose board is composed of the members of the Supervisory Board who are not members of the Audit Committee. They each have one vote on the board of the Foundation. The Meeting of Holders of Priority Shares has the right to draw up binding lists of nominees for appointment to the Super- visory Board and the Board of Management. Amendments to the Articles of Association are subject to the approval of this meeting. AkzoNobel Report 2010 | Financial statements | Other information 135 2010 key figures Managing our values Stakeholder activity Sustainability framework Invent: integrate sustainable value propositions Eco-premium solutions Cradle to Cradle AkzoNobel Carbon Policy Sustainable fresh water management Sustainability leadership Manage: include sustainability in all aspects of the value chain Research, Development and Innovation Investment decisions Sourcing Manufacturing Marketing 138 139 141 142 145 145 145 145 148 148 149 149 149 149 150 151 This Sustainability facts and figures section of the 2010 Report is separate from, and does not in any way form part of, the company’s annual financial report (“jaarlikse financiële verslaggeving”) as defined in article 5:25c of the Dutch Financial Markets Supervision Act for 2009. This section contains summarized key performance indicators (KPIs) relating to sustainability performance. Further information on AkzoNobel’s sustainability strategy, activities and results can be found on our corporate website: www.akzonobel.com/sustainability Improve: continue to comply and ensure our license to operate Integrity management Employees Community 152 152 153 156 Health, Safety, Environment and Security management 157 Product stewardship Health and safety performance Environmental performance Reporting principles Independent assurance report Sustainability performance summary Other links to this section: Case studies Strategic ambitions Strategic agenda Embedding sustainability Business performance section Corporate govenance statement Risk management Investor relations 159 159 161 166 167 168 2 18 20 26 29 63 75 80 2010 key figures Sustainability topics and data have been integrated into all sections of the AkzoNobel Report 2010. This summary focuses on sustainability processes and activities that span our businesses. A fuller overview of AkzoNobel’s sustainability strategy, activities and results can be found in the Sustainability section of our corporate website: www.akzonobel.com/sustainability • Eco-premium solutions 25 percent • Total waste down 11 percent per ton (2009: 20 percent) of production • Employee/supervised contractors injury • 266 supportive supplier visits rate down 3 percent since 2007 • CO2 emissions (cradle to gate) down around 3 percent per ton of product • 95 percent of online employees completed Code of Conduct training • Sustainable fresh water management in place at 48 percent of production sites • More than 1,400 Community Program projects since 2005 Key Performance Indicator summary Objective Metric 2010 performance 2015 ambitions Top three on DJSI Position on DJSI 2nd place Top quartile safety performance Step change in people development Eco-premium solutions (% of sales) 25% Cradle-to-gate carbon footprint (3%) Sustainable fresh water (% of sites) Total reportable injury rate (per million hours worked) Behavior-based safety (% of sites) Employee engagement (mean score out of 5)1 Women executives (in %) Executives from high growth countries (in %) 48% 3.6 61% 3.56 12% 12% Top 3 30% Reduce 10% from 2009 Reduce 20% to 25% by 2020 100% 2.0 100% Improvement in employee survey index 20% 20% 138 2010 key figures | Sustainability | AkzoNobel Report 2010 1The Gallup Q12 grand mean score: the average of the mean scores of each question (out of 5). Managing our values Strategic focus The importance of sustainability to running our business is firmly integrated into AkzoNobel’s strategy. In 2008, we set ambitions for 2015 for sustainable value creation in order to support our overall goals: • Remain in the top three on the Dow Jones Sustainability Index (DJSI) • Achieve top quartile safety performance • Deliver a step change in people development During 2010, these ambitions were updated and we reviewed our sustainability programs to bring greater focus to our efforts: • Top quartile safety performance • Top three position in sustainability • Top quartile performance in diversity, employee engagement and talent development • Top quartile eco-efficiency improvement rate. For 2011, we will strengthen our safety peer group for exter- nal benchmarking. The Board of Management (as of January 1, 2011, supported by the other members of the Executive Committee) moni- tors the company’s financial and sustainability performance using a special dashboard, which specifies indicators – both leading and lagging – against each objective. For most key performance indicators we have announced 2015 ambitions; other short and long-term milestones are set at business level. Performance against these ambitions are described in the following pages. Sustainability framework The AkzoNobel sustainability framework maps out a progression towards sustainability. It has three levels (Invent, Manage and Improve – explained in detail in this section) which include environmental, economic and social aspects. The focus has shifted away from an emphasis purely on risks – working on integrity, governance and compliance – towards creating opportunities for value creation through process excellence, innovation and talent development. This framework covers issues and topics that are material for the company and support our strategic agenda (see page 20). Management structure We have established a Sustainability Council, which advises the Executive Committee on strategy developments, moni- tors the integration of sustainability into management processes and oversees the company’s sustainability targets and overall performance. The Council includes representa- tives from the Executive Committee, General Managers from our businesses, Corporate Directors of Strategy, Research, Development and Innovation (RD&I), Sourcing, Human Resources (HR), Communications and Sustainability, as well as the Managing Director of Technology and Engineering. The Corporate Director of Sustainability (including Health, Safety, Environment and Security) reports directly to the CEO and has a small team, including an expert group focusing on lifecycle assessment. The General Manager of each business defines their respec- tive non-financial targets and reports on progress every quarter. All businesses have also appointed a Sustainabil- ity Focal Point to support the embedding of sustainability throughout their operations. They bring together an appropri- ate team to develop and implement the sustainability agenda for the business. Focal Points from across the company have regular meetings to exchange best practices and identify opportunities for further development. A Compliance Committee also exists to foster awareness of, and monitor compliance with, the Code of Conduct. Members include the General Counsel, Secretary to the Executive Committee, and Corporate Directors of Internal Audit, Control, Compliance and HR. Each business has appointed a member of its management team to act as the Compliance Officer to manage the roll-out of compliance projects and to monitor compliance with the Code of Conduct. Meanwhile, each element of the value chain has identified focus areas for sustainability, with targets where appropriate. Functional management teams, such as HR, Sourcing and RD&I, which comprise corporate and business representatives, are in place to support the implementation of functional strategy, including the sustainability elements. Management processes We include key sustainability issues in our corporate and busi- ness planning processes, as well as in our risk management and compliance processes. Where there are specific “sustain- ability” risks or issues of concern to stakeholders, we develop position papers and an improvement plan owned by a corpo- rate staff member. Progress in embedding sustainability is monitored using an annual self-assessment benchmark which reflects the content of the sustainability framework and management processes. The assessment results are reviewed at corpo- rate level. The current level of definition within the self assess- ment leads to some interpretation differences, but the results provide useful trends. AkzoNobel Report 2010 | Sustainability | Managing our values 139 The 2010 results indicate that sustainability processes are in place, or mostly in place, in all businesses, except one that merged in 2010 and which is still developing common processes. The highest level of embedding is at the Improve or compliance level and processes such as risk management and reporting. Integration in the value chain, or Manage level, is making steady progress, but continuing focus is required in all areas. The Invent topics are making progress, but are a clear focus for improvement in 2011. We strive to empower all employees to contribute and be accountable for our sustainability performance. This respon- sibility is increasingly anchored in the personal targets and remuneration packages of managers and employees. From 2009, half of the conditional grant of shares for Board members and all executives is based on AkzoNobel’s perfor- mance in the DJSI over a three-year period (see page 74). The main corporate monitoring processes for sustainability items are: • Non-financial Letter of Representation. At the end of the year, the General Manager of each business signs the non-financial Letter of Representation to confirm compliance with the Code of Conduct and other corporate non-financial requirements, as well as indicating any material non-compliance. The outcome is reviewed with the responsible Board member and General Counsel and the results are reported to the Board of Management and the Audit Committee. Outstanding actions are followed up in each business and progressed in quarterly reviews • In-control process. An annual in-depth in-control process informs management whether business processes are in control. Shortcomings are reported and remediated: during 2010 control awareness and training got special attention • Corporate audits, which include sustainability and compliance issues. The outcomes are shared with the Compliance Committee and Sustainability Council. Our processes for managing sustainability were again reviewed as part of our 2010 external assurance activity. 140 Managing our values | Sustainability | AkzoNobel Report 2010 Stakeholder activity We have established engagement processes and activities with many stakeholder groups, which are described in other sections of this report: employees (page 153); customers (see Business performance section); suppliers (page 149); inves- tors (page 80); communities (page 156). During 2010 we continued to have dialog with external stakeholders through a range of external projects and partnerships, which align with our sustainability ambitions for now and the future. We are currently setting up a small group to oversee and integrate all the stakeholder engagement processes around the sustain- ability aspects of our business. They will build on work carried out this year to identify the key stakeholder groups in each of our key countries. Suppliers and sustainable trade The first International Supply Management Congress – a joint initiative between NEVI (knowledge network for purchas- ing and supply management in the Netherlands), Alfa Delta Compendium, AkzoNobel, Rabobank and the Dutch Sustain- able Trade Initiative (IDH) – attracted more than 1,100 partici- pants. Speakers included leaders from sustainability organi- zations, NGOs and business, including our CEO Hans Wijers. The 2010 event focused on sustainability and innovation in supply chains in a range of sectors: construction, health care, transport & logistics, process industry, manufacturing indus- try, food & agricultural business, financial services, and the public sector. We were able to use this event to invite suppli- ers, customers and other stakeholders, raising their aware- ness of sustainable and innovative sourcing opportunities. Biodiversity and eco-systems The agenda around eco-systems stewardship continues to develop within AkzoNobel. Wood stewardship and Forest Stewardship Council In 2010, we underlined the importance of wood stewardship to our sustainability agenda by signing a landmark agreement with the Forest Stewardship Council (see separate case study). Eco-systems services Our involvement with the Eco-system Valuation Initiative started in 2008, when we took part in the World Business Council for Sustainable Development Future Leaders Team. That program explored how the Eco-systems Services Review (ESR) assessment tool could be incorporated into corporate decision-making processes. Our Pulp and Paper Chemicals business has used the process to evaluate pulp and paper production in China and identified both risks and business opportunities to explore. They recently road tested the Corporate Eco-systems Valuation on a project evaluating alternative chemicals used in solid board production. Fresh water is one of the identified priority eco-system services for gum rosin. The results can help in managing reputational risks and opportunities and are also demonstrating company values supporting long-term business. ESR is now one of the sustainability tools available for use in the BU strategy process. Biodiversity Linking with the International Year on Biodiversity, we are involved in two studies to formulate future priority and action around biodiversity, for our own sites and our supply chains. Our Decorative Paints business in the UK is trialing a supply chain biodiversity risk assessment developed by Cranfield University School of Management. The trial includes three key suppliers representing important raw materials – titanium dioxide, filler and water. Our water supplier is also including the effect of customers’ use of water – to clean brushes and so on – in his assessment. The results indicate generally low risks, but potential additional risks for second tier suppliers. At the same time, the business has initiated a full evaluation of two AkzoNobel production sites against the UK Wildlife Trust’s biodiversity benchmark, which was set up to support the UK Biodiversity Action Plan to help increase the contribution that businesses can make towards enhancing biodiversity. In the Netherlands, our Functional Chemicals business is working on a complementary project with Wageningen Univer- sity to measure the biodiversity impact of one of our sites. Partnerships and endorsements We support a number of external organizations and char- ters to demonstrate our commitment to sustainability issues. These include the UN Global Compact – we are also an active member of the network in the Netherlands – and the Global Responsible Care Charter. In order to contribute to, and keep up-to-date with, develop- ments in the sustainability agenda, we continue to support the work of the World Business Council for Sustainable Develop- ment (WBCSD), the World Resources Institute, Forum for the Future in the UK and the Conference Board. • AkzoNobel participated in the 2010 WBCSD Future Leaders Team with the task of bringing the Council’s Vision 2050 to life • We hosted a World Resources Institute meeting in Amsterdam to support their European program • We have taken part in good practice sharing on linking sustainability to compensation via both a WRI Mindshare meeting and the WBCSD People Matter program • Forum for the Future supported us to integrate sustainability aspects into our graduate development program. AkzoNobel Report 2010 | Sustainability | Stakeholder activity 141 Sustainability framework Sustainability framework The framework (right) maps out the sustainability topics covered in this report (see also the index on page 174). The AkzoNobel framework has three levels (Invent, Manage, Improve). Each includes environmental, economic and social aspects, which together map out the journey towards sustainability. Invent: integrate sustainable value propositions As we move forward, we are identifying and managing those issues which provide long-term opportunities for our businesses. • Working in partnership with customers and suppliers to deliver eco-premium solutions • Managing long-term resource and environmental issues • Developing our people to lead and deliver innovative solutions • Increasingly working in partnership with a range of stakeholders to achieve transformational change. Manage: include sustainability in all aspects of the value chain Based on the foundations of compliance and license to operate, we are now integrating sustainability into all areas of the value chain, from market research through to sales and marketing. • Research, Development and Innovation groups focusing on product design for eco-efficiency, applying clever chemistry • Sourcing managers working in partnership with suppliers to control business integrity issues, and to help us deliver sustainable value to our customers • Manufacturing sites optimizing processes, improving yields, improving energy efficiency • Sales and marketing teams working with customers to develop eco-premium solutions. Improve: continue to comply and ensure our license to operate Our management processes include directives and stan- dards, management systems, improvement objectives, train- ing and auditing. They are underpinned by AkzoNobel’s risk management process, which integrates environmental, social and governance issues. Economic • Integrity management: Our Code of Conduct details the requirements on employees and on the company to operate with integrity. There is a compliance management process in place. In parallel, a global complaints procedure allows employees to report any violations which they encounter. Environmental and social • Health, Safety, Environment and Security management: HSE&S management systems are based on international and internal company standards. Implementation