|
All figures in
£millions
|
2016
|
2015
|
|
Short-term employee
benefits
|
6
|
7
|
|
Retirement
benefits
|
1
|
1
|
|
Share-based payment
costs
|
1
|
1
|
|
Total
|
8
|
9
|
|
Risk
|
2016 activities and 2017 plans
|
|
STRATEGY AND CHANGE
|
|
|
Business transformation and change:
The pace and scope of our
business transformation initiatives increase our execution risk
that benefits may not be fully realised, costs may increase, or
that our business-as-usual activities may be impacted and do not
perform in line with expectations.
|
2016 activities: As
highlighted in the chairman's introduction on p4,2016 continued to
be a year of transformation and change for Pearson, supported by
the board. The restructure and associated cost savings programme
announced at the start of the year was delivered in full in 2016.
The first implementation of The Enabling Programme - a programme of
work to deliver a single Pearson-wide solution to integrate our
data, systems and processes across HR, finance, procurement and
supply chain - went live in the UK.
Key to the success of our change programmes is the
quality of data (reported as a separate principal risk in 2015).
The unavailability of timely, complete and accurate data limits
informed decision-making and increases the risk of noncompliance
with legal, regulatory and reporting requirements.
Controls
-
Project and change management best
practices
-
Enhanced governance and reporting,
including monthly updates on the most significant change
initiatives to the Pearson executive, board and audit
committee
-
Monthly assurance reporting on the
programmes.
2017 plans: In 2017,
business transformation and change
initiatives will be supporting our strategic goal to accelerate our
digital transition in higher education, to manage the print
decline, and to reshape our portfolio.
A key pillar in our strategy, as emphasised in the CEO's strategic
overview on p7, is underpinning our content and assessment with our
technology and services. We are speeding up work to simplify our
global learning platform and enhancing our courseware service
capabilities.
We will also continue with the next phase of The Enabling Programme
to further progress the simplification of our business (the
importance of which our chairman highlights on p4), reduce costs
and improve our data capabilities. The focus will be on customer
and product master data as core
to all systems and businesses.
See CEO's strategic overview on p6-9.
|
|
Products and services:
Failure to accelerate our shift
to digital by developing and
delivering (to time and quality) market leading global products and
services that will have the biggest impact on learners and drive
growth; ensuring Pearson offers products to market at the right
price and with a deal
structure that remains competitive as well as supports our
strategy.
|
2016 activities: This risk
remains one of our highest as it is central to our growth strategy.
The end of 2016 saw unprecedented declines in our US higher
education
courseware business (as described in full in the Performance
section on p38) which we failed to adequately anticipate and build
into our forecasts.
Significant activity took place in 2016 to mitigate this risk and
support the growth of Pearson. We have combined our lines of
business for courseware into a single product organisation, as well
as rationalised and integrated our product development capabilities
to focus on learning and user experience design, and more adaptive,
personalised learning in next generation courseware and online
services.
In 2016, we completed initial portfolio reviews on global school,
US higher education courseware and higher education managed
services, capturing opportunities for shifts in focus and better
differentiation.
The Global Product Lifecycle continues to be embedded across
Pearson to enable visibility and transparency into our product
investment decisions using the Global Product Lifecycle stages and
gates, data-driven decision-making and incremental funding
principles.
Controls
-
Separate school, higher education
and English product teams brought together into one global product
organisation
-
Product Development
Lifecycle
-
Product and portfolio councils
launched
-
Product portfolio management
approach and benefits articulated.
2017 plans: Turning this
risk into an opportunity - successfully accelerating our shift to
digital as well as investing in and delivering the right products
and services - is
key to successful business performance in 2017.
In the CEO's strategic overview on pages 6-9, we have laid out our
strategy in more detail.
Key elements that relate to the products and services risk
are:
Accelerating work to simplify our product learning platform and
enhancing our courseware service capabilities with £50m of
additional investment, which will remove barriers to faster product
innovation, accelerate our product roadmap by two
years and drive faster adoption of institution-wide digital direct
access for Pearson courseware.
Increasing our participation in the courseware rental market,
by:
a. Reducing eBook rental prices by up to 50% across
2,000 titles - making digital rental the best option
for
price-conscious students,
b. Launching our own print rental programme, piloting with an
initial group of 50 titles made available through Pearson's
approved rental partners, and ensuring Pearson is paid more often
for the usage of our courseware. If successful, we
will scale this programme rapidly.
See Develop digital & services on p14.
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|
Talent:
Failure to attract, retain and
develop staff, including adapting to new skill sets required to run
the business.
|
2016 activities: The
restructure and associated cost savings
programme announced at the start of the year was delivered in full
in 2016.
