The risk committee is pleased to present its report for the financial year ended 31 March 2016 to the shareholders of TFG.
The TFG Enterprise Risk Management (ERM) framework provides a structured, dynamic and consistent approach to risk management. It is an integrated approach to strategy, risk and performance. The framework is in line with the King Code on Corporate Governance 2009 (King III) and relevant international standards, including ISO 31 000 and the COSO framework.
The ERM framework ensures that emerging risks that could affect the group’s strategy and achievement of objectives are identified and managed in accordance with acceptable risk levels. Identified risks are documented in a risk register and are assessed on the basis of likelihood of occurrence and impact. The group continuously seeks to improve and enhance the risk management process and made progress in developing its risk appetite for managing significant risks that could have a material impact on the business.
The board confirms that the group’s risk management, mitigation and monitoring processes were effective in limiting the potential impact of risks on the business during the period. While the board is ultimately responsible to maintain an effective risk management process, it is assisted by the risk and audit committees.
Information technology governance
An IT steering committee was established, which includes representatives from the various trading and services divisions. The committee meets quarterly and reviews the emerging IT-related risks, disaster recovery plans and other significant initiatives. The risk committee receives feedback on matters discussed and monitors IT initiatives to ensure these do not pose a risk to the continuity of the group’s operations.
The risk committee is updated on all matters of compliance. No fines and/or censures were incurred during this period, and there were no instances of prosecutions of directors or officials for failure to comply with any applicable legislation or codes of conduct.
Risk management process
The TFG risk management process is continuous and is depicted in the diagram below:
Risks are monitored continuously and are discussed formally once a year, with quarterly reviews by the executive management. The risk process includes South Africa, Africa and UK operations.
The audit committee focuses on the financial risks and all other risks are reviewed by the risk committee.
The landscape in which the group operates changed during the year under review. At this stage last year, the country experienced a significant number of power outages. This situation stabilised and, although the group mitigations remain in place, the risk decreased. Recent events led to instability in the economy, which influences available capital and affects consumers. Our consumer have less disposable income and this increases the risk to turnover and debtor delinquencies.
The group has identified the following key risks:
|Enterprise risk||Response and controls|
|Increasing complexity of the South African regulatory environment||The legal and compliance department monitors significant risks and provides the business with updates and training as required. Regular reports are provided to senior management and the audit and risk committees respectively.|
|Introduction of credit legislation hampering ability to increase credit limits and customer base||The group strategy and related initiatives are in place to grow TFG’s account base and the average spend per account.|
|Increasing footprint of the group into other jurisdictions including Africa and those operated by Phase Eight and Whistles||The compliance department was restructured to give advice and support to new territories, including Africa and Phase Eight.|
|Our customer base and average credit spend do not grow sufficiently to support our turnover targets and the competitive advantage of in-house credit is reduced||The group manages its Rewards programme to stimulate cash and credit, and continues to review available credit products with the potential to attract less debt-vulnerable accounts (LSM 8+).|
|Instability of the South African financial market influences available funding and increases cost of capital||Treasury meetings are held monthly to review funding requirements and options. The funding strategy is presented to and reviewed by the board at each meeting.|
|The impact of global financial instability and the effect of fluctuating exchange rates on purchasing power and the ability to remain price competitive||The strategy for purchasing forward cover is reviewed regularly to ensure it remains relevant and provides the best possible protection against currency fluctuations for committed and future orders.|
|Current consumer debt levels inhibit credit and cash sales||The group manages its Rewards programme to stimulate cash and credit, and continues to review available credit products with the potential to attract less debt-vulnerable accounts (LSM 8+).|
|Increase in bad debts and delinquencies||Credit applications are reviewed for fraud indicators and assessed against NCA-compliant internal scorecards, credit bureau scores and verification of employment where necessary. Collection strategies are reviewed regularly with the assistance of internal behavioural and credit bureau scorecards.|
|The weakening economy, increasing cost of living and high level of retrenchments negatively affects TFG’s customers’ purchasing power||The group continually strives to increase accessibility to a broad spectrum of the market by growing its footprint in varied locations. In addition, it continues to refine credit score models for collections and follow-ups to assist customers in maintaining an open-to-buy position.|
|The weakening economy leads to the collapse of key suppliers||The group’s supply chain strategy includes sourcing alternate suppliers and maintaining relationships with relevant government, industry and trade union organisations. This includes building sustainable relationships with local suppliers and the continuous performance measurement and grading of suppliers.|
|Continued high levels of crime (i.e. burglaries and armed robberies but excluding credit fraud) reducing the operating margin||The group subscribes to a culture of zero tolerance and recently appointed a Head of Forensics to coordinate investigation, engage with anti-crime forums, other retailers, mobile providers, industry bodies and South African Police Service (SAPS). Various analytical tools are employed to identify trends. The group has also embarked on the roll-out of a revised and enhanced security strategy.|
|The destruction of head office buildings or distribution centres (including international operations)||Business continuity plans were developed across the group. These plans are reviewed annually.|
|Failure of IT infrastructure||Disaster recovery plans are in place across the group.|
|Power outages’ impact on the stores’ ability to trade||The group continues to monitor Eskom’s announcements to proactively anticipate power outages. Generators were installed at the head office and main warehouses, and selected stores are fitted with phase inverters.|
The group has adopted a zero tolerance approach to fraud, corruption and other forms of crime or dishonesty. Measures were implemented to assist in minimising the number of incidents:
- The board promotes a culture of openness and transparency throughout the organisation in accordance with the group’s values of trust and mutual respect.
- Encourage whistle-blowing through the outsourced Deloitte tip-off anonymous line. A whistle-blowing facility for the reporting of suspected fraud and unethical behaviour has been in place since February 1998. Reports are submitted to the group forensics department for investigation.
- Conduct forensic investigations and recommend corrective action where applicable.
During the year, 141 reports were received (2015: 114). These matters were independently investigated leading to appropriate disciplinary action including dismissals.
Chairman: Risk committee
29 June 2016