Principal risks and uncertainties

The Board has considered the principal risks and uncertainties affecting the Group as at 31 December 2013 and up to the date of this report. These are described below. The Group has specific policies in place to ensure that risks are properly evaluated and managed at the appropriate level within the Group.

Issue Potential impact How it is managed
Clients
The Group competes for clients in a highly-competitive industry and client loss may have a material adverse effect on the Group’s market share and its business, revenues, results of operations, financial condition or prospects. Competitors include large multinational advertising and marketing communication companies and regional and national marketing services companies, database marketing and modelling companies, telemarketers, social media and consulting internet companies. Service agreements with clients are generally terminable by the client on 90 days’ notice and many clients put their advertising and communications business up for competitive review from time to time. The ability to attract new clients and to retain or increase the amount of work from existing clients may also in some cases be limited by clients’ policies on conflicts of interest. Operating companies seek to establish reputations in the industry that attract and retain clients, including by improving the quality of their creative output.

The Group’s different agency networks limit potential conflicts of interest and the Group’s cross-discipline team approach seeks to retain clients.

Brand Check at every Board meeting.
The Group receives a significant portion of its revenues from a limited number of large clients and the loss of some of these clients could have a material adverse effect on the Group’s prospects, business, financial condition and results of operations. A relatively small number of clients contribute a significant percentage of the Group’s consolidated revenues. The Group’s 10 largest clients accounted for 17.8% of revenues in the year ended 31 December 2013. Clients generally are able to reduce advertising and marketing spend or cancel projects on short notice. The loss of one or more of the Group’s largest clients, if not replaced by new client accounts or an increase in business from existing clients, would adversely affect the Group’s financial condition. Global client account managers seek to ensure the Group maintains partnership relationship with major clients. Operating companies seek to establish reputations in the industry that attract and retain clients and key talent.

Brand Check at every Board meeting and regular dialogue between directors of the Company and directors of the Group’s largest clients.
Data Security
The Group is subject to strict data protection and privacy legislation in the jurisdictions in which it operates and relies extensively on information technology systems. The Group operates on a largely decentralised basis with a large number of different agencies and operating entities and the resulting size and diversity of the operational systems increases the vulnerability of such systems to breakdown or malicious intrusion. The Group may be subject to investigative or enforcement action or legal claims or incur fines, damages, or costs if the Group fails to adequately protect data or observe privacy legislation in every instance. A system breakdown or intrusion could have a material adverse effect on the Group’s business, revenues, results of operations, financial condition or prospects. The Group assists the operating companies in developing principles on privacy and data protection and compliance with local laws.

Nominated senior executives provide leadership on privacy and data protection.

Implemented a WPP Data Code of Conduct and new WPP policies on data privacy and security.

Rolled out Group-wide WPP Data Health Checker which is an interactive survey to understand the scale and breadth of data collected by WPP agencies, so level of risk associated with this can be assessed.
Economic
The Group’s businesses are subject to economic cycles. Many of the economies in which the Group operates currently have significant economic challenges. Reduction in client spending or postponing spending on the services offered by the Group or switching of client expenditure to non-traditional media and renegotiation of contract terms can lead to reduced profitability and cash flow. Reduction in headcount and overheads. Ensuring that variable staff costs are a significant proportion of total staff costs and revenue.

Increased controls over capital expenditure and working capital.

Strategic focus on BRICs, the Next 11, MINT, new media and data investment management.

Diversification by geographic and product markets.

Consideration of the impact on the Group if certain countries left the Euro, or in the event the Euro was devalued.

Brand Check at every Board meeting.
Financial
Currency exchange rate fluctuations could adversely impact the Group’s consolidated results. The Company’s reporting currency is pounds sterling. Given the Group’s significant international operations, fluctuations in currency exchange rates can affect the Group’s consolidated results. The Group hedges the currency element of its net assets using foreign currency borrowings, cross-currency swaps and forward foreign exchange contracts. The balance sheet and cash flows of the Company are hedged by borrowing in the currency of those cash flows.

The Company publishes and explains its results in constant currency terms, as well as in sterling and on an actual dollar basis.

The Group's treasury position is a recurring agenda item for the Audit Committee.
The interest rates and fees payable by the Group in respect of certain of its borrowings are, in part, influenced by the credit ratings issued by the international debt rating agencies. The Company’s long-term debt is currently rated Baa2 by Moody’s and BBB by Standard and Poor’s and the Company’s short-term debt obligations P2 and A2 respectively. If the Company’s financial performance and outlook materially deteriorate, a ratings downgrade could occur and the interest rates and fees payable on certain of the Company’s revolving credit facilities and certain of the Group’s bonds could be increased. Active dialogue with the rating agencies to ensure they are fully apprised of any actions that may affect the Company’s debt ratings. The Company also seeks to manage its financial ratios and to pursue policies so as to maintain its investment grade ratings.

The Group's treasury position is a recurring agenda item for the Audit Committee.
The Group is subject to credit risk through the default of a client or other counterparty. The Group is generally paid in arrears for its services. Invoices are typically payable within 30 to 60 days.