We have successfully recruited in-demand skill sets in support of
our strategic goals to accelerate the shift to digital, including
the appointment of global leaders to lead both the business and the
transformation eff orts in North America.
Throughout the year, we have continued to promote
our internal talent filling 45% of our open roles with
internal staff.
Controls
-
Globally consistent performance,
talent and succession management approaches
established
-
Annual global employee engagement
survey conducted with follow-up action plans in
place
-
Retention data is monitored on a
monthly basis
-
Exit interviews are conducted and
monitored globally to identify any trends and
concerns
-
Learning programmes now offered on
a single platform with access to new content for all
staff.
2017 plans: Over 60% of our
staff completed the engagement survey. The results of the survey
have been shared with all line managers and action planning will
take
place at the start of 2017. Each member of the Pearson executive
will work in partnership with human resources and corporate affairs
to build business-level action plans.
See p23 in Sustainability for more on the engagement
survey.
Oversight of succession plans and development planning has been
improved with rigorous quarterly talent reviews implemented for
2017.
Further learning programmes will be launched within our Pearson U
learning platform with a strong emphasis on leadership and
technology.
|
|
Political and regulatory risk:
Changes in policy and/or regulations have the
potential
to impact business models and/or decisions across all
markets.
|
2016 activities: Work was
undertaken in 2016 to ensure that we can more proactively identify
and mitigate political/ regulatory risk that had the potential to
impact Pearson globally; bringing greater co-ordination, clarity
and consistency to our work; building political and institutional
relations, and increasing our ability to receive and respond to
external intelligence.
In June 2016, a UK referendum voted in favour of leaving the EU. A
risk assessment of impacts arising from this was carried out and
continues on an ongoing basis. There has been no significant
downside for Pearson identified so far following the result of the
referendum. The main risk arising
at this stage for Pearson is the resulting overall
uncertainty.
2017 plans: Following the
inauguration of a new President of the US, in 2017 Pearson will
continue to implement its state strategy which will ensure
engagement with new office holders. We will build on the groundwork
already done in Washington, DC and state capitals throughout the US
to position Pearson as a leader in the education space and to
establish the company as a key partner for Governors and state
legislators as they pursue their economic agendas. This work will
focus on Congress, the Administration, and in
priority state capitals.
In the UK, 2017 is a year of major qualification and accountability
changes. Our focus is on working with government, regulator and
other stakeholders to
demonstrate the professionalism and solidity of the system. We have
increased engagement with Department for Education officials ahead
of major periods of change (key moments include summer Key Stage 2,
GCSE and A Level 2017 results).
We will continue to assess the potential impacts of the UK's
decision to leave the EU as the model that will replace our
membership becomes clearer.
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OPERATIONAL
|
|
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Testing failure:
Failure to deliver tests and
assessments and other related contractual requirements because of
operational or technology issues, resulting in negative publicity
impacting our brand and reputation.
|
2016 activities: Pearson is
an education content, assessment and related services company and,
as such, managing this risk remains a priority. In the UK, the
summer
exam series was delivered more smoothly than the previous year as a
result of mitigating actions taken. Action plans were put in place
for US schools assessment, for example to mitigate against future
outages and disruption.
Controls
We seek to minimise the risk of a breakdown in our student marking
systems with the use of:
-
Robust quality assurance
procedures and controls
-
Oversight of contract
performance
-
Investment in technology, project
management and skills development of our people, including software
security controls, system monitoring, pre-deployment testing,
change controls and the use of root cause analysis procedures to
learn from incidents and prevent recurrence.
2017 plans: Investigation is
under way to mitigate risks around compatibility and responsiveness
of our assessment
tools by using cloud and web services.
The migration and retirement of legacy systems in use will
continue.
Plans are being developed to upgrade Pearson's bespoke online
marking system - ePEN in the UK in 2017 and to continue with
mitigating actions put in place in the 2016 summer series in the
meantime.
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|
Safety and Corporate security:
Risk to safety and security due to increasing local and global
threats.
|
2016 activities: Good
progress was made in 2016 towards achieving our three-year health
and safety strategy. The
implementation of health and safety standards continued, plus
health and safety reviews have now been formally included in
management review processes in our businesses.
During 2016, the travel security programme was reviewed and a
revised process implemented to include improved traveller
communications.
The Travel ASSIST app was also updated to allow access for the
circa 44,000 associates, including assessors, examiners and
validators, who will be able to see their itinerary, country
information and alerts. The importance of continuing to develop and
extend this was evidenced during the Hoboken
train incident in September 2016, when 37 travellers in the area
were successfully contacted via the travel management
tool.
