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- Annual Report and Accounts for the year ended 31 December 2013
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- The Notice of Annual General Meeting to be held on 25 April 2014
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- The Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group and company; and
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- The directors' report contained in the annual report includes a fair review of the development and performance of the business and the position of the company and Group, together with a description of the principal risks and uncertainties that they face.
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Principal risks
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Mitigating factors
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Technology changes
Our businesses will be impacted by the rate of and state of technological change, including the digital revolution and other disruptive technologies.
We operate in markets which are dependent on Information Technology (IT) systems and technological change. The transition of our products and services to digital increases the potential exposure to cyber threats.
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Our global education strategy will drive a faster move to digital and services, recognising that this is a significant opportunity for Pearson, as well as a potential risk. We are transforming our products and services for the digital environment along with managing our print inventories. Our content is being adapted to new technologies across our businesses and is priced to drive demand. We develop new distribution channels by adapting our product offering and investing in new formats.
We seek to mitigate IT risks by establishing strong IT policies and operational controls, employing project management techniques to manage new software developments and/or systems implementations and have implemented an array of security measures to protect our IT assets from attacks or failures that could impact the confidentiality, availability or integrity of our systems.
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Education regulation and funding
Our US and UK educational solutions and assessment businesses may be affected by changes in government funding resulting from either general economic conditions, changes in government educational funding, programmes, policy decisions, legislation and/or changes in the procurement processes.
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In the US we actively monitor changes through participation in advisory boards and representation on standard
setting committees. Our customer relationship teams have detailed knowledge of each state market. We are investing in new and innovative ways to expand and combine our products and services to provide a superior customer offering when
compared to our competitors, thereby reducing our reliance on any particular funding stream in the US market. We work through our own corporate affairs team and our industry trade associations including the Association of American Publishers. We are also monitoring municipal funding and the impact on our education receivables.
In the UK we maintain relationships with those government departments and agencies that are responsible for
policy and funding. We work proactively with them to ensure our programmes meet existing and new government objectives at the right quality.
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Economic uncertainties
Global economic conditions may adversely impact our financial performance.
A significant deterioration in Group profitability and/or cash flow caused by prolonged economic instability could reduce our liquidity and/or impair our financial ratios, and trigger a need to raise additional funds from the capital markets and/or renegotiate our banking covenants.
We generate a substantial proportion of our revenue in foreign currencies, particularly the US dollar, and foreign exchange rate fluctuation could adversely affect our earnings and the strength of our balance sheet.
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The Group's approach to funding is described on page 37 and the Group's approach to the management of financial
risks is set out in note 19 to the financial statements.
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Business transformation
The pace and scope of our business transformation initiatives increase the execution risk that benefits may not be fully realised, costs of these changes may increase, or that our business as usual activities do not perform in line with expectations.
If we fail to attract and retain appropriately skilled employees, our business may be harmed.
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A chief transformation officer was appointed in 2013, to oversee the development and implementation of a significant change programme. Some of the key mitigations for potential execution risk include change management workshops
for senior leaders; additional support for people moving to new roles; and regular communication from the CEO
and his leadership team in person and by online videos. To clarify decision-making authority and accountability
in the new global matrix organisation, worked examples of day-to-day activities have been developed, including customer-facing activities such as developing and delivering online education services.
Our trading update in January 2014 noted the importance of our transformation and our decisions on timing of
changes such as deferring sales-related restructuring to avoid key selling periods.
Through the changes during 2013, we have been successful in promoting our best internal talent and recruiting individuals who are global leaders in their specific field.
Further details of how we are managing the risks associated with transformational change are set out under
'Responsible business' from page 47.
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Brand/reputation management
Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain or expand our business.
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We seek to mitigate this risk through the development of comprehensive processes to enable our business units to effectively manage relationships with stakeholders, customers, communities and employees. We have an ongoing
process to understand and evaluate potential brand threats and monitor and evaluate information about our brand
across media sources. This process and associated governance includes the reputation and responsibility committee.
The committee met during 2013 and has considered a number of topics including Pearson's non-financial targets,
brand and reputation metrics and reputational risk and mitigations associated with testing failures in the US.
We take very seriously the health, safety, wellbeing and protection of our employees, learners and customers and implement appropriate policies, standards and procedures.
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Emerging markets
Our investment into inherently riskier emerging markets is growing and the returns may be lower than anticipated.
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We draw on our experience of developing businesses internationally to manage specific country risks.
We have designed and adopted an operating model for a globally connected education company and we
continue to strengthen our financial control and managerial resources in emerging markets to manage expansion.
The diversification of our international portfolio, and relative size of emerging markets in relation to the Group,
further minimises the effect any one territory could have on the overall Group results.
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Intellectual property rights
If we do not adequately protect our intellectual property and proprietary rights our competitive position and results may be adversely affected and limit our ability to grow.
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We seek to mitigate this type of risk through general vigilance, co-operation with other publishers and trade
associations, advances in technology, as well as recourse to law as necessary. Digital rights management standards
and monitoring programmes have been developed. We have a piracy task force to identify weaknesses and remediate breaches. We monitor activities and regulations in each market for developments in copyright/intellectual property
law and enforcement and take legal action where necessary.
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Acquisitions and mergers
Failure to generate anticipated revenue growth, synergies and/or cost savings from acquisitions, mergers and other business combinations could lead to goodwill and intangible asset impairments.
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We perform pre-transaction due diligence and closely monitor actual performance to ensure we are meeting operational and financial targets. Any divergence from these plans will result in management action to improve performance and minimise the risk of any impairments. Executive management and the board receive regular reports on the status of acquisitions and mergers.
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Data privacy breach
Failure to comply with data privacy regulations and standards or weakness in information security, including a failure to prevent or detect a malicious attack on our systems, could result in a major data
privacy breach causing reputational damage to our brands and financial loss.
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Through our global enterprise information security and compliance programme, we have established a governance
model; security and privacy framework and policies; a global security and privacy organisational model; and standard-based information security and privacy controls and practices. We constantly test and re-evaluate our data security procedures and controls across all our businesses with the aim of ensuring personal data is secured and we comply with relevant legislation and contractual requirements. We pursue appropriate privacy accreditations, e.g., TRUSTe Privacy and Safe Harbor Seal. We regularly monitor regulation changes to assess the impact on existing processes and programmes. We have established a global security operations centre that provides ongoing monitoring of potential malicious attacks on our infrastructure and systems.
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Testing failures
A control breakdown or service failure in our school assessment and qualifications businesses could result in financial loss and reputational damage.
Our professional services and school assessment businesses involve complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. Our financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are poorly managed.
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We seek to minimise the risk of a breakdown in our student marking with the use of robust quality assurance
procedures and controls and oversight of contract performance, combined with our investment in technology, project management and skills development of our people.
In addition to the internal business procedures and controls implemented to ensure we successfully deliver on our contractual commitments, we also seek to develop and maintain good relationships with our customers to minimise associated risks.
We also look to diversify our portfolio to minimise reliance on any single contract.
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