is carried out by trained, experienced employees. Improvement actions are driven by objectives, while verification is achieved though internal and external audits. • Product stewardship: Management systems and processes are in place to control the safety and environmental impact of our products throughout the lifecycle and to manage compliance with international and local regulations. • Employment practices: HR systems are set up to meet business and local needs, within the framework of the global HR policy, which sets out principles for development, education and training, and compensation and benefits. Sustainability framework chart index Improve Environmental management HSE&S management Emissions, waste Raw material efficiency Energy, greenhouse gases Land remediation 157 161 23, 163 161 165 Product stewardship Product stewardship Distribution 23, 159 159 Integrity management Code of conduct Competition compliance Anti-bribery Integrity management Supply chain Sourcing Health, Safety, Security Management HSE&S management H&S performance Process safety Employment practices People development Diversity & inclusion Restructuring Community involvement Community Risk management Risk management 152 152 152 152 23, 151 157 159 160 153 153 156 156 75 Invent Climate change Carbon policy Energy, greenhouse gases 145 161 Scarce resources Managing scarce resources Freshwater availability Cradle to Cradle 21, 23 148, 165 145 Products Eco-premium solutions Mid-markets 145 20, 21, 22 External partnerships Accelerate profitable growth 20, 22, 26 23, 149 Sourcing 149 RD&I 145 Cradle to Cradle Leadership development Sustainability leadership Talent factory 148 20, 24, 25, 153 Mid markets Mid-markets 20, 21, 22 Manage Research & Development Innovate more RD&I Eco-premium solutions Sourcing Functional excellence Sourcing Manufacturing Functional excellence Manufacturing Sales & Marketing Eco-premium solutions Marketing 21 149 145 20, 23 149 20, 23 23, 150 145 151 Stakeholder Engagement Investors Customers Employees Suppliers Other stakeholders 80 21, 22, 29-57 19, 24, 153 149 141 142 Sustainability framework | Sustainability | AkzoNobel Report 2010 2010 priority areas Sustainability framework Environmental Economic/Governance Social Invent Integrate sustainable value propositions Manage Include sustainability in all aspects of the value chain Improve Continue to comply and ensure a license to operate Climate change Carbon policy Energy, greenhouse gases Scarce resources Managing scarce resources Freshwater availability Cradle to Cradle Products Eco-premium solutions Mid-markets External partnerships Accerate profitable growth Sourcing RD&I Cradle to Cradle Leadership development Sustainability leadership Talent factory Mid-markets Market research Research and development Investment decisions Sourcing Manufacturing Sales and marketing Research & Development Innovate more RD&I Eco-premium solutions Sourcing Functional Excellence Sourcing Manufacturing Functional Excellence Manufacturing Sales & Marketing Eco-premium solutions Marketing Stakeholder engagement Investors, customers, suppliers, employees, other stakeholders Environmental management HSE&S management Emissions, waste Raw material efficiency Energy, greenhouse gases Land remediation Product stewardship Product stewardship Distribution Integrity management Code of conduct Competition compliance Anti-bribery Integrity management Sourcing Risk management Health, Safety, Security management HSE&S management H&S performance Process safety Employment practices People Development Diversity & inclusion Restructuring Community involvement AkzoNobel Report 2010 | Sustainability | Sustainability framework 143 AKzONOBEL AND ECO-PREMIUM SOLUTIONS With cries for manufacturers to stop using NPEs (nonylphenol ethoxylates) in their products becoming louder – and legislation to prevent their use becom- ing more global – the search is on for environmentally benign alternatives that offer similar performance. NPEs are already banned completely in Europe, while in the US, the Environmental Protection Agency has announced that it will be banning NPEs in indus- trial laundry and cleaning products. The good news for customers seeking an eco-premium alternative is that our Surface Chemistry business has already devel- oped one. Berol 609 is AkzoNobel’s next generation nonylphenol ethoxylate replacement which exceeds the degreasing power of leading NPE replacements. Completely water soluble and biodegradable, there’s also no need for customers to reformulate. It can simply be used as a direct drop-in for NP9 or NP10. Produced in large volumes and widely used in deter- gents and cleaning products, NPEs are thought to be toxic to aquatic organisms. Initiatives to encourage companies to voluntarily phase out their use (which we did some time ago) have been gathering momentum in recent months, with the world’s high growth markets expected to follow suit sooner rather than later. Berol 609 is therefore well placed to position itself as the most attractive alternative. Invent Integrate sustainable value propositions portfolio. For more than 50 percent of these solutions, the eco-efficiency benefit is realized downstream by our custom- ers or the end user of our products. higher productivity, better economy and reduced environ- mental impact. Eco-premium solutions Eco-premium solutions help to create value for our busi- nesses and our customers. They provide top line growth opportunities because of their improved performance in areas such as raw material use, manufacturing processes and product innovation. We are committed to continuously improve the sustainabil- ity of our operations and the entire value chains in which we operate. Downstream, we seek to offer solutions that allow our customers, or their customers, to reduce their footprint. For example, by reducing energy or water requirement, or waste generation. Upstream, we achieve improvements by working with our suppliers to reduce their eco-footprint, or to identify new and lower footprint process, formulation or appli- cation routes to meet our customers’ needs. Our businesses continue to use desktop tools to review the eco-footprint during R&D development processes. An additional tool being developed focuses on comparing the environmental and social impacts of renewable raw materials. We have a ambition to increase the share of revenue from eco-premium solutions to at least 30 percent in 2015. This is a challenging objective because the measurement will be taken against the mainstream, or standard, product in the market, which is a moving target. Eco-premium solutions in % of revenue Milestone 18 18 20 30 25 2007 2008 2009 2010 2015 An eco-premium solution is measured using a quantitative analysis or a qualitative assessment focusing on six categories: toxicity, energy efficiency, use of natural resources/raw materials, emissions and waste, land use and risks (eg accidents). The eco-premium solution must be significantly better than currently available solutions in at least one criterion, and not significantly worse in any. As an important element of portfolio analysis, we also use this analysis to identify products that may not be sustainable in the longer term due to competitive or regulatory pressures. This includes products which contain materials of concern where we have phase-out plans in place, for example some lead compounds and chromates. Our businesses carry out an annual assessment of their port- folio. In 2010, total revenue relating to eco-premium solutions were more than €3.5 billion. The proportion of revenue from eco-premium solutions has increased to 25 percent (2009: 20 percent). This is divided between Specialty Chemicals (23 percent), Performance Coatings (22 percent) and Decora- tive Paints (29 percent). The 2010 analysis shows that sales growth in eco-premium solutions is ahead of the total product Decorative Paints’ Dulux Weathershield SunReflect lowers the temperature of external walls by up to 5° Celsius and reduces the need for air conditioning by reflecting up to 90 percent more infrared radiation than comparable exterior paints. Our Pulp and Paper chemicals product Compozil Fx is a wet end management system for the largest and fastest paper machines. Top quality paper can be produced with Autoclear LV Exclusive is a high gloss clearcoat paint for car refinishing. Based on proprietary resin technology, it is not only highly resistant to scratches and easy to apply, but also features remarkable self-healing properties when exposed to gentle heat. Additional examples are given in the case studies included in this report. Cradle to Cradle studies We have continued with the pilot phase of our Cradle to Cradle (C2C) activity with German professor Michael Braungart and his EPEA organization. This is enabling our businesses to explore the opportunities of the C2C concept. For our coatings businesses, the focus is on identifying products that support new functionality, for example recyclability, or absorption of air pollutants, rather than simply reducing footprint. Several exploratory projects are being developed with partners. AkzoNobel has also been involved in a partnership with other corporations, research institutions and academia to develop a model for a C2C coatings/chemical plant, the “Factory of the Future”. The facility design is based – as far possible – on C2C principles and emphasizes renewable energy, water manage- ment and active materials and transport management. AkzoNobel Carbon Policy Climate protection is an integral element of our busi- ness objectives. Early in 2009, the Board of Management approved the company’s Carbon Policy, including 2015 and 2020 improvement targets and ambition levels. We continue AkzoNobel Report 2010 | Sustainability | Invent 145 AKzONOBEL AND INVENTIVE THINKING It’s usually the major, pioneering product innovations that grab all the glory. And there’s nothing wrong with that. But most of the time, it’s the less high profile break- throughs that give our customers the most satisfaction. Applying putty to repair large wooden substrates is a classic example. Imperfections and defects that occur naturally in wood are normally repaired by hand, using putty. The putty then needs to be dried before the huge panels of wood can be turned into flooring, furniture, doors and so on. This process is slow, not always accu- rate and the technology used is not particularly durable. So our Wood Finishes and Adhesives business – working together with leading manufacturers Swed- wood (an IKEA company) and Tarkett – developed a new concept known as the Automatic Putty System (APS). It’s an automated system which uses scanners/ cameras to detect imperfections, robots for application and a special APS machine to push down, smooth out and cure the putty, which is supplied by AkzoNobel. This new patented process brings major benefits to the customer as it requires fewer people, offers increased quality due to the use of our UV curing putty, results in higher productivity and efficiency and is more accurate and consistent. Tarkett is running one line in Hanaskog in Sweden, while Swedwood is using the system to produce spruce and pine furniture for IKEA. The putty system also provides benefits in terms of sustainability. For example, because our customers are able to transform defective or poor quality wood into usable wood, it means there is less waste, so fewer trees are being harvested. to focus on improving the energy efficiency and managing the fuel mix of our energy intensive businesses to reduce green- house gas emissions and potential carbon costs. We are also committed to reducing the impact of our raw materials and developing solutions that help our customers to reduce their energy requirements. ity of this developing reporting activity, and the uncertainty of some measurement processes and current data available. At AkzoNobel, we want to use these measurement activities to help drive performance improvement. During this learning and maturity phase, we will aim to monitor relative improvements by setting clear boundaries and consistent assumptions. In addition to internal activity to reduce energy use and green- house gas emissions, we support transparent disclosure and business initiatives calling for urgent inter-governmental action. We are signatories of the UN Global Compact’s Caring for Climate platform, and communiqués from the Prince of Wales’ Corporate Leaders Group on Climate, which have urged action towards an international UN Climate Change treaty at each of the annual Climate Change conferences. We still advocate the implementation of global cap-and-trade mechanisms on carbon emissions as a requirement to accel- erate transition towards a low carbon economy. Cornerstones of Carbon Policy Measurement Measure and report on a cradle-to-gate basis and manage carbon along the value chain. Reduction Use a structured and consistent carbon reduction approach, aligned with business objectives. Communication and advocacy Actively communicate approach and performance to staff, customers, suppliers, investors and the general public and encourage dialog. Best practices Promote activities to share good practice, generate efficiencies and accelerate improvement. Our carbon management and performance is reported through the Carbon Disclosure Project. We have also taken an active part in developing the GHG Protocol Accounting and Report- ing Guidelines for product lifecycles and corporate value chains (Scope 3). During 2010, we were one of the compa- nies chosen to road test both standards and carry out a trial assurance process. This pilot was helpful in providing bound- aries and some prioritization tools, but reinforced the complex- Our framework for measuring the carbon footprint of products and facilities is based on the international Greenhouse Gas Protocol and lifecycle analysis. It was tested with the World Resources Institute and several Dutch NGOs. During 2009, our businesses (see note to graph) identified and assessed the cradle-to-gate carbon footprint of key value chains in order to understand the high carbon areas where improvements will deliver financial and environmental benefits. This indicated that more than 70 percent of the company footprint is from raw materials extraction, processing and transport (Scope 3 upstream), while the remaining 25 to 30 percent is from our own direct emissions and indirect emissions from energy use. During 2010, our businesses have been developing carbon management plans which identify specific improvement oppor- tunities and programs. Examples of programs in place include: • Joint activities with suppliers to reduce the footprint of key raw materials • Reformulations using lower footprint raw materials • Site programs to improve yields, reduce waste and improve energy efficiency • Technology and process developments • New curing developments to reduce energy use during product application. 2010 is the second time we have assessed the cradle-to-gate footprint of our operations. We have now assessed 286 key value chains (2009: 158). This year’s assessment indicates a total footprint of around 16.0 million tons CO2(e) assessed cradle-to-gate. There was an additional 0.7 million tons Scope1 and 2 CO2(e) reported from Chemicals Pakistan and National Starch (now divested). As in 2009, the cradle-to-gate assessment indicated around 70 percent was from raw mate- rials and transport (Scope 3 upstream) and under 30 percent from our own direct and indirect emissions from energy use. Ambitions • Reduce our cradle-to-gate (scope 1, 2 and 3 upstream) carbon footprint per ton of product by 10 percent by 2015 (2009 baseline) • Reduce cradle-to-gate carbon footprint per ton of product by 20 to 25 percent by 2020 (2009 baseline) • Control absolute scope 1 and 2 greenhouse gas emissions below 2008 levels • Our existing objective to increase eco-premium solutions to 30 percent of sales will track the provision of carbon-efficient solutions to customers, reducing our downstream footprint. These improvements will be achieved though a mix of inno- vation, energy efficiency and fuel mix improvements. Assessment method The assessment uses boundaries in line with financial report- ing and definitions in line with the Greenhouse Gas Protocol. It is carried out using recognized tools and staff experienced in lifecycle assessment. Businesses identify and assess the cradle-to-gate carbon footprint of key value chains in order to understand the high greenhouse gas emission areas where improvements will deliver financial and environmental benefits. Scope 3 (upstream) includes GHG emissions from the extrac- tion, production and transport of raw materials. We have developed a central raw materials database to provide consis- tency/transparency of data use. This database includes mainly “default” or proxy data which has been selected as the most representative/current data from recognized data sources, as well as specific supplier data. The absolute data and year on year comparision provide indicative assessments. Scope 1 includes direct GHG emissions from our production and owned transport. Emissions from our sites are assessed from measured fuel use and process emissions; transport is assessed from fuel use and/or estimated distance traveled. Scope 2 includes the indirect GHG emissions from purchased electricity and heat. Energy use is collected from site measure- ments, with emissions assessed using supplier or country grid factors and fuel mix. Since the 2009 assessment we have further developed our raw materials database and the value chains in some busi- nesses. We have restated the 2009 figures to include these changes and also included a facility which was acquired The individual business footprint was calculated by extrapo- lating from measured key value chains, or from assessing the total raw material footprint from purchased materials, and total production and transport energy use. AkzoNobel Report 2010 | Sustainability | Invent 147 but not reported last year – so we have an indication of the improvement per ton achieved