Barloworld Group Top Risks - 2007

BARLOWORLD GROUP TOP RISKS – 2007

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 riskadjusted 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 of possible synergies.
Competitor actions The risk that competitors will take individual actions, through pricing or other activities, that 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.
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. Preventative measures are implemented around determination of pricing mechanisms and structuring of commercial contracts to negate the impact of any adverse currency fluctuations.
Defined-benefit scheme exposure The key risk for the United Kingdom’s two defined-benefit schemes is a downward movement in the yield on AA-rated corporate bonds against which the liabilities are valued. In addition, market volatility and increased life expectancy of members may have an adverse impact on the schemes’ funding positions requiring additional company contributions over and above the schemes’ current normal contribution rates. The current combined deficits for the two defined-benefit schemes in the United Kingdom amounts to £48.5 million, which has been based on conservative assumptions including updated mortality statistics.	Market risk Suitably qualified representative boards of trustees exist which, together with separate investment sub-committees, are responsible for regularly evaluating the effectiveness of investment decisions. They use professional investment advisors to assist them 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 managers and actuaries to assess optimum risk balance. The actuaries also conduct regular valuations. Funding shortfalls are planned to be made up within sensible timeframes via increased contributions, together with an adjustment to future benefits where appropriate. Subsequent to the year-end, the company has committed £55 million to address the funding deficits in the United Kingdom defined-benefit schemes. Existing defined-benefit schemes in the United Kingdom have been closed to new members since 2002 to assist in managing future liabilities. All new employees in the United Kingdom are automatically enrolled in the United Kingdom’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 and the competitiveness of their products and services. 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 to our principals by giving constant feedback on market movements and product competitiveness. Continually improve/build our relationship with our principals and major suppliers and ensure that we are the preferred dealer/customer. Provide excellent customer service and lead in our markets. Build smart partnerships with customers. Enter into longer-term contracts with customers. Build relationships with local authorities.
Exposure to equipment and motor vehicle Financial risk buy-backs and residual values Some of the group’s businesses could be exposed to losses due to contractual obligations to buy back equipment or motor vehicles previously sold or rented out, at prices above market or replacement cost at the time of being compelled to repurchase. This risk could arise, inter alia, through inadequate valuation skills at the time of determining the buy-back amount, poor condition of equipment and motor vehicles repurchased or significant shifts in the economic environment adversely impacting used values.	Financial risk This is managed by ensuring adequate valuation competencies, managing inventory levels, optimally structuring contracts, modelling transactions to ensure adequate economic return, continually scanning market conditions, hedging currency risks and monitoring the use and condition of equipment and motor vehicles in respect of which obligations exist.
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.	Political risk Minimise exposure in high-risk countries through thorough and in-depth risk assessments coupled with the application of preventative 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 business 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 smart partnerships with customers. Develop customer solutions which differentiate and expand our offering from product-based businesses. Establish long-term contracts with key customers. Diversify customer base.
Regulatory environment Many of the group’s activities are governed, one way or another, 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 employees 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 Employee Value Creation (EVC) is the technique that Barloworld has introduced globally to align employees with the strategy of the organisation. This process identifies and aligns all employee elements of a value-creating organisation to ensure sustainable intellectual capacity. 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. Extensive training resources and facilities are in place to assist and encourage employees to enhance their levels of competence and performance. An appropriate suite of reward and incentive schemes has been implemented to ensure recognition and retention of high-performing employees.