In accordance with the law, the administration of the Company is entrusted to the Board of Directors, whose members are appointed by the Shareholders’ Meeting.

Directors’ terms of office

The statutory duration of Directors’ terms of office is three years, and may be renewed. The term of office of any Director who is an individual expires automatically at the conclusion of the Shareholders’ Meeting that votes on the previous year’s financial statements and that is held in the year during which such Director has turned or will turn 70. Nevertheless, pursuant to a decision of the Shareholders’ Meeting, this age limit does not apply to one or more Directors who may remain in office or who may be reappointed one or more times, so long as the number of Directors concerned by this provision does not exceed one-fourth of the number of Directors in office.
All Directors’ terms of office are staggered, thereby facilitating regular renewal of the Board by the shareholders (i) due to the fact that the by-laws provide for relatively short terms of three years and (ii) because of spreading the expiration dates of the various terms of office, the Shareholders’ Meeting is able to vote each year on the terms of office of several Directors. Based on the current composition of the Board, the terms of office of two Directors will expire at the conclusion of the Shareholders’ Meeting convened to vote on the financial statements for fiscal year 2012, the terms of office of six Directors will expire at the conclusion of the Shareholders’ Meeting convened to vote on the financial statements for fiscal year 2013 and the terms of office of the remaining six Directors will expire at the conclusion of the Shareholders’ Meeting convened to vote on the financial statements for fiscal year 2014.
Although French law does not impose a minimum shareholding requirement on the directors of French limited companies (sociétés anonymes) Danone’s by-laws nevertheless require each Director to hold a minimum of 4,000 shares (representing, by way of example, and based on a share price of €50, an amount of €200,000), which must be held as registered shares.

Members of the Board of Directors as of February 28, 2013

As of February 28, 2013, the following persons are the 14 members of the Board of Directors:

(a) Each Director’s term of office and duties are detailed in section 11.2 Positions and responsibilities of the Directors and nominees to the Board of Directors.
(b) Director deemed independent by the Board of Directors on the recommendation of the Nomination and Compensation Committee, in accordance with the AFEP-MEDEF Code (see section 6.1 Board of Directors).
(c) Provided his term of office is renewed by the Shareholders’ Meeting of April 25, 2013.
As of February 28, 2013, the Board of Directors includes a Lead Independent Director, Mr. Jean LAURENT, who was appointed by the Board of Directors at its meeting on February 18, 2013 on the recommendation of the Nomination and Compensation Committee (please refer to the section Board of Directors’ rules of procedure hereafter for a description of the Lead Independent Director’s powers).
In addition, Mr. Michel DAVID WEILL was appointed Honorary Vice-Chairman of the Board of Directors at the conclusion of the Shareholders’ Meeting of April 28, 2011; he has an advisory role in this capacity.
The Shareholders’ Meeting of April 25, 2013 is asked to renew the terms of office as Directors of Messrs. Franck RIBOUD and Emmanuel FABER (see section 9.3 Comments on the resolutions submitted to the Shareholders’ Meeting hereafter).
Provided that the renewal of the terms of office of the latter is approved by the Shareholders’ Meeting of April 25, 2013, the composition of the Board will have the following characteristics:
(i)  a rate of independence of 57% (compared with a rate of 43% as of December 31, 2009 when the terms of office of Messrs. Franck RIBOUD and Emmanuel FABER were last renewed). This rate of independence is higher than that recommended by the AFEP-MEDEF Code (which is 50% for widely-held companies without controlling shareholders, such as Danone);
(ii)  a percentage of women of 21% (compared with a rate of 7% as of December 31, 2009 when the terms of office of Messrs. Franck RIBOUD and Emmanuel FABER were last renewed), i.e. three of 14 Directors, in accordance with the prevailing regulations, which require the percentage of women to be 20% by 2014;
(iii) an average age of Directors of 57.3 years (compared with an average age of 60.6 years as of December 31, 2009 when the terms of office of Messrs. Franck RIBOUD and Emmanuel FABER were last renewed); and
(iv) an average duration of Directors’ term of office of 6.5 years (compared with an average term of 11.6 years as of December 31, 2009 when the terms of office of Messrs. Franck RIBOUD and Emmanuel FABER were last renewed). Despite this significant decrease in the average seniority of its members, the Board of Directors has striven to retain, in order to preserve the diversity of the Board, several non-executive Directors who have extensive knowledge of the Group (in particular, Mr. Jacques VINCENT, who has been a Director since 1997) and one Director who will turn 70 during his term of office (Mr. Jean LAURENT).
It should be noted that, for several years, the Board has been committed, and has reiterated its commitment towards its shareholders, to continue, in the future, to make proposals to the Shareholders’ Meeting that improve its corporate governance, particularly in terms of its independence, the percentage of women on the Board and the diversity of its expertise and composition.
In accordance with the law, four members of the Danone works council, nominated by said council (two from the employees category, one from the supervisors and technicians category and one from the executives category) attend all Board meetings in an advisory capacity.

The Board of Directors’ rules of procedure, which set out the Directors’ rights and obligations and the method of operation of the Board of Directors, were adopted by the Board of Directors on April 25, 2002.
Following each of the self-assessments (the most recent being carried out in 2003, 2007, 2008, 2010 and 2012), the Board of Directors amended the rules of procedure (see section Self-assessment of the Board of Directors hereafter). More specifically, the Board of Directors’ meetings of February 14, 2011, February 14, 2012 and February 18, 2013 amended the rules of procedure to take into account best practices in governance (see, in particular, the section Directors’ Code of Ethics hereafter).
The main provisions of the Board of Directors’ rules of procedure are summarized hereafter.

Responsibilities of the Board of Directors

The Board of Directors is a collegial body in which all Directors have the same powers and duties, and in which decisions are made collectively. It is responsible towards the shareholders, it meets at least five times each year and establishes operating rules for itself and its various Committees.
The Board of Directors sets the Company’s business policies and ensures that they are implemented. It votes on all decisions concerning the Company’s major strategic, economic, social, financial and technological policies.
At each Board meeting, the Chairman reports on transactions concluded since the previous meeting and on significant projects in progress that may be concluded before the following meeting. Each year, the Board reviews the key points of the Group Management Report, as well as the resolutions to be submitted to the Shareholders’ Meeting. Furthermore, at least once every six months, General Management informs the Board of Directors of the Company’s financial position, cash position and commitments.
Between Board meetings, the Directors receive all necessary information concerning events or transactions of significance to the Group. More generally, the Directors may at any time request from the Chairman all information and documents they deem necessary to perform their duties.

Limits on the powers of the Chief Executive Officer

The list of transactions for which the rules of procedure require the Chief Executive Officer to obtain prior Board approval is detailed in section 6.5 Powers of the Chief Executive Officer.

Board of Directors’ meetings

In accordance with statutory and regulatory provisions and the Board of Directors’ rules of procedure, Directors who attend Board meetings by videoconference or other means of telecommunication are deemed to be present for the purposes of calculating the quorum and majority. However, this method of attendance is not permissible when the Board decides on whether to approve Danone’s statutory and consolidated financial statements or when it prepares the management report, including the Group Management Report.

Committees of the Board of Directors

The Board of Directors may create one or more specialized Committees and determine their composition and powers. The Committees perform their duties under the Board of Directors’ responsibility. These Committees may not interfere in the Company’s management or reduce or limit the powers of the Chairman and Chief Executive Officer, the Deputy General Manager or the Board of Directors. On matters within its jurisdiction, each Committee submits proposals, recommendations and opinions, and reports to the Board of Directors on its activities.
The Committees are comprised solely of Directors. Their members are appointed by the Board of Directors on the recommendation of the Nomination and Compensation Committee. They are appointed in their individual capacity and may not, in turn, appoint a proxy to represent them. The Committee Chairmen are appointed by the Board of Directors on the recommendation of the Nomination and Compensation Committee.

Compensation of Board of Directors’ members

The Shareholders’ Meeting determines the total maximum amount of attendance fees to be divided among the Directors. Directors who are members of the Executive Committee do not receive attendance fees. At the Shareholders’ Meeting of April 25, 2013, shareholders will be asked to change the total amount of these attendance fees in order to compensate the new role of Lead Independent Director and to take into account the specific situation of Directors who are resident abroad (by granting them an additional amount to cover their travel to Board meetings).

Directors’ Code of ethics

The Board’s rules of procedure include a Directors’ Code of ethics. Under this Code, the Directors are bound by a general confidentiality obligation regarding the decisions of the Board and of the Committees, as well as with respect to confidential information of which they become aware in the performance of their duties. Each Director is required to act in the interest of and on behalf of all shareholders.
In performing his/her duties, each Director must act independently of any interest other than the corporate interest of the Group and its shareholders. Each Director must at all times ensure that his/her personal situation does not create a conflict of interests with the Group. Any Director who has a conflict of interests must report it to the Board so that it may make a decision thereon, and must refrain from taking part in any vote on the relevant matter.
Following the Board of Directors’ meeting of February 14, 2011, the provisions of the rules of procedure were bolstered with respect to the following three points:

Awareness of Directors’ rights and obligations

At the time he/she takes office, each Director must be aware of the general and specific obligations incumbent on his/her position;

Directors’ confidentiality obligation

The Directors’ general confidentiality obligation was extended to all information and documents of which they may become aware in the course of performing their duties;

Duty to report conflicts of interest

Each Director must provide a sworn statement describing whether or not he/she has any conflicts of interest, including potential conflicts of interest: (i) at the time he/she takes office, (ii) annually, in response to the Company’s request when it prepares the Registration Document, (iii) at any time, if requested by the Chairman of the Board of Directors, and (iv) within ten business days of the occurrence of any event that causes the Director’s previously filed statements to become inaccurate, in whole or in part. In addition, in cases when the Director cannot avoid a conflict of interest, including potential conflicts of interest, he/she must abstain from taking part in discussions and from voting on the subjects concerned.
Moreover, at its meeting of February 14, 2012, the Board of Directors strengthened and detailed the Directors’ obligations regarding their commitment to the Board as follows: Directors must limit the number of their appointments as a director or chairman of committees of the board of directors of other companies in such a manner as to ensure they are able to commit fully to the Danone Board. Furthermore, should a Director wish to accept a new appointment within a French or foreign listed company, he or she must inform the Chairman of the Board of Directors and the Chairman of the Nomination and Compensation Committee.

Transactions involving the Company’s securities

The relevant securities include the Company’s shares and all financial instruments linked to the shares.
In general, the members of the Board of Directors are bound by a duty to exercise due care and diligence, as well as an obligation to exercise particular care with respect to any personal transactions involving the Company’s securities.
In particular, Directors may not engage in speculative or short-term transactions involving the Company’s securities.
Furthermore, they may not engage in transactions involving the Company’s securities in the following cases:
• if they have information that, when published, is likely to affect the price of the securities;
• during periods explicitly indicated by the Company, in particular, during the month preceding announcements of the Company’s annual and semi-annual results, or during the two-week period prior to publication of the Company’s quarterly sales figures.
In addition, the members of the Board of Directors must not use any instruments to hedge DANONE shares or any financial instruments linked to DANONE shares (in particular, stock-options or rights to allotments of DANONE shares subject to performance conditions). This rule also applies to all transactions engaged in by persons who have ties to the Directors (within the meaning of the regulations in force). Finally, any Director who is unsure about a transaction involving the Company’s securities (or other financial instruments) that he/she intends to enter into or about the precise nature of the information he/she is required to disclose must inform the Chairman of the Board of Directors or the Lead Independent Director accordingly.

Assessment of the Board of Directors’ performance

The Board’s performance is assessed every two years. This assessment may be a self-assessment, an assessment by the Nomination and Compensation Committee or an assessment by a third party organization.
At its February 14, 2012 meeting, in its annual report on its operations, the Board of Directors reviewed progress to date in implementing the recommendations issued as a result of the self-assessment carried out in December 2010. The last self-assessment was carried out at the end of 2012. Its findings were reviewed by the Board at its meeting on February 18, 2013 (see section Self-assessment of the Board of Directors hereafter).

Lead Independent Director

Discussions with the Company’s shareholders have enabled the Board of Directors to note that certain shareholders consider that the aggregation of the offices of Chairman of the Board of Directors and Chief Executive Officer could cause risks as regards corporate governance. It therefore appeared opportune to the Board to make obligatory the appointment of a Lead Independent Director when the functions of Chairman of the Board of Directors and Chief Executive Officer are combined in order to provide additional assurance as to the smooth operation of the Board and the balance of powers within General Management and the Board. Consequently, at the Board meeting on February 18, 2013, the Board’s rules of procedure were amended to provide for the position of Lead Independent Director.
The Lead Independent Director is appointed by the Board of Directors from among the independent Directors, based on a proposal from the Nomination and Compensation Committee. He/she remains in office throughout the duration of his/her term of office. Each time the Lead Independent Director’s term of office expires, a review will be carried out of the operation of said role and its holder’s powers so that, if necessary, they can be adapted.