during the year. The results of the cradle-to-gate assessments show a reduction of around 3 percent from about 853 kg/ton to approximately 827 kg/ton. fresh water assessment tool, which evaluates risks in six categories: water sources, supply reliability, efficiency, quality of discharges, compliance and social competitive factors. Sustainable management is indicated by a low risk score in all categories. Cradle-to-gate carbon footprint in million tons of CO2 During 2009, our manufacturing sites completed the self- assessments – the results indicated that 38 percent of sites have sustainable fresh water in place (see our corporate website for more details). Our manufacturing sites will update their assessments every two years. The focus in 2010 has been on validating and updating the assessment tool and analyzing the preliminary results for common risks areas. Information on water use and discharges is included in the Environmental performance section of this report. Sustainable fresh water management in % sites Milestone 38 2009 48 2010 100 2015 Sustainable fresh water management is defined as a low risk score in all categories in the AkzoNobel sustainable fresh water assessment tool. Our sites are now developing improvement plans that may include investments in infrastructure and technology, changes in water use, improvements in water discharges, managing community and social water issues, etc. The improvement activity for water use and discharges will be integrated with our operational eco-efficiency program, described in the Manufacturing section. The quick scans have already identi- fied opportunities for reuse of wash, cooling and other process waters, as well as improving controls for cooling water and heat extraction. Improvements already achieved include: • In Australia, production was relocated to a customer location to take advantage of surplus recycled water • Surface water has replaced ground water as the source for a site in the Netherlands Other aspects Eco-efficiency assessment, which includes water, is at the heart of sustainability reviews for our eco-premium solu- tions and all major projects – to achieve a balance between environmental footprint and cost effectiveness. Our portfolio includes a number of processes/products that support more efficient water use, recycling and improved water/waste water treatment. Water scarcity, stricter regulation and consumer requirements for lower impact solutions are expected to provide increased opportunities for the future. Our Supportive Supplier Visits program already reviews the water use and discharges of our critical suppliers in high growth economies, where required improvement plans are progressed and closed. In 2011, we will review how we might extend our sustainable water management. Our commitment to sustainable fresh water manage- ment requires our sites to engage with local authorities and communities to understand the risks related to water supply and competition for water uses. Our sites also support local communities through community panels and projects. A recent project in Cikarang, Indonesia, involved 60 employees, in partnership with a local NGO, initiating a new local waste management system to separate household waste, which results in less land and water contamination. Sustainability Leadership In November 2010, 22 of AkzoNobel’s future leaders traveled to India to take part in a week-long development program. Known as Sustainability Leadership, the new initiative is designed to help nurture the talent and skill set of the partici- pants and expose them to both the social and environmental aspects of sustainability. Traveling to India – one of AkzoNobel’s strategic high growth regions – enabled the team of executive potentials to draw on a rich and diverse set of experiences and gain insight into different cultures. They were able to achieve better under- standing of their motivation and skills and this will help improve their ability to contribute simultaneously to a more successful business and a more sustainable world. • Extensive recycle and reuse systems have been implemented at salt production sites in Europe, including reuse of condensate and recirculation of process water via technologies such as deionization. Having taken part in the expedition element, each member of the team now has clear objectives and tangible projects to ensure that their businesses, and ultimately the whole of AkzoNobel, benefit from their personal development. Scope 3 upstream Scope 1 Scope 2 14.9 2.8 1.3 10.8 2009 16.0 3.0 1.5 11.5 2010 The carbon footprint of the six main greenhouse gases is measured from cradle-to-gate based on the international Greenhouse Gas (GHG) Protocol and Lifecycle Assessment ISO 14040-44. See Assessment method. The cradle-to-gate assessment excludes Chemicals Pakistan and National Starch. They measure Scope 1 and 2 emissions which is included in the Performance Summary data. 2009 cradle-to-gate data has been restated to reflect changes in portfolio and raw material data. Sustainable fresh water management AkzoNobel is concerned with the sustainable use and the conservation of water resources worldwide. We are aiming to achieve sustainable fresh water management at our produc- tion sites by 2015, as we recognize water supply is essential to life – and to the sustainability of our business. We rely on water for raw materials production, product formulation and manufacturing, power generation, cooling, cleaning, trans- porting and for effective use of some products. In July 2010, AkzoNobel signed the UN Global Compact CEO Water Mandate. By doing so, we have committed to develop- ing our programs over time for: direct operations, supply chain and watershed management, collective action, public policy, community engagement and transparency. We also took part in the 2010 Carbon Disclosure Project water assessment. We are currently defining an integrated, company-wide Water Program, including expert resource support for improve- ments, which has included benchmarking our efforts with the leaders in the water initiatives. Current progress We assess our progress using the AkzoNobel sustainable 148 Invent | Sustainability | AkzoNobel Report 2010 Manage Include sustainability in all aspects of the value chain Research, Development and Innovation (RD&I) Sustainability and the reduction of our ecological footprint are embedded in AkzoNobel’s strategy for RD&I and their consid- eration is inherent throughout the innovation process. We use our eco-premium solutions metric – which considers the whole lifecycle – as the key performance indicator for our product sustainability performance. Two important focus areas have been VOC reduction and raw materials. A cross-business group, including RD&I, marketing and product stewardship, has created a comprehensive model of VOC use across the Decorative Paints and Performance Coatings Business Areas. This has provided a thorough analysis of the 2009 VOC baseline and a robust forecast of the position in 2015. AkzoNobel is committed to taking a leadership role in the reduction of VOCs within the coatings industry and plans have been put in place to ensure that a 25 percent reduction in the volume weighted average VOC content of Decorative Paints and Performance Coatings products is achieved by 2015. Renewable raw materials are already used extensively through- out the company. Our Surface Chemistry business has devel- oped and introduced Alcoguard H5240, an anti-scalant used in automatic dishwashing and laundry detergent applications. Based on hybrid polymer technology in which a substantial proportion of the synthetic petrochemically-derived polymers are replaced by polysaccharides, Alcoguard H5240 has a significantly lower carbon footprint than competitive equivalent products, and its polysaccharide component is fully biode- gradable. Hybrid polymers with similar compositions have been commercialized for use in oilfield applications and the technology has been nominated for P2 (pollution prevention) recognition by the US Environmental Protection Agency. A number of our businesses are evaluating renewable raw materials as offering novel functionality or more sustainable alternatives to mainstream products. We are taking steps with supply chain partners and external bodies to ensure that, where used, renewables offer a genuine sustainability advan- tage taking social and environmental impacts fully into account. Industrial Chemicals is developing innovative process tech- nology for the use of carbon dioxide as a renewable basic feedstock. These processes are being developed in line with the principles of Green Chemistry and the targeted prod- ucts will constitute valuable strategic additions to Industrial Chemicals’ current portfolio. In order to accelerate progress in this relatively young field, a variety of collaborations have been set up with knowledge institutes, universities and indus- trial partners. In recognition of the highly innovative character and broader significance of these projects, they have recently been granted support by various public funding schemes such as the EU 7th Framework Program and the Dutch Energy Research Subsidies. Elsewhere, open innovation approaches, both along the value chain as well as through the AkzoNobel Networked Innovation (ANNI) program, have been strengthened as a way of helping us to achieve our innovation ambitions. Strategic partnerships have been set up with key suppliers aimed at establishing long-term relationships in strategically important and mutu- ally beneficial areas of research and development. ANNI has been embedded in the organization as a structured approach to acquiring solutions to unmet technology and know-how needs from within and outside AkzoNobel (together with Nine- Sigma, a global leader in open innovation). to significantly reduce complexity in the business. The new raw materials strategy being implemented is both reducing the number of raw materials it uses and helping to drive the move towards raw materials with lower ecological footprints. A principal goal of the strategy has been reformulation to reduce the TiO2 content of paint, which is usually the main contributor to its carbon footprint. Further reductions of carbon footprint are being achieved through the choice of latex for water-based paints. Investment decisions All our major investment proposals require a sustainability evaluation alongside the financial case. This includes an eco- efficiency assessment, as well as a full review of health and safety, process and product safety, natural resource/raw mate- rial requirements and environmental impacts. These require- ments are fully embedded in the company process for allocat- ing funds for an investment or acquisition. The proposals are reviewed by subject matter experts, who provide comments and advice to the Board of Management, on both the financial and non-financial issues associated with the investment, to provide a strong basis of the investment decision. Sourcing Business principles AkzoNobel aims to do business with partners who endorse our ethical values and our social and environmental stan- dards. Our Supplier Support Visits (SSV) program was estab- lished to verify that the business principles and practices of our critical suppliers in high growth markets comply with our vendor policy. It also helps suppliers to improve their health, safety and environment standards. Decorative Paints is making good progress in establish- ing a global product architecture and raw materials strategy Our businesses identify critical suppliers in each region and visit them on a regular basis, the frequency defined by their AkzoNobel Report 2010 | Sustainability | Manage 149 Supplier engagement % of spend 2007 2008 2009 2010 2010 ambitions 2011 ambitions Raw material suppliers. Vendor policy signed NPR 1 business suppliers. Vendor policy signed NPR 1 centrally contracted suppliers. Vendor policy signed Suppliers visited since 2007 1 Non-product related. 81 100 82 80 152 85 89 185 91 62 100 266 90 50 100 220 95 Total 75 300 performance rating provided by the SSV teams. These teams agree specific and continuous improvement programs with each supplier as appropriate and monitor progress through routine re-visits. Those suppliers either unwilling or incapable of positive progress are de-listed. The SSV program has been a forceful and effective step towards creating a sustainable supplier base, needed for AkzoNobel’s growth in high growth markets. The 2011 program will be enhanced and include metrics to monitor the development of a maturing, sustainable supplier base in the respective region, which supports AkzoNobel’s sustainability objectives, eco-footprint initiative and the rapid growth of a high growth market supply base. Key supplier management In 2010, we further developed our Key Supplier Manage- ment program. We have set up 20 long-term agreements with global, leading suppliers for in-depth cooperation on value creation and innovation. Focusing on sustainability is paramount, as it supports our CO2(e) reduction ambition and the delivery of eco-premium solutions to our customers (see Invent section). Carbon footprint The result of our initial calculations show that raw materials account for more than 70 percent of the AkzoNobel CO2(e) footprint (see Carbon Policy section). Together with suppliers and RD&I, we are defining projects to reduce the volume of these raw materials in product recipes. We are also working with long-term cooperations to identify alternative raw mate- rials with a reduced carbon footprint; to investigate the use of renewable raw materials; and to study their effect on our product quality and the carbon footprint. Car lease The AkzoNobel target for lease cars is to achieve a weighted average of 130g CO2(e) emissions per kilometer by 2013. CO2(e) levels in Europe for passenger cars came down from 158.8g/km to 152.4g/km, while the cars that were added to the fleet in 2010 have an average CO2(e) level of 138.5g/km. During the fourth quarter of 2010, we adapted the maximum allowances in Europe downwards by 10g/km. Logistics We work closely with our road transport suppliers to measure their environmental performance and development. For example, we have ambitions to achieve Euro 5 level engines during 2011 and green driving training for drivers. We have started projects with suppliers on maximum payload utilization and reducing empty load journeys. In addition, we recently joined the clean shipping index to start measuring, comparing and put targets on shipping lines and their vessels. Talent management The AkzoNobel Procurement Academy provides standard- ized training for our worldwide procurement professionals. In 2010, we trained more than 250 purchasers in strategic sourcing methodology and negotiations and influencing in various parts of the world. At the end of the year, we started a new branch of the academy in China to provide this training to new hires in Mandarin. In October 2010, a global workshop took place, when 240 purchasers from 30 different countries worldwide initiated strategic learning projects. During 2011, our executive potentials will carry out further work on learning projects, coached by senior executives from the Sourcing function. The learning projects are derived from our strategic sourcing initiatives. A dedicated, one-week training for the executive potentials will give the AkzoNobel context for their learning path, with themes such as diversity, sustainability and innovation. The members of the global One Procurement Leadership Team were trained in executive performance to improve their creative and communication skills. Remuneration Within Sourcing, the sustainability agenda is linked to individ- ual remuneration. Every member of the global Procurement Council has at least one sustainability target as an item in their personal targets. Manufacturing AkzoNobel is a manufacturing company, so excellence in supply chain management and manufacturing operations is a fundamental requirement for success. Our businesses use established tools such as Six Sigma and Black Belt training to achieve improvements. During the year, the Decorative Paints business set up a Supply Chain Academy to build manufac- turing capability and skills and accelerate cross-functional and cross-country learning. Lifecycle assessments have indicated that for most of our businesses, the environmental footprint of our direct activity is low compared with the impact of raw materials and use of our products. However, we see improving operational eco-efficien- cy as a fundamental element of manufacturing excellence – helping us to achieve cost reduction, environmental protection and more effective use of raw materials and natural resources. In January 2010, we initiated an Operational Eco-Efficiency Program to achieve a step change in the environmental foot- print of our own operations. The main indicators are energy consumption, greenhouse gas emissions, waste produced, fresh water intake and VOC emissions. Quick scan reviews 150 Manage | Sustainability | AkzoNobel Report 2010 to identify improvement opportunities were conducted at 75 production sites, which represent approximately 75 percent of the whole company. A more extensive, compre- hensive diagnostic toolkit for waste and energy consumption has been developed. This has been applied at selected sites. As a result, AkzoNobel has defined a program to improve its environmental footprint by 10 percent, delivering €70 million in cost savings over the next two years. This is a first step towards a higher ambition of a 30 percent footprint reduc- tion during the years to come. This 30 percent reduction will come from improving existing processes, rationalization of the manufacturing footprint and the application of best avail- able technologies for new investments. We have brought together cross-functional and cross-business Expert Groups to support this activity by sharing good practice and expertise across the company and have developed a rigorous benefits monitoring process to track improvements. The first wave of projects is