INTEGRATED ANNUAL REPORT 2011 GRI RESPONSES  

Risk management

Identifying risks and opportunities through a robust and systematic process is central to our overall strategic planning process and achieving our strategic objectives. A comprehensive risk management policy is in effect throughout the group, complemented by the Barloworld risk management philosophy (view pdf download - pdf 195KB ).

At all levels in the organisation, the strategic planning process requires that action plans are in place to appropriately address such risks. At group level these are reflected in the disclosed risk matrix. As required by King III, the directors have reviewed the group risk management process and concluded it is both appropriate and effective.

In line with international best practice, risks are assessed on their probability, severity and quality of the existing control environment. These measures produce residual risk scores that indicate the importance of the risk and enable progress in addressing these risks to be assessed. Through the risk and sustainability committee, the board determines levels of risk tolerance for the group and ensures risk assessments are performed continually by formally reviewing divisional and group risk registers twice a year.

In line with international best practice, risks are assessed on their probability, severity and quality of the existing control environment.

Barloworld group top risks – 2011

These risks are presented in alphabetical order

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

A 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 pre-acquisition 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.
The CEOs and CFOs of each business unit are responsible for ensuring that the policy and procedures are adhered to.
Following acquisitions, planning and task teams are established to focus on the realisation and management
of possible synergies.
 
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.

 

 
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, 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.
 
Defined benefit scheme exposure

One of the key risks for the UK’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 scheme’s assets invested in equities, although a small (8%) diversification into absolute return funds was made in the year.

A deterioration in the funding level may require additional company contributions over and above the scheme’s current normal contribution rates.

The year-end valuation indicates that the deficit has increased to approximately £71 million, largely due to an adjustment in the longevity assumptions as compared to the September 2010 year-end and reduced asset yields.

Market risk

A suitably qualified representative board of trustees exists which, together with a separate investment sub-committee, is responsible for regularly evaluating the effectiveness of investment decisions. Professional investment advisors 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 advisors and actuaries to assess optimum risk balance. The actuary also conducts regular valuations.
Funding shortfalls are planned to be made up within sensible time frames via market-anticipated increased
interest rates, positive returns on investments and potentially increased company and/or employee contributions.
The defined benefit scheme in the UK was closed to new members in 2002 and benefits were changed to a CARE basis in 2006 to assist in managing future liabilities. The scheme is now mature with only 7% active membership. All new employees in the UK are automatically enrolled in the UK’s defined contribution scheme.
 
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.
Build relationships with local authorities.
Align strategies and targets with those of our major principals as far as possible.
 

Exposure to political risks, 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, are exposed through 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 thorough and 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

The risk that we are exposed to certain large customers and/or industries and that well-established distribution channels 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.
 
Slow recovery of global economies

The effect of the prolonged slowdown 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, could lower commodity prices and impact 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.
 
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.
 
Strategic employee skills

Barloworld’s key asset is the intellectual capacities 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 comprehensive employee approach and related set of initiatives to align employees with the strategy of the organisation.
These identify and align all employee elements of a value-creating 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.