Excerpt from the Board’s rules of procedure relating to the Lead Independent Director

Duties of the Lead Independent Director

“The Lead Independent Director’s primary function is to ensure the smooth operation of the Board of Directors and its Committees. In that context, he/she is in charge of the following matters:
Board of Directors assessment
The Lead Independent Director participates in the Board of Directors assessment process.
Management of conflicts of interest
The Lead Independent Director prevents conflicts of interest from occurring, notably by taking preventive measures to raise awareness.
He/she brings any conflicts of interest involving executive directors and officers and other Board members that he/she has identified to the attention of the Board of Directors.
As part of the duty to report conflicts of interest as specified in Article 8.3 of these rules of procedure [see section above Directors’ Code of Ethics], any Director having a conflict of interest, even potential, notifies the Lead Independent Director.
Compliance with the rules of procedure
The Lead Independent Director ensures that these rules of procedure are complied with.
As part of the consultation procedure with respect to market ethics as specified in Article 8.8 of these rules of procedure [i.e. the consultation procedure concerning transactions by the Directors involving DANONE shares, see section above Transactions involving the Company’s securities], the Lead Independent Director may be consulted by the Directors in the same capacity as the Chairman and Chief Executive Officer.
Relations with shareholders
The Lead Independent Director assists the Chairman and Chief Executive Officer, upon his/her request, to answer questions from shareholders, and makes himself/herself available to meet with them and receive comments and suggestions from them, at the request of and with the approval of the Chairman and Chief Executive Officer.
Activity report
The Lead Independent Director reports on the execution of his/her duties once a year to the Board of Directors.
During the Shareholders’ General Meetings, he/she may be requested by the Chairman and Chief Executive Officer to report on his/her actions.

Prerogatives of the Lead Independent Director

As part of his/her duties, the Lead Independent Director exercises the following prerogatives:
Convening of the Board of Directors/Agenda/Informing Directors
The Lead Independent Director may request the Chairman and Chief Executive Officer to convene the Board of Directors for a given agenda.
He/she may propose to the Chairman and Chief Executive Officer additional agenda items.
He/she ensures that the Directors are capable of performing their duties under the best possible conditions, and notably that they are properly informed prior to the Board of Directors meetings.
Independent Directors
Directors certified as independent by the Board of Directors may hold a meeting at the initiative of the Lead Independent Director.
The Lead Independent Director ensures the link between independent Directors and the Chairman and Chief Executive Officer, the other Board members and the General Management.
Board of Directors Committees
The Lead Independent Director may be appointed by the Board of Directors to serve as Chairman or member of one or more Board of Directors Committees. Even if not appointed, the Lead Independent Director may attend the meetings and has access to the work of the other Committees. In particular, the Lead Independent Director is involved in the work of the Nomination and Compensation Committee concerning the annual performance assessment and recommendations regarding the compensation of executive directors and officers.
Meetings with managers
The Company keeps the Lead Independent Director regularly informed of its activities, including through the organization of regular meetings with operational or functional managers, on his/her request.
Means
The Lead Independent Director has access to all documents and information that he/she deems necessary to fulfill his/her duties.”

Independence of Board members

Independence rules

Each year, after reviewing the opinion of the Nomination and Compensation Committee, the Board of Directors considers the individual situation of each Director having regard to the corpus of the AFEP-MEDEF Code independence rules.
This Code considers a Director to be independent if he/she “ has no relationship of any type with the Company, its Group or its management that could compromise his/her ability to freely exercise his/her judgment ”, and sets forth the following independence criteria. A Director is deemed independent if:
• “ he/she is not, and during the previous five years has not been, an employee or executive director and officer of the Company, or an employee or director of its parent company or of a company within its consolidation scope;
• he/she is not an executive director and officer of a company in which the Company directly or indirectly holds a directorship or in which an employee appointed for such purpose or an executive director and officer of the Company (currently or who has held such position within the previous five years) holds a directorship;
• he/she is not a customer, supplier, investment bank or commercial bank:
-  that is significant to the Company or its Group;
-  or for which the Company or its Group represents a significant part of its business;
• he/she does not have close family ties with an executive director and officer;
• he/she has not been one of the Company’s auditors during the previous five years;
• he/she has not been a Director of the Company for more than 12 years.”

Review of Board members’ independence

As it does every year, the Board of Directors, on the recommendation of the Nomination and Compensation Committee, reviewed the independence of each Director.
Danone’s Board of Directors is composed of 14 Directors, of which eight are considered to be independent, giving an independence rate of 57%.
The six Directors who are not considered to be independent are:
• Messrs. Franck RIBOUD, Emmanuel FABER and Bernard HOURS in their capacity as executive directors and officers as well as Mr. Jacques VINCENT in his capacity as a former executive director and officer of Danone (he was Deputy General Manager until April 2010);
• Mr. Yoshihiro KAWABATA due to the fact that Yakult Honsha, of which he is a director, is accounted for by the Group as an associate;
• Mrs. Isabelle SEILLIER, an executive within the J.P. Morgan Chase banking group, which is one of the banks with which the Group regularly does business. Various measures have been implemented to ensure that any potential conflicts of interest linked to Mrs. Isabelle SEILLIER’s responsibilities are properly controlled by the Group, namely: (i) systematic abstention of Mrs. Isabelle SEILLIER during deliberations involving, directly or indirectly, the J.P. Morgan group (as stipulated by law), (ii) express reference in the report of the Board of Directors to the Shareholders’ Meeting of her classification as a non-independent Director and of the existence of potential conflicts of interest involving her, (iii) full transparency on compensation terms for the J.P. Morgan group by the Group as part of agreements subject to shareholder approval, and (iv) a systematic resolution concerning all new regulated agreements entered into with the J.P. Morgan group, which will automatically be put to a separate shareholder vote during the subsequent Shareholders’ Meeting.
The eight independent Directors are:
• Messrs. Bruno BONNELL, Jacques-Antoine GRANJON, Richard GOBLET d’ALVIELLA, Jean LAURENT, Benoît POTIER, Jean-Michel SEVERINO, Mrs. Mouna SEPEHRI and Mrs. Virginia STALLINGS, who meet all of the AFEP-MEDEF Code’s independence criteria;
• in response to a question from a shareholder representative concerning Mr. Richard GOBLET d’ALVIELLA’s independence due to his responsibilities within Sofina, it was specified that Mr. Richard GOBLET d’ALVIELLA is the Executive Chairman of Sofina, that held, as of December 31, 2012, 2.1% of Danone’s share capital and 3.6% of its gross voting rights (due to the double voting rights mechanism). As a result of this relatively low stake, the Board confirmed that Mr. Richard GOBLET d’ALVIELLA satisfies all of the AFEP-MEDEF Code’s independence criteria and that his situation is not likely to be a source of any conflicts of interest;
• in response to a question from the same shareholder representative concerning Mr. Jean LAURENT’s independence due to his responsibilities within Eurazeo, it was specified that Mr. Jean LAURENT is Vice-Chairman of the supervisory board of Eurazeo. This group held, as of December 31, 2012, 2.6% of the Company’s share capital and 4.6% of its gross voting rights (due to the double voting rights mechanism). In addition, Eurazeo’s entire equity interest in the Company is pledged to the holders of bonds convertible into DANONE shares, issued by Eurazeo in 2009. These convertible bonds mature on June 10, 2014 and Eurazeo is therefore likely to cease to be a shareholder in the Company on that date. Consequently, the Board has confirmed that Mr. Jean LAURENT satisfies all of the AFEP-MEDEF Code’s independence criteria and that his situation is not likely to be a source of any conflict of interest;
• in response to a question from the same shareholder representative concerning Mrs. Mouna SEPEHRI’s independence due to her responsibilities within Renault, it was noted that her independence was specifically reviewed by the Nomination and Compensation Committee, followed by the Board of Directors in February 2012, when her candidacy was being considered. Thus, consideration was given as to whether the presence of Mr. Franck RIBOUD on the board of directors of Renault, a group in which Mrs. Mouna SEPEHRI performs management functions, was of a type to compromise Mrs. Mouna SEPEHRI’s independence. The rules of the AFEP-MEDEF Code stipulate that the independence of a Director would be compromised only if said Director were herself an executive director and officer of Renault, which is not the case here (since Mrs. Mouna SEPEHRI is not a director of Renault). In addition, Mr. Franck RIBOUD is himself an independent director on the Renault board of directors. The Board therefore confirmed that Mrs. Mouna SEPEHRI satisfies all of the AFEP-MEDEF Code’s independence criteria and that her situation is not likely to be a source of any conflicts of interest.

Conflicts of interest

To the Company’s knowledge, (i) there are no family ties between the Company’s executive directors and officers, and (ii) during the last five years, no executive director and officer has been convicted of fraud, declared bankruptcy, been placed in receivership or liquidation, been officially and publicly accused and/or penalized by any statutory or regulatory authority, or been deprived by a court of the right to hold a position in a company’s administrative, management or supervisory bodies or to participate in a company’s management or business operations.
To the Company’s knowledge, there are no potential conflicts of interest between any Director’s duties to the Company and their private interests and/or other duties, with the exception of Mrs. Isabelle SEILLIER.
In the case of Mrs. Isabelle SEILLIER, after the matter was reviewed by the Nomination and Compensation Committee, the Board, at its meeting in February 2011, reviewed her proposed appointment as a Director and took note of the existence of a potential conflict of interest due to her position as an executive of the J.P. Morgan banking group, which is one of the banks with which the Group regularly does business. Due to the foregoing, the Board’s rules of procedure were amended to increase Directors’ reporting obligations with respect to conflicts of interests (see in this section the points concerning changes to the Board of Directors’ rules of procedure). Furthermore, in accordance with the law and the Board’s rules of procedure, since her appointment, Mrs. Isabelle SEILLIER has not participated in any discussions or votes on decisions that create a conflict of interest for her. Moreover, the new regulated agreements concluded with the J.P. Morgan group are the subject of specific disclosure in the Board’s report to the Shareholders’ Meeting of April 25, 2013.
As of the date of this Registration Document, no executive director and officer is a party to a service agreement with the Company or any of its subsidiaries that provides him/her with any specific benefits.

Organization of Board of Directors’ meetings

The executive directors and officers always attend Board of Directors’ meetings. The Company’s external Directors meet only when the internal Directors are present to ensure that all Board members have access to the same amount of information and to reinforce the collegial nature of the Board. However, the Lead Independent Director may now convene meetings of the independent Directors.
When the Board sets the compensation of executive directors and officers, they are present at the time of the Board’s deliberations but, in accordance with the law, they do not take part in the vote. However, no executive director and officer attends any meeting of the Nomination and Compensation Committee during which his/her own compensation is discussed.

Directors’ attendance fees

The Shareholders’ Meeting of April 23, 2009 increased from €500,000 to €600,000 the maximum total yearly amount of attendance fees to be divided by the Board of Directors among its members. This total amount was increased solely to take into account an increase in the number of Directors and Board meetings and the creation of a new Committee (the Social Responsibility Committee).
Directors who are also members of the Executive Committee and/or executive directors and officers do not receive attendance fees.
The gross amount of attendance fees due in respect of 2012 was €515,000 (compared to €410,000 in respect of 2011).
A Director who is a member only of the Board of Directors receives compensation that includes a fixed component of €10,000 per year and a variable component of €2,000 for each Board meeting he/she attends. In addition, Directors who are also members of one of the three Committees created by the Board of Directors receive compensation of €4,000 for each Committee meeting he/she attends. The Chairmen of these Committees receive €8,000 per meeting. Honorary Directors do not receive attendance fees.
The Shareholders’ Meeting of April 25, 2013 will be asked to increase the total annual maximum amount of attendance fees that could be paid to all Directors from €600,000 to €800,000 (see section 9.3 Comments on the resolutions submitted to the Shareholders’ Meeting). This increase would enable to (i) meet the costs associated with the appointment of a Lead Independent Director by the Board of Directors at its meeting on February 18, 2013 and (ii) take into account the particular situation of Directors residing abroad through the allocation of an additional amount to cover the cost of their travel to Board meetings. The other rules for allocating board attendance fees would not be amended and, more particularly, the amount of attendance fees for Directors would not be increased in fiscal year 2013 (with the exception of the two changes described above). Any increase in the amounts to be paid to Directors which may, where relevant, be decided upon subsequently will relate only to the variable portion, in order to encourage attendance at Board meetings.

