This table reflects the group’s top risks as well as management’s responses to them.
| Key risks |
|
Category of risk and management response |
 |
|
|
Acquisition underperformance
The risk of future net cash flows from acquisitions
failing to realise the projections upon which the
initial purchase consideration was based may lead
to value destruction for shareholders and a need
to impair the related goodwill or assets. |
|
Acquisition risk
| – |
business acquisition policy and procedure is in place that
sets out a structured approach and framework to be used
when acquisitions are being made. This includes a preacquisition
phase that includes the requirement to conduct
a comprehensive strategic analysis of intended targets,
development of acquisition criteria, both strategic and
financial, and quantification of risk-adjusted value creation
potential for the respective business unit and the group |
| – |
Following acquisitions, planning and task teams are
established to focus on the realisation and management
of possible synergies |
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Climate change and environmental stewardship
Barloworld considers a number of environmental
related risks to its operations and value chain. These
include climate change and related physical risks
due to changing weather patterns; regulatory
risks associated with greenhouse gas
emissions; financial risks resulting from
carbon taxes; operational risks due to
constraints in energy supply and the
availability of natural resources, such
as water. The group identifies the
predominant use of fossil-fuel
based energy in its supply chain,
operations, products and
solutions as a risk to itself
and its value chain. |
|
Environmental/operational/strategic/financial/
regulatory risk
| – |
Minimise exposure through in-depth risk assessments and
strategic responses. Ensure organisational resilience through
aligned and integrated management activities and policies.
These include:
| – |
Implementation of aspirational efficiency improvement
targets in non-renewable energy consumption and
greenhouse gas emissions (scope 1 and 2) and focus on
water stewardship |
| – |
Association with leading principals, provision of products
and solutions with reduced environmental footprint and
which assist customers achieve their sustainable
development objectives |
| – |
Geographic, industry and product diversification |
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|
Competitor actions
Competitor actions will erode our competitive position
and have a significant impact on the value we create
for shareholders. |
|
Competitor risk
| – |
Continually reduce costs by focusing on operational
efficiencies and staff training |
| – |
Continually improve service and the provision of innovative
solutions to customers |
| – |
Develop key customer plans which contain all the
information and strategies to satisfy the customer |
|
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Currency volatility
Movement of currencies against one another, mainly
the movement of other currencies against the rand
which creates risks relative to the translation of
non-rand profits, the marking-to-market of
financial instruments taken out to hedge
currency exposures and the cost of imports
into South Africa. |
|
Financial risk
| – |
The responsibility for monitoring and managing these risks is
that of line management. A group treasury policy is in place
which clearly sets out the philosophy of hedging and
guideline parameters within which to operate, and
permissible financial instruments to be utilised |
| – |
Preventive measures are implemented around determination
of pricing mechanisms and structuring of commercial
contracts to reduce the impact of any adverse currency
fluctuations |
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|
Defined benefit scheme exposure
One of the key risks for the United Kingdom’s defined
benefit scheme over the past few years has been the
reduced real yield on AA-rated corporate bonds which
is used to value the liabilities. In addition, increased
life expectancy of members will have an adverse
impact on the scheme’s funding position. Market
volatility remains a risk, with 50% of the
schemes assets invested in growth assets
(largely equities), which includes 25%
diversification into absolute return funds.
The year-end valuation resulted in the
deficit increasing to £104 million, largely
due to lower discount rates, which was
partially offset by decreased inflation
above expected investment returns
and recovery plan payments by the
company.
As the active members have
reduced substantially, the trustee
board will adopt more prudent
assumptions in future in line
with the maturity profile of
the liabilities which will
result in the scheme’s
liabilities increasing in
the actuarial valuation
as compared to the
accounting valuation. |
|
Market risk
| – |
A suitably qualified representative board of trustees, which
includes a professional independent trustee, exists which is
responsible for regularly evaluating the effectiveness of
investment decisions. Professional investment advisers are
used to assist in the management of the investment
portfolios with a view to conservatively preserving and
enhancing fund valuations. Complex investment risk models
are run by the investment advisers and actuaries to assess
optimum risk balance. The actuary also conducts a formal
triennial valuation with six-monthly updates |
| – |
Funding shortfalls are planned to be made up within
sensible time frames via market-anticipated increased
interest rates, positive returns on investments and additional
contributions from the company agreed as part of a 10-year
recovery plan to bring the fund back to full funding on an
accounting basis |
| – |
The defined benefit scheme in the United Kingdom was
closed to new members in 2002 and the scheme is now
mature with only minimal active membership following the
disposal of Handling UK. All new employees in the United
Kingdom are automatically enrolled in the United Kingdom’s
defined contribution scheme |
| – |
The company and trustees have agreed on a long-term
strategy for reducing investment risk as and when
appropriate. This includes an asset-liability matching policy
which aims to reduce volatility of the funding level of the
pension plan by investing in matching annuities (buy-ins) for
pensioners which perform in line with the liabilities of the
plan. In 2013, the fund purchased a buy-in representing
approximately 12% of the liabilities |
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Dependence on principals and suppliers
Some of the businesses in the group are dependent
on a small number of principals and/or suppliers.
