With effect from 22 May 2013 the Audit and Risk Committee was split into two Committees to allow each committee to give more focus to their different roles.  The Risk Committee comprises: Mr Chris Seabrooke (Chairman); Mr Norman Gray; Dr Lulu Gwagwa; Messrs Guy Hayward, Mark Lamberti, Michael Spivey, Llewellyn Walters and Ilan Zwarenstein; Ms Phumzile Langeni; and Mrs Julie Wilford, four of whom are independent non-executive directors and who each have the requisite financial and commercial skills and experience to contribute to the Committee’s deliberations. The Risk Committee met twice in the year ended December 2013.

The Board recognises its responsibility to report a balanced and accurate assessment of the Group’s financial results and position, its business, operations and prospects. Aspects of how this is achieved are covered in the section below.

The Board considers risk management to be a key business discipline designed to balance risk and reward, and to protect the Group against risks and uncertainties that could threaten the achievement of business objectives. The Board’s risk strategy has been established through debate with the executive directors where the Group’s risk tolerance has been considered and balanced against the drive towards the achievement of its strategies and objectives.

The Committee is responsible to the Board for overseeing the Group’s risk management programme. The day-to-day responsibility for risk management, including maintaining an appropriate loss prevention and internal control framework, remains with the executives of the Group and of each Division.

The Committee’s primary role is one of oversight and therefore it reviews and assesses the dynamic interventions, within the Group’s available resources and skills, required in response to business-specific, industry-wide and general risks. The Committee tables a Group risk register, aggregated from those prepared by the Divisions and the Group Executive Committee, to the Board annually in February. The Committee considers there to be two categories of Group risk which can broadly be described as Strategic/Environmental risks and Operational risks.

Strategic/Environmental risks tend to be longer-term and more material in nature and can, in most cases, only be monitored, managed and partially mitigated through longer-term strategic or tactical business responses. These risks, which, for example, include executive talent retention and succession, transformation and supply chain, are the primary focus of the Group’s Risk Management process.  The Group risk register summarises the major risks facing the Group, taking into account the likelihood of occurrence, the potential impact and any mitigating factors or compensating controls. The Risk Committee oversees the maintaining of a sound system of governance, risk management and control with regard to operations, safeguarding assets, reliability of management reporting, and compliance with laws and regulations.
Operational risks by their nature can be immediately addressed or mitigated by local management actions. These risks – which include in-store health, safety and security, compliance, fire prevention and detection, IT systems and food safety, amongst others – are therefore the direct responsibility of each Divisional Executive Committee where a Loss Prevention or Risk Officer has line-responsibility for overseeing these risks.

 

INTERNAL CONTROL FRAMEWORK

Massmart maintains clear principles and procedures designed to achieve corporate accountability and control across the Group. These are codified in the Massmart Governance Authorities that describes the specific levels of authority and the required approvals necessary for all major decisions at both Group and Divisional level. Through this framework, operational and financial responsibility is formally and clearly delegated to the Divisional Boards. This is designed to maintain an appropriate control environment within the constraints of Board-approved strategies and budgets, while providing the necessary local autonomy for day-to-day operations.

The Board is responsible for the risk management programme that attempts to balance the risks and rewards in achieving the Group’s objectives.  On behalf of the Board, the Risk Committee oversees the Group’s risk management programme. Responsibility for risk management and loss prevention rests however, with the Group and Divisional Executive Committees.

 

LITIGATION AND LEGAL

There are no current, pending or threatened legal or arbitration proceedings that may have, or have had in the previous 12 months, a material effect on the Group’s financial position.  As part of the litigation relating to the Massmart-Walmart acquisition, Massmart has either satisfied or is in the process of satisfying the conditions ordered by the 2012 Competition Appeal Court order. Two conditions remain active.  Firstly, Massmart has established a Supplier Development Fund that has commenced distributing funds to qualifying beneficiaries. The first annual report of the Fund was submitted to the Competition Commission in December 2013. Secondly, in cooperation with the Competition Commission, Massmart has initiated its remedial plan to re-instate the approximately 230 employees who were either not located or did not accept their original re-instatement offer from the pool of 503 retrenched employees. The objective of the remedial plan is to ensure that Massmart has fully complied with the court order to re-instate all employees.

 

FINANCIAL RISK AND APPRAISAL

Financial targets agreed in Group budgets and strategy processes are predicated on assumptions about the future that are uncertain and may prove incorrect or inaccurate. The monitoring and management of this risk is the responsibility of the Group Executive Committee. Monthly performance is measured and compared to the budget and prior year, and corrective or remedial action taken as appropriate.

Despite extensive financial, accounting and management controls and procedures, including reviews by Internal and External Auditors, there are risks arising from the Group’s cash management and treasury operations, direct and indirect taxation, and employee or third-party fraud or economic crime.

In addition to financial reviews, Massmart participates in externally-facilitated review and disclosure processes that enable independent reviews of its corporate accountability performances. These include a bi-annual ethics review by the South African Institute of Ethics, Carbon Disclosure Project participation, Broad-based Black Economic Empowerment verification and an annual JSE Socially Responsible Investment Index review.