Self-assessment of the Board of Directors

In accordance with its rules of procedure, every two years, the Board of Directors conducts a self-assessment (most recently in 2008, 2010 and 2012), which covers the performance of the Board itself and of each of its Committees.
The Board’s self-assessment in 2008 led the Board of Directors to amend its rules of procedure in order to inter alia (i) clarify the rules concerning information to be provided to the Board on the Company’s financial position (i.e. at least once every six months, which was already the practice) and (ii) definitively prohibit the Directors from using any hedging instruments in connection with the Company’s shares. In addition, following this self-assessment, a dedicated one-day event was initiated for presenting and discussing strategic plans and the annual budget.
The self-assessment of the Board and its various committees in 2010 led to improvements in (i) the operation of the Board, by the introduction of annual meetings on specific topics, (ii) the integration of new Directors, by offering them the opportunity of benefitting from a mentor director and an integration process including site visits and meetings with operational managers and (iii) the composition of the Board, particularly as regards its independence and the diversity of its composition.

To date, the following improvements have been implemented:
• a three-day study program, which, in all cases, includes visits to the sites of the Fresh Dairy Products Division, was set up to speed up new Directors’ integration and to broaden all Board members’ knowledge of the main issues and opportunities specific to that business. The first two sessions took place in the winter and spring of 2012;
• a procedure, providing for annual feedback to the Board on the work performed by the various Committees, has been set up;
• the Board has regularly reviewed the performance of the Unimilk group’s companies since their acquisition in November 2010 and progress as regards their integration into the Group;
• concerning the composition of the Board, the percentage of women on the Board increased in 2012 from 14% to 21%, the proportion of independent Directors also increased (from 50% to 57%) and its diversity was improved by the appointment of new Directors with additional skills and expertise.
The most recent self-assessment of the Board and its various Committees was conducted in December 2012. The following changes were decided at the Board meeting on February 18, 2013.
This self-assessment highlighted the fact that Directors regard the Board’s operation and composition to be satisfactory overall. However, the Directors expressed their wish to (i) strengthen the balance of powers between the Board and General Management and (ii) continue to improve the integration of new Directors.
To implement some of the suggestions made by the Directors following the self-assessment carried out in December 2012, the following changes were decided on by the Board of Directors on February 18, 2013:
• institution of the position of Lead Independent Director in the event of the non-separation of the offices of Chairman of the Board of Directors and of Chief Executive Officer of the Company;
• implementation of an improved integration process for new Directors comprising (i) individual meetings with several existing Directors and (ii) individual meetings with members of General Management and the Executive Committee;
• improved training for the other Directors: proposed presentation sessions by the managers of the Group’s main functions, continuation of site visits and Directors to be encouraged to undertake external training;
• implementation of a regular update on the results of the Board of Directors’ assessment.

Actions undertaken to improve the efficiency of the Board of Directors’ operation continued in 2012.
The Board of Directors met nine times in 2012 (compared to five times in 2011). The average length of each meeting was 2½ hours (compared to 3½ hours in 2011).
The Directors’ attendance, expressed as their attendance rate at meetings, was 92% in 2012 (compared with 94% in 2011).
Following discussions with the shareholders, the decision was taken to disclose, when a Director’s term of office is being renewed by the Shareholders’ Meeting, said Director’s average individual attendance rate, during their expiring term of office.

Recurring matters

The following recurring matters were reviewed and discussed by the Board of Directors in 2012:

(i) Monitoring major policies of day-to-day management

Detailed review of the Group’s business activities, presentation of annual budgets, approving statutory and consolidated annual financial statements, approving the semi-annual financial statements and financial communications (in particular, when the annual and semi-annual financial statements are published), acquisitions and sales of assets or equity interests, reviewing the Group’s financial position and its debt (changes, amount, composition and repayment dates, off-balance sheet commitments, equity levels, liquidity, hedging of financial risks, credit ratings), reviewing the Statutory auditors’ approach to their work, authorizations for commercial paper issuance programs, financial commitments (security interests and guarantees), annual authorization to General Management with respect to the Group’s bond issuance program (EMTN), receiving regular information on the Group’s risk management and internal control systems and reviewing the Group’s risks by overseeing the work of the Audit Committee, annual capital increases reserved for employees, allotting Group performance units and Group performance shares (including setting, each year, the performance objectives for the following year and verifying that such objectives were met the previous year), monitoring the Company’s share price and shareholder structure, setting the proposed dividend, approving the Group’s yearly contributions to danone.communities and the Danone Ecosystem Fund.

(ii) Operation of corporate bodies

Monitoring corporate governance issues, receiving regular reports on the meetings of the three Board Committees (Audit Committee, Nomination and Compensation Committee and Social Responsibility Committee), which are submitted to the Board following each of their meetings, determining all components of the compensation of each of the Company’s three executive directors and officers, approving the various Board reports and proposed resolutions submitted for shareholder approval, and preparing for the Shareholders’ Meeting.

(iii) Group strategy

Reviewing the Group’s transformation axes (i.e. exposure to emerging markets, prioritizing certain key countries, etc.) and their various impacts on the Group (in terms of organization and operation of human resources, adaptation of the Group’s products to local demand, etc.), attending the annual strategic presentations made to the Board by each member of the Executive Committee at a dedicated one-day event held off-site in December. These presentations are always followed by discussions with the Directors.
In addition, each year Directors are invited to attend several working days organized in Evian, where an annual seminar is held for all of the Group’s executives, during which the strategies of the Group’s various Divisions are reviewed and discussed.

Specific matters

The following specific matters were reviewed by the Board of Directors in 2012 and in February 2013:

(i) Transactions and the Group’s accounting and financial position

• review of year-end closing process in connection with the 2012 consolidated financial statements;
• share buyback transactions completed in 2012 and 2013 and cancellation of treasury shares upon completion of these transactions;
• examination of diversified sources of financing for the Company, including a review of the bond issue carried out in the U.S. market by means of a private placement with institutional investors;
• review of the restructuring of the Group’s debt, including the extension for an additional year of the €2 billion syndicated facilities agreement;
• review of the authorization for Danone’s guarantee, increased to a total amount of €750 million, for commitments of Danone Corporate Finance Services (in connection with financial risk management transactions carried out by it on behalf of Group companies);
• review of the adjustment of the trading operating margin target for 2012;
• in connection with the Shareholders’ Meeting of April 25, 2013, review of the resolutions to be submitted to the Shareholders’ Meeting concerning the renewal of financial authorizations and the resolution concerning the payment of dividends.

(ii) Corporate governance

In connection with the Shareholders’ Meeting of April 26, 2012

• review of the composition of the Board vis-à-vis its renewal and member recruitment policies, in particular as regards the number of women and of independent members and the diversification of its composition, resulting in the proposal to renew the terms of office of Messrs. Richard GOBLET D’ALVIELLA, Jean LAURENT and Benoît POTIER, and to appoint Mrs. Mouna SEPEHRI, Mr. Jacques-Antoine GRANJON and Mrs. Virginia STALLINGS to positions on the Board;
• review of the composition of the Nomination and Compensation Committee, and in particular the decision to replace Mr. Hakan MOGREN (whose term of office was not renewed at the conclusion of the Shareholders’ Meeting of April 26, 2012) with Mr. Benoît POTIER;
• review of the composition of the Audit Committee, and in particular, in compliance with the Nomination and Compensation Committee’s recommendations, the decision to appoint Mr. Jean-Michel SEVERINO and Mrs. Mouna SEPEHRI as members of this Committee (following the non-renewal of the directorships of Mr. Christian LAUBIE and Mrs. Guylaine SAUCIER), and the appointment of Mr. Jean-Michel SEVERINO as the Chairman of the Audit Committee and a financial expert.
In this framework, the expertise and skills of new members of the Audit Committee have been reviewed:
-  concerning Mr. Jean-Michel SEVERINO, an Inspector General of Finances, the Board noted that in his previous positions (notably as Vice-President for East Asia at the World Bank and as the Chief Executive Officer of the French Development Agency (Agence Française de Développement)) he had developed solid expertise in accounting and finance as well as in internal control and risk management issues. The Board also valued his excellent knowledge of emerging markets. The Board also noted that due to his appointment one year previously as a Director and member of the Social Responsibility Committee, Mr. Jean-Michel SEVERINO is well acquainted with the issues facing the Group;
-  concerning Mrs. Mouna SEPEHRI, the Board had noted that for the last 16 years she had been closely involved in the development of the Renault group and in its major acquisitions and strategic partnerships. The Board also considered that her expertise in the corporate functions delegated to the Chief Executive’s Office, and legal affairs in particular, would enhance the Audit Committee’s skills;
• amendments to the rules of procedure of the Board, the Audit Committee and the Social Responsibility Committee.

In connection with the Shareholders’ Meeting of April 25, 2013

• review of the composition of the Board and, more specifically, consideration of (i) the renewal of the terms of office as Directors of Messrs. Franck RIBOUD and Emmanuel FABER and (ii) the renewal of their respective terms of office as Chairman and Chief Executive Officer and Deputy General Manager, subject to the condition precedent of the renewal of their terms of office as Directors by the Shareholders’ Meeting.
In connection with this review, the Board paid particular attention to the following matters:
-  concerning Mr. Franck RIBOUD: the Board of Directors examined his situation with regard to: (i) the rules relating to the aggregation of offices, (ii) the continuing non-separation of his offices of Chairman of the Board of Directors and Chief Executive Officer, (iii) his employment contract remaining in force, (iv) the indemnities for breach of this employment contract and (v) the obligation to hold shares acquired through the grant of shares subject to performance conditions;
-  concerning Mr. Emmanuel FABER: the Board of Directors examined his situation also with regard to (i) the rules relating to the aggregation of offices, (ii) the indemnities for breach of his employment contract and (iii) his obligations to hold shares acquired through the grant of Group performance shares;
• examination of the amount of attendance fees paid to the Directors and the proposal to increase the total maximum amount to provide compensation for the new position of Lead Independent Director created by the Board of Directors at its meeting on February 18, 2013 and to take into account the specific situation of Directors residing abroad through the allocation of an additional amount to cover the costs of their travel to Board meetings;
• amendments to the Board’s rules of procedure concerning, in particular, the creation of the position of Lead Independent Director and the modification of the rules for allocating attendance fees;
• review of the self-assessment of the Board of Directors and annual update on the operation of the Board;
• review and authorization of related party transactions.

(iii) Restructuring, disposals and acquisitions

• overseeing the completion of the acquisition of the Wockhardt group’s baby and medical nutrition business in India;
• overseeing the integration of the Unimilk group’s companies within the new Danone-Unimilk entity and the performance of this entity in 2012;
• overseeing the acquisition in progress of Centrale Laitière du Maroc; and
• reviewing the possibility of acquiring the nutrition activities of Pfizer Inc. (this acquisition did not ultimately take place).

(iv) Corporate Social Responsibility (CSR)

• annual review of the Group’s situation and policy concerning gender equality at work and pay equality;
• monitoring the activities of the Danone Ecosystem Fund, danone.communities and Livelihoods funds;
• review of the Group’s four strategic priorities (Health, For All, Nature, People); and
• review of the consequences for the Group of the new “Grenelle II” regulations.

Internal control objectives and guidelines used

Internal control is a process put in place by Danone’s General Management, line management and operational teams. It is designed to provide reasonable assurance, albeit not absolute certainty, that the following main objectives are being met:
• accuracy of financial information;
• compliance with applicable laws, regulations and internal policies;
• effectiveness and efficiency of internal processes, including those related to the protection of the Group’s assets.

Group’s internal control referential: DANgo

Danone’s internal control system is adapted to the Group’s strategic orientations and consistent with its international development and organization. The internal control referential drawn up and used by the Group – DANgo (Danone Governing and Operating Processes) is based on the reference framework implementation guidelines suggested in 2007 by the French Financial Markets Authority (Autorité des marchés financiers), completed by its application guide, and updated in 2010. This reference framework relates to risk management and internal control procedures, and approaches monitoring processes and the preparation of the accounting and financial information. This reference framework is consistent with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) I and II guidelines. It was created in its present form in 2003, and greatly enriched in 2005 and 2006, as Danone, being a publicly listed corporation in the United States at the time, was subject to the Sarbanes-Oxley Act.
It includes operating procedures (Danone Operating Models), internal control items per se (Danone Internal Control Evaluation), and the practices promoted by the Danone Wayapproach (see section 7.1 Danone social, societal and environmental approach) and is the subject of a systematic annual review (see section hereafter Control environment).
In addition, this DANgo referential is managed in an eponymous software application accessible to everyone worldwide.