now being implemented. For 2011, we have two main goals. The first is to rigorously implement the findings from the quick scans and compre- hensive diagnostics. Secondly, we will be embarking on the next level of improvements: identifying best available tech- nology for all new investment projects and manufacturing technologies, which will drive further and more ambitious footprint reductions. Waste, water, energy and VOC improvements Improvement on Operational Eco-Efficiency is not dependent on a handful of large projects, but on many smaller site initia- tives. Some concrete examples: • A Surface Chemistry site in Sweden has reduced VOC emissions by 70 percent and saved €100,000 in fixed and variable costs by reducing the level of excess methyl chloride required in the process reaction • An agreement with a local raw material supplier to reuse steel drums, together with improved drum emptying procedures, saved a coatings site in China more than €33,000 in four months. They have reduced waste by 14 tons and recovered more than eight tons of raw materials • A combined heat and power unit at a coatings site in Birmingham, UK, supplies most of the site’s electricity and provides heat for the process and buildings. The €470,000 investment saves €116,000 from annual energy costs and reduces the site carbon footprint by 19 percent • The impact of compressed air leaks was not fully understood at one of our Decorative Paints sites. However, following an ultrasonic leak detection survey, the site has repaired nearly 100 leaks with an estimated saving of €36,000. Marketing AkzoNobel’s challenging target to extend sales of eco-premi- um solutions – which provide sustainability benefits over the mainstream products in the market – involves teamwork across the value chain. Our sales and marketing profession- als have a pivotal role to play in engaging with customers to identify products to meet their immediate functional needs, and to deliver against immediate and longer term sustainabil- ity requirements. The global AkzoNobel network Make More with Market- ing (MMM) has identified innovation and sustainability as key themes to raise awareness and share successes. This was the focus when 60 European members met under the banner “Catch the customer if you can” earlier this year. A pre- event survey concluded that 92 percent of members believe sustainability is a priority for customers – but only 53 percent have it in the top three – and there are marked differences between the markets where we operate. Members raised their skills and understanding in innovation and sustainability workshops, but above all shared current successes and barri- ers to success in their markets. Examples included: • Paper chemicals to help the paper industry speed up paper making and reduce the use of water and wood pulp • Additives for tarmac to speed up road building and reduce energy and emissions • Cleaning product ingredients which eliminate phosphates released in water • Salt which de-ices road and limits the environmental effects • Coatings which are harder wearing, so extend repainting programs. These examples indicate that it is not about sustainable prod- ucts with reduced functionality, but about new functionality which includes sustainability benefits. Marketers play a key role in developing an end-to-end view of value chains and identifying where AkzoNobel can contribute the most with leading, innovative, sustainable solutions. AkzoNobel Report 2010 | Sustainability | Manage 151 Improve Continue to comply and ensure our license to operate Integrity management Enhancing the compliance framework We have defined our compliance framework based on the AkzoNobel value “Integrity and responsibility in our actions”. This has resulted in company-wide awareness on compliance, clear norms set in the Code of Conduct and Compliance Poli- cies, implementation of the Compliance function within the businesses and clear monitoring and reporting lines. In 2010 the different elements were further enhanced. Underlying principle Underlying the compliance framework is the Code of Conduct, which contains a summary of the key elements of our compliance norms for the company and for each employee. Communication on the Code of Conduct for new employees starts at the time they join AkzoNobel and includes online or classroom training; for current employees the Code of Conduct is also discussed at the year-end performance and development review with their manager. For employees who have access to share price-sensitive information, AkzoNobel has a specific Code for Insider Trading, which provides guid- ance on allowable trading in AkzoNobel securities. A core element of the framework is the AkzoNobel complaints procedure, which operates under the name Speak Up! The Speak Up! procedure encourages employees to address their concerns with their managers. If employees do not feel able to report within hierarchical lines, they may use the Speak Up! hotline or the internet to report their concerns directly into the Corporate Compliance Committee. Finally, the compliance framework includes (online) training programs and monitor- ing tools, and is overseen by the AkzoNobel Compliance Committee as described in the Managing our values section. By the end of 2010 we had invited nearly 41,000 employ- ees to complete the online Code of Conduct training module. Completion rates are monitored monthly and business units are committed to having new employees trained within three months of that invitation. Specific compliance areas Within the compliance framework, specific compliance areas are addressed by specific programs. These include, among others, programs for competition law, anti-bribery regulations, privacy and trade secrets. Each of these topics is supported by online training and a declaration program. These programs can be supplemented with face-to-face training during annual conferences for some functions. For example, employees who have contacts with third parties (e.g. in sales or procurement) or have management posi- tions, are called to complete online training in competition law. To close the loop, these employees complete an annual declaration confirming their adherence to the AkzoNobel standard on competition law: in 2010, almost 13,000 employees signed this declaration. In addition, each opera- tional manager confirms adherence to the AkzoNobel stan- dards during the annual non-financial Letter of Representa- tion process (NFL). This provides evidence for the Statement of the Board of Management in this 2010 Report. Communication Communication is an essential part of an effective compliance framework. During regular meetings with business Compli- ance Officers, we have open dialog to support them to main- tain an effective compliance framework within each business unit, and to ensure that the AkzoNobel compliance initiatives address the relevant issues within each of the business units. Complaints procedure (Speak Up!) In 2010 we dealt with 23 cases which were handled at the level of the Compliance Committee (2009: 19). Of these, 14 were substantiated and five are still under review. Compa- ny-wide we had 115 dismissals on grounds related to breaches of the Code of Conduct (2009: 66). While none of the issues reported has been material for AkzoNobel in total, we continue to analyze the root causes and take appropriate action. This has already resulted in specific issues addressed in our NFL process and resulted in adaption of our online training programs. Key performance indicators – integrity Code of Conduct trained (% online employees) Competition law certification 152 Improve | Sustainability | AkzoNobel Report 2010 2008 2009 2010 2010 ambitions 31 ~95 95 100 10,000 13,000 Employees Our Talent Factory ambition We believe that growing our people is the way to grow our business for the long term. It is our ambition to be recog- nized by our employees – and those looking to join us – as a company which offers opportunity to its people for ongoing learning, development and growth in an environment that’s defined by our company values. In return, we expect all our employees to seize each oppor- tunity to learn, develop and grow their talents in order to be the best at what they do and actively contribute to deliver- ing Tomorrow’s Answers Today. Since 2006, our work to build AkzoNobel’s Talent Factory has focused on the implementation of best practice HR and people development programs and processes. These programs have already significantly simplified and strength- ened the way we work with our people and have driven a continuous focus on talent development. In order to build on what has already been achieved, in 2010 we focused our efforts on three main areas, which are explained in detail on the following pages: 1. Excellence in people development – ensuring our people managers are given the right support to capitalize on our global development programs and processes and reach the next level of excellence. 2. Stronger employee engagement – creating a working environment where people feel valued and are given the right conditions to perform at their best. 3. Effectiveness of the HR function – ensuring that the HR function is ideally positioned to support the businesses in the best possible way. Excellence in people development Our targets and reporting are consolidated into a Talent Factory Scorecard to track our operational progress and create transparency across all AkzoNobel businesses. Performance & Development Dialog (P&D Dialog) The P&D Dialog incorporates both a performance review and development/career planning. Our company values and Success Factors (behavioral competencies) are an inte- gral part of all development discussions and are integrated into the system and annual performance appraisal process. In 2010, we increased the number of employees using the web-based process to 76 percent (2009: 72 percent), with a paper system available for the remainder. Management development programs Our standardized best practice global Management Essentials and Advanced Management programs (MEP and AMP) are operational in 44 countries (2009: 32). 2,028 managers from across the globe started the MEP program in 2010 (2009: 2,256), representing, in total, 50 percent (2009: 32 percent) of the total target population of first line managers. During 2010, 724 senior managers (2009: 452) participated in the AMP, which represents, in total, 44 percent (2009: 21 percent) of the target popula- tion of senior managers. Leadership pipeline A strong leadership pipeline is crucial to supporting the company’s growth ambitions, particularly in our target high growth countries. To develop this pipeline, we are working hard to deepen our understanding of future market needs, identify the talent that we already have and further improve our planning to ensure we can meet new requirements. For example, Leadership Talent Reviews in our businesses and functions play an important role in identifying potential talent early, managing succession planning and structur- ing individual development. Our top management has also been actively involved in development dialogs with poten- tial leaders, and facilitating career development moves. During 2010, we made good progress on delivering on individual development plans and achieved improvement both in the number of cross-business moves made by our employees and in the diversity of our executives. In 2011, our businesses will be able to use a new guide for assessing leadership potential to conduct a fuller review of their potential future leaders. In addition, we will continue to take action to build the sort of engaging, challenging environment that is needed to attract and retain talented people. Diversity & Inclusion Input and feedback from our people continues to drive our focus on Diversity & Inclusion (D&I). While not excluding other groups, our current focus is on improving gender and cultural diversity and further strengthening our company’s engaging environment. It’s an environment in which every- one is valued, where everyone counts and where everyone has the opportunity to develop their skills and talents in line with our company values and objectives. A dedicated global working team and steering committee oversees and supports all AkzoNobel businesses in improv- ing their D&I performance. Using a standard framework and approach, the management teams of each AkzoNobel busi- ness are developing specific action plans to improve their unit’s D&I performance. Nine of our businesses have D&I action plans in place. All other businesses will follow in 2011. AkzoNobel Report 2010 | Sustainability | Improve 153 As work continues on business action planning, the data analysis and feedback from structured employee interviews – an integral part of the action planning process – indicates that women and employees from high growth regions (our two initial focus areas) are treated fairly, with no obvious discrimination. We also see that both of these groups are equally ambitious and that there is no significant difference in remuneration between female and male executives. The challenge is, therefore, to overcome the unconscious prac- tices that may inhibit the progress of women and employees from high growth regions, consequently ensuring that these minority groups are adequately represented at senior levels in AkzoNobel. While it is clear that a one-size-fits-all approach to D&I is not possible, we have identified a number of improvement actions common to all businesses which are being driven centrally. For example, we have developed a dedicated D&I training program for all people managers and an internet- based learning module for all employees. Both of these tools started to roll-out across the company at the end of 2010. We aim to see all managers complete the training program and all employees (including managers) complete the online learning module by the end of 2012. Other common actions include increasing the transparency of our internal job market by developing an improved vacancy bank and job rotation policy, and establishing a global mentoring framework to support mentor/mentee matching across the business. Key performance indicators – employees Online P&D Dialog participation (% employees) Women executives (%) Executives from high growth markets (%) MEP training participation (number of employees) AMP training participation (number of employees) Employee engagement (mean score out of 5) 1 2008 2009 2010 60 2 8 10 527 0 78 72 10 11 2,256 452 80 2010 ambitions 76 12 12 90 11.5 13 2,028 total 3,500 724 3.56 total 850 n/a 1 The Gallop Q12 “grand mean” score: the average of the mean score of each question. Our employ survey has changed, the 2008 to 2009 results are not comparable. 2 2008 data excludes former ICI employees. Management development programs number of participants Management Essentials Program Advanced Management Program Europe Americas Asia Total 2008 182 117 228 527 2009 732 796 728 2,256 2010 1,084 400 544 2,028 2008 0 0 0 0 2009 199 80 173 452 2010 405 182 137 724 154 Improve | Sustainability | AkzoNobel Report 2010 Employee engagement Our 2010 employee survey focused on engagement, because engaged teams produce better results. The 2010 Gallup Q12 survey was open to all employees. In total, 79 percent of our global workforce participated. The results indicated an overall engagement score of 3.56. Compared with peer companies in the Gallup database, this puts AkzoNobel in the bottom quartile. The 2010 results provide us with an initial benchmark of our engagement levels and an excellent starting point to make the neces- sary improvements at all levels of our organization. We will implement another full survey of our people in 2011, when our ambition is an engagement score of 3.76. This will enable our managers to track their progress and continue to drive improvements. Effectiveness of the global HR function In 2010, we continued our drive to significantly increase the effectiveness and efficiency of our HR function and increase the capability of HR professionals across the company. We are focusing our efforts on harmonizing our policies, programs and initiatives at a country level by creating service organi- zations to better support the activities of the various busi- nesses operating in ten key countries, representing more than 71 percent of employees. The Netherlands organization was chosen to pilot this new approach and launched their new HR organization in July 2010. Learning is being transferred to other countries. The US and Sweden also continue to make notable progress. HR IT and data systems Our drive to consolidate HR data and payroll systems made strong progress in 2010. This initiative, called OneView, is helping us to increase data quality and reduce costs. The OneView data system became fully operational in the second half of 2010. We also reduced the number of payroll systems from 251 to 89 in 76 countries. Executive diversity: female in % Executive diversity: high growth markets in % GM/Sales Support Marketing Manufacturing R&D Tech Other Total AkzoNobel 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 3 3 18 24 12 15 10 8 7 13 14 13 10 12 GM/Sales Support Marketing Manufacturing R&D Tech Other Total AkzoNobel 19 18 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 9 12 8 10 7 5 4 5 5 4 11 12 2010 employee survey score for each engagement item GrandMean Learn & grow Progress Best friend Quality Mission/Purpose Opinions count Development Cares Recognition Do Best Materials & equipment Expectations Percentiles 23 25 24 23 28 34 33 23 22 21 26 31 28 Means 3.56 3.61 3.41 3.19 3.67 3.84 3.46 3.37 3.60 2.98 3.65 3.77 4.18 AkzoNobel Report 2010 | Sustainability | Improve 155 Restructuring In 2010, we continued to restructure our business to meet the needs of our customers and deliver our company strat- egy. We are committed to supporting our employees during such reorganizations. We do this in compliance with legal requirements and, where applicable, in consultation with employee representative bodies. We strive to ensure clear and ongoing communications, transparent