Our success is therefore linked to their ongoing
financial stability, the competitiveness and
quality of their products and services and
the availability of equipment to meet
customers’ needs.
In order to ensure sustainable value
creation, we depend on suppliers of
infrastructure in the countries in
which we operate. Most of our
businesses are dependent,
inter alia, on reliable power
and water supply and
appropriate transport
networks. |
|
Strategic risk
| – |
Add value by giving constant feedback to our principals
on market movements and product competitiveness |
| – |
Continually improve/build our relationships with our
principals and major suppliers and attempt to ensure
that we are a preferred dealer/customer |
| – |
Provide excellent customer service and lead in our markets |
| – |
Build long-term partnerships with customers |
| – |
Supplier due diligence performed |
| – |
Build relationships with local authorities |
| – |
Align strategies and targets with those of our major
principals as far as possible |
|
|
|
|
Exposure to political risks, sanctions, terrorism and
crime in the countries in which we operate
The group’s people and assets are spread through
numerous countries around the world, while our
activities are conducted in many more. The
possibility exists that our people and assets,
and the viability of the businesses, may be
exposed to sanctions, acts of terrorism,
political turmoil or crime in some of the
regions in which the group operates,
as well as in those that may be the
subject of expansion. Business
growth initiatives require that
new markets and territories
are the focus of our
business expansion. These
opportunities come with
their own distinct risk
exposures. |
|
Operational risk
| – |
Minimise exposure in high-risk countries through in-depth
risk assessments, coupled with the application of preventive
and corrective risk-management activities |
| – |
Maintain flexible business models |
| – |
Maintain business continuity plans that incorporate
emergency response actions, crisis management and
business recovery plans specific to the businesses and the
respective territories in which the businesses operate |
|
|
|
|
Exposure to significant customers and dependence
on channels to market
We are exposed to certain large customers and/or
industries and well-established distribution
and support channels that may change
or consolidate. |
|
Market risk
| – |
Build long-term partnerships with customers |
| – |
Develop customer solutions which differentiate and expand
our offering from product-based businesses |
| – |
Diversify customer base |
| – |
Develop new channels |
|
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Occupational Health and Safety risks
Barloworld’s key asset is its employees. Occupational
Health and Safety risk is the likelihood of a person
being harmed or suffering adverse health effects if
exposed to a hazard in the workplace. |
|
Employee/operational/strategic risk
| – |
Minimise exposure through in-depth risk assessments,
coupled with the application of preventive and corrective
risk management activities and policies |
| – |
Training in accident prevention, accident response,
emergency preparedness and the use of protective clothing
and equipment, all with the aim of ensuring a safe
workplace |
|
|
|
|
Regulatory environment
Many of the group’s activities are governed by
regulations. Due to the complexity and changing
nature of these regulations across the industries
and geographical spectrum of the group’s
activities, there are challenges in staying
abreast of all developments and maintaining
full compliance. |
|
Regulatory risk
| – |
Management is responsible for the ongoing monitoring of
all pending and actual changes to the group’s regulatory
environment. Due to the large number of jurisdictions which
govern the group’s activities, this monitoring occurs in each
relevant country of operation |
| – |
Where feasible, the group will comment on proposed
changes to the regulatory environment that may adversely
affect the group in a particular jurisdiction |
|
|
|
|
Slow recovery of global economies
The effect of the slow recovery on our businesses,
customers, suppliers and funders and the continued
risk that funding constraints within the supply
chains could result in a double-dip recession
and/or impede growth. This, in turn, has
lowered commodity prices and impacted
mining company investments. |
|
Financial risk
| – |
Inflationary pressures to be carefully monitored and
managed, as appropriate, in each business |
| – |
Reduce costs and improve operating efficiencies |
| – |
Monitor our customers’ ability to spend and access credit |
| – |
Reduce working capital, limit capital expenditure and
improve cash flow |
| – |
Secure adequate committed borrowing facilities |
|
|
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|
Strategic employee skills
Barloworld’s key asset is the intellectual capacity and
skills of its employees. This necessitates ongoing
management of the challenges regarding
recruitment, succession planning, skills
retention and development. |
|
Employee risk
| – |
Barloworld has a defined Employee Value Proposition and
methodology to align employees with the strategy of the
organisation |
| – |
These identify and align all employee elements of a valuecreating
organisation to ensure sustainable intellectual
capacity and value-creation competence |
| – |
Through performance management systems, employees’
purpose, role, function and accountabilities are defined,
and, using competency-based assessments, employees are
regularly reviewed to ensure the appropriate skill sets are
available to enable performance at optimum levels |
| – |
Investments in training resources and facilities are
continuing to assist and encourage employees to enhance
their levels of competence and performance |
| – |
An appropriate suite of reward and incentive schemes
ensures recognition, value creation for employees and
retention of high-performing employees |
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