Scope of internal control

Danone’s internal control system applies to the Group’s fully consolidated subsidiaries. In the specific case of very small or newly-acquired entities, a simplified referential focused on the DANgo “fundamentals” was specifically established in order to facilitate their integration and development while ensuring adequate control of their financial and accounting processes.
During the fiscal year 2012, 174 Group-owned entities located in 60 countries and accounting for 99% of the Group’s consolidated net sales were evaluated under Danone’s internal control system (i.e. 20 more entities than in the fiscal year 2011), including 42 using the referential focusing on the fundamentals.
The Unimilk group’s companies were also integrated into the Group’s internal control system in 2012:
• initially, preliminary work was carried out during the fiscal years 2011 and 2012 by means of internal audits of subsidiaries, the purpose of which was to make an initial assessment of the level of internal control and its compliance with the DANgo referential. Following the findings of these audits, the subsidiaries have implemented action plans;
• in addition to these action plans, the subsidiaries have implemented the revised internal control structure and provided staff with the necessary training for the roll-out of the Group’s internal control system;
• in accordance with the Group’s rules on internal control, they carried out a first DANgo self-assessment in fiscal year 2012.

Internal control participants

General Management

General Management is responsible for the Group’s internal control system, while the Audit Committee is responsible for monitoring the effectiveness of the Group’s internal control and risk management systems (see section 6.2 Audit Committee). In order to accomplish this, General Management relies on the Group Finance Department and the operational reporting lines (Divisions, regions, business lines, subsidiaries).

Group Finance Department

The Group Finance Department is responsible for the Finance function within the entire Group, directly through centralized functions (Finance Control, Consolidation, Reporting and Standards, Treasury and Financing, Tax, Strategy, Financial Communication, Acquisitions, Corporate Legal), and, through functional ties, with the Finance Directors of the respective Divisions.
The Group Finance Department is also responsible for risk management, internal control and internal audit, which enables a focus on corporate governance and compliance-related topics.
The Chief Financial Officer, who reports to one of the two Deputy General Managers, is a member of the Group’s Executive Committee. The main heads of the functions and Divisions are members of an Executive Finance Committee, which meets monthly.

Risk management

Reporting to the Finance Control Department, the Risk Management Department is responsible for the Group’s risk identification and management system (Vestalis). It is supported by several other teams, notably Group operational managers through various internal committees, including the Group Risks Executive Committee, and for the Finance business line through the Finance Directors of the regions. The approach used is described in section 2.7 Risk factors and hereafter in the section Risk identification and assessment.

Internal Control Department

Reporting to the Finance Control Department, the Internal Control Department is composed of a three-member central team, supported by (i) a head of the Asia/Pacific region, (ii) a coordinator dedicated to the Baby Nutrition and Medical Nutrition Divisions, and (iii) a network of local internal controllers, who typically report to the Finance Directors of the subsidiaries. These internal controllers ensure that the procedures defined by the Group are properly applied in their entities and organizations.
The Internal Control Department’s main responsibilities are as follows:
• preparing and rolling out DANgo, the Group’s internal control referential;
• defining (i) the priorities as regards to internal control, (ii) the methodology for analyzing and documenting operating processes, and (iii) the methodology to be used for the self-assessment process;
• managing and analyzing the (i) internal control indicators, and (ii) results of the assessments and action plans implemented by the community of internal controllers;
• supporting and guiding this international network of internal controllers through coordination, communication and training.

Internal Audit Department

The Internal Audit Department reports to the Group Finance Department. It reports functionally to the Chairman of the Audit Committee (see section 6.2 Audit Committee) and submits twice a year reports to the Audit Committee on internal audit activity and fraud management.
The Internal Audit Department consists of a central team of audit engagement managers and directors who supervise specialized teams from international audit and consulting firms (including KPMG in particular). It conducts regular audits in the operating units as well as audits covering central and transversal functions. In 2009, the Internal Audit Department was certified, for the first time, by the French Institute for Internal Audit and Internal Control (IFACI) in accordance with International Internal Auditing Standards. Following annual renewals of this initial certification, the Internal Audit Department was re-certified by IFACI in 2012 for a further three-year period.
This central unit is supported by local internal auditors in certain major subsidiaries, as well as by the audits and supervision activities of other centralized functions (Quality, Industrial, Safety, Environment, Information Systems, Crisis Management, Organization, Human Resources, etc.).

Other internal control participants

In a growing number of countries or country groups, organizations covering Risk Management, Internal Control and Internal Audit have been developed in order to provide a higher level of service and support to the Danone subsidiaries, particularly in emerging countries.
In addition, the line management teams at headquarters and in the subsidiaries have a major role in internal control and its implementation in their respective areas of responsibility, with support from relevant central corporate departments (mainly Finance, but also Human Resources, Sustainable Development, Environment, Safety, Quality, Information Systems, Legal, etc.).
Finally, (i) the DANgo steering Committee, (ii) the Internal Control steering Committee, (iii) the transversal coordination Committee, (iv) the Dialert Committee (fraud monitoring) and (v) the Compliance Committee described hereafter are involved in the management and continuous monitoring of internal control, with a view to ensuring, in particular, consistency with the operating activity at all levels.

Internal control consists of the following five closely-related components:
• control environment;
• risk identification and assessment;
• control activities;
• information and communication;
• continuous monitoring.
They are implemented by the Group as described hereafter.

Control environment

The aim of the control environment is to make staff aware of the usefulness and necessity of internal control, and it is the foundation on which the other components of internal control are built, notably by establishing an ethic, discipline and organization.
Danone’s control environment is based on the following:
• Danone values, which are widely communicated across all of the subsidiaries and the Group’s dual economic and social project;
• the Business Conduct Policy, defined by the Group and conveyed through a Questions & Answers booklet updated in 2012;
• the human resources and social policy, particularly with regard to employee development and training;
• the impetus given by the Board of Directors and the willingness to achieve continuous improvements in all operating procedures, as expressed by the Group’s General Management;
• the Danone Wayapproach, which is deployed in nearly all of the Group’s subsidiaries;
• an anti-fraud program, which has been deployed and operated by the Group for several years and which informs the subsidiaries’ Management Committees and all employees of internal fraud and corruption risks. This antifraud program is based on seven “stages”: (i) raising awareness, (ii) prevention, (iii) detection, (iv) investigation, (v) penalties, (vi) reporting and (viii) continuous improvement of the internal control system. In addition, since 2006 Danone has operated a whistleblowing system (Dialert), which focuses on internal control matters concerning (i) employees, (ii) suppliers and (iii) any failure to comply with the terms defined by the WHOCode (see section hereafter Monitoring internal fraud and section 7.2 Information concerning the Group social, societal and environmental performance in compliance with the Grenelle II law). The system’s visibility was enhanced in 2010 through the progressive deployment of an introductory guide (Danone Inside Pack) for new employees that highlights the Business Conduct Policy and the ethics hotline;
• the standardization of the Group’s operating processes through the implementation of the DANgo referential and the regular use of a single integrated information system (Themis, see section hereafter SAP/Themis integrated information system) which contribute to the strength of the control environment;
• the DANgo referential (see section above Group’s internal control referential: DANgo): accessible to all Group employees, in a user friendly electronic version, it is subject to a systematic annual review by which the Group ensures that the DANgo internal control and best practices referential is kept up-to-date. DANgo is updated by (i) experts from the network of internal controllers and (ii) operational managers from various business lines, which enables DANgo to be used by participants in the various departments and makes it possible to enhance the referential through best operating practices;
• in addition to DANgo, there is an intranet site dedicated to the Group’s internal controllers presenting all the documents useful for internal control and contributing to the sharing of experiences and best practices in the area of internal control. It is also accessible to all Danone employees and is updated regularly;
• the elaboration and diffusion of internal control guidelines, which were reviewed in 2012.

Risk identification and assessment

Every company faces internal and external risks that may hinder the achievement of its objectives. The principal risks the Group faces are described in section 2.7 Risk Factors, which also includes a brief description of the risk management policy and scope.
The Group has established a systematic risk identification system, using a special risk-mapping application called Vestalis. Risks are updated annually in most of the subsidiaries of the Waters and Fresh Dairy Products Divisions, and they were mapped for the first time in this way in 2009 in several subsidiaries of the Baby Nutrition and Medical Nutrition Divisions. In 2012, 80 entities from these two Divisions applied this system and compiled their risk mapping, working either with support from Risk Management or independently.
The methodology employed enables the risks and weaknesses of all operations in the covered companies to be identified, consolidated and ranked based on their probability of occurrence and their financial impact, on the scale of a country or a Division, and accordingly to define the preventive or corrective measures to be taken, either locally or globally as the case may be. The most significant risks are reviewed once a year with the top management of the regions, at specific meetings attended by the General Manager and Finance Director of each region. In 2012, Almost all of these regional risk Committee meetings were held.
A review of the most significant risks is also performed regularly by the Group Risks Executive Committee, whose members comprise Danone’s two Deputy General Managers, the Chief Financial Officer, the Head of Human Resources, the Group Finance Control Director and the Head of Risk Management. A mapping of Danone’s major risks is assessed during these meetings, risk owners are systematically designated, and risk mitigation plans are reviewed and assessed. This work serves as the basis for the presentations made to Danone’s Executive Committee and to the Audit Committee.
In addition, the existence of procedures – regarding the monitoring of competition, training, risk prevention and protection, etc. – and the initiatives taken by specialized departments – such as the Environment Department and the Quality and Safety Department for food – contribute to the identification and analysis of risks. The Safety Department helps to identify threats against Group employees or assets. The Crisis Management Department uses information made available by the Vestalis risk maps to identify potential crises and prepare the affected entities accordingly, ensuring that an appropriate response is provided for all crises, even if the risk was not identified beforehand.
Moreover, the identification and reporting of risks is also facilitated by the relatively low number of reporting levels, short decision-making channels and input from the operating units in strategic discussions. In addition, a quarterly transversal Compliance Committee, headed by the Internal Audit Department, has been set up to deal with compliance issues, whose members have, since 2006, come from various central functions that collaborate on the quality of the control environment.

Control activities

The control activities are intended to ensure the application of the standards, procedures and recommendations that contribute to the implementation of the main strategic orientations made by the Group’s General Management.
All the subsidiaries integrated into DANgo use an annual self-assessment process, and the largest of them follow a more detailed internal control review methodology that includes information flows, control points and tests conducted by management.
• the IT application that hosts DANgo allows subsidiaries to document their operating processes, especially those used to prepare financial information, to perform self-assessments, to determine whether they are compliant with the Group’s internal control referential, and to monitor any necessary action plan;
• the results of the annual self-assessments by the subsidiaries are sent to the Internal Control Department, which analyzes them and communicates relevant summaries to the different interested parties. Appropriate action plans are put in place by the entities with a view to continuous improvement and under the supervision of the Internal Control Department. Internal audits are subsequently carried out to validate that corrective measures have indeed been taken.
In addition, the performances and results of each operating unit in the area of internal control are regularly and systematically monitored by the entities’ Management Committees.

Information and communication

Appropriate information must be identified, collected, quantified and communicated in a format and within an appropriate time frame that enables each person to carry out his or her responsibilities.
To accomplish this, Danone relies on:
• its organization and information system, which are elements that facilitate the communication of the necessary information to the decision-making process;
• the various intranet sites and documentation databases that enable information to be shared within the Group. This information includes not only financial information but also non-financial information that meets the needs of the various operating and administrative departments. In 2012, the Group deployed its Danone Social Network, which is accessible to all, to transmit information and develop communication and the sharing of experience;
• the distribution of the DANgo referential and the Internal Control Department, which manages, trains and coordinates the internal controllers’ network:
-  it organizes working and annual training sessions for the internal controllers’ network including workshops and information-sharing seminars. The two sessions organized in 2012 were attended by more than 160 internal controllers;
-  it is responsible for the training and integration of new internal controllers, including those working for newly-acquired companies;
-  it is also responsible for internal control training sessions open to all managers of the finance functions;
-  it coordinates and communicates regularly at various levels of the organization (Corporate Committees, meetings at Division level with the Finance Directors or Operations Directors, systematic annual presentations to the General Managers and Finance Directors of the regions, and participation on the Management Committees of central functions).

Continuous monitoring

The internal control system is reviewed periodically so that its performance and effectiveness may be qualitatively assessed.
The continuous monitoring of control procedures is part of the ongoing activities of the Company and its subsidiaries.
The quality of the internal control system’s steering and monitoring is ensured by two Committees – led by the Internal Control Department – which meet regularly:
• the DANgo steering Committee, which meets twice a year and consists of the operational executive managers designated to represent the Group’s key functions: Research and Development, Purchasing, Operations, Marketing, Sales, Finance, Human Resources, Information Systems, etc.;
• the Internal Control steering Committee, which consists mainly of the heads of the Finance function of the headquarters and the Divisions and meets quarterly.
In addition, the Audit Committee, as well as Group’s General Management, are informed at least twice a year of the self-assessments’ progress in the subsidiaries, the related findings, and the results of the audits conducted by the Internal Audit Department. The following year’s targets are also presented as well as the priorities selected by the Risk Management, Internal Control and Internal Audit functions.