Controls
-
Up-to-date global health and
safety policy in place
-
Management review processes are
established with key leadership groups
-
Incident data collected globally
every six months.
2017 plans: The ongoing
focus of health and safety will be the implementation of the
three-year strategy which in
2017 will include enhancing our incident reporting procedures and
processes globally.
Travel security improvements will continue towards automation,
smoother communications and feedback from travellers. Security risk
assessments will take place to review physical security measures at
key facilities, and a corporate security policy, strategy and
guidelines will be delivered.
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|
Safeguarding and protection:
Failure to adequately protect
children and learners, particularly in our direct delivery
businesses.
|
2016 activities: We continue
to take safeguarding as a fundamental obligation to our young
learners and a high priority.
Safeguarding training was reviewed in 2016 and indicated good
take-up and positive feedback regarding the content. Safer Schools
materials have been developed in partnership with University
College London (UCL), which will be rolled out to the relevant
businesses, and development of a sexual
harassment policy for our further education businesses
commenced.
Controls
-
Safeguarding committee
established
-
Metrics regarding safeguarding
reports and training collected
-
Safeguarding policy and
training.
2017 plans: We will continue
to develop and question our
practices around safeguarding in 2017, including developing
external validation for our safeguarding strategy. The Safer
Schools materials will be implemented in relevant businesses, as
will the new sexual harassment policy.
|
|
Customer digital experience:
Challenges with reliability and availability of customer facing
systems could result in incidents of poor customer digital
experience and impact our customer service
responsiveness.
|
2016 activities: Managing this risk is
critical to achieving our
strategic goal of accelerating our shift to digital products and
services, and crucially, becoming a trusted partner. We will only
succeed if robust platforms and responsive customer support service
underpin our content, assessment and services.
The risk increased in 2016 due to the fact that, despite a
comparably good customer back-to-school in 2016, there were issues
in the area of our subscription management system (SMS) which
negatively impacted our North American customers 'ability to easily
access our systems. The initial
issues have been addressed.
Controls
-
Real-time monitoring of systems
(for service disruptions) and reporting of operational performance
used to identify issues
-
Project management disciplines in
place to ensure enhancements and new products meet required
standards.
2017 plans: Further
investment is being made in 2017 in our
global learning platform with products being developed on it for
testing. Read more on this in 'our strategy in action' section on
p14-15.
Mitigations are being put in place to prevent a reoccurrence of the
2016 back-to-school issues for customers, which are described
further in the Develop digital and services section on
p15.
Continued focus on customer service quality and responsiveness with
specialised service for specific customer groups. We continue to
invest in training agents to ensure that they are ready to handle
the broad range of issues faced by learners and educators. We have
also improved escalation
processes so that we can be more responsive to complex issues that
require engagement from product engineering teams.
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Business continuity:
Failure to have plans in place or plans are not properly executed.
Crisis management and technology disaster recovery (DR) plans may
not be comprehensive
across the whole enterprise.
|
2016 activities: A revised
business resilience policy and supporting guidance was developed in
2016, identifying our
exposure and risk as they relate to key products, sites, services
and supply chain. A common crisis management framework was
implemented, with training and scenario sessions running during
2016.
Pearson won an external award for Business Continuity/Resilience
Team of the Year, in recognition of the ongoing eff orts and
shifting focus from traditional business continuity towards
resilience management.
Technology incidents are dealt with reactively and proactive
closure of known DR gaps is prioritised based upon the importance
of products and systems. Data centres are being consolidated,
including greater use of cloud solutions. A schedule is in place
for testing the DR of data centres.
Controls
-
Business resilience governance
group has been established, meeting quarterly, with senior leaders
from across the business
-
Key enterprise systems developed
during 2016 (the Enabling Programme, oneCRM, and Identity and
Access Management) have all been delivered with 'high availability'
requirements to provide resilience
-
Product Lifecycle includes an
explicit checkpoint to ensure appropriate resilience is built into
new products.
2017 plans: Key Pearson
locations identified that will be the priority for 2017 to ensure
business resilience plans are in place and tested.
Crisis management training will continue across 2017.
Work continues to address any gaps in the DR arrangements for
legacy systems where appropriate. Further data centre consolidation
and migration to cloud services..
