Morgan Advanced Materials Regulatory News (MGAM)

RISK

MITIGATION

Strategy and strategic planning risks

Technical leadership

One of the core competencies that the Group is focused on is materials science. This is fundamental to achieving the goal of continuing to be one of the world's very best advanced materials companies.

Unforeseen/unmitigated technology obsolescence, the emergence of competing technologies, the loss of control of proprietary technology or the loss of intellectual property/know-how would impact the Group's business and its ability to deliver on its strategic goals.

The Group has a Chief Technology Officer and a dedicated technology team which monitors technology and business developments globally using technology roadmaps linked to 20 major technology families to ensure it remains at the leading edge of technology development. Two global Material Centres of Excellence are now established to focus expertise and resources in core technologies, underpinned by a Technical Advisory Board comprising some of the world's leading academics, who provided valuable insight, advice and challenge in respect of the Group's technology plans during the year.

The technology team proactively manages the Group's technology pipeline and R&D investment in new/improving technologies as well as providing active management of the technology lifecycle. The technology pipeline and key R&D projects are regularly reviewed by the Group Executive and the Board.

Where Group products are designed for a specific customer, they are developed in tandem with the customer to maintain leading-edge differentiated solutions. The Group seeks to secure intellectual property protection, where appropriate, for its existing and emerging portfolio of products; external advisers manage this protection globally.

People management and development

A key execution priority for the Group is to increase the investment in people management and development, ensuring that the Group has strong leadership and deep functional capabilities.

The advanced technological nature of the Group requires people with highly differentiated skillsets. Any inability to recruit, retain and develop the right people would impact the Group achieving its strategic goals.

Making Morgan a safe, fulfilling and rewarding group to work for is the primary means of engaging the workforce and managing this risk. The Group has an HR Director and a network of HR professionals within the business who, along with policies and processes, support Morgan's managers to mitigate the risks relating to its people. The HR function covers areas including reward and recognition, recruitment, talent management, skills assessment and development, performance management and employee consultation.

In 2012 the Group launched its Graduate Leadership Programme which continued to run in 2015. The Group continued its global leadership programme in conjunction with Cranfield University, adding an advanced programme to reach more high-potential commercial, functional and technical leaders.

Further detail on People is set out on pages 33 to 35.

Operational risks

Treasury risks

The Group's global nature means that it is exposed to uncertainties in the financial markets and the banking sector which heighten the Group's funding, foreign exchange, interest rate, credit and liquidity risks as well as the risk of bank failure impacting the Group's cash.

The Group's treasury function operates on a risk averse basis and this is enshrined in the Treasury Policy and procedures which specify strict controls on the selection of banks, cash management and other treasury practices and payments globally. The Group treasury team proactively manages and is ultimately responsible for all of the Group's funding, liquidity, cash management, interest rate, foreign exchange, counterparty credit and other treasury related risks. Treasury matters are regularly reviewed by the Board/Audit Committee.

Further detail on Treasury Policies is set out in the Financial review on page 47.

Quality of contracts

As a global advanced materials business supplying into critical applications, the quality of the Group's contracts must match the quality and nature of its products. Ineffective contract risk management could result in significant liabilities for the Group and damage customer relationships.

The Group has an in-house legal function supplemented by specialist external lawyers.

The Group Legal Policy requires in-house legal review of high-value or high-risk contracts to ensure they contain appropriate protections for the Group. CEO approval is required before any part of the business can enter into an unlimited liability contract or one where the liability cap exceeds £5 million. In 2015, the CEO approved three contracts or tenders with this liability profile, where the underlying risks were considered to be within the Group's risk appetite.

Contract risk management training is provided by the in-house legal function and remains part of the Responsible Business Programme (RBP) and has been rolled-out in 2015 to further mitigate the risk of ineffective contract management. Additionally, a Group wide project has been implemented to ensure that appropriate contractual terms and conditions are in place across the business.

To the extent that risk cannot be mitigated through contractual arrangements, the Group has insurance cover in place, including product liability insurance.

IT risks and cyber risks

In order to meet the Group's strategic objectives the availability and integrity of its underlying IT infrastructure and the successful implementation of new core global systems are essential. If a critical business system were to fail or core systems development/ implementation were ineffective, the ability of the business to deliver on its strategic goals would be impacted.

Information security/cyber risks are dynamic and ever-present in the external environment. If the Group lost critical data or information, including proprietary information, through inadequate data management or compromised information security, the business would be impacted and suffer reputational damage.

The Group has an IT policy and guidelines in place as well as Group and business IT teams to manage the Group's infrastructure,

IT systems roadmap and information security risks.

During the course of 2015 there has been continued focus on testing the global infrastructure, reviewing information security and developing the Group's business continuity plans in relation to IT risk. Good progress has also been made in the development and implementation of new global systems. An enhanced, globally consistent, training and awareness programme is being developed for implementation in 2016.