Monitoring internal control indicators

The Internal Control Department has introduced and monitors internal control performance indicators (coverage rate, internal control intensity rate and deficiency rate on control points) to analyze and communicate the internal control results of the subsidiaries and of the Group together with a monitoring by geographic region and by Division. The targets for these performance indicators are discussed in the internal control steering Committee and in the DANgo steering Committee, and are then presented to the Audit Committee (see section 6.2 Audit Committee), before being sent to the subsidiaries, which assists in harmonizing and developing a shared vision of the internal control priorities.
In 2012, Danone’s internal control key indicators showed again signs of improvements: the coverage rate of subsidiaries increased by six points relative to 2011, to reach 97%; the deficiency rate was stable compared to 2011: the impact of the Unimilk group’s companies integration was totally balanced by an improvement of the whole other subsidiaries of the Group, this improvement was also noted at each Division level. This was achieved thanks to continuous monitoring of DANgo and internal control throughout the organization.

Monitoring internal fraud

The Group has introduced six-month internal fraud reporting covering 175 entities, i.e. nearly all of the Group’s operating entities. These entities report twice a year on identified fraud cases. The number of suspected or confirmed fraud cases reported by the subsidiaries has remained stable for three years. In 2012, approximately 170 suspected cases were reported per six-month period, of which approximately 120 were subsequently proven to be fraudulent, the majority of these proven cases involved minor incidents (thefts of products or equipment or minor embezzlement). None of these fraud cases had a significant impact on Danone’s consolidated financial statements. In the majority of the identified cases, the employment agreements of the corresponding employees were terminated following investigations of these frauds.
The Group has also introduced a whistleblowing system (Dialert), which enables employees and suppliers to confidentially disclose any fraud case they suspect (see also the section above Control environment).
A monitoring meeting of fraud cases and suspected frauds is held monthly at Group headquarters level in order to ensure the effective monitoring of fraud cases and their appropriate management with respect to compliance and internal control. To that end, detailed information on the nature of the main cases is collected and analyzed by the Dialert Committee (fraud monitoring), which comprises representatives from the Human Resources, Internal Audit and Legal functions and meets once a month.
In 2012, the Group received notifications of around 60 suspected fraud cases, of which around ten were subsequently confirmed to be fraudulent.

Internal audit assignments

In 2012, the Internal Audit Department conducted 55 internal audits at subsidiaries or transversal functions, based on the plan previously approved by the Audit Committee. These audits confirmed the overall reliability of the DANgo self-assessment performed by the subsidiaries.
Following each audit, an action plan is prepared by the management of the subsidiary to correct weaknesses identified in the audit report. The implementation of action plans is systematically monitored by the operational and functional managers, under the supervision of the Internal Audit Department. In particular, in 2012, 16 short follow-up audits on the implementation of action plans were carried out, within 12 months from the initial audit as far as possible.
In addition, the Treasury and Financing, Information Systems, Internal Control, Environment, Legal and Crisis Management Departments all arrange for audits and periodic reviews in the subsidiaries, in addition to the internal audit assignments.

Organization of the finance function

The finance function’s organization is based on:
• centralized functional departments: Treasury and Financing, Acquisitions, Strategy, Finance Control (to which the following departments report: (i) Consolidation, Reporting and Standards and (ii) Controlling), Financial Communication, Corporate Legal and Internal Audit;
• the Finance Department of each Division. These departments are organized by geographic regions supervising business units and, in some countries, the accounting, treasury and certain specialized functions are shared.

Production of financial and accounting information

Financial information is generated by a rigorous and comprehensive financial planning process. This process integrates, in particular:
• a medium-term strategic plan;
• an annual budget process, preceded by the preparation of a framework defining key financial targets;
• comprehensive re-estimates of financial indicators projected to the year end, calculated at regular intervals;
• monthly reports;
• monthly updated forecasts of certain financial indicators as well as monthly performance review meetings attended by the finance teams and the General Managers of the Divisions.
The relevance of the financial indicators selected to monitor performance is reviewed on a regular basis.
In this context, each operating unit prepares a monthly, detailed financial reporting, and twice a year an exhaustive consolidation package used in the preparation of the Group’s consolidated financial statements.
These consolidation packages are verified by a central team, which is responsible for all elimination and consolidation entries, as well as analyzing and validating the most significant line items of the Group’s consolidated financial statements (intangible assets, financial assets, taxes, provisions and debt).
In addition, the production of financial information integrates the following preliminary control stages, carried out by the Consolidation, Reporting and Standards Department:
• validation by the central team, throughout the year, of the main accounting options adopted by the subsidiaries and central functions and simulation of complex transactions in the consolidation software;
• in-depth review of certain subsidiaries’ monthly reports at the end of May and November based on the specific transactions and risks identified;
• meetings to share information and best practices are attended regularly by the main financial managers of each Division and some department heads and training sessions covering specific accounting topics are also held regularly;
• (i) preparation meetings with the financial staff of the Group’s main subsidiaries based on the specific transactions and risks identified, and (ii) presentations to the Audit Committee (specific transactions during the period, the main accounting options concerning the closing and the contemplated significant changes introduced by developments of the International Financial Reporting Standards) (See section 6.2 Audit Committee).
In addition, the Group’s financial and accounting information is produced and communicated using the following applications.

SAP/Themis integrated information system

The management and optimization of information flows for the financial functions as well as the purchasing, industrial, quality, supply chain and sales functions, both within the subsidiaries and between them, is performed primarily through the SAP/Themis integrated information system. This application is being steadily deployed in all Group subsidiaries and its features are constantly being improved.
The activities supported by Themis accounted for 75% of consolidated sales in the Fresh Dairy Products and Waters Divisions (excluding the Unimilk group’s companies) for the year ended December 31, 2012. The roll-out is continuing in the Unimilk group’s companies.
The same information system is currently being rolled out in the subsidiaries of the Medical Nutrition and Baby Nutrition Divisions (covering around 20% of these two activities’ total sales for the year ended December 31, 2012).

Consolidation software

Monthly financial reports, and more generally the financial information used to manage and control the activities of the operating units, are produced by a unified information system (SAP/BusinessObjects Financial Consolidation).
This same system is also used to produce the six-month and full year consolidated financial statements. The procedures related to the security, use and development of new features of this consolidation system are documented.

Control environment

The control environment relating to the preparation and processing of Danone’s financial and accounting information is based on the following:
• the organization of the finance function, which is based on central functional departments and the Finance Department of each of the Divisions (see section above Organization of the finance function). In all cases, the operating units are responsible for the production and content of their financial statements as well as their internal control;
• the control practices and procedures mentioned in DANgo, which help to ensure the reliability of the processes for preparing the financial statements. Indeed, the DANgo referential includes many points that address the quality of the financial and accounting information;
• the control stages carried out by the Consolidation, Reporting and Standards Department (see section above Production of financial and accounting information);
• the definition for the Group of the roles and skills required at the different levels of the organization and the drawing up, as a result, of the internal training programs;
• the production and communication of the Group’s financial and accounting information via the unified tools described above;
• the single set of guidelines covering accounting procedures and principles, which are consistent with its internal control principles. Available on the Daφnet intranet, these guidelines are accessible to all the Group’s employees.

Risk identification and assessment

The monitoring and management of the main identified risks relating to the preparation and processing of Danone’s financial and accounting information is organized as follows:
• the identified risks and results obtained through the various approaches established (DANgo, Danone Wayand Vestalis) are used;
• the budgeting and strategic planning processes, the performance monitoring, the regularly scheduled meetings that highly involve finance functions (Controlling, Treasury and Financing, Consolidation, Reporting and Standards, Development) as well as the meetings of the Group Risks Executive Committee and the Group’s Executive Committee allow to monitor and manage the most important risks identified;
• specific risks related to the processes used to prepare and communicate financial information are also reviewed and the internal control system is adapted based on the identified risks.

Control activities

Each Division has a Finance Department, which is responsible for monitoring performance, capital expenditure and operating cash-flow, primarily through the rigorous financial planning and reporting process. The Divisions’ Finance Departments are supported by the Finance Departments in the geographic regions and operating units, with the overall management control process administered by the Controlling Department.
Members of the central departments visit the operating units on a regular basis (performance monitoring, procedure reviews, pre-closing meetings, ad hoc audits, progress on improving internal controls, follow-up on action plans, and training in accounting standards). The appropriate documents are provided sufficiently well in advance for them to be reviewed by the Group’s management bodies.
Twice a year, the General Manager and Finance Director of each subsidiary along with their counterparts in the regions and Divisions provide written confirmation of compliance with the Group’s applicable procedures and with all of the standards applicable to the financial information sent to the central teams. This confirmation is provided in a representation letter that covers the six-month and full year closings of the financial statements, including all subjects involving risk management, internal control and corporate law.
The control activities are therefore conducted at all of the Group’s hierarchical and functional levels and include a variety of actions such as approving and authorizing, verifying and comparing, assessing operational performances, ensuring the protection of assets and monitoring the segregation of duties. The audits administered and conducted independently by the Internal Audit Department provide appropriate validation.

Information and communication

The Group’s financial and accounting information is produced and communicated via the tools described above.
To communicate financial information within the Group, each quarter the Group’s entire finance function can log onto a website where the Chief Financial Officer comments on the activity for the quarter, the year-to-date financial results and the main challenges for the Group.
Lastly, the Group’s referential covering financial and accounting information (Daφnet, DANgo, etc.) are accessible to all employees.

Continuous monitoring

One of the responsibilities of each Division’s Finance Director and Function Manager is to improve the procedures used to prepare and process financial information. Detailed audits are conducted on the key control procedures in the preparation of financial information (particularly published disclosures) in the subsidiaries and in the Group’s headquarters and on their effective application. Moreover, the internal audit assignments conducted in the operating units are aimed primarily at verifying the quality of the accounting and financial information. The Divisions’ Finance Departments ensure that the action plans established subsequent to the above-mentioned internal and external audits have been carried out correctly.

Assessment

The procedures intended to control the accounting and financial information provided by the consolidated subsidiaries, as well as the internal control procedures used to prepare the consolidated financial statements, are adequate to provide reliable accounting and financial information.

Danone maintains an active risk management policy aimed at protecting and developing its assets and reputation and protecting the interests of its shareholders, employees, consumers, customers, suppliers, the environment and its other stakeholders.

Since 2002, the Group has implemented a global risk identification and management system that prioritizes challenges in terms of their probability of occurrence and their estimated impact on the Group. It uses a special risk mapping methodology called “Vestalis”.

This mapping is designed to identify the risks related to the various strategies and activities, to prioritize them at the local level and to consolidate and contextualize them at the regional level. This mapping then leads to the definition of key risk mitigation actions through preventive measures, which may be local or global as appropriate, or through the establishment of crisis management plans.

Since 2002, Vestalis has thus been deployed in the companies in the Fresh Dairy Products and Waters Divisions, and since 2009 its use has been largely and progressively extended to the companies in the Medical Nutrition and Baby Nutrition Divisions. In 2012, Vestalis was deployed in 148 Group operating subsidiaries, which represent 99% of the Group’s consolidated sales.

The most significant risks are reviewed once a year by the management teams of the geographic regions during specific meetings. In 2012, almost all regions general managers’ and finance directors’ participated to a risk committee meeting focusing on the risks faced by their subsidiaries. A general review of the Group’s risks is regularly performed by Danone’s General Management. The Audit Committee is also regularly informed of these risks, and operating managers occasionally attend these meetings in person in order to report on the risks related to their areas of responsibility.

The risk management system is described in greater detail in the Chairman’s report on internal control and risk management in section 6.11 Internal control and risk management. It is an integrated system which relies significantly on the Group’s risk management, internal control and internal audit activities but which also benefits from the other activities of the Group Finance Department and several other central functions.

I.          Risks associated with the volatility of prices and the availability of raw materials

Risk identification

The Group’s principal raw material needs consist primarily of:
• materials needed to produce Danone’s food and beverage products, primarily milk and fruits (“food raw materials”);
• materials needed for packaging its products, primarily plastics and cardboard (“packaging”);
• energy supplies. They account for only a limited portion of the Group’s purchases.
Variations in supply and demand at global or regional levels, weather conditions, government controls, regulatory changes and geopolitical events could substantially impact the price and availability of raw materials and of the materials needed to package the products concerned, which could have an adverse effect on the Group’s results. In particular, a potential increase in their prices may not be passed on, either in full or in part, in the sales price of the Group’s products and could have in any event a significant adverse effect on the Group’s activities and on its results.