The Group commits to media and production purchases on behalf of some of its clients as principal or agent depending on the client and market circumstances. If a client is unable to pay sums due, media and production companies may look to the Group to pay such amounts to which it committed as an agent on behalf of those clients.
Evaluating and monitoring clients’ ongoing creditworthiness and in some cases requiring credit insurance or payments in advance.

The Group's treasury position is a recurring agenda item for the Audit Committee.
Mergers & Acquisitions
The Group may be unsuccessful in evaluating material risks involved in completed and future acquisitions and may be unsuccessful in integrating any acquired operations with its existing businesses. The Group regularly reviews potential acquisitions of businesses that are complementary to its operations and clients’ needs. If material risks are not identified prior to acquisition or the Group experiences difficulties in integrating an acquired business, it may not realise the expected benefits from such an acquisition and the Group’s financial condition could be adversely affected. Business, legal, tax and financial due diligence carried out prior to acquisition to seek to identify and evaluate material risks and plan the integration process. Warranties and indemnities included in purchase agreements.

Audit Committee oversight of acquisition and Board oversight of material acquisitions and review of the integration and performance of recent and prior acquisitions.
Goodwill and other intangible assets recorded on the Group’s balance sheet with respect to acquired companies may become impaired. The Group has a significant amount of goodwill and other intangible assets recorded on its balance sheet with respect to acquired companies. The Group annually tests the carrying value of goodwill and other intangibles for impairment. The estimates and assumptions about results of operations and cash flows made in connection with impairment testing could differ from future results of operations and cash flows. Future events could cause the Group to conclude that the asset values associated with a given operation have become impaired which could have a material impact on the Group’s financial condition. Regular impairment testing which is a recurring agenda item for the Audit Committee.
Operational
The Group operates in 110 countries and is exposed to the risks of doing business internationally. The Group’s international operations are subject to the following risk factors: (i) restrictions and/or changes in taxation on repatriation of earnings; (ii) economic, social or political instability within different countries, regions and markets; (iii) changes in foreign laws and regulatory requirements, such as those on foreign ownership of assets or data usage or business models; and (iv) uncertainty or potential ineffectiveness or lack of enforcement in relation to the Group’s client service agreements or other contractual rights. Affiliate, associate and joint venture structures with local partners used in developing markets.

Brand Check at every Board meeting.

Uniform approach to internal controls to seek to ensure best practice employed in all jurisdictions.
People
The Group’s performance could be adversely affected if it were unable to attract and retain key talent or had inadequate talent management and succession planning for key management roles. The Group is highly dependent on the talent, creative abilities and technical skills of our personnel as well as their relationships with clients. The Group is vulnerable to the loss of personnel to competitors and clients leading to disruption to the business. The Group’s incentive plans are structured to provide retention value, for example by paying part of annual incentives in shares that vest two years after grant.

Operating companies seek to establish reputations in the industry that attract and retain key personnel, including by improving the quality of their creative output and by offering competitive performance-based compensation.

Succession planning of key executives is a recurring agenda item of the Board and Nomination and Governance Committee.

Compensation Committee oversight for the Group's incentive plans and compensation.
Regulatory/Legal
The Group may be subject to regulations restricting its activities or effecting changes in taxation. Governments, government agencies and industry self-regulatory bodies from time to time adopt statutes and regulations that directly or indirectly affect the form, content and scheduling of advertising, public relations and public affairs and market research or otherwise limit the scope of the activities of the Group and its clients which could have a material adverse impact on our financial position. Changes in tax laws and international tax treaties or their application may also adversely affect the Group’s reported results. The Group actively monitors any proposed regulatory or statutory changes and consults with government agencies and regulatory bodies where possible on such proposed changes. Regular briefings to the Audit Committee of significant regulatory or statutory changes. Group representation on a number of industry advisory bodies.
The Group may be exposed to liabilities from allegations that certain of its clients’ advertising claims may be false or misleading or that its clients products may be defective or harmful. The Group works for a large number of clients across a broad spectrum of industries and end markets, some of which may become subject to litigation. As a consequence of providing services to such clients, the Group may itself become involved as a defendant in litigation brought against its clients by third parties, including its clients, competitors or consumers or governmental or regulatory authorities. The Group seeks to comply with all laws and industry codes governing marketing material.

Upward business approval procedure within operating companies and to WPP ethical review meetings.
The Group is subject to strict anti-corruption and anti-bribery legislation and enforcement in the countries in which it operates. The Group may be exposed to liabilities in the event of breaches of anti-corruption and anti-bribery legislation in all of the 110 countries in which it operates. Online and in-country ethics and anti-bribery and corruption training on a Group-wide basis to raise awareness and seek compliance with the WPP Code of Conduct.

Confidential helpline for WPP staff to raise any concerns which are investigated and reported to the Audit Committee on a regular basis.

Due diligence on selecting and appointing suppliers and acquisitions.

Gift and hospitality register and approvals process.

Chapter 10 of 13

77%