During the 2016 financial year, the Committee met on two occasions.

 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. Each division has developed a risk and loss prevention process that is best suited to its culture, structure and operations.

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 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. The Committee tables a Group risk register to the Board twice annually, in February and August, which is aggregated from those prepared by the Divisions and the Group Executive Committee.

The Committee is also responsible for reviewing and reporting on the Group’s application of King III, and will play an integral part in aligning the Group’s governance structures and processes with requirements and principles of the King IV Report.

As part of the annual risk reporting process, the Divisions’ Risk Officers report any major risk incidents that occurred during the year.  These incidents are defined in the Group Risk Policy as ones that:

  • Directly or indirectly impact annual Divisional earnings before interest and tax or total assets by 5% or more (quantitative); or
  • Have significant qualitative dimensions that may include:
    • A major concern to Massmart Holdings’ public shareholders;
    • Serious damage to the reputations of the Division and/or its executives and management;
    • Affecting a major portion of the Division’s customer base;
    • A large fraud or theft;
    • A legal matter that may result in major financial or reputational risk;
    • A material ethical or compliance breach, whether qualitative or quantitative;
    • A major breakdown in the control environment;
    • Significant IT system failure;
    • Nationwide media coverage and/or public concern; or
    • Affecting the Division or Group’s ability to implement or execute its strategy and business objectives.

The Committee considers there to be two categories of Group risk that 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.

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 Delegation of Authority policy 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.

Lease exclusivity litigation and other contingent liabilities

Some of the legal proceedings and litigation matters we have previously disclosed related to restrictive lease clauses involving Massdiscounters/Game, three of the major food retailers and certain landlords in South Africa, remain pending. However, Massmart prevailed in its appeal to the Constitutional Court in relation to one of the interdict applications involving Pick ‘n Pay in a judgment delivered by the Constitutional Court on 25 November 2016 which reversed and set aside prior decisions of the High Court and the Supreme Court of Appeal. Additionally, in March 2017, Shoprite formally abandoned the interdict granted to it on 12 July 2016 in the Grahamstown High Court in relation to the Mthatha Plaza Shopping Centre lease exclusivity dispute. Our self-referral to the Competition Tribunal continue to proceed apace, following a hearing of preliminary matters (stay and exception application) in July 2016, as a result of which Massmart amended and filed its revised pleadings with the Tribunal on 14 November 2016. The respondent counter-parties are required to file their revised answering papers in March 2017. The Competition Commission retail grocery market enquiry is ongoing with public participation process having commenced in February 2017. While the Constitutional Court judgement granted Game the right to operate as a supermarket that sells fresh food at the Cape Gate shopping centre, and may have paved the way for the acceleration of our fresh food strategy roll out in Game stores, the delayed or unfavourable conclusion of the rest of the pending proceedings may curtail our Game fresh food strategy.

In addition to the matters outlined above, the Group and our subsidiaries are party to a variety of legal, administrative, regulatory and government proceedings, claims and inquiries arising in the normal course of business. While the results of these proceedings, claims and inquiries cannot be predicted with certainty, management believes that the final outcome of the foregoing will not have a material adverse effect on the Group’s financial position.

The Risk Committee comprises:

      

Mr Moses Kgosana
Chairman

Mr Norman Gray
Chief Ethics and Compliance Officer

Dr Lulu Gwagwa
Independent non-Executive Director

Mr Guy Hayward
Executive Director

Ms Phumzile Langeni
Independent non-Executive Director

Mr Joe Ralebepa
General Counsel and Company Secretary

Mr Johannes van Lierop
Executive Director

 

Mr Chris Seabrooke was the Chairman and a member of the Risk Committee until his resignation from the Committee on 31 August 2016.