Risk management

In the context of high raw materials price volatility, the Group manages this commodity inflation through the following measures:
• continuous improvement of its productivity and optimization of the use of raw materials, notably through reductions in production waste, lighter packaging and better use of milk sub-components in the Group’s various products;
• establishment of a purchasing policy (“Market Risk Management”) that consists of defining rules for securing the physical supply and price setting with suppliers and/or on financial markets when they exist. The monitoring of exposures and the implementation of this policy is made at the level of each raw materials category by the Group’s central purchasing staff. The buyers typically negotiate forward purchase agreements with suppliers, since no financial markets exist that would allow full hedging of the volatility of the Group’s main raw materials purchase prices.
Additional information is provided in section 2.5 Other elements related to the Group’s activity and organization and in Note 30 of the Notes to the consolidated financial statements.

II.         Risks associated with the concentration of distribution and the default
of a customer

Risk identification

While the end customers of Danone products are individual consumers, the Group sells its products mainly to major retail and grocery chains. Overall, the distribution market has become increasingly concentrated globally and locally. In 2012, the Group’s top 10 customers worldwide (of which five are French) accounted for approximately 20% of its consolidated sales; the top five customers represented approximately 14% of its consolidated sales. A continuation of the movement to concentrate distribution at the global level along with the emergence of key players at the local level would result in a smaller number of customers for the Group companies and could lead to retailers demanding better terms. This could affect the operating margin of these companies and therefore of the Group, change their market shares and/or represent a counterparty risk in the event of a default by a major customer, and consequently have a significant adverse effect on the Group’s activities and results.
In some countries, certain subsidiaries of the Baby Nutrition and Medical Nutrition Divisions have commercial relations with public and quasi-public organizations, health insurance and supplementary health insurance companies, as well as hospitals, whose default risk is relatively limited but which have long payment terms. It is possible that some of these organizations would collaborate and issue joint tenders, which could have a significant negative impact on the results of the respective Divisions.

Risk management

The Group manages this risk mainly through an action program in the sales policy area focused on the large key accounts and Credit Committees or equivalents in Danone subsidiaries, as described in section 2.5 Other elements related to the Group’s activity and organization.
Moreover, the Group’s exposure to unpaid trade receivables not yet impaired is limited, as indicated in Note 16 of the Notes to the consolidated financial statements.

III.        Risks associated with competition

Risk identification

The Group conducts its business in highly competitive markets that include large multinational companies and numerous local players of different sizes. In Western Europe and North America, the Group’s markets tend to be relatively mature, and competition is therefore particularly intense, both in terms of pricing and innovations. With respect to the Group’s activities in the Rest of the World, a few international food and beverage groups also hold strong positions in some emerging markets and seek to expand such positions or enter new markets. In addition, certain retail and grocery chains, having developed their own brands, could reduce the shelf space occupied by the Group’s products in favor of their own products.
The Group is thus facing national and international competition which could lead it to reduce its prices to defend its market shares, which could have a significant adverse effect on the Group’s results.

Risk management

To be able to compete effectively with the main operators in these markets, the Group has decided to differentiate from its competitors in terms of products’ range, quality/price ratio and positioning.
This strategy enables Danone to develop a long-lasting, balanced and constructive relationship with the major distribution networks by supplying leading products that generate growth and profitability for both parties.
The aim of these actions is to mitigate competition risk.
Additional information is provided in section 2.5 Other elements related to the Group’s activity and organization.

IV.       Risks related to the geopolitical environment

Risk identification

Danone’s activities and employees can be subject directly or indirectly to the effects of economic, political or social instability period in numerous countries susceptible to experience or having recently experienced such periods, particularly in the Maghreb/Mashrek, Sub-Saharan Africa, the Near and Middle East, Latin America or Asia.
Also, some countries where the Group is present have regulations that are not very developed and/or not very protective (in particular with respect to intellectual property rights), and are often very unstable due to the influence of powerful local interests. Some of these countries maintain foreign exchange controls, control the repatriation of profits and invested capital, impose taxes and other payments and impose restrictions, sometimes retroactively, on the activities of multinational groups.
Any period of political or economic instability in a country in which the Group operates or any economic or political measure of a type described above that may be implemented in some countries could have a negative impact on the Group’s activities.

Risk management

Danone’s international growth enables a geographical distribution that diversifies and limits the concentration of this risk. In addition, the Group elaborates action plans and implements measures aimed at reducing, to the greatest extent possible, the impacts of this risk in the areas of human resources, finance and legal affairs. Depending on the situation, the Security Department participates in the development and implementation of these plans and measures, and forms or consolidates in certain regions relationships with state or private partners, that the Group may make use of, should the need arise. The Security Department also gets involved in situations where the safety of the State and/or international crises may affect the activities of Group subsidiaries. However, there can be no assurance that the results of the Group will not be significantly affected by a deterioration of economic, political or regulatory conditions or by a crisis in some of the countries where the Group is present.

V.        Risks associated with economic conditions in the Group’s principal markets

Risk identification

The Group’s sales are dependent on the overall economic climate in its principal geographic markets. In periods of economic slowdown that may hit some countries, the Group may have to face reduction in consumers spending whose purchasing power has declined and/or changing consumption patterns as a result of economic conditions. These trends may have adverse effects on the Group’s activities and results.

Risk management

Danone’s diversified geographic presence limits its exposure to the particular challenges in a given country. The product portfolio of the Group’s various subsidiaries, which is also diversified, and the ability of its management to adapt to changes in the market also enables the Group to reduce the risk associated with economic conditions.

VI.       Risks associated with weather conditions and seasonal cycles

Risk identification

Some of the Group’s product markets are affected by seasonal consumption cycles and weather conditions, which may have a negative impact on the Group’s results: in particular, demand for beverages peaks during the summer months. For instance, relatively cool summer temperatures may result in substantially reduced sales of beverage products, especially packaged water, in the impacted geographical area relative to a normal year, and thus may have adverse effects on the Group’s activities and results.

Risk management

The Group’s Divisions are affected by seasonal factors differently and, thanks to its diversified geographic presence, Danone has a limited exposure to weather conditions specific to a particular area. The Group manages these seasonal effects on the basis of lengthy operational experience and anticipates changes in weather conditions to the greatest extent possible.

VII.      Risks associated with the consequences of restructuring plans

Risk identification

Danone works continuously to improve its efficiency in order to achieve better performance and anticipate adjustments needed to respond to changes in the market, projects, competition and, with respect to its internal organization, jobs and skills. This commitment to blending both short and medium term visions may in some cases result in difficult decisions regarding jobs (plant closings, restructuring plans with layoffs, etc.), that may be poorly understood and received by both employees and local constituencies (local elected officials, governmental authorities, etc.). Such decisions could affect the Group’s relations with its employees, resulting in industrial disputes including, in particular, stoppages, strikes and other disruptions and, consequently, could have, in addition to the financial impacts, adverse effects on the Group’s reputation, activities and results.

Risk management

At Danone, a restructuring decision needs to be made at the earliest possible stage, when the Group has the time and resources to prevent and responsibly manage the social and human consequences of such restructuring. In order to minimize the various risks associated with this type of decision (labor disputes, increase in local unemployment, loss of reputation), Danone (i) keeps under constant review its needs in terms of skills, (ii) is committed to continually improving the employability and skills of its employees to ensure that they are able to adapt, at all times, to changes in their jobs and to acquire skills to qualify them for promotion to a more senior post within or, if necessary, outside Danone, (iii) makes its restructuring decisions based on economic and social criteria in accordance with the international agreement signed on this subject with the International Union of Food workers (IUF) in 1997, and (iv) implements them with an emphasis on a return to employment and support for employees.

VIII.     Risks associated with the Group’s reputation

Risk identification

The Group is exposed to criticisms of all types and origin, whether well-founded or not and whether in good or bad faith, that could affect its image and reputation. The Group may therefore face negative publicity that could result from a risk situation, or even a simple allegation, concerning its activities and products.
This type of criticism could adversely affect the Group’s sales, activities, results and growth prospects.

Risk management

The Group has established risk management procedures designed to avoid and anticipate potential crises, and crises management procedures aimed at anticipating such criticisms and limiting their effects to the extent possible.

I.          Risks associated with the concentration of purchases of some products
and services from a limited number of suppliers

Risk identification

In connection with its policy of optimizing its purchasing, the Group centralizes the purchases of certain goods (in particular raw materials such as the ferments used in the Fresh Dairy Products Division or powdered milk for the Baby Nutrition Division in some Asian countries) and certain services (in particular sub-contracted services or information technology services) from a restricted number of suppliers.
If some of these suppliers were not able to provide the Group with the quantities and qualities of products or goods specified that the Group needs under the conditions set forth, or if the suppliers are not able to provide services in the required time period, the Group’s activities and results could be materially adversely affected.

Risk management

Great care is given to the initial selection and subsequent monitoring of such key suppliers. Measures are taken to safeguard these supplies and services with the development of business continuity plans that include the identification of backup suppliers.

II.         Risks associated with the Group’s position in certain markets

Risk identification

The Group is market leader in some of its markets. As a consequence, the Group may be accused by third parties of abusing a dominant position in these markets or of engaging in anti-competitive practices. Such allegations could affect the reputation of the Group, and possibly result in legal proceedings or even potential penalties. This could have an adverse effect on the Group’s activities and results.

Risk management

This topic is addressed with considerable attention by circulating and presenting the Danone Business Conduct Policy and the Code of Ethics aimed at the sales functions. The legal function comprises an international network specialized in competition law, which closely monitors this risk.

III.        Risks associated with the Group’s acquisitions and partnerships

Acquisitions

Risk identification

The Group’s strategy is to enjoy leading positions in each of the markets in which it operates. Within the context of continued concentration in the food and beverage industry, this strategy involves the pursuit of growth opportunities through joint ventures or acquisitions, as was the case in 2010 with the Unimilk transaction in Russia and in other countries with Yocream and ProViva. Acquisitions may have a negative impact on the activities and results of the Group if it does not successfully integrate the acquired companies, provide the necessary resources and/or achieve all the expected synergies and cost savings.
Significant acquisitions may, during the integration phase, generate risks associated with historical structures and practices. In the case of Unimilk, integration is continuing, following a first phase related to the specific assessment of operational risks.

Risk management

The Group draws up an integration program and provides the resources necessary for its implementation.
Within Danone-Unimilk, the Group’s policies are in the process of being implemented. In particular, internal audits, internal control principles and the risk management system are being rolled out.

Partnerships

Risk identification

The relationships with partners of the Group in certain entities are governed by contracts or documents that may provide for certain decisions to be made either with the agreement of such partners or without the agreement of the Group. Such restrictions could make it difficult for the Group to carry out its strategy in these entities, which could have an adverse effect on the Group’s activities. More generally, problems of any kind encountered with joint venture partners could adversely affect the Group’s activities and results. In addition, certain agreements signed with partners may provide the Group or its partners with call or put options on their stake.

Risk management

Danone carefully reviews the drafting of shareholders’ agreements and ensures the implementation and maintenance of adequate governance with its partners.

IV.       Risks associated with an unfavorable change in business activity forecasts and its impact on impairment testing of assets

Risk identification

In connection with the Group’s acquisitions, a significant amount of the acquisition price could be allocated to goodwill and to acquired brands with an indefinite useful life. In particular, a significant amount of the purchase price was allocated to goodwill and to acquired brands with an indefinite useful life in connection with the Numico acquisition in 2007, and to a lesser extent, in connection with the Unimilk group’s companies acquired in 2010.
Goodwill and indefinite useful life brands are not amortized. They are subject to an impairment test at least once a year and whenever events or circumstances indicate that a reduction in value might have occurred.
An unfavorable change in business activity forecasts and assumptions used in the projection of cash-flows for the purpose of the impairment tests, in particular with respect to goodwill and to the Numico brands, could result in the recognition of impairment charges. These charges could then have significant adverse effects on the Group’s results.

Risk management

The Group draws up assumptions and business activity forecasts: establishes, on a yearly basis, a strategic plan and an annual budget for each subsidiary, proceeds to their analysis and, when deemed necessary, draws up customized action plans.

V.        Risks associated with the Group’s products

Due to the nature of its activity, Danone is exposed to the risk, whether proven or merely alleged, of product contamination or that its products are harmful which, in addition to the immediate financial impact, could also have an adverse impact on the Group’s reputation and sales.

Contamination risk

Risk identification

The absence of chemical and microbiological contaminants in raw materials and packaging, the lack of cross-contamination with allergens and the maintenance of the safety of finished products when they leave the factory and throughout the distribution chain are crucial.
For all Group products, in particular fresh dairy products, application of appropriate conditions of storage is vital in order to retain their flavor and nutritional value and to avoid subsequent contamination or deterioration. If certain of the Group’s products were alleged to be contaminated or actually were contaminated due to the non-detection of contaminants (even in infinitesimal amounts), the deterioration of products during the distribution phase or any other factor, the Group’s activities, results and reputation could be adversely affected.

