REG - Pearson PLC - Annual Financial Report <Origin Href="QuoteRef">PSON.L</Origin> - Part 2

PearsonAnnouncement

24/03/2017 12:30

- Part 2: For the preceding part double click  ID:nRSX4839Aa 

engagement from product engineering teams.                                                                                                                   
 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 comprehensiveacross the whole enterprise.                                                                                                                                                                                                                                                                                                                                                                                                                                                          2016 activities: A revised business resilience policy and supporting guidance was developed in 2016, identifying ourexposure 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..                                                                                                                                                           
 FINANCIAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
 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 abuseactivities, results in a highereffective tax rate, doubletaxation and/or negative reputational impact.                                                                                                                                                                                                                                                                                                                                   2016 activities: This risk has slightly increased during 2016 due to pending legislative changes, and the definition of therisk 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 onproposed 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 impactthey 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 treasuryfinancial 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 offunds 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.                                                                                                                                                                                                                                           
 LEGAL AND COMPLIANCE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
 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 togetherin 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 developingspecialist 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 securityimprovement programmes that commenced  
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    in 2015will continue throughout 2017 and will implementcritical 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 departurefrom the EU and, if necessary, will adapt its privacyprogramme 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 intellectualproperty rights (including patents, trademarks and general copyright) in our brands, content and technology may prevent usfrom enforcing our rights against competitors' to protect our market share. Failure to obtain permissions,or to comply with the terms ofpermissions, for copyrighted or otherwise protected materials such as photos resulting in potential litigation; risk of authorsalleging improper calculations or payments of royalties.  2016 activities: In 2016, we rolled out the new Pearson brand with its protection greatly improved by expanding wordmark 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 theimpact 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   
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    rolledout 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-trustand competition compliance. Controls -     Policy and guidance published -        
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Lawyer network launched across Pearson -     Ongoing training and awareness initiatives. 2017 plans: Employee training will continue throughout2017 and risk assessments are ongoing to monitor compliance with anti-trust and competition legislation.         
 
 
LEGAL NOTICE 
 
"Except for the historical information contained herein, the matters discussed
in this document include forward-looking statements. In particular, all
statements that express forecasts, expectations and projections with respect
to future matters, including trends in results of operations, margins, growth
rates, overall market trends, the impact of interest or exchange rates, the
availability of financing, anticipated costs savings and synergies and the
execution of Pearson's strategy, are forward-looking statements. By their
nature, forward-looking statements involve risks and uncertainties because
they relate to events and depend on circumstances that will occur in future.
They are based on numerous assumptions regarding Pearson's present and future
business strategies and the environment in which it will operate in the
future. There are a number of factors which could cause actual results and
developments to differ materially from those expressed or implied by these
forward-looking statements, including a number of factors outside Pearson's
control. These include international, national and local conditions, as well
as competition. They also include other risks detailed from time to time in
Pearson's publicly-filed documents and you are advised to read, in particular,
the risk factors set out in this document. Any forward-looking statements
speak only as of the date they are made, and Pearson gives no undertaking to
update forward-looking statements to reflect any changes in its expectations
with regard thereto or any changes to events, conditions or circumstances on
which any such statement is based. Readers are cautioned not to place undue
reliance on such forward-looking statements." 
 
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