The Group insurance programme includes business interruption insurance.

Product quality, safety and liability

Products used in applications for which they were not intended or inadequate quality control /over-commitment on customer specifications could result in products not meeting customer requirements, which could in turn lead to significant liabilities and reputational damage.

Many of the Group's products are designed to customer specifications. Over 90% of the Group's manufacturing output is accredited to ISO 9001 and the Group's quality management systems and training help ensure that Morgan's products meet or exceed customer requirements and national/international standards.

Contracts relating to products used in potential high-risk applications are subject to mandatory legal review.

While a number of minor product quality issues were identified in 2015, these had no material impact.

The Group insurance programme includes product liability insurance; this Group-level insurance is reviewed annually by the Board.

Single-point exposures

The Group has a number of potential single- point exposure risks, which include:

Ø Single-point supplier - a significant interruption of a key internal or external supply could impact business continuity.

Ø Single-point customer - the unmitigated loss of a major customer could have an impact on Group profit.

Ø Single-point profit - a key site exposed to a strike, a natural catastrophe or serious incident, such as fire, could impact business continuity. One Group site, Haywood CA, is situated in the California earthquake zone.

The Group Executive is responsible for monitoring and managing key single-point exposures and has reviewed such exposures during 2015. The level of business diversification within the Group means that such exposures are kept to a minimum.

Local and Regional management of these risks involves monitoring and reviewing supply chains (internal and external), dual/multiple sourcing of materials or strategic stock, site security and safety mechanisms, business continuity plans, and maintaining product quality and strong customer relationships.

The Group insurance programme includes business interruption cover and specific cover in relation to the impact of an earthquake in California; this Group-level insurance is reviewed annually by the Board.

Environment, health and safety (EHS) risks

The Group operates a number of manufacturing facilities around the world. A failure in the Group's EHS procedures could lead to environmental damage or to injury or death of employees or third parties, with a consequential impact on operations and the increased risk of regulatory or legal action being taken against the Group. Any such action could result in both financial damages and damage to reputation.

The Group has a comprehensive EHS programme managed by the EHS Director, with site-based EHS officers to implement and monitor EHS compliance at site level. Independent EHS audits are regularly undertaken at site level.

During 2015 the Group completed the rollout of its behavioural safety programme 'thinkSAFE'.

As at 31 December 2015 the Group was managing projects to remediate legacy contamination at four former sites and one operational site in conjunction with external specialists and relevant authorities. The anticipated costs of these projects are provided for in the accounts.

Further detail of the EHS programme in place to manage these risks is available on pages 25 to 31.

Compliance and ethics risks

Changes to or non-compliance with laws and regulation

The Group's global operations must comply with a range of national and international laws and regulations including those related to bribery and corruption, human rights, trade/export compliance and competition/anti-trust.

A failure to comply with any applicable laws/regulations could result in civil or criminal liabilities and/or individual or corporate fines and could also result in debarment from government-related contracts or rejection by financial market counterparties as well as reputational damage.

The Group is committed to the highest standards of corporate and individual behaviour and this commitment is set out in the Group's Core Values Statement and Ethics Policy, underpinned by ongoing investment in the Responsible Business Programme (RBP).

In addition to Group compliance specialists, all businesses have established compliance officer roles, responsible for supporting

local training and monitoring with trade/export compliance specialists in higher risk businesses and jurisdictions. Nine internal compliance audits were carried out in 2015. Full information is available on pages 22 to 24.

External risks

Changing political, economic and social environment

The Group operates in a range of markets and geographies around the world and can be affected by political, economic, social or regulatory developments or instability for example the European referendum, China slowdown or issues stemming from oil and natural resources price shocks.

The Group's broad market/geographic spread helps to mitigate the effects of political and economic crises.

Key risks and events are monitored at business and Group levels, with contingency plans in place to manage changing situations.

Financial and treasury controls limit exposure to foreign currency, interest rate, credit and liquidity risk. Also, the Group seeks to maintain a sufficiently robust financial position to ensure that its debt ratio is within acceptable market tolerances.

Taxation

The Group operates within and across a range of fiscal jurisdictions around the world and can be affected by changes in tax rules, rulings or rates. For example, the Group is cognisant of the 2015 OECD pronouncement on base erosion profit shifting (BEPS) and its potential impact on the taxation of global businesses in the short to medium term.

The Group's tax function, working in conjunction with external specialists as required, closely monitors fiscal developments and changes such as BEPS, to ensure that the Group's tax arrangements

and practices continue to comply with the requirements of all relevant jurisdictions whilst enabling efficient management of the

Group's tax liability.

Pension funding risk

The Group participates in defined benefit pension arrangements which are exposed to fluctuating interest rates, investment values and inflation. This coupled with the increased longevity of members could result in funding burdens on the Group in the future.

Active management of the pension scheme assets is the primary means of mitigation. This comprises management both internally within the Group but also externally through corporate actuaries and professional advisers.