LEGRAND_REGISTRATION_DOCUMENT_2017

INTERNAL CONTROL AND RISK MANAGEMENT Risk factors and control mechanisms in place

Furthermore, an Innovation and Systems Department, that works cross-functionally with the Group’s various Strategic Business Units (SBUs), monitors system architectures, interoperability, technology trends, standardization and intellectual property, enabling it to define the Group’s strategic objectives, particularly in terms of innovation. An innovation program organized around four key themes (Energy efficiency, the Internet of Systems and artificial intelligence, Installation trends, and New technologies) underpins the projects managed by each SBU. Moreover, each SBU analyzes the Group’s products, technologies and markets on an ongoing basis. Research and development expenditure represents, on average, between 4% and 5% of Group sales over the long term, while the amount spent on electronic and digital technology has been increasing for many years. Finally, the Group has signed multiple partnerships with major players in new technology to jointly develop offerings of connected and interoperable products. For years the Group has also been a member of various technology associations and alliances. R 3.6.1.4 ACQUISITIONS & DOCKING The Group’s growth strategy, in line with the guidance given by the Strategy and Social Responsibility Committee and the Board of Directors, mainly relies on bolt-on (1) acquisitions with strong market positions or new technology and offering synergies with its existing businesses. The Group may not be able to complete transactions or obtain financing on satisfactory terms, to successfully integrate acquired businesses, technologies or products, to effectively manage newly acquired operations or to achieve the anticipated cost savings. It could also experience problems integrating acquired businesses, including possible incompatibilities of systems, of procedures (particularly accounting systems and controls), of policies and business cultures; or the departure of key employees and the assumption of liabilities, particularly environmental liabilities. All these risks could have a material adverse effect on the Group’s businesses, results and financial position. A dedicated acquisitions team in the Sustainable Development and Strategic Processes Department works closely with country managers to identify appropriate targets, and coordinates the acquisition process with the head office departments – finance, legal, industrial, logistics and marketing (see section 2.2.2.2 of this Registration Document). The Group conducts audits and due diligence prior to any planned acquisition, based, where appropriate, on advice provided by outside consultants, in order to ensure in-depth examination of the target company’s position. At every important stage in the transaction, and according to a formal process, each planned acquisition is subject to validation reviews

acquisitions. The Group’s net sales and profitability could be affected as a result. Furthermore, in order to remain competitive, the Group regularly launches new products which, if not well received, could negatively affect its business in the countries where these products are launched. Some competitors could benefit from better knowledge of their national markets and from their long established relationships with electrical installers and, as a result, have a competitive advantage. In addition, changes in the market for the Group’s products towards integrated and connected systems could see new entrants emerge and lead to increased competition, resulting in a fall in sales, a loss of market share or an increase in the Group’s costs, due to additional sales and marketing expenses or research and development costs. Moreover, in markets where the end-user is particularly sensitive to price rather than product appeal or features, imports of less expensive products manufactured in low-cost countries and sold at lower prices, including counterfeit products, could lead to a drop in the Group’s market share, and/or a decrease in the average selling price of its products in the markets in question. In addition, the market in which Legrand operates could be open to vertical integration, since some distributors also choose to become producers. Finally, e-commerce developments could cause the Group to lose market share to new entrants with online distribution channels (see section 2.1.1.2.4). The Group is aware of these risks and therefore engages in ongoing and sustained efforts in terms of market intelligence, brand positioning, active management of the product mix, price management, research and development and marketing, to develop new distribution channels and thus increase the added value of its products and the attractiveness of its offering while maintaining a tight rein on costs and maintaining or growing its market share (see section 2.2.2.1 of this Registration Document). R 3.6.1.3 DISRUPTIVE TECHNOLOGY AND DIGITAL TRANSFORMATION The digitization of the economy and rapid development of connected objects could undermine the Group’s ability to enter new high growth markets or threaten its traditional markets should its products fail to meet the new user expectations. To address these new challenges, and in parallel with the roll-out of the Eliot program and its range of Connected Objects, the Chief Digital Officer manages a digital program designed to improve the customer experience, the employee experience, and operational excellence through the contribution of new technology.

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(1) Small to mid size acquisitions that complement the Group’s business activities.

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REGISTRATION DOCUMENT 2017 - LEGRAND