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FINANCIAL
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Tax:
Legislative change caused by the OECD Base Erosion and Profit
Shifting initiative, the UK exit from the EU, US tax reform or
domestic government initiatives, potentially in response to the
ongoing EU anti tax abuse
activities, results in a higher
effective tax rate, double
taxation and/or negative reputational impact.
|
2016 activities: This risk
has slightly increased during 2016 due to pending legislative
changes, and the definition of the
risk was reworded to take into account the external focus on
transparency, linked to greater scrutiny and the potential for
reputational damage. Plans are being put in place to manage the
implementation of these legislative changes.
Controls
-
Our tax strategy reflects our
business strategy and the locations and financing needs of our
operations. In common with many companies, we seek to manage our
tax affairs to protect value for our shareholders, in line with our
broader fiduciary duties. We are committed to complying with all
statutory obligations, to undertake full disclosure to tax
authorities and to follow agreed policies and procedures with
regard to tax planning and strategy
-
Oversight of tax strategy is
within the remit of the audit committee, which receives a report on
this topic at least once a year. All of the audit committee members
are independent non-executive directors. The chief financial
officer is responsible for tax strategy; the conduct of our tax
affairs and the management of tax risk are delegated to a global
team of tax professionals. See p133 for details of tax accounting
policy.
-
Media and public scrutiny on tax
issues continues to be actively monitored by group tax and
corporate affairs.
2017 plans: Continued close
monitoring with advisers on
proposed and potential legislation changes and possible
impacts.
Potential impact of the UK's decision to leave the EU, and the
inauguration of a new President in the US are being closely
monitored. There could be significant changes to the US and UK tax
regimes including VAT and withholding tax. It is too early to know
what these changes will be, or any impact
they may have.
Media and public scrutiny on tax issues will continue to be
actively monitored by group tax and corporate affairs.
|
|
Treasury :
Failure to manage treasury
financial risk (e.g. FX, interest rate, counterparty and
operational risk).
|
2016 activities: Treasury
slightly increased in 2016 and remains a major risk as Pearson has
net debt of £1.1bn which periodically needs refinancing, and
faces the possibility of the loss of cash balances in the event of
a bank failure. Pearson also faces the possibility of losses due to
changes in FX or interest rates adversely affecting the
organisation.
However, the probability of a major issue is relatively low due to
the spread of debt maturities, the cautious approach to
counterparty credit risk and the strong liquidity position. Pearson
finished the year with over £1bn of cash and sufficient access
to funds to be able to repay its $850 million in maturities in 2018
with the additional possibility of
funds from the PRH disposal or recapitalisation.
The potential impacts of the UK's exit from the EU, such as market
and FX volatility, were closely monitored throughout 2016 (which
will continue in 2017).
2017 plans: During January
2017, the Group's credit ratings with Moody's and Standard and
Poors were modified from Baa2/BBB (stable) to Baa2/BBB (negative
outlook). This is not expected to restrict short-term capital
market access if this was required.
In 2017, we will continue to operate in line with our treasury
policy. More on this can be found in note 19, starting on
p160.
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LEGAL AND COMPLIANCE
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|
Data privacy and information security:
Risk of a data privacy incident or other failure to comply with
data privacy regulations and standards; and/or a 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 and financial
loss.
|
2016 activities: Risk
concerning cyber security and data privacy remains high due to
complex external factors,
including increasingly sophisticated attack strategies, as well as
Pearson's ongoing transition to digital products, services and
cloud adoption.
There are also upcoming increased regulatory obligations under the
new EU data privacy law, the General Data Protection Regulation
(GDPR), which will apply from May 2018 and introduce more onerous
privacy obligations and more stringent penalties for
non-compliance. The data privacy and information security offices
worked together
in 2016 on the bulletproofing and critical product programme to
ensure that appropriate security and privacy controls are built
in.
Data privacy
Actively worked to mitigate the risk through continued eff orts on
our privacy programme, in particular the roll-out of global
policies and training, deploying new vendor and programme privacy
impact assessment processes, and developing
specialist privacy toolkits to help employees better manage privacy
risks.
Controls
-
Established data privacy
office
-
Data privacy policy and annual
training
-
Monitoring by the Data Privacy
Council
-
Privacy impact assessments in
place.
Information security
The information security programme continued in 2016 to close gaps
where risk has been identified, such as undertaking security impact
assessments and putting in place remediation plans. Work continued
towards global PCI compliance to avoid potential for severe fines
and potential loss of contract revenue.
Controls
-
Established information security
office
-
Up-to-date security policies and
awareness training
in place
-
Ongoing monitoring for potential
malicious attacks on our infrastructure and
systems
-
Ongoing firewall management
activities
-
Automated security exception
management
-
Vendor contract reviewed and
approved for appropriate security controls.