selection process- es and, in many cases, support in the transition from work to work, which can include training and out-placement. While restructuring is a business necessity, our responsibility as an employer stretches to those who unfortunately have to leave our company. Community AkzoNobel’s main societal contributions fall into three areas: • Societal programs that support community/social development though the company’s Community Program and Education Fund • Fighting malnutrition through our products and partnerships • The social contribution of our overall business activities (employment, sourcing, taxation), particularly in high growth economies. Cumulative Community Program involvement Projects (number) Volunteers (number) Support (€ million) 8000 6400 4800 3200 4.0 5.4 2500 8.5 6000 7.1 4000 1600 1500 322 0 568 854 1133 1408 2005/2006 2007 2008 2009 2010 156 Improve | Sustainability | AkzoNobel Report 2010 10.0 7000 10 8 6 4 2 0 Community Program The success of our Community Program continued into 2010. Employees from the newest parts of the company (following acquisitions and integration) have embraced the opportuni- ties the program offers and have started many new initiatives. The program encourages employees to engage in hands- on involvement in their local communities and gives them the necessary financial support. The fund is also available to support post-relief efforts for major disasters in countries where AkzoNobel operates – as long as there is hands-on involvement by our employees. In 2010, major disaster relief efforts included the volcano eruption in North Sumatra in Indonesia (including cross-business unit collaboration), the widespread flooding in Pakistan, the major earthquake in Haiti and the red sludge flooding in Hungary. The initiative allows sites and individuals to take part in proj- ects where our products/resources and the skills and knowl- edge of employees can benefit the wider community. In the past five years this has led to a great variety of projects; from educating underprivileged youngsters to contributing to creating more awareness in the community about the impor- tance of a clean environment. It also provides opportunities for employees to develop team building and leadership skills. Since the start of the program, more than 7,000 volunteers from 50 countries have worked on more than 1,400 projects, totaling about €10 million. According to the NCDO Millen- nium Development Goal Scan methodology, these projects have impacted an estimated 400,000 people. It is remarkable to observe that increased cross-business unit collaboration takes place in many countries. Over the last five years, nearly 70 percent of projects have supported educational/employ- ability and healthcare/well-being activities, with environmental and housing projects also well represented. In 2010, 275 new projects were initiated. These were narrowed down to a shortlist of 15 and more than 4,560 employees around the world then voted for their favor- ite in our annual Community Program Best Practice competi- tion. First prize went to the “Help with healthy living” project, a cross business initiative by Marine and Protective Coatings, Industrial Coatings and Powder Coatings in India. Our volun- teering employees have helped establish a health clinic which has become an indispensable part of life for residents in four villages in Bangalore. 2010 projects by region E A Europe B North America C South America D Asia E Africa/Oceania 157 46 17 50 5 D C B A Education Fund 15th anniversary In 2010, a worldwide campaign was launched to create more awareness about the AkzoNobel Education Fund. A special internet site was developed in order to help reach employees, their families, friends and our business relations. The proceeds of this new fundraising campaign will go to support projects in Vietnam, India and Brazil. These three projects are designed to help young people – in many cases girls – find decent and safe employment that offers them long-term prospects. The Education Fund was created at the end of 1994 to mark the 25th anniversary of the company Akzo, to make a contri- bution to the education of children in developing countries. Since the Education Fund was created, it has changed the lives of tens of thousands of young people by supporting proj- ects from school renovation in Burkina Faso, through improv- ing sanitation and hygiene conditions at schools in Vietnam, to increasing the capabilities of primary school teachers in Brazil. Plan Nederland estimates that several thousand children aged three to 16 have directly benefited from quality pre-school and primary education provided by the Education Fund. The number of indirect beneficiaries is many times that number. Health, Safety, Environment and Security management Managing health, safety, environment and security (HSE&S) is a cornerstone of a successful coatings and chemicals indus- try. We have global HSE&S standards in place to ensure our sites protect people, assets, the environment, the business and society at large. Leadership training Our Safety Leadership Program targeted at senior business leaders was developed and launched with sessions for the Board of Management and corporate directors in 2009. It has now been rolled out across business management teams. The objective is to help senior managers to be a personal role model for safety in their organizations and for them to ensure the right level of management support for improve- ment activities. Shared learning and engagement An HSE&S alert system, to share learning on serious inci- dents and near misses, is now fully operational and reaches our HSE&S professionals worldwide. Alerts for 2010 have included learning and good practice around chemical burns, distribution and driving safety, and permit to work systems. An intranet-based global incident reporting system was success- fully piloted in 2010 and was released for use across our busi- nesses. We will analyze the basic risk factors from incidents to identify new improvement initiatives required to continue to improve the safety and health of our people and to safeguard our facilities. HSE&S capability building and career development Activities to strengthen our HSE&S capability standards and development processes are progressing to plan. The compe- tency framework and role profiles for HSE&S professionals have been piloted and finalized. During 2011 the framework and profiles will be extended to management roles with criti- cal HSE&S functions, including production managers and site managers. The framework will be applied in the 2011 annual performance assessment and resulting development planning activities. Reliable operations Operational management systems at our sites are integrated for quality and HSE&S. They are risk-based and follow the Responsible Care® and Coatings Care® principles. Our management standards are set up and updated in accor- dance with international standards such as ISO-9000, ISO-14001, RC-14001 and OHSAS-18001. HSE&S audit The new HSE&S audit process combines a continuous improvement tool for sites with a periodic audit managed by our internal auditing department. During 2010, we carried out 51 corporate HSE&S audits and 10 reassurance audits, which are required for sites with high risk findings. As a result of the management review of the audit process in 2009, the HSE&S management system tools have been fine-tuned and further improved. All members of the corpo- rate HSE&S auditor pool were trained on the improved audit protocol in the first half of 2010. The regionally conducted training sessions in North America, Latin America, Europe and Asia focused on calibration of the classification of audit findings, as well as the latest changes of the audit protocol and system tools. Learnings from the 2010 audits indicate that we need to improve our management of occupational health and process safety/asset integrity. Serious incidents We classify incidents based on severity of outcome from local impact (Level 1) to serious incident (Level 3) – see glossary. All incidents are investigated to identify root causes, take reme- dial action and share learning, via HSE alerts, as appropriate across our other sites. There were ten serious incidents (Level 3) during 2010. We regret that, although not under our direct control, haulage truck drivers and members of the public died as a result of these incidents. Management audits number of audits 64 61 66 61 2007 2008 2009 2010 Serious incidents number of incidents 9 10 4 2 2007 2008 2009 2010 Serious incidents (Level 3) involve any loss of life; more than five serious injuries; environmental, asset or business damage totaling more than €25 million; or serious reputational damage. • Six distribution incidents (in Brazil, China, Australia, India, the US and Colombia) involved loss of life to haulage truck drivers and members of the public • One motor vehicle incident in the US in which one of our employees died and three incidents involving our employees in which four members of the public died in Brazil and Poland • One kidnap case without personal injury in Pakistan. All these incidents have renewed our focus on haulage contract management and implementation of safe and defen- sive driving practices. For further details on preventive action, see the Occupational safety/safe driving and Product stew- ardship/distribution sections. AkzoNobel Report 2010 | Sustainability | Improve 157 AKzONOBEL AND COOL COATINGS Many of us instantly recognize the familiar Heineken beer can. But what a lot of people may not be aware of is the fact that the new tactile packaging appearing in stores across Europe was achieved using technology developed by AkzoNobel. The newly designed can features a stylish, embossed effect which uses tactile ink to form a series of tiny raised dots on the surface. When held, the improved grip becomes noticeable, while the texture gives the impression of condensation and the contents appear to be ice cold. These unique visual and sensory elements boost brand recognition and help the can to become even more instantly recognizable. The technology behind the new can was supplied by our Industrial Coatings business, whose Aquaprime 186 product makes the so-called differential textur- ing possible. It offers a better alternative to current techniques as traditional embossing slows down the production. Heineken initially approached the can makers in 2008, requesting ideas for how to change the specialty finish of cans that were embossed for the European market. The texturing proposal then surfaced, which is when AkzoNobel became involved, because we had the product which made it possible. Trials were conducted with can makers and, following a few modifications, the appearance and formulation were finalized and production was scaled up. Heineken is now promoting the textured can globally. 158 Regulatory actions We have defined three categories of regulatory action, from self-reported issues (Level 1) to formal legal notifications with fines above €10,000 (Level 3) and are reporting these for the second year. There were four Level 3 incidents during 2010: • Three minor violations of the risk management program regulations at LeMoyne • An injury related to a hose rupture in Sweden • A provisional fine for an infringement of the Seveso regulations at Kleefsewaard, the Netherlands, was commuted by timely corrective actions. We also received a fine following an injury in Barcelona, reported last year. Security management Security of assets, people and information is an integral part of our HSE&S management system. Security assessments help our sites to identify risks and put in place appropriate security protection, as well as meeting the demands of increasingly strict legislation in the US and Europe. In 2010, a special team led by our corporate Information Management department has been addressing cyber security at our plants to protect our process safety performance and intellectual property rights. Product stewardship During 2010, the Product Stewardship & Regulatory Affairs core team strengthened a number of our product steward- ship requirements – to support the development of a greater sustainable product culture and ensure that our substances and products can be used by all stakeholders in a safe and cost effective manner. The team has developed strategies to replace major product liabilities from our portfolio, and policies to enable the company to position itself favorably against our leading competitors. An example is our new animal welfare policy, which clearly indicates our commitment to minimizing the use of animal testing, but without losing our ability to run such studies when they are clearly necessary. Based on major changes in substance classification, we have updated the mechanism for defining substances of high concern within the portfolio. All substances that are classified according to the new UN globally harmonized System of Clas- sification and Labeling, GHS, will fall under the category of “substance of concern”. There is then a mechanism to priori- tize substances with the highest degree of concern – a simple risk assessment to verify that concern – and, if required, a more robust lifecycle assessment to determine next steps. Specific plans are being developed for lead, chromate, cobalt and silica compounds. Distribution We are also increasing our attention on the distribution aspect of product stewardship. There were 91 distribution incidents during 2010 involving the transport of our product by road (82), sea (5) and rail (4) (see also the Serious incidents section). We have been working actively with sourcing groups in emerging countries to improve the safety performance of contract distribution companies. In China, specific guidance on the content and follow-up of these distribution contracts has been prepared and implemented. Regulatory affairs In order to meet our legal obligations, AkzoNobel continues to devote considerable resources to ensure that all substanc- es and products can be manufactured and marketed in all countries where we operate. A number of substances have been registered with the European Chemicals Agency as defined by the first phase of the EU REACH regulations. To date, we have achieved the required submissions according to the specified requirements. We have continually tracked the work of our key raw materials suppliers and in a few cases we have taken special steps to ensure continued avail- ability. Work to implement the GHS requirements in different parts of the world has continued. We have initiated a number of new advocacy activities aimed at a more harmonised manner of introducing new legisla- tion. Initiatives in countries such as China, the US, Malay- sia, Taiwan and Turkey have shown supportive outcomes. Overall, AkzoNobel continues to ensure that all its substanc- es and products are produced and marketed in accordance with all prerequisite legal requirements. Furthermore, we continuously strive to ensure that our substances and prod- ucts are developed, manufactured and marketed in a manner that supports their long-term sustainable use. Health and safety performance Occupational safety The human factor remains an essential element in safety management. In 2006, we set an ambitious target to improve safety performance by a factor of four by 2010, reduc- ing the Total Reportable Rate (TRR) for employee injuries to 2.0 per million hours worked. Since 2009, we have report- ed the safety performance of employees together with our supervised contractors. Quarterly reports on business safety improvement programs and agreed targets are reviewed by the Executive Committee, together with the quarterly financial performance indicators. There had been a steady reduction in TRR since 2005, with good progress towards the 2010 milestone rate of 2.0. However, in 2010, this trend stagnated. The TRR for employ- ees and supervised contractors improved slightly to 3.6 injuries per million hours worked (2009: 3.7). The rate for independent contractors is 3.0 injuries per million hours (2009: 2.8). In total, in 2010, 66 percent of our units performed at or better than the milestone, representing approximately 50 percent of the hours worked by our employees and supervised contractors. We have not achieved the ambitious target, however senior managers have focused significant attention on re-establishing the improvement trend – with success towards the end of the year. In October, we organized a global AkzoNobel Safety Day, when more than 14,000 employees made their personal pledge towards safety in both their working and private lives. AkzoNobel Report 2010 | Sustainability | Improve 159 Employee and supervised contractors total reportable injuries injury rate Milestones 5.3 4.6 3.7 3.6 2.0 2.0 2007 2008 2009 2010 2010 2015 2007 and 2008 data includes employees only. The total reportable rate is the number of injuries, including fatalities, resulting in a lost time case, restricted work or requiring medical treatment by a competent medical practitioner per million hours worked. Independent contractors total reportable injuries injury rate 5.2 2008 2.8 2009 3.0 2010 2008 data includes supervised and independent contractors. The total reportable rate is the number of injuries, including fatalities, resulting in a lost time case, restricted work or requiring medical treatment by a competent medical practitioner per million hours worked. We continue to focus improvement actions on behavior-based safety (BBS) training and continuous raising of awareness. In 2010, BBS improvement processes – which involve employ- ees and focus on reducing unsafe situations and unsafe behaviors – were in place at more than 60 percent of our sites worldwide. We believe that full implementation of BBS and management leadership training is essential to meet the chal- lenge. Five of our businesses were operating at safety levels below the 2015 ambition level during the year. This sets an excellent example for the other businesses to follow. In 2010, we developed a generic AkzoNobel safety induction package for our