Risk management

The risk of product contamination is classified into four categories (microbiological, chemical, physical and allergic) and depends on the nature of the products. This risk of contamination exists and is controlled at each stage of the production and marketing cycle: at the time of purchase and delivery of raw materials, the production process, the packaging of products, the storage and delivery of finished products to distributors and food retailers, the storage and shelving of finished products at the final sales points. The Group has put in place measures to limit the risk of contamination, in particular through the completion of multiple controls of the production lines and throughout the distribution chain and regular audits of its sites.
Moreover, partnerships with scientific organizations of international standing and the implementation of zero-tolerance quality management and food safety policies enable the Group to achieve the expected level of quality and food safety.

Other health risks

Risk identification

In the event that certain of the Group’s products (including recipes/formulas or certain active ingredients) were alleged to have harmful short or long term health effects or to have no health effects, or if this was in fact the case, the Group’s activities, results and reputation could be even more adversely affected since the Group’s strategy is based on the development of products with a strong nutrition/health component.
In addition, the food industry must deal with the growth in obesity; consumers, the medical profession and public bodies are becoming increasingly concerned about the resulting public health consequences. Although the Group has a large portfolio of product ranges enabling it to offer a wide variety of products meeting the various needs and changing tastes of consumers, local governments could take actions against the food industry, such as imposing surtaxes or more stringent regulation of the advertising of certain products. Such actions could adversely affect not only the Group’s results but also its reputation.

Risk management

In general, the Group is particularly vigilant regarding scientific fundamentals, the regulatory context and the origin of ingredients used.
Moreover, the Group also remains vigilant with respect to the follow-up of issues considered critical by the consumer, such as obesity. To this end, the Group has developed a network of key contacts (including, in particular, consumer associations) in order to discuss common topics of concern in both a formal and informal manner and to offer points of clarification.

Risk associated with innovation and consumer taste

Risk identification

The Group’s activities are subject to trends in the tastes and preferences of consumers. If the Group cannot predict, identify, and interpret trends in the tastes and dietary habits of consumers, its sales and results could be negatively affected.

Risk management

The Group has a broad portfolio of product lines that allows it to offer a wide variety of products to respond to different consumption needs and situations. The Group carries out regular studies of consumers’ attitudes, perceptions and expectations with regard to its various product categories. In this area, the Group uses a decentralized approach that allows it to respond quickly and precisely to consumer expectations: local marketing teams have a high degree of autonomy in carefully monitoring consumers’ evolving tastes and adapting the offer of Group products within each country.

VI.       Risks associated with human resources

Risk identification

The availability, quality and commitment of Danone’s employees play an essential role in the Group’s success. A decline in the ability of the Group to attract and retain employees with the necessary skills or talents could negatively affect Danone’s ability to achieve its objectives, which could have an adverse effect on its results.

Risk management

The Group’s subsidiaries and top management carefully monitor indicators related to human resources (turnover, commitment, etc.), annual employees survey results and how Danone is perceived as the “Employer of Choice” in countries where it is present. The Group’s actions in these areas are focused on compensation (regular benchmarks in each country), implementation of basic medical cover in countries where no such cover exists (Dan’Cares program), and the priority given to training and career development programs. In high-growth countries with significant resource requirements in terms of quantity and quality, specific programs for setting up talent incubators are drawn up, at country (China, Mexico, etc.) or region (Asia) level, with the aim of attracting, developing and retaining skills.

VII.      Risks associated with information systems

Risk identification

The Group is increasingly dependent on common infrastructures and information technology applications for all its business activities. The main risks are related to the availability of computer services and the confidentiality and integrity of data. Any failure of these infrastructures, applications or communication networks, any interruption linked to the failure of security of data centers or networks as well as any accidental or intentional loss of data and any use of data by third parties, could block or slow down production or sales, delay or taint certain decisions and, more generally, have an adverse effect on the Group’s activities and results.
In addition, most of the former Numico subsidiaries, as well as the recently acquired Unimilk group’s companies, rely on different information systems, specific to certain subsidiaries, which may increase the complexity of the monitoring and management of these risks by the Group.

Risk management

The Group’s policy is to consolidate data centers. In particular, the Group’s central applications are hosted in a highly-secure data center managed by IBM.
In addition, Danone is developing and implementing specific information systems (Themis, Artemis, etc.) in its subsidiaries to optimize and streamline IT investment while promoting global synergies and reducing risks. The former Numico and Unimilk subsidiaries are gradually benefitting from the implementation of Themis, Danone’s integrated information system. Additional information is provided in section 2.5 Other elements related to the Group’s activity and organization.

VIII.     Risks of an internal control failure

Risk identification

The risk of an internal control failure is mainly associated with: accurate and reliable financial information; compliance with the applicable laws, regulations and internal policies; and efficient and effective internal processes, including those related to the protection of the Group’s assets.
If the Group’s internal control systems were to experience failures or prove to be inadequate, particularly in the area of fraud, the quality of its financial information, the ability of its executives to take the correct decisions and, more generally, its results, could be adversely affected.

Risk management

The Group has implemented an internal control system. This system, regardless of how adequate it may be, can only provide reasonable assurance and not an absolute guarantee with respect to the achievement of the Company’s objectives due to the limits inherent in any control process. While the Group cannot fully exclude the risk of an internal control failure, the performance level and widespread deployment of its five internal control components (Control environment, Risk identification and assessment, Control activities, Information and communication, and Continuous monitoring) reduce the Group’s exposure to this risk (see section 6.11 Internal control and risk management).
Similarly, the Group cannot exclude all risks associated with fraud or corruption. However, the risk profile of its activities and the existence of an exhaustive anti-fraud program, covering all aspects of reducing the risk of fraud and the potential impact of any fraud (risk identification, prevention, fraud detection, corrective measures and reporting) and widely communicated, reduce the Group’s exposure to this risk (see section 6.11 Internal control and risk management).

IX.       Risk of failure of insurance coverage

Risk identification

The Group’s insurance coverage could be insufficient and/or the Group could be unable to renew its insurance programs on acceptable terms, which could have an adverse effect on the Group’s financial situation.

Risk management

See the Insurance and risk coverage section hereafter.

I.          Risks associated with intellectual property

Risk identification

The Group owns rights to brand names, registered designs and patterns, copyrights and domain names throughout the world.
The territorial extent of the protection depends on the significance of the products and activities concerned: the protection is global for products intended for the international arena, and local or regional for other products.
The Group is also the owner of patents, licenses, proprietary recipes and substantial expertise related to its products and packaging, as well as to their manufacturing processes. Finally, the Group has established licensing agreements with its subsidiaries and partners that use these intellectual property rights. Intellectual property represents a significant portion of the Group’s assets.
Danone cannot be certain that third parties will not attempt to infringe on its intellectual property rights. Moreover, the Group’s potential recourse to intellectual property rights protection varies by country. The degree of protection may be different, as may be the Group’s implementation of a defense strategy. If the Group was unable to protect its intellectual property rights against such infringement or misuse, its results and growth could be negatively affected, as could its reputation.
In addition, certain employees have access to confidential documents in the course of their work. The loss or dissemination of sensitive and/or confidential information could harm the Group’s interests and reputation, and have an adverse effect on its results.

Risk management

In order to monitor its assets and ensure the protection, management and defense of these rights in a coherent and optimal manner, the Group has drawn up an “Intellectual Property” charter. The Group regularly contacts each of its subsidiaries in order to update its intellectual property rights portfolio and thereby protect and defend, to the best of its ability, the brand names, decors, forms, packaging, advertisements, websites, etc. that are used by the Group. The Group also takes all appropriate legal measures, notably through actions for infringement and/or unfair competition, to protect and defend its intellectual property rights at both international and local level.
The Group is continuing its efforts to develop awareness among staff with access to and/or in possession of sensitive and/or confidential information and provides updates to staff on best practices with a view to limiting this risk, notably as regards the use of information systems and corporate networks.

II.         Risks associated with regulations

Risk identification

As a player in the food and beverage industry present in numerous countries, the Group’s activities are subject to extensive laws and regulations enacted by many national and international authorities and organizations, including regulations with respect to corporate governance, tax and customs duties, labor law, hygiene and food safety, quality control and the use of water sources. The Group’s activities are also subject to good conduct rules such as those of the World health organization (WHO) regarding the marketing of breast-milk substitutes and the corresponding rules at the various local regulatory levels. The Group may also be subject to customs duties, trade barriers or sanctions that may be imposed.
More particularly, the Group’s activities are subject to numerous laws and regulations that are always changing and becoming increasingly restrictive, relating, in particular, to the protection of health and food safety, consumer protection, nutrition and claims about the health benefits of products marketed by the Group, along with environmental claims, the reimbursement of certain products of the Medical Nutrition and the Group’s advertising and promotional activities. Any change in these laws or regulations, any decision by an authority regarding these laws or regulations or any other event that would challenge the nutritional or health claims related to certain products could have a significant impact on the Group’s activities, increase its costs, reduce consumer demand and possibly result in litigation.
In addition, the Group is involved, or could be involved, in litigation associated with its normal course of business. Should the result of such litigation be unfavorable for the Group, this could adversely affect the Group’s financial situation and its image or reputation. Major litigation is presented in Note 25 of the Notes to the consolidated financial statements.

Risk management

The subsidiaries, assisted by their legal departments and/or external legal advisors, take steps to ensure that they comply, at all times, with national and international regulations. This compliance forms an integral part of the Group’s quality strategy and internal control system.

I.          Industrial risks

Risk identification

Natural risks (floods, earthquakes, hurricanes, tornadoes, etc.)

Overall, the Group’s industrial plants have limited exposure to natural risks and any new site development project is analyzed with respect to such risk exposure. Nevertheless, the Group’s geographic expansion sometimes leads it to be present in regions exposed to natural risks, notably seismic. In those cases, these facilities (buildings and equipment) are designed by integrating measures recommended by prevention/protection experts that often exceed the applicable national safety standards.

Other risks

Like any industrial activity, the Group’s sites are exposed to various risks: fire, explosion, systems failure, pollution, terrorism, epidemy, strike or other factors. Such events could cause damage to people, goods or the environment and possibly have a negative impact on the Group’s financial situation.

Risk management

In order to reduce, if not eliminate, these risks and their potential impact, the Group has elevated personal safety, the protection of industrial plants and the environment to core values of the Group’s policy. These values are “measured” through various programs with lofty targets and action plans monitored by Group departments, notably the Divisions’ Industrial Departments.
With respect to industrial sites protection, several years ago the Group established a security assessment program through regular engineering visits; in 2012, nearly 150 of such visits were conducted by independent experts. These visits, which are based on international guidelines that typically exceed national regulations, enable to define the prevention and protection levels of the sites and monitor the completion of the action plans needed to achieve the objectives assigned to each site. The Group’s procedures with respect to engineering are deployed as widely as possible through partnership projects with the Group’s largest suppliers.
Since the end of 2011, the Group transitioned to a new rating scale ranging from 1 to 90 points through the so-called Risk Mark system. The greater precision and detail of this new rating system enables better steering of industrial risks. A schedule with minimum targets was defined for each plant based on the insured value and the strategic importance for each Division’s activity.
As of December 31, 2012 the Group’s average Risk Mark – calculated for the 160 sites visited on a regular basis – was 55 points, compared with a target of 57 points for this fiscal year. The Group’s objective is to reach an average Risk Mark of 68 points by end-2015, which would correspond to a high level of prevention and protection for the Group’s sites.

II.         Risks associated with environmental regulations

Risk identification

In all of the countries where the Group does business, it is subject to numerous regulations in the environmental area (mainly regarding water, air, the use of natural resources, noise and waste), which are becoming more and more stringent and constantly evolving.
These activities are notably subject to (i) obtaining operating authorizations or (ii) the submission of a prior notification statement:
• in Europe, pursuant to the laws relating to installations designated for environmental protection;
• in other countries, pursuant to similar regulations.
Access to water sources and resources is sometimes linked to national or local regulations. Changes in these regulations could negatively affect the availability of water intended to be bottled and marketed by Danone.
Packaging is subject to specific regulations and in particular European directive 94/62, as amended in 2004, relating to packaging and packaging waste, which requires source reductions, reductions in the use of substances hazardous to the environment, recycling, and recovery. Danone’s activities are furthermore subject to the European waste framework directive 2008/98/EC.
The Group’s activities are also subject to, on the one hand, the European directive of 2003 establishing a trading system and, on the other hand, quotas for greenhouse gas emissions and the transpositions of the National allocation plans in the European union. Five of the Group’s sites in the European union are thereby subject to quotas (whose impact on the Group’s financial situation is not significant), while the other sites are currently below the minimum eligibility threshold. If, in the future, the Group is unable to limit the emissions of these five sites and comply with allocated quotas, it will incur a fine and would have to purchase the shortfall on the market for greenhouse gas quotas. The quantity of quotas allocated at no charge will gradually diminish and be reduced to zero in the years ahead, which will represent an additional cost for the Group.
Moreover, the Group cannot guarantee that it will always be in compliance with these multiple regulations, which are complex and constantly changing. Lastly, bringing the Group’s activities into compliance with new regulations or changes in existing regulations could be costly or even limit the Group’s capacity to pursue or develop its activities.