2017 plans: The data privacy
and information security
improvement programmes that commenced in 2015
will continue throughout 2017 and will implement
critical processes to drive best practices.
The joint activity on bulletproofing and critical products
programme will continue, for example ensuring that the new global
learning platform is 'secure by design'.
The data privacy programme will progress changes required to comply
with the GDPR ready for it to take effect in May 2018. As Pearson
operates across several EU Member States, Pearson will still need
to comply with GDPR even when the UK leaves the European Union. The
data privacy office will continue to monitor plans for the UK's
departure
from the EU and, if necessary, will adapt its privacy
programme to take into account any new UK-specific privacy
developments.
|
|
Intellectual property including rights, permissions and
royalties:
Failure or lack of practical ability to adequately manage, procure
register, monitor, protect and/or properly license our
intellectual
property rights (including patents, trademarks and general
copyright) in our brands, content and technology may prevent
us
from enforcing our rights against competitors' to protect our
market share.
Failure to obtain permissions,
or to comply with the terms of
permissions, for copyrighted or otherwise protected materials such
as photos resulting in potential litigation; risk of
authors
alleging improper calculations or payments of
royalties.
|
2016 activities: In 2016, we
rolled out the new Pearson brand with its protection greatly
improved by expanding word
mark protection to 80 new countries and filing for logo in 150
countries. A global brand database was also fully implemented to
support this. The patent governance programme was revamped in 2016
and a stronger framework to protect intellectual property (IP) was
established.
Work began in 2016 to evaluate new royalty and business practices.
We also began to implement a global three-tier strategy guiding
third-party assets (e.g. images, text, rich media) rights
acquisition as well as a more stringent rights review and
reclearance process.
Controls
-
Policies in place to manage and
protect our intellectual property
-
Cooperation with trade
associations
-
Monitoring of technology and legal
advances
-
Patent programme in
place.
2017 plans: We will continue
to streamline our portfolios;
procure and register expanded rights in our high-value IP globally,
including aggressively expanding our patent portfolio; monitor
activities and regulations; and proactively enforce our rights,
taking necessary legal action.
In 2017, we will start to implement the newly developed royalty and
business practices. A new rights management system is being
developed for roll-out in the UK, US and Canada during 2017 and
2018.
|
|
Anti-bribery and corruption (ABC):
Failure to effectively manage risks associated with compliance to
global and local ABC legislation.
|
2016 activities: Internal
procedures and controls, including training, continue to improve,
which should mitigate the
impact as part of an 'adequate procedures' defence, in the event
that an undetected ABC matter arises.
The audit committee reviewed the results of a self-assessment of
the ABC programme, supplemented by internal audit and external
independent review (see p72). Overall, this indicated an effective
framework to be in place.
Pearson's ABC infrastructure includes a network of local compliance
officers based in country, being mainly members of the legal team.
These officers have assumed responsibility for ABC compliance in
their respective businesses, and function as the 'eyes and ears' of
the organisation with the oversight of the central compliance and
legal teams.
In addition to ongoing face-to-face training for higher risk
groups, a compliance awareness campaign took place in December 2016
which included ABC, to coincide with UN International
Anti-Corruption Day. ABC certification was rolled
out across all higher risk markets in 2016.
Controls
-
Policy and guidance updated,
although no change to Pearson's 'zero tolerance'
principle
-
Code of Conduct certification and
training in place, which includes a clear statement of ABC
policy
-
Business Partner Code of Conduct,
emphasising ABC compliance
-
Local Compliance Officer programme
in place and proving successful.
2017 plans: Continue risk
assessments in 2017 to ensure that the ABC programme continues to
reflect local market and business model risks.
Further develop and deploy risk-based third-party due diligence and
monitoring.
Leverage The Enabling Programme's systems and processes to automate
and embed improved preventive and detective controls relevant to
ABC.
|
|
Competition law :
Failure to comply with anti-trust and competition legislation could
result in costly legal proceedings and/or adversely impact our
reputation.
|
2016 activities: A policy,
general training plus supporting guidance were developed in 2016,
containing all the measures, indicators and actions required to
ensure anti-trust
and competition compliance.
Controls
-
Policy and guidance
published
-
Lawyer network launched across
Pearson
-
Ongoing training and awareness
initiatives.
2017 plans: Employee
training will continue throughout
2017 and risk assessments are ongoing to monitor compliance with
anti-trust and competition legislation.
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PEARSON
plc
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Date: 24
March 2017
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By: /s/
NATALIE DALE
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------------------------------------
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Natalie
Dale
|
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Deputy
Company Secretary
|