new and existing employees, to complement site specific training. Currently available in four main languages, the package will be extended in 2011 to cover all ten major countries where we operate. Our ambition for 2015 remains to be in the top quartile of our peer group in TRR performance – the milestone we have set is 2.0 for both employees and supervised contractors. Safe driving This is a priority area, based on the many incidents we have had over two years of monitoring. During 2010, there were 34 incidents involving injury, as well as the fatalities of one employee and four members of the public. An analysis of the serious motor vehicle incidents revealed that the major cause was distraction from the main task – driving the car safely – which was attributed to fatigue, mobile phone use, intense discussions with passengers, etc. We have signed a global contract for defensive driving through e-learning programs and have developed a company-wide approach for training those who drive on company busi- ness. The program and good practice guidance will be rolled out across our businesses in 2011. Drivers at risk (covering more than 20,000 business miles) will also be advised to take regular hands-on safe driver training. Employee health As well as ensuring a safe working environment, we also focus on employee health and managing illness absence. Business- es continued to implement a health management standard during the year. The Total Illness Absence Rate has improved to 1.9 percent (2009: 2.0 percent). We will keep monitoring this indicator for the whole company, aiming to stay at a level around 2 percent, but will not set new long-term targets. The Occupational Illness Rate for employees and supervised contractors stands at 0.3 illnesses per million hours worked (2009: 0.4). With our expansion in high growth countries, we recognize that there are challenges associated with cultural aspects – health beliefs and the emphasis on group importance rather than the individual – as well as differences in healthcare. During 2010, we strengthened our occupational health provi- sion in China and Vietnam. They have made important contri- butions by visiting sites and supporting local management to identify improvement opportunities. Process safety Drawing on the learning from the process safety audits carried out after the Baker Report, and best practices from the former ICI, we updated our process safety/asset integrity standard and management practices in 2009. Businesses are now implementing the requirements – the management system and revised standards for management of change (including organizational change), contractor safety and hazard studies. The global process safety network has developed additional guidance and training materials to support roll-out. We are using “loss of containment” as the main indicator for asset integrity management – four categories indicate the severity of the loss, from small on-site spill (Level 1) to a major emission of toxic/hazardous materials (Level 4) – see glossary. There was no serious loss of containment (Level 4) during 2010. 160 Improve | Sustainability | AkzoNobel Report 2010 Loss of containment incidents 0 Significant 29 Not contained at site 168 • Energy consumption per ton of production is stable at 5.7GJ/ton (2009: 5.7GJ/ton). Absolute consumption was up 14 percent at 111,000TJ (2009: 97,000TJ) due to higher production volumes, the acquisition of the high energy Frankfurt site, and partly compensated in the last quarter by the divestment of our National Starch business • Greenhouse gas emissions per ton of production decreased slightly to 267kg/ton CO2(e) (2009: 272kg/ ton). Absolute GHG emissions stand at 5.2 million tons of CO2(e) (2009: 4.7 million tons). Increase caused by higher energy intake caused by increased production volumes Not readily controlled but contained at site • Direct greenhouse gas emissions (2.0 million tons of 1,520 Readily controlled and contained at site CO2(e)) are split into 1.7 million tons from fuel burned and 0.3 million tons of CO2(e) process emissions, mainly from the Soda Ash business in Pakistan and the carbide busi- ness in Sweden. Environmental performance Operational eco-efficiency improvement Improvement activities are focused on the Operational Eco- Efficiency (OEE) program described in the Manufacturing section. This first wave is expected to deliver approximately 3 to 4 percent footprint reduction, resulting in €26 million recurring cost benefits. Emissions to air Energy and greenhouse gases This section reflects the performance of our own operations. More details on our Carbon Policy and cradle-to-gate report- ing can be found in the Invent section. Energy is a major raw material for some of our Specialty Chemicals businesses, so energy efficiency and carbon efficient energy consumption are important metrics for our operations. Energy reduction is also part of the OEE program. Energy use in 1000*TJ Energy use 1000*TJ GJ per ton production 250 200 150 100 50 0 6.1 5.7 5.7 116 115 97 111 2007 2008 2009 2010 2007 and 2008 data for former AkzoNobel coatings businesses were based on factors per ton production. Greenhouse gas emissions in million ton Direct CO2(e) Mt Indirect CO2(e) Mt kg CO2(e) per ton production Milestone 248 246 272 267 245 3.1 3.0 3.2 2.8 1.7 1.6 1.9 2.0 5 4 3 2 1 0 300 240 180 120 60 0 2007 2008 2009 2010 2015 Total greenhouse gas emissions made up of direct emissions from processes and combustion at our facilities and indirect emissions from purchased energy. 2007 and 2008 data for former AkzoNobel coatings businesses were based on factors per ton production. 7.5 6.0 4.5 3.0 1.5 0 Clean air around our plants Our air monitoring is focused on volatile organic compound (VOC) emissions that may lead to local low level ozone creation, smog formation and associated health problems for people in surrounding areas, and NOx and SOx emis- sions which contribute to acidification. In 2009, we strength- ened our NOx and SOx reporting to include the contribution from fuel burned across our operations. In 2005, before AkzoNobel’s portfolio change, we set a milestone to reduce VOC emissions to 4,000 tons by 2010. We continue to reduce the level of emissions, but have not yet achieved this target with the changed business portfolio. Our Specialty Chemicals businesses will continue to manage VOC emissions from plants in line with regional legal require- ments. In future, VOC ambitions will be set at BU level, but monitored at company level. The VOC reduction focus for our paints and coatings businesses has shifted from control- ling VOCs in our operations to low/zero VOC product design. Reducing VOC emissions from our plants remains part of the AkzoNobel Report 2010 | Sustainability | Improve 161 AKzONOBEL AND SUPPLYING IKEA It started out as a special soft touch finish for laptop computers. But when an enterprising global market sector manager showed it to IKEA, the seeds of a new opportunity for our Powder Coatings business were planted. The technology in question was initially developed for use on laptop covers. Customers were looking for eco-efficient solutions that offered new textures, effects and patterns. So a soft touch topcoat was developed which met all the demanding specifications. However, one of Powder Coatings’ furniture sector managers thought the new range might be of interest to IKEA and before long a new business opportunity was born. IKEA will now produce 1.5 million flower pots during 2011 in Vietnam and Germany, all coated with our soft touch powder technology. Not only is it far more eco-efficient in terms of energy consumption when compared with traditional glaze, but the overall cost is lower as well. The product also fits in with IKEA’s drive to encourage suppliers to use more sustainable materials and processes. scope of our OEE program, while our Research, Develop- ment and Innovation groups (RD&I) are working on projects to reduce the solvent content of our products – the zero VOC challenge (see the RD&I section). Volatile organic compounds in kilotons Volatile organic compounds kg per ton production Milestone Milestone • VOC emissions per ton of production were down 12 percent to 0.22kg/ton (2009: 0.25kg/ton) as a result of site rationalization and the closure of inefficient plants. Total VOC emissions were up 2 percent to 4.3 kilotons (2009: 4.2 kilotons), due to increased production rates • SOx emissions (from process emissions and energy) per ton of production were down 3 percent to 0.36kg/ton of production (2009: 0.37kg/ton) due to increased efficiency in our three sulfur derivatives plants. Absolute emissions were up 15 percent at 7.1 kilotons (2009: 6.2 kilotons). Although the main contribution comes from three sulfur derivatives plants in Germany, the US and Argentina, there was also an increase from our Pakistan operations, where scarcity of natural gas has led to higher oil consumption for power generation • NOx emissions from our sites per ton of production were down 17 percent at 0.10kg/ton (2009: 0.12kg/ton). Total emissions were slightly down at 2.0 kilotons (2009: 2.1 kilotons) • Emissions of ozone depleting substances are at a very low level. They are mainly due to Freon22 in older air conditioning and cooling units, which are continuously being replaced. NOx and SOx emissions in kilotons 2007 1 2008 1 2009 2010 NOx NOx kg/ton SOx SOx kg/ton 0.9 4.1 1.1 4.8 2.1 0.12 6.2 0.37 2.0 0.10 7.1 0.36 Emissions may form acid rain that can lead to acidification. The gases are emissions from manufacturing and combustion of fuel that we burn. 1 main emissions only • Hazardous waste to landfill per ton of production is down 17 percent to 0.24kg/ton (2009: 0.29kg/ton) and the total figure is down to 4.7 kilotons (2009: 4.9 kilotons) down 4 percent. This is mainly due to site closures in Moi Rana, Opava, a successful brine waste recovery project in Deer Park and improved waste management practices at our Decorative Paints Europe business. Total waste in kilotons Reusable Non-reusable Total kg per ton production Milestone 0.25 0.19 0.20 0.15 0.10 0.05 0.26 4.9 10 8 6 4 2 0 0.25 0.22 0.22 4.0 4.2 4.3 4.0 2007 2008 2009 2010 2010 1 2015 VOC emissions may lead to local low level ozone creation, smog formation and associated local health issues. We measure halogenated and non-halogenated organic compounds discharged to air. 1 2010 milestones were set in 2005, based on the AkzoNobel portfolio that year. Raw materials efficiency Effective waste management helps to increase raw material efficiency in our manufacturing operations, reduces our envi- ronmental footprint and reduces costs. Our focus is on reduc- ing total waste and eliminating hazardous waste to landfill. The exception is asbestos waste – mainly from demolishing old equipment and buildings – where the only current safe disposal route is properly designed landfill facilities. 0 400 320 240 160 80 0 15.1 285 199 14.7 249 160 13.1 258 155 10 84 86 89 103 2007 2008 2009 2010 2015 Non-reusable waste is not used for resource recovery, recycling, reclamation, direct reuse, or alternative uses. Hazardous waste in kilotons • Non-reusable waste. We have realized improvements from projects implemented in the Operational Eco-Efficiency program, but total non-reusable waste per ton has increased slightly. Improvements are anticipated in 2011 • Total waste per ton of production generated and leaving our sites is down 11 percent to 13.1kg/ton (2009: 14.7kg/ton). However, increased production levels and the new Frankfurt facility have led to absolute waste rising to 258 kilotons (2009: 249 kilotons) an increase of 4 percent. Due to this acquisition, hazardous waste also increased in absolute terms 150 120 90 60 30 0 Reuseable Total kg per ton production Non-reuseable not landfill Non-reuseable to landfill 3.3 62 39 23 2008 4.2 71 41 25 4.9 2009 3.9 77 48 24 4.7 2010 19 2007 2007 – 2008 indicate total non-reusable waste. 15 12 9 6 3 0 5 4 3 2 1 0 AkzoNobel Report 2010 | Sustainability | Improve 163 AKzONOBEL AND CUTTING OUT CARBON Saying that you’re going to become more sustainable is one thing, but actually embracing the whole concept of being more eco-efficient and less reliant on fossil fuels requires positive action. One of the most active and successful businesses in AkzoNobel’s concerted drive to lower its envi- ronmental footprint is Industrial Chemicals. Already honored externally for its Carbon Policy, it is one of our most energy intensive businesses, but it has also adopted an integrated approach to sustainability and is constantly implementing new and innovative ways of improving its carbon and ecological footprint. For example, much of the steam Industrial Chemicals uses in its various manufacturing processes comes from waste or renewables, with four plants in Europe now using energy being created from these sources. Initiatives involving wind energy are also being investi- gated, while the business already operates so-called green barges and runs trucks on bio-diesel, ensuring that its transportation of products is also sustainable and that its efforts stretch across the value chain. In addition, as part of the overall plan to reduce its carbon footprint, the business is currently engaged in a site modernization program, which will further optimize the drive towards more sustainable manufacturing. 164 Page title | Sustainability | AkzoNobel Report 2010 • Reductions in COD in effluent are being achieved across the company. The COD load to surface water per ton of production was down 33 percent to 0.10kg/ton (2009: 0.15kg/ton). The total COD load to surface water was down 24 percent to 1.9 kilotons (2009: 2.5 kilotons). Improvements are due to the divestment of National Starch business in the last quarter and improvement projects executed in this business earlier in the year. Soil and groundwater remediation There are substantial costs associated with the assessment and remediation of historical soil and groundwater contami- nation. We periodically review contamination at our sites, taking remedial action when required, and have procedures to prevent new contamination. Our Environmental Affairs Group provides support for managing these issues professionally and effectively and is also a key contributor to an integrated legacy management approach across the company. In line with IFRS accounting rules, we make provisions for environmental remediation costs when it is probable that liability will materialize and the cost can be reasonably esti- mated. We have set aside €419 million which we believe is sufficient for the sites where we have ownership or responsi- bility (see also notes 3, 17 and 21 in the Financial statements). Fresh water availability Sustainable fresh water supply is essential to life – and to the sustainability of our business. Our ambition is to achieve sustainable fresh water management at all our sites in 2015. See the Sustainable fresh water management section for details of the water program. Fresh water use in million m3 Fresh water consumption m3 per ton production 16 16 16 16 304 297 270 309 600 480 360 240 120 0 2007 2008 2009 2010 Total fresh water used from surface, ground or potable water sources. 20 16 12 8 4 0 Chemical oxygen demand in kilotons Chemical oxygen demand Milestone kg per ton production 10 8 6 4 2 0 0.16 0.15 0.15 3.1 2.9 2.5 2007 2008 2009 0.20 0.16 0.12 0.08 0.04 0 0.10 1.9 2010 1.5 2010 1 Chemical oxygen demand (COD) is the amount of oxygen required for the chemical oxidation of substances in the waste water effluent which is directly discharged into surface waters from our facilities. It excludes our effluent treated by others. 