Risk management

In order to comply with applicable environmental regulations, the Group took the following steps:
• reduced the intensity of direct emissions, notably those from the Group’s industrial sites, by focusing mainly on energy consumption;
• contributed to the development of recycling (collection and use of recycled materials).
The environmental action plans are described in section 7.2 Information concerning the Group social, societal and environmental performance in compliance with the Grenelle II law.
No major provision for contingencies and charges related to environmental protection has been recognized in the consolidated balance sheet as of December 31, 2012.

III.        Risks associated with consumers’ choices, preferences or environmental considerations

Risk identification

Consumers’ purchasing preferences, notably in the most developed countries, are increasingly influenced by environmental concerns (in particular greenhouse gas emissions – including methane emissions by cows producing the milk used by the Group – and the preservation of water resources), and such preferences are at times supported by NGOs (Non-Governmental Organizations). Distributors also pay increasing attention to communications with consumers (in particular the labeling of the carbon footprint of products). If the Group is unable to anticipate changing consumer preferences, in particular through the implementation of reduction measures and communication on environmental consequences, its results could be negatively affected.

Risk management

The Group undertakes continuous efforts to reinforce its corporate commitment and improve the management of its business activities with respect to every step of its products’ life cycle.
In 2008, the Group identified five types of impact across the full supply chain of its activities (CO2, water, packaging, agriculture and biodiversity). Specifically, it had set a goal of reducing the carbon intensity related to its products by 30% over the 2008-2012 period and for the scope of its direct responsibility (packaging, production, logistics, end of life – excluding Unimilk group’s companies). The Group has more than achieved this goal (see section 7.2 Information concerning the Group social, societal and environmental performance in compliance with the Grenelle II law).
In 2009, Danone created a Nature Department, which reports to the Group Finance Department, thereby putting environmental concerns at the heart of its decision-making process. In addition, a portion of the annual variable compensation of directors, executive directors and officers (including all Executive Committee members) is conditioned upon the achievement of environmental objectives.
Danone’s Nature strategy and its implementation and achievements in 2011 are described in section 7.2 Information concerning the Group social, societal and environmental performance in compliance with the Grenelle II law.

IV.       Other environmental risks

Risk identification

The principal potential other risks are water pollution (essentially organic and biodegradable pollution), risks related to cooling installations (ammonia and other cooling liquids), and risks related to the storage of raw materials or products for the cleaning and disinfection of the Group’s plants (acid or basic products), especially when these installations are located in inhabited areas. In the event that the Group’s environmental responsibility is called into question, resulting from a significant accident or case of pollution, its results and reputation could be adversely affected.
With respect to purchases of raw materials and packaging, the Group identified an indirect risk of deforestation in the supply chain.

Risk management

In 2012, Danone continued to roll out its global water footprint measurement application (DROP), which integrates a measurement of the impact related to water pollution. This application, developed in the Waters Division, should be gradually extended to the other Divisions. In 2011, the Group also developed, in conjunction with Quantis and the Institut de l’Elevage, a module applied to dairy farms that was tested at four subsidiaries in 2012.
A plan to reduce the impact of the installed base of the Group’s refrigeration systems has been ongoing since 2008 (“Bcool”) and partnerships with refrigeration distributors/manufacturers, notably in Spain, are showing promising results. Moreover, through the Consumer good forum, Danone has pledged not to purchase equipment that does not use natural coolants beginning in 2015 in order to help promote the emergence of breakthrough technologies.
The Group also drafted and published a “Forest impact study” and a “paper/cardboard packaging and deforestation study” to address the risks related to these challenges (see section 7.2 Information concerning the Group social, societal and environmental performance in compliance with the Grenelle II law).

I.          Introduction

Risk identification

As part of its normal business, the Group is exposed to financial risks, especially foreign currency, financing and liquidity, interest rate, counterparty, and securities-related risks.
Additional information and data, in particular with regard to the Group’s residual exposure (after hedging) to these different risks, are provided in Note 30 of the Notes to the consolidated financial statements.

Risk management

The Group’s policy consists of (i) minimizing the impact that its exposure to financial market risks could have on its results and, to a lesser extent, on its balance sheet, (ii) monitoring and managing such exposure centrally, whenever the regulatory and monetary frameworks so allow and (iii) using derivative instruments only for the purpose of economic hedging.
Through its Treasury and Financing Department, which is part of the Group Finance Department, the Group possesses the expertise and tools (trading room, front and back office software) to act on different financial markets following standards generally implemented by first-tier companies. In addition, the Internal Control and Internal Audit Departments review the organization and procedures applied. Lastly, a monthly treasury report is sent to the Group Finance Department, enabling it to monitor the decisions taken to implement the previously approved management strategies.

II.         Currency risk

Risk identification

Due to its international presence, the Group could be exposed to foreign exchange rate fluctuations in the three following situations:
• in relation to its operating activities: the sales and operating expenses of the subsidiaries of the Fresh Dairy Products Division and most of the subsidiaries of the Group’s Waters Division are expressed primarily in their country’s domestic currency. In some cases, however, imports (especially raw materials and finished products between Group companies) and exports (finished products between Group companies) are expressed in other currencies. Similarly, due to the limited number of production units in the world, the subsidiaries of the Medical Nutrition and Baby Nutrition Divisions and certain Waters Division subsidiaries frequently use intra-group imports denominated in a currency other than their functional currency. The sales and operating margin of certain Group subsidiaries are therefore exposed to fluctuations in exchange rates against their functional currency;
• in relation to its financing activities: in application of its risk centralization policy, the Group manages multi-currency financings and liquidities;
• when translating into euro the financial statements of subsidiaries denominated in a foreign currency: sales and the trading operating income are generated in currencies other than the euro (see section 3.2 Consolidated net income review for the 10 countries generating the highest net sales). Consequently, fluctuations in exchange rates of foreign currencies against the euro may have an impact on the Group’s income statement. These fluctuations also have an impact on the accounting value in the consolidated balance sheet of assets and liabilities denominated in currencies other than the euro.
In accordance with IAS 39, Financial instruments: recognition and measurement, foreign exchange rate fluctuations can have an impact on the Group’s results and consolidated shareholders’ equity (see Note 30 of the Notes to the consolidated financial statements).

Risk management

Pursuant to its operational foreign exchange risk hedging policy, the Group’s residual exposure (after hedging) was significantly reduced during the fiscal year (see Note 30 of the Notes to the consolidated financial statements).
Pursuant to its financial foreign exchange risk hedging policy, the Group’s residual exposure (after hedging) is not significant (see Note 30 of the Notes to the consolidated financial statements).
The Group has established a policy for monitoring and hedging the net position of certain subsidiaries, with regular assessments of risks and opportunities to use hedging instruments

III.        Financing and liquidity risk

Risk identification

The Group does not use indebtedness in either a recurring or a significant way in connection with its operating activities. Operating cash-flows are generally sufficient to self-finance the Group’s business operations and organic growth.
The Group may, however, in the future, increase its indebtedness to finance acquisitions or as and when required to manage its cash cycle, particularly when dividends are paid to the Company’s shareholders.
Its goal remains to maintain debt at a level enabling it to retain flexibility with respect to its financing sources.
The Group’s liquidity risk comes mainly from the maturities of its (i) interest-bearing (bonds, bank debt, etc.) and (ii) non-interest-bearing liabilities (liabilities on put options granted to non-controlling interests), and from payments on derivative instruments (see Note 30 of the Notes to the consolidated financial statements).
As part of its debt management strategy, the Group regularly seeks new financing to refinance its existing debt.
In countries where centralized financing is not accessible, when medium-term financing is unavailable and/or in cases where certain financing existed at a company prior to being acquired by the Group, the Group is exposed to liquidity risk on limited amounts in these countries.
More generally, it is possible that in the event of a systemic financial crisis, the Group could be unable to access the financing or refinancing it needs on the credit or capital markets, or to access such finance on satisfactory terms, which could have an adverse impact on its financial situation.

Risk management

The Group manages its exposure to refinancing risk by: (i) centralizing its financing sources, (ii) borrowing from diversified financing sources, (iii) arranging a significant portion of its financing as medium term financing, (iv) maintaining financing sources available at any time and (v) ensuring that it is not subject to any covenant relative to maintaining financial ratios in connection with financing contracts. In countries where centralized or medium-term financing are not available and/or, in some cases when financing agreements are in place at a company prior to its acquisition by the Group, certain Group companies may, for operational reasons, be required to borrow from local sources; from a Group perspective, the amounts borrowed are relatively small, whether considered individually or in total, given the level of operating cash-flow of these companies that is generally sufficient to finance their operations and organic growth.
Further information on the financing structure and on financial security is given in section 3.4 Balance sheet and financial security review.

IV.       Interest rate risk

Risk identification

The Group is exposed to interest rate risk on its financial liabilities and cash equivalents. Its interest-bearing debt exposes it to interest rate fluctuations that impact its financial expenses.
In addition, in accordance with IAS 39, Financial instruments: recognition and measurement, interest rate fluctuations may have an impact on the Group’s results and consolidated shareholders’ equity (see Note 30 of the Notes to the consolidated financial statements).

Risk management

The Group has established a policy for monitoring and managing interest rate risk aimed at limiting the volatility of its financial income and expense through the use of hedging instruments.

V.        Counterparty risk

Risk identification

The Group is exposed to counterparty risk, especially on banking counterparties, as part of its financial risk management activities.
As part of its normal activities, the Group has financial institutions as counterparties, mainly to manage its cash and foreign exchange rate and interest rate risks. The failure of these counterparties to comply with one or more of their commitments could adversely affect the Group’s financial situation.

Risk management

The Group’s banking policy aims to reduce its risks by focusing on the quality of counterparty credit and by applying limits for each counterparty (see Note 30 of the Notes to the consolidated financial statements).

VI.       Securities-related risk

Risk identification

Risk related to the Company’s shares

Pursuant to its share buyback policy and the authorizations granted by the Shareholders’ Meeting, the Company may choose to repurchase its own shares. Any fluctuations in the price of the Company’s treasury shares repurchased in this manner have no impact on the Group’s results. Any decrease in the Company’s share price could, however, have an impact on the potential amount paid out in shares in connection with the financing of acquisitions.

Risk related to other shares

The Group holds equity interests in listed companies. Any significant and/or prolonged decline in the prices of these companies’ shares could have an adverse impact on the Group’s results.

Risk management

The Group has established a monitoring policy for this risk.

As regards risks other than financial market risks (which are described in the preceding section), the Group has a global insurance coverage policy that is based on stringent technical assessments and uses insurance products from the world market, depending on availability and local regulations. Thus, this risk coverage is consistent for all companies over which the Group has operational control.

Insurance programs for property damage, business interruption and commercial general liability risk are negotiated at Group level for all subsidiaries, with leading international insurers. The “all risks except” policies are based on the broadest guarantees available on the market, coupled with deductibles of varying amounts, which are relatively low compared to those extended to groups of comparable size to reflect the autonomous management of subsidiaries. The guarantee limits are set based on worst case scenarios and on insurance market availability. These programs were renewed on January 1, 2012 for a term of one year; the total cost of these programs was approximately €27.5 million in 2012.

Insurance programs for common risks, which require local management, such as coverage of fleets of vehicles, guarantees for the transportation of merchandise, work-related accidents (in countries in which these accidents are covered by private insurance), and insurance specific to some countries, are negotiated and managed in accordance with local practices and regulations, within the framework of precise directives provided and controlled by the Group. Total premiums came to approximately €28 million in 2012.

Lastly, insurance programs for potentially significant special risks, which require centralized management, such as the liability of the Group’s executive directors and officers, fraudulent acts, and assorted risks (taking products off the market, credit risk, environmental risk, etc.) are negotiated according to market availability, on the basis of scenarios estimating the probable impact of any claims. The total cost of this category of coverage amounted to approximately €3 million in 2012.

In addition, in order to optimize its insurance costs and properly control its risks, the Group has a self-insurance policy through its captive reinsurance subsidiary Danone Ré (a fully consolidated Group entity). The self-insurance policy applies to specific risks where the costs can be accurately estimated as the Group is aware of their frequency and financial impact. This concerns essentially (i) coverage of property damage, business interruption, commercial general liability, and transportation for a large majority of the Group’s companies (these self-insurance programs are limited to frequent claims with a maximum of €7.5 million per claim), and (ii) for the French subsidiaries payments for death, long-term disability, and education. Moreover, stop-loss insurance protects Danone Ré against any increased frequency of claims. These self-insurance programs are managed by professional insurers under Danone’s supervision and the provisions are determined by independent actuaries.