The Freudenberg Group

During the course of its global business activities, Freudenberg faces very diverse risks and opportunities. The Freudenberg Group operates a standardized global risk management system allowing the timely identification and control of risks inseparably associated with entrepreneurial action and the prompt initiation of appropriate countermeasures. The system classifies risks by risk category, likelihood and the scale of damage. The functionality of the risk management system was assessed by the auditor on implementation, and the auditor determined that the system is appropriate for the timely identification of developments that could pose a threat to the continued existence of the company.

As an internationally-oriented company, Freudenberg is exposed to macroeconomic risks. Given the high degree of uncertainty associated with the future economic situation of most industrialized nations, the Group is exposed to currency and interest rate risks which are monitored by the risk management system. By setting up and expanding efficient production sites around the world, Freudenberg not only reduces the impact of changes in currency parity, particularly dollar-euro parity, but also ensures proximity to the customer. In addition, currency and interest rate risks are hedged to a meaningful extent. Internal guidelines for Group companies clearly specify that derivative financial instruments may not be used for speculative purposes, but only for hedging risks in connection with underlying transactions and associated financing operations (see also comments in the section on "Financing strategy", page 11, and the Notes to the Consolidated Financial Statements, page 69).

As a supplier, Freudenberg is exposed to business and product risks, particularly as regards developments in the sectors the company serves: these are primarily the automotive industry and the mechanical engineering industry, the textile and clothing industry and the construction industry. Freudenberg responds to the economic and price risks in these sectors by an unceasing effort to constantly improve performance vis-à-vis the customer through innovative and reliable products and services. Furthermore, the broad diversification of the Freudenberg Group, referred to sectors and regions, serves risk distribution. Diversification helps to balance risks while at the same time creating opportunities for the further advancement of the company by establishing new Business Groups and Divisions and developing markets in high-growth regions.

The Freudenberg Group attaches considerable importance to its research and development activities. By continually expanding these activities, the Group not only combats possible risks arising from rapid technological change, but also safeguards its future competitive edge through its technology leadership.

On the procurement market, Business Groups and Divisions in the Freudenberg Group face risks relating to the availability and price of raw materials, particularly steel, crude oil and rubber. Operating units respond to these risks with global purchasing activities and by reviewing the utilization of substitute raw materials and alternative production processes. Long-term contracts are concluded where feasible and meaningful.

The business activities of the companies in the Freudenberg Group are subject to legislative provisions and the risk of litigation. In its capacity as a supplier, the focus in this context is on product liability risks. Freudenberg seeks to avoid these risks through extensive quality assurance and control measures.

The Freudenberg Group responds to possible risks in the IT sector in line with standardized IT guidelines valid throughout the Group. State-of-the-art technical measures are in force and IT security checks regularly conducted. Furthermore, internal communication measures encourage a heightened awareness on the part of employees with regard to the correct handling of information and information systems.

The raw materials and processes used for the manufacture of products have a varying impact on the environment and the workplace. The principle applied by the Freudenberg Group is to avoid the use of critical substances wherever possible. If the use of such substances is currently unavoidable in order to comply with technical specifications, then special protective and precautionary measures apply. The high standard of environmental protection and occupational safety is reflected, for example, by the accident rate, which has for many years been lower than the industrial average. Furthermore, numerous projects have been and are being implemented under the "We all take care" initiative to enhance the present good status of environmental protection and occupational safety even further.

The analysis of present risks concludes there are no risks which could pose a threat to the continued existence of the Freudenberg Group.

Freudenberg largely implements the rules of the German Corporate Governance Code on a voluntary basis. The only provision of relevance to Freudenberg that is not implemented concerns the publication of individual executive compensation for the Management Board and Board of Partners.

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