1 2010 milestones were set in 2005, based on the AkzoNobel portfolio that year. In addition to the intake of fresh water, the emission of contam- inated water from our sites to surface waters may negatively impact fresh water resources and eco-systems. We continue to reduce the COD of our effluent to surface water. In 2005, before AkzoNobel’s portfolio change, we set a milestone to reduce COD emissions to surface water to 1,500 tons by 2010. We continue to reduce the level of emis- sions, but have not yet achieved this target with the changed business portfolio. • Fresh water use per ton of production has remained stable at 16m3/ton (2009: 16m3/ton). Total fresh water use was 309 million m3 (2009: 270 million m3), an increase of 14 percent, mainly due to production volume increases AkzoNobel Report 2010 | Sustainability | Improve 165 Reporting principles Reporting scope This integrated report combines our financial and sustainabil- ity reporting and is addressed to readers interested in both areas: shareholders, value chain partners and analysts. In particular, we seek ways of linking sustainability performance to business results in areas such as carbon emission reduc- tion and eco-premium solutions. Alongside the publication of this report, more sustainabil- ity information, including an index of all GRI indicators, will be made available online on our corporate website (www. akzonobel.com/sustainability). The information in the AkzoNobel Report 2010 also serves as a progress report on our implementation of the ten principles of the United Nations Global Compact. The Global Compact Index on the website gives an overview of all the topics. In our 2010 reporting we have made a conscious effort to extend our application of the Reporting Guidelines issued by the Global Reporting Initiative (GRI). The topics covered in this report were selected on the basis of the GRI guidelines, the sustainability aspects which form part of the AkzoNobel strategy and various external stakeholders. These include our engagement with external organizations such as Forum for the Future, the World Business Council for Sustainable Devel- opment and the World Resources Institute and third party questionnaires, notably the influential Dow Jones Sustainabil- ity Indices. We have used the principle of materiality to assess the topics to include in the report, which are current and important for the company and key stakeholders. Our website includes a fuller review of processes in place. Reporting boundaries AkzoNobel’s 2010 Report integrates sustainability aspects of our processes and business operations in each section, in particular the strategy, business reports and governance and compliance sections. This Sustainability facts and figures section summarizes the global, cross-business elements of the sustainability agenda and company performance. Specifically, it includes quantita- tive and qualitative information relating to the calendar year 2010 and comparative data for 2009, 2008 and 2007, which is based on the AkzoNobel portfolio, including the former ICI at the end of 2008. Data for 2005 and 2006 cover the AkzoNobel portfolio in those years, including Organon. We report on consolidated data from entities where AkzoNobel is the majority shareholder (more than 50 percent) and joint ventures where we have management control, but exclude all data from entities where we have minority owner- ship, or no management control. Former ICI business Chemi- cals Pakistan has its own management board. The require- ment to report on specific AkzoNobel sustainability indicators has been limited to HSE&S and compliance issues. Chemi- cals Pakistan was included in the Sustainability self-assess- ment benchmark process in 2010. Comparability Previously, our policy was to report new acquisitions within one calendar year. From 2010, we reported from the date of purchase, recognizing that there may be reporting improve- ments required at these facilities. Significant changes which are reflected in 2010 data are: • Acquisitions: Industrial Chemicals facility in Frankfurt (2009), Dow Chemicals Powder Coatings business (Q2 2010) • Divestments: Chemicals Pakistan PTA (2009), National Starch (Q4 2010). We introduced a revised set of HSE&S KPIs with detailed reporting guidance for 2009. There are a number of defini- tion, calculation and reporting differences which impacted the comparability of data with 2007 and 2008: Total Reportable Rate, energy, CO2, NOx and SOx emissions. We identify these in the text and footnotes. More details are available on our corporate website. In 2010 we changed our employee survey to Gallup Q12. The Gallup “grand mean” scores are not comparable with the previous survey’s percent favorable score. Reporting process and assurance The reporting period is 2010. Data has mainly been obtained from our financial management reporting systems, corporate HR information management system and the AkzoNobel and former ICI corporate reporting systems for Health, Safety, Environment & Security (HSE&S) performance indicators. We are confident in the overall reliability of the data reported, but recognize that some of these data are subject to a certain degree of uncertainty, inherent to limitations associated with measuring and calculating data. Senior managers approved the content and the quantita- tive data used in the Sustainability facts and figures relating to their respective areas of responsibility. The integration of sustainability in day-to-day business is part of our routine internal audit process. The Sustainability facts and figures section has been reviewed by independent, external auditors. The Assurance report, including the scope of the audit, can be found in the Indepen- dent assurance report section. Independent assurance report To the readers of AkzoNobel’s Sustainability facts and figures: We have been engaged by the Board of Management of Akzo Nobel N.V. to provide assurance on the informa- tion in the section Sustainability facts and figures of the AkzoNobel Report 2010. The Board of Management of Akzo Nobel N.V. is responsible for reporting on sustain- ability in such a way that it provides an adequate view of AkzoNobel’s sustainability policies, measures and perfor- mance in 2010. This includes the identification of material issues and the design and implementation of an adequate internal control system to ensure the sustainability information does not contain any material inaccuracies. Our responsibility is to provide assurance on this information based on the engagement outlined below. Our engagement was designed to provide: • Reasonable assurance on whether the information in the section Managing our values is fairly presented in accordance with the reporting criteria • Limited assurance on whether the other information in Sustainability facts and figures is fairly stated in accordance with the reporting criteria. Procedures performed to obtain a reasonable level of assurance are more extensive than those for a limited level of assurance which are aimed at determining the plausibility of information. Reporting criteria and assurance standard AkzoNobel applies the Sustainability Reporting Guidelines of the Global Reporting Initiative (G3), supported by internally developed guidelines, as described in the section Report- ing principles. It is important to view the performance data in the context of this explanatory information. We believe that these criteria are suitable in view of the purpose of our assur- ance engagement. We conducted our engagement in accordance with the Inter- national Standard for Assurance Engagements (ISAE) 3000: Assurance Engagements other than Audits or Reviews of Historical Financial Information, issued by the International Auditing and Assurance Standards Board. This Standard requires, among others, that the assurance team possesses the specific knowledge, skills and professional competencies needed to understand and review sustainability information, and that they comply with the requirements of the Code of Ethics for Professional Accountants from the International Federation of Accountants to ensure their independence. Work undertaken We have performed the procedures deemed necessary to obtain the evidence that is sufficient and appropriate to provide a basis for our conclusions. Our procedures for the information for which limited assur- ance was provided, were: • A documentation study to obtain insight into the organization and a risk analysis (including a sector benchmark, a media analysis and internet search) to identify relevant environmental, safety and social issues for AkzoNobel in the reporting period • A review of the reporting criteria and the design and implementation of systems and processes for information management, internal control and processing of the qualitative and quantitative information in Sustainability facts and figures • Interviewing management at corporate and business level who are responsible for the sustainability policies, management, internal control and reporting and evaluating trends and the explanations provided in Sustainability facts and figures • Reviewing internal and external documentation to determine whether the qualitative information in the section Sustainability facts and figures is supported by sufficient evidence • Joining two site visits of the Internal Audit department in relation to Health, Safety and Environment (Cologne and Huron). In order to obtain reasonable assurance on the information in the section Managing our values, we performed additional procedures, including: • Reviewing relevant internal audit work for all business units • Joining one business unit visit of the Internal Audit department in relation to managing our values (Marine and Protective Coatings). During the assurance process, we discussed changes to the various drafts of Sustainability facts and figures with AkzoNo- bel, and reviewed the final version of Sustainability facts and figures to ensure that it reflects our findings. Conclusions Based on our procedures for reasonable assurance, we conclude that the information in the paragraph Managing our values is fairly presented, in all material respects, in accor- dance with the reporting criteria. Based on our procedures for limited assurance, nothing came to our attention to indicate that the other information in the section Sustainability facts and figures is not fairly stated, in all material respects, in accordance with the reporting criteria. Amsterdam, February 16, 2011 KPMG Sustainability W.J. Bartels RA AkzoNobel Report 2010 | Sustainability | Independent assurance report 167 Sustainability performance summary Economic/Governance/Social Area Product Eco-premium solutions 5 Business integrity Code of Conduct incidents handled by the Compliance Committee H&S 2 Fatalities employees Code of Conduct trained Total reportable injury rate employees/supervised contractors Lost time injury rate employees/supervised contractors Occupational illness rate employees Total illness absence rate employees % revenue number % employees number /million hour /million hour /million hour % Employees 5 Fatalities contractors (supervised plus independent) number Total reportable injury rate independent contractors /million hour Lost time injury incidents contractors % sites with BBS program Distribution incidents Motor vehicle incidents with injury Employee numbers Women executives High growth country executives Online P&D Dialog participation number % number number number % % % Management development program participation number Employee engagement index 7 Community program investment Reliable operations Management audits plus reassurance audits Serious incidents – Level 3 Serious incidents – Level 1, 2 Significant loss of containment Regulatory actions – Level 3 Sourcing 5 Raw material suppliers – vendor policy signed NPR central suppliers – vendor policy signed NPR business suppliers – vendor policy signed Supportive Supplier Visits since 2007 % favorable 7 €m number number number number number % purchases % purchases % purchases number 168 Sustainability performance summary | Sustainability | AkzoNobel Report 2010 2005 2006 2007 2008 2009 2010 2010 2015 Milestones 7.4 2.3 0.5 2.4 76 15 6.8 2.2 0.4 2.3 72 72 4 46 3 18 1 5.3 1.9 0.3 2.2 1 1 – 66 53 76 1.4 64 4 81 18 31 0 4.6 1.9 0.3 2.2 1 0 5.2 – 8 10 60 527 78 1.5 61 2 82 80 20 19 ~95 0 3.7 1.5 0.4 2.0 3 2.8 – 56 52 31 25 23 95 1 3.6 1.6 0.3 1.9 0 3.0 – 61 91 34 54,740 55,590 10 11 72 2,708 80 1.4 66 9 24 1 3 85 89 12 12 76 2,752 3.56 1.5 60 10 22 0 4 91 100 62 266 22 (2009) 30 2.0 100 20 20 2.0 3 0.5 3 0.2 3 90 100 50 220 100 152 185 Environmental Area Raw material efficiency Maintain natural resources/fresh air Total waste (excluding Soda Ash process) 4 per ton production Total hazardous waste per ton production Non-reusable waste 4 per ton production Hazardous non-reusable waste 4 per ton production Hazardous waste to landfill per ton production Fresh water use per ton production COD emissions per ton production % sites with sustainable fresh water VOC emissions per ton production NOx emissions per ton production SOx emissions per ton production Total CO2(e) emissions (cradle-to-gate) 5 per ton product 5 Raw material CO2(e) emissions (Scope 3) 5 per ton product 5 Direct CO2(e) emissions (Scope 1) 6 per ton production 6 Indirect CO2(e) emissions (Scope 2) 6 per ton production 6 Total energy consumption per ton prodcution kiloton kg/ton kiloton kg/ton kiloton kg/ton kiloton kg/ton kiloton kg/ton million m3 m3/ton kiloton kg/ton % kiloton kg/ton kiloton kg/ton kiloton kg/ton kiloton kg/ton million ton kg/ton million ton kg/ton million ton kg/ton 1000TJ GJ/ton 2005 2006 2007 2008 2009 2010 2010 2015 Milestones 109 25 298 2.4 112 27 285 2.4 5.1 4.9 3.3 3.2 285 15.1 62 3.3 86 4.5 23 1.2 297 16 2.9 0.15 4.0 0.22 1.1 4.8 1.6 85 3.0 161 115 6.1 249 14.7 71 4.2 89 5.2 30 1.8 4.9 0.29 270 16 2.5 0.15 38 4.2 0.25 2.1 0.12 6.2 0.37 14.9 8 853 8 10.8 8 621 8 1.9 110 2.8 162 97 5.7 258 13.1 77 3.9 103 5.3 29 1.5 4.7 0.24 309 16 1.9 0.10 48 4.3 0.22 2.0 0.10 7.1 0.36 16.0 827 11.5 593 2.0 102 3.2 165 111 5.7 84 4.4 19 1 304 16 3.1 0.16 4.9 0.26 0.9 4.1 1.7 87 3.1 161 116 75 3 1.5 3 4.0 3 10.0 100 0.19 -10% -10% -10% -10% 2005, 2006 data: former AkzoNobel businesses in those years. 2007-2010: current AkzoNobel business. 1 Former AkzoNobel businesses only. 2 HSE KPIs: from 2009 report employees/supervised contractors (was employees only) and independent contractors (was all contractors). 3 Targets set in 2005 have been replaced by 2015 ambitions, baseline 2009. 4 In addition to this figure, our Soda Ash facility in Pakistan generated on dry basis 533 kilotons (2009: 515 kilotons) of non- (non-reusable) waste, as a result of the process chemistry. This aqueous mixture is stored and evaporates in large, managed on-site lagoons. 5 Excludes National Starch and Chemicals Pakistan. 2009 figures restated. 6 Includes Chemicals Pakistan and National Starch 7 Employee survey has changed, from % favorable to Gallup Q12 “grand mean”: average of mean scores for each question (out of 5). 8 2009 figures restated AkzoNobel Report 2010 | Sustainability | Sustainability performance summary 169 Financial summary Consolidated statement of income In € millions Revenue Operating income Financing income and expenses Income tax Results from associates and joint ventures Profit for the period from continuing operations Non-controlling interests Discontinued operations Net income attributable to shareholders Common shares in millions at year-end Dividend 2001 2002 2003 1 2004 2005 2 2006 2007 2008 3 2009 2010 14,158 1,162 14,059 1,390 13,106 1,146 12,833 1,588 13,000 1,492 (221) (294) 55 702 (31) – 671 285.9 343 (232) (335) 30 853 (35) – 818 285.7 343 (248) (254) 7 651 (49) – 602 285.7 343 (205) (412) 10 981 (36) – 945 285.8 343 (162) (338) 6 998 (37) – 961 285.8 343 10,023 10,217 15,415 13,028 887 (134) (96) 87 744 (29) 438 1,153 287.0 344 778 (151) (166) (20) 441 (31) 8,920 9,330 262.3 472 (577) (232) (260) 25 (1,044) (65) 23 (1,086) 231.7 417 855 (405) (141) 21 330 (77) 32 285 232.3 325 14,640 1,219 (327) (170) 25 747 (83) 90 754 233.5 320 Number of employees at year-end 66,300 67,900 64,600 61,400 61,300 42,700 42,600 60,000 54,700 55,600 Salaries, wages and other employee benefits Salaries, wages and other employee benefits (in % of revenue) Ratios Operating income in percent of revenue Operating income in percent of invested capital Net income in percent of shareholders’ equity Interest coverage EBITDA coverage Per share information Net income Dividend Shareholders’ equity Highest share price during the year Lowest share price during the year Year-end share price 3,416 24.1 3,552 25.3 3,505 26.7 3,216 25.1 3,221 24.8 2,158 21.5 8.2 12.5 24.1 5.3 8.3 2.35 1.20 10.07 57.85 33.73 50.15 9.9 15.4 32.9 6.0 8.9 2.86 1.20 7.34 54.50 27.25 30.23 8.7 13.6 26.2 4.6 7.3 2.11 1.20 8.76 32.44 16.00 30.60 12.4 20.8 40.6 7.7 10.5 3.31 1.20 9.12 33.79 24.87 31.38 11.5 19.4 32.0 9.2 12.7 3.36 1.20 11.95 40.18 30.82 39.15 8.8 16.3 30.5 6.6 9.4 4.02 1.20 14.44 49.41 38.30 46.18 2,215 21.7 7.6 14.6 122.9 5.2 7.5 33.82 1.80 42.06 65.56 44.41 54.79 3,022 19.6 2,955 22.7 2,980 20.4 (3.7) – 4 – 4 – 4 – 4 (4.38) 1.80 32.21 57.11 22.85 29.44 6.6 7.3 3.7 2.1 4.2 1.23 1.35 33.48 46.52 26.01 46.40 8.3 9.6 8.4 3.7 6.0 3.23 1.40 38.47 47.70 37.18 46.49 1 The 2001 – 2003 figures have not been restated to IFRS accounting standards. The differences mainly relate to pensions and other post-retirement benefits, the recognition of deferred tax on intercompany profit. and the recognition of goodwill. For the most part, the changed accounting is a matter of timing of the recognition of the assets, liabilities and related results. 2 The 2001 – 2005 figures have not been restated for the Organon BioScences divestment. 3 The 2001 – 2008 figures have not been restated for the National Starch divestment. 4 Not meaningful as operating income was a loss. 170 Financial summary | Additional Information | AkzoNobel Report 2010 Consolidated balance sheet In € millions, December 31 2001 2002 2003 1 2004 2005 2 2006 2007 2008 3 2009 2010 Intangible assets Property, plant and equipment Financial non-current assets Total non-current assets Inventories Receivables Cash and cash equivalents Assets held for sale Total current assets Shareholders’ equity Minority interests Total equity Provisions Long-term borrowings Other non-current liabilities Total non-current liabilities Short-term borrowings Current liabilities Current portion of provisions Liabilities held for sale Total current liabilities Invested capital: - Of consolidated companies - Of investments in associates and joint ventures Property, plant and equipment: - Capital expenditures - Depreciation Ratios: - Revenue/invested capital - Equity/non-current assets - Inventories and receivables/current liabilities 508 4,568 1,895 6,971 2,270 3,229 455 – 5,954 2,878 138 3,016 2,400 2,235 560 5,195 2,267 2,447 – – 629 4,402 2,217 7,248 2,206 2,815 520 – 5,541 2,098 137 2,235 3,855 2,797 513 7,165 979 2,410 – – 590 3,967 1,866 6,423 2,133 2,671 727 – 5,531 2,502 140 2,642 3,333 2,717 590 6,640 441 2,231 – – 448 3,535 1,418 5,401 1,978 2,761 1,811 – 6,550 2,605 140 2,745 2,877 2,392 200 5,469 560 2,677 500 – 4,714 3,389 2,672 3,737 9,395 575 8,692 491 8,117 353 7,145 318 822 635 1.52 0.43 2.25 689 622 1.55 0.31 2.08 581 599 1.56 0.41 2.15 551 540 1.68 0.51 1.77 488 3,432 1,800 5,720 1,987 2,910 1,486 322 6,705 3,415 161 3,576 2,210 2,702 183 5,095 357 2,571 766 60 3,754 8,007 301 514 528 1.68 0.62 1.9 682 3,346 1,706 5,734 2,042 2,919 1,871 219 7,051 4,144 119 4,263 2,132 2,551 181 4,864 410 2,652 571 25 3,658 8,060 177 371 349 1.85 0.74 1.87 669 2,203 1,402 4,274 1,177 2,164 11,628 – 14,969 11,032 97 11,129 1,598 1,954 133 3,685 1,635 2,276 518 – 7,172 3,357 1,848 7,388 3,474 1,783 7,308 3,384 1,977 12,377 12,645 12,669 1,781 2,977 1,595 4 6,357 7,463 450 7,913 2,072 2,341 715 5,128 1,338 3,510 845 – 1,441 2,666 2,128 – 6,235 7,775 470 8,245 1,919 3,488 674 6,081 384 3,373 797 – 1,678 2,896 2,851 – 7,425 8,984 525 9,509 1,855 2,880 589 5,324 907 3,761 593 – 4,429 5,693 4,554 5,261 5,197 142 359 330 1.91 2.60 1.47 13,424 11,732 12,718 201 534 453 1.07 0.64 1.36 175 513 424 1.11 0.65 1.22 175 534 435 1.15 0.75 1.22 1 The 2001 – 2003 figures have not been restated to IFRS accounting standards. The differences mainly relate to pensions and other post-retirement benefits, the recognition of deferred taxes on intercompany profit, and the recognition of goodwill. 2 The 2001 – 2005 figures have not been restated for the Organon BioSciences divestment. 