Managing risk

Managing risk

Identifying risks and opportunities through a robust and systematic process is central to our strategy and planning process. A comprehensive risk management policy is in effect throughout the group and is complemented by the Barloworld Limited risk management philosophy.

In line with international best practice, risks are assessed on their probability, severity and quality of the existing control environment. These measures result in residual risk scores that indicate the importance of the risk and facilitate assessing progress made in addressing identified risk. Through the risk and sustainability committee, the board determines the level of risk tolerance for the group and also ensures that risk assessments are performed on a continual basis by formally reviewing the divisional and group registers twice a year.

Barloworld group top risks 2015 (in alphabetical order)

KEY
RISKS		   CATEGORY OF RISK AND
MANAGEMENT RESPONSE		   2015 STRATEGIC 
FOCUS AREA
Acquisition/joint venture underperformance

The risk of future net cash flows from acquisitions and/or joint ventures 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 and/or joint ventures 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 acquisition phase includes legal, financial, tax, human resources, empowerment and transformation, information systems and technology, technical, risk, governance and responsible corporate citizenship and environmental due diligence processes to verify and validate assumptions and future projections
  • Following acquisitions and/or joint ventures, planning and task teams are established to focus on the realisation and management of possible synergies

 

  
 
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
  
 
Competitor actions

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.

  
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
  • Robust strategic planning process assists in identifying industry trends and uncertainties and developing appropriate strategies in response
  
 
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
  • Geographic, industry and product diversification
  
 
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 scheme’s assets invested in growth assets (largely equities), which includes 25% diversification into absolute return funds.

The year-end valuation resulted in the deficit decreasing to £93 million, largely due to recovery plan payments made in the year.

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, manages the scheme and is responsible for regularly evaluating the effectiveness of investment decisions, the setting of actuarial factors for the liabilities and managing the administration. 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 updated figures available in real time
  • Funding shortfalls are planned to be made up within sensible timeframes 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. All new employees in the United Kingdom are automatically enrolled in the United Kingdom’s money purchase personal pension plan
  • The company and trustees have agreed 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
  • The accounting deficit has been reflected on the company’s balance sheet as a liability in line with international accounting standards
  
 
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 to service and solutions focused
  • Diversify customer base
  • Develop new channels
  
 
IT and information security-related risks

Barloworld’s strategy of providing innovative customer solutions by transforming our business from Products to Services and Solutions which leverage technology to deliver productivity and performance benefits to our customers, gives rise to an increased risk related to information security and related cybercrime attempts.

  
Employee/operational/strategic risk

Barloworld has revised its response to these risks with an updated information security approach which is underpinned by the implementation of new group-wide information security policies.:

The approach is based on the ability to:

  • Prevent, detect and respond to attempts to access our information
  • Restore confidentiality, integrity and availability of systems and information and data in the event of a breach

The approach includes all appropriate security mechanisms, physical, technical, organisational, human orientated and legal to keep all information protected against threats.

  
 
Occupational health and safety risks

Barloworld’s key asset is its employees. The 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 on-going 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 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 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
  
 
Weak commodity prices

The effect of weak commodity prices and the decline in oil prices have contributed to 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 recurring recession and/or impede growth. This, in turn, has negatively impacted many 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
  • Maintain credit rating

 

  
Risk heat map

The heat map below reflects the relative position of the group’s residual risks which are assessed on their probability, severity and quality of existing control environment. The occupational health and safety risks are not reflected on the heat map as our practice is not to attach a value to fatalities.

Risk heat map

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Barloworld’s 2015 CDP climate change and 2015 CDP water disclosure responses