3 The 2001 – 2008 figures have not been restated for the National Starch divestment. AkzoNobel Report 2010 | Additional Information | Financial summary 171 Business Area statistics In € millions Decorative Paints Revenue EBITDA 2 EBIT 2 Operating income Invested capital 3 EBIT margin 2 (in %) Capital expenditures Average number of employees Average revenue per employee (in €1,000) Average EBITDA per employee (in €1,000) Performance Coatings Revenue EBITDA 2 EBIT 2 Operating income Invested capital 3 EBIT margin 2 (in %) Capital expenditures Average number of employees Average revenue per employee (in €1,000) Average EBITDA per employee (in €1,000) Specialty Chemicals Revenue EBITDA 2 EBIT 2 Operating income Invested capital 3 EBIT margin 2 (in %) Capital expenditures Average number of employees Average revenue per employee (in €1,000) Average EBITDA per employee (in €1,000) 2008 2009 1 2010 5,006 598 401 (669) 6,187 8.0 120 4,573 4,968 487 298 133 6,206 6.5 112 548 343 275 6,404 6.9 154 24,600 22,900 21,800 203 24 200 21 228 25 4,575 4,112 4,786 566 467 444 2,004 10.2 89 594 492 433 1,817 12.0 61 647 540 487 2,122 11.3 87 21,000 20,200 20,600 218 27 204 29 232 31 5,687 4,359 4,943 909 605 130 4,055 10.6 305 738 490 422 3,106 11.2 319 939 679 604 3,457 13.7 273 12,900 11,400 11,100 441 70 382 65 445 85 1 Restated for transferred businesses and excluding National Starch, divested in 2010. 2 Before incidentals. 3 At year-end. 172 Financial summary | Additional Information | AkzoNobel Report 2010 Regional statistics In € millions Revenue by destination Revenue by origin EBIT 2 Operating income Capital expenditures Invested capital 3 Number of employees 3 Revenue by destination Revenue by origin EBIT 2 Operating income Capital expenditures Invested capital 3 Number of employees 3 Revenue by destination Revenue by origin EBIT 2 Operating income Capital expenditures Invested capital 3 Number of employees 3 Revenue by destination Revenue by origin EBIT 2 Operating income Capital expenditures Invested capital 3 Number of employees 3 Revenue by destination Revenue by origin EBIT 2 Operating income Capital expenditures Invested capital 3 Number of employees 3 1 Excluding National Starch, divested in 2010. 2 Before incidentals. 3 At year-end. 2007 2008 2009 1 2010 2007 2008 2009 1 2010 The Netherlands US and Canada 777 1,368 103 (6) 83 893 4,900 Germany 907 930 66 59 17 365 3,100 Sweden 472 1,406 156 156 53 564 867 1,423 18 (45) 86 2,007 5,000 1,141 1,179 115 (34) 25 1,086 3,600 478 1,457 157 126 50 557 3,700 3,800 UK 552 617 14 12 14 486 3,000 1,093 1,206 153 (48) 31 1,324 4,200 Other European countries 3,147 2,068 186 163 66 950 9,000 3,666 2,582 195 113 81 2,359 10,100 792 1,284 (49) (69) 104 1,489 4,800 1,088 1,089 90 44 19 983 3,700 423 1,284 124 59 37 461 3,500 768 830 82 75 22 1,562 3,800 3,095 2,211 216 115 69 2,420 9,400 803 1,537 (41) (78) 84 1,290 5,000 1,160 1,096 102 91 22 915 3,500 468 1,475 200 162 19 542 1,855 1,871 136 118 56 1,214 6,100 Latin America 606 475 58 62 15 272 2,700 687 658 110 110 38 142 China 3,330 3,463 154 (608) 94 325 12,000 1,306 1,103 135 89 49 776 4,800 1,054 968 144 (98) 67 861 2,600 2,712 123 114 55 2,554 10,100 1,147 959 121 108 30 767 2,954 3,074 226 225 63 2,762 10,300 1,394 1,168 121 140 30 872 4,300 4,300 997 929 159 157 143 772 1,249 1,177 161 162 147 952 3,400 5,100 6,300 6,100 6,700 Other Asian countries 798 854 67 76 28 1,782 3,900 3,398 2,336 269 172 83 2,616 9,100 784 567 85 76 10 195 3,300 Other regions 430 257 33 28 7 116 1,700 1,866 1,682 199 (110) 43 103 7,800 614 352 45 38 8 174 2,400 1,585 1,389 224 220 27 610 1,780 1,514 212 217 48 766 6,800 7,200 533 341 41 32 7 114 2,200 636 409 57 52 10 221 2,200 AkzoNobel Report 2010 | Additional Information | Financial summary 173 Index Accounting policies 91 Financial instruments 96, 124, 132 Remuneration 65, 69, 120 Acquisitions and divestments 11, 98 Foreign exchange risk management 124 Report of the Board of Management Antitrust cases Audit Committee Auditor’s report Board of Management Borrowings Business Area statistics Car Refinishes Carbon Policy Cash and cash equivalents Chairman’s statement Chemicals Pakistan Code of Conduct 35 Report of the Supervisory Board 175 Research, Development and Innovation 157, 159 Risk management Safe harbor statement inside back cover 118 Functional Chemicals 62 Glossary 134 Health and Safety 8 High growth markets 116, 117 Incidentals 172 Industrial Chemicals 46 Industrial Coatings 78, 145 Intangible assets 110 Internal controls 6 Inventories 39 Investments in associates and joint ventures 22 99 36 47 Segment information Shareholders’ equity Sourcing 105 Specialty Chemicals 16, 65, 124 Stakeholder activity 109 108 Strategic agenda Strategic ambitions 16, 67, 75, 152 Key developments by Business Area 30, 40, 50 Supervisory Board Community Program activity 26,156 Manufacturing 23, 150 Surface Chemistry Company financial statements 129 Marine and Protective Coatings 45 Sustainability framework Consolidated balance sheet Consolidated statement of cash flows Consolidated statement of changes in equity Consolidated statement of comprehensive income Consolidated statement of income 87 88 89 87 86 National Starch Nomination Committee 11, 13 Sustainability facts and figures 60, 62 Sustainability management Other financial non-current assets 109 Tax Outlook Pensions 10, 16 Ten-year financial summary 14, 79, 93, 112 Trade and other payables Contingent liabilities and commitments 118 Performance Coatings Corporate governance Decorative Paints Dividend proposal Earnings per share 63 50 Powder Coatings Product stewardship 13, 68, 80 Profit allocation 13, 86, 92 Property, plant and equipment Economic Value Added (EVA) 13 Provisions Emissions and waste Employees 161, 163 Proxy voting 19, 24, 153 Pulp and Paper Chemicals Exchange rates of key currencies 93 Regional statistics Financial calendar 177 Remuneration Committee 40 48 23, 159 135 107 112 68, 80 37 173 62, 66 Trade and other receivables Wood Finishes and Adhesives 174 Index | Additional Information | AkzoNobel Report 2010 10 61 21, 149 75 90 14, 111, 130 23, 149 30 141 20 18 60 38 142–143 137–169 139 100 170 117 109 49 Glossary Adjusted earnings per share Basic earnings per share from continuing operations excluding incidentals in operating income, amortization of intangible assets and tax on these adjustments. Comprehensive income is the change in equity during a period resulting from transactions and other events other than those changes resulting from transactions with shareholders in their capacity as shareholders. Eco-efficiency Eco-efficiency means doing more for less: creating goods and services while using fewer resources and creating less waste and pollution. ADR American depositary receipt. Autonomous growth is defined as the change in revenue attributable to changed volumes and selling prices. It excludes effects from currency and acquisition and divestment. BBS Behavior-based safety. Carbon footprint The carbon footprint of a product or organization is the total amount of greenhouse gas (GHG) emissions caused during a defined period, or across the total or part of a product life- cycle. It is expressed in terms of the amount of carbon dioxide equivalents emitted. Code of Conduct Our Code of Conduct defines our company values and how we work. It incorporates fundamental principles on issues such as business integrity, labor relations, health, safety, envi- ronment and security and community involvement. Code of Conduct incident The Code of Conduct incidents handled by to the Corporate Compliance Committee will cover competition law, bribery, export control, insider trading or auditing matters; or involve a senior member of corporate staff, business teams or local management; or have a value greater than EUR 0.1 million. Community Program AkzoNobel’s global Community Program encourages and gives financial support for employees to get involved, hands- on, in their local communities. Cradle to Cradle The Cradle to Cradle concept encourages the creation of products for cradle-to-cradle cycles, whose materials are perpetually circulated in closed loops. Dow Jones Sustainability Index (DJSI) The Dow Jones Sustainability Index tracks the performance of the global sustainability leaders. The top 10 percent of the 2,500 largest companies in the Dow Jones Global Indexes, rated by sustainability performance, are selected as compo- nents of DJSI. Earnings per share Net income attributable to shareholders divided by the weighted average number of common shares outstanding during the year. EBIT Operating income before incidentals. EBIT margin Operating income or EBIT as percentage of revenue and can refer to margins both before and after incidentals. EBITDA EBIT before depreciation and amortization and refers in this report to EBITDA before incidentals. EBITDA coverage EBITDA divided by the sum of financing income and expenses. EBITDA margin EBITDA as percentage of revenue. Eco-premium solutions A measure of the eco-efficiency of our products. An eco- premium solution is significantly better than competing offers in the market in at least one eco-efficiency criterion (toxicity, energy use, use of natural resources/raw materials, emissions and waste, land use, risks), and not significantly worse in any other criteria. EMEA Europe, Middle East and Africa. Emerging Europe Czech Republic, Estonia, Hungary, Poland, Romania, Russian Federation, Slovenia, Turkey and Ukraine. Emissions and waste We report emissions to air, land and water for those substanc- es which may have an impact on people or the environ- ment: CO2, NOx and SOx, VOCs, chemical oxygen demand, hazardous and non-hazardous waste. Definitions are in the Sustainability facts and figures section. EOI (EVA on invested capital) Economic value created in relation to invested capital during the period of three consecutive years. This measure is used to encourage EVA performance over a longer period of time. EVA (Economic Value Added) Calculated by deducting from net operating profit after taxes (NOPAT) a capital charge representing the cost of capital. GHG Greenhouse gases. AkzoNobel Report 2010 | Additional Information | Glossary 175 Incidentals Incidentals are special charges and benefits, results on acquisitions and divestments, restructuring and impairment charges, and charges related to major legal, antitrust, and environmental cases. EBIT and EBITDA before incidentals are key figures management uses to assess the company’s performance, as these figures better reflect the underlying trends in the results of the activities. Interest coverage Operating Income divided by net financing expenses. Invested capital Total assets (excluding cash and cash equivalents, invest- ments in associates, assets held for sale) less current income tax payable, deferred tax liabilities and trade and other payables. Key value chain Used to map the carbon footprint of our businesses. Key value chains are product groupings with similar footprint char- acteristics, which are representative of the majority of total BU revenue/production. Loss of containment Loss of containment is an indicator we use to monitor the integrity of our assets. We have defined four levels to indicate the level of loss, from small, on-site spill to Level 4 – a signifi- cant emission of a toxic/hazardous material. Mature markets Comprise of Western Europe, the US, Canada, Japan and Oceania. Moving average ROI is calculated as EBIT of the last 12 months divided by average invested capital. Natural resource use We do not report specific natural resource use, except water. 176 Glossary | Additional Information | AkzoNobel Report 2010 We do report our use of energy and wastes from our opera- tions, and indicate the main raw materials used in our products. RD&I Research, Development and Innovation. Net debt is defined as long-term borrowings plus short-term borrow- ings less cash and cash equivalents. Revenue Revenue consists of sales of goods, services and royalty income. Net income Net income attributable to shareholders of Akzo Nobel N.V. Operating income Operating income is defined in accordance with IFRS and includes the relevant incidental charges. Serious incident We have defined three levels of serious incident. The highest category – Level 3 – involves any loss of life; more than five serious injuries; environmental, asset or business damage totaling more than €25 million; inability to maintain business; or serious reputation damage to AkzoNobel stakeholders. Operating ROI is calculated as EBIT before amortization of the last 12 months divided by average invested capital excluding intan- gible assets. Shareholders’ equity per share Akzo Nobel N.V. shareholders’ equity divided by the number of common shares outstanding at December 31. Operating working capital Operating working capital is defined as the sum of invento- ries, trade receivables and trade payables in the Business Areas. When expressed as a ratio, operating working capital is measured against four times last quarter revenue. Operational eco-efficiency Operational eco-efficiency is the eco-efficiency of our manu- facturing operations. Our aim is to improve the operational eco-efficiency by reducing the resources used and emissions/ waste from our sites during the manufacture of our products. P&D Dialog The Performance & Development Dialog (P&D Dialog) is AkzoNobel’s global performance and appraisal system for employees. Profit for the period The sum of net income attributable to shareholders of Akzo Nobel N.V. and the income attributable to non-control- ling interests. Talent Factory Talent Factory describes our ambition to be recognized as a company which offers opportunities to its people for ongoing learning, development and growth. Total reportable rate of injuries (TRR) The total reportable rate is the number of injuries per million hours worked. Full definitions are in the Sustainability facts and figures section. TSR (total shareholder return) Used to compare the performance of different companies’ stocks and shares over time. It combines share price appreci- ation and dividends paid to show the total return to the share- holder. The relative TSR position reflects the market percep- tion of overall performance relative to a reference group. Financial calendar April 21 April 27 April 29 May 3 May 10 July 21 Report for the first quarter Annual General Meeting Ex-dividend date of 2010 final dividend Record date of 2010 final dividend Payment date of 2010 final dividend Report for the second quarter October 20 Report for the third quarter February 16 Report for the fourth quarter and full-year 2011 Report 2010 including Sustainability Report The company’s annual financial report has this year been combined with the sustainability report into one Report 2010. The sustainability sections, however, in no way form part of the company’s annual report as the company is required to publish pursuant to Dutch law. Report 2010 – Dutch version Selected chapters of this report are also available in Dutch. In the event of any discrepancies between the two versions, the English report will prevail. Brands and trademarks In this Report, reference is made to brands and trademarks owned by, or licensed to, AkzoNobel. Unauthorized use of these is strictly prohibited. Disclaimer In this Report, great care has been taken in drawing up the properties and qualifications of the product features. No rights can be derived from these descriptions. The reader is advised to consult the available product specifications themselves. These are available through the relevant business units. In this report the terms “AkzoNobel” and “the company” refer to Akzo Nobel N.V. and its consolidated companies in general. The company is a holding company registered in the Nether- lands. Business activities are conducted by operating subsidi- aries throughout the world. The terms “we”, “our” and “us” are used to describe the company; where they are used in the chapter “Business performance”, they refer to the business concerned. Safe harbor statement This Report contains statements which address such key issues as AkzoNobel’s growth strategy, future financial results, market positions, product development, products in the pipeline and product approvals. Such statements should be carefully considered and it should be understood that many factors could cause forecasted and actual results to differ from these statements. These factors include, but are not limited to, price fluctuations, currency fluctuations, develop- ments in raw material and personnel costs, pensions, physi- cal and environmental risks, legal issues, and legislative, fiscal and other regulatory measures. Stated competitive positions are based on management estimates supported by informa- tion provided by specialized external agencies. Concept, design and realisation Pentagram AkzoNobel Corporate Communications Photography Allon Wechsler Arie de Leeuw David Lichtneker Lee Funnell Tessa Posthuma de Boer Tony Burns Audi Heineken Vodafone McLaren Mercedes Additional photography supplied by the AkzoNobel Business Units Lithography and printing Tesink B.V., Zutphhen, the Netherlands Paper Heaven 42, printed with bio-ink Akzo Nobel N.V. Investor Relations Strawinskylaan 1077 ZZ Amsterdam The Netherlands www.akzonobel.com/investor_relations T +31 20 502 7854 F +31 20 502 7605 E investor.relations@akzonobel.com AkzoNobel is the largest global paints and coatings company and a major producer of specialty chemicals. We supply industries and consumers worldwide with innovative products and are passionate about developing sustainable answers for our customers. Our portfolio includes well known brands such as Dulux, Sikkens, International and Eka. Headquartered in Amsterdam, the Netherlands, we are a Global Fortune 500 company and are consistently ranked as one of the leaders in the area of sustainability. With operations in more than 80 countries, our 55,000 people around the world are committed to excellence and delivering Tomorrow’s Answers Today™.

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