RISK MANAGEMENT

ROLES, RESPONSIBILITIES AND REPORTING

The Board is accountable for risk management in AECI. It is assisted by the Risk Committee which provides the Board with assurance that an effective and measurable risk management process is in place.

The AECI Executive Committee is committed to the effective and efficient implementation of the risk management plan. The Risk Management function has a duty to report on risk-related issues to the Board and the AECI Executive Committee timeously and accurately so that such risks can be mitigated and properly managed. Reporting includes the following:

SUGGESTED AND AGREED CORRECTIVE ACTION, RISK RESPONSES/ACTION PLANS, AND TIMELINES TO MITIGATE RISKS;

HIGHLIGHTING UPWARD/DOWNWARD MOVEMENTS IN TRENDING CHANGES PER QUARTER, AND THE REASONS FOR THESE;

HIGHLIGHTING ANY LOSS EVENTS FOR EACH QUARTER;

THE STATUS OF COMPLIANCE WITH THE RISK MANAGEMENT FRAMEWORK IN AECI AND ITS INDIVIDUAL BUSINESSES;

UPDATES ON KEY RISK MANAGEMENT PROJECTS; AND

SCANS OF THE EXTERNAL ENVIRONMENT FOR RISK-RELATED ISSUES THAT MAY HAVE AN IMPACT ON THE BUSINESS.

The management of risk is integral to generating sustainable shareholder value and enhancing stakeholders’ interests. Risk management, therefore, is embedded in the Group’s BIGGER values and culture, and is driven by the Board’s mandate, leadership and commitment.

By understanding and properly managing its risks, the Group can provide greater certainty and security for employees, customers, suppliers and other stakeholders. Furthermore the organisation is better informed, leading to it being more decisive and able to move with confidence towards the achievement of its goals. The close alignment of risk management and strategic decision-making, with an appropriate balance between risk and reward, assists in minimising downside risks and capitalising on opportunities.

Given the size and complexity of the Group, it is acknowledged that it will always be exposed to a level of risk. To mitigate this, management has designed and implemented a continuous process to identify, assess, manage, monitor and report on significant risks faced by individual businesses and by the Group as a whole.

The Group Risk Management policy details the systematic, consistent and professional approach to successful and effective risk management. Underpinning this is the Group Enterprise Risk Management Framework, based on the principles embodied in the International Guideline on Risk Management (ISO 31000) and King III. AECI’s risk management processes are supported by an appropriate software application that has been deployed Group-wide.

Several key risk management enhancements were made to the AECI Enterprise Risk Management Framework during 2014. In 2015 these enhancements were entrenched in all businesses, resulting in a more risk intelligent and resilient organisation. Key points included:

classifying risks according to causational categories (Preventable, Strategic and External);
introducing a risk delegation of authority within the AECI Risk Matrix;
revising risk appetite, tolerance and risk rating scales;
introducing new country risk management components that will enhance high-level analysis and reporting; and
upgrading certain elements of the risk management software so as to capture the risk methodology enhancements.


EMBEDDING RISK-INTELLIGENCE AND RESILIENCEF

For risk management to be effective, and for the successful implementation of associated processes, the proper context of risks must be established. Important considerations when determining context are outlined in the figure below.

Given the pressures and rapid change of the external environment in which the Group operates, appropriate contextual analysis is crucial for the provision of proactive and informed risk information that supports timeous decision-making and leads to the effective execution of the Group’s strategy. Scanning the external environment involves a multi-dimensional assessment of key elements that shape and are shaped by the Group’s actions.

LEVEL OF RISK MATURITY


A risk maturity assessment was undertaken internally at year-end, using AECI’s adopted Risk Intelligence Maturity Model. The assessment indicated that risk maturity had evolved during 2015, moving up half a level from “semi-integrated and change-driven” towards “intelligent, integrated and optimised”.

AECI ENTERPRISE RISK MANAGEMENT FRAMEWORK
CONTEXTSETTING3AECI ENTERPRISE RISK MANAGEMENT FRAMEWORK

The external context is the external environment in which the entity seeks to achieve its objectives:

P − POLITICAL
E − ECONOMIC
S − SOCIAL
T − TECHNOLOGICAL
L − LEGAL
E − ENVIRONMENTAL

The internal context is the internal environment in which the entity seeks to achieve its objectives:

› GOVERNANCE
› STRUCTURE
› CULTURE
› CAPABILITY
› POLICIES, PROCEDURES, IT SYSTEMS ETC.

The risk management context is where the approach and boundaries are defined and applied to the risk assessment at hand:

› SCOPE AND BOUNDARIES
› DEFINE RISK CRITERIA
› RISK ASSESSMENT METHODOLOGY

AECI’S RISK INTELLIGENCE MATURITY MODEL
AECI’S RISK INTELLIGENCE MATURITY MODEL

BUSINESS ENVIRONMENT ASSESSMENT
BUSINESS ENVIRONMENT ASSESSMENT

 

ON THE BASIS OF ITS INTERNAL RISK ASSESSMENT PROCESS AND THE OUTCOMES OF FEEDBACK FROM STAKEHOLDERS, AECI HAS IDENTIFIED THOSE STRATEGIC UNCERTAINTIES THAT COULD HAVE A DIRECT IMPACT ON ITS ABILITY TO DELIVER ON ITS BUSINESS STRATEGY AND MEET ITS GROWTH OBJECTIVES. THE TABLE BELOW HIGHLIGHTS THE KEY RISKS TO THE GROUP AS A WHOLE.

TOP GROUP-WIDE RISKS

AECI’s risks are classified as being preventable, strategic or external.

PREVENTABLE RISKS are internal to the Group and are controllable. AECI has a low tolerance for taking these risks as they offer no strategic benefit.

STRATEGIC RISKS are both internal and external and entail voluntary risk-taking to generate superior returns in line with the growth strategy. AECI has a moderate tolerance for these risks in the context of the perceived business benefits.

EXTERNAL RISKS exist outside of the Group and are beyond its influence or control. Business resilience strategies are crucial if AECI is to deal appropriately with the consequences should these risks materialise. AECI has a moderate tolerance for this type of risk.

RISK TYPE*   RISK DESCRIPTION   KEY CONTROLS/TREATMENTS
   
         
PREVENTABLE   The management of safety, health and environmental issues, in accordance with the Group’s values, policies and standards.

This is always the highest priority in a Group dominated by explosives and specialty chemicals businesses — from raw material handling to production, to the transport of products, their application and safe disposal at the end of their life cycle.
 
1. Comprehensive safety, health and environmental management systems are in place in all businesses.
2. Effective incident reporting, emergency management and business resumption management.
3. Promoting a culture of excellence and compliance in accordance with AECI’s BIGGER values and world-class standards.

PREVENTABLE
 
The attraction and retention of skilled and diverse human resources.

AECI’s people are key if it is to deliver future growth in line with its stated strategy. It is important that high performers be attracted and retained, even in countries and in disciplines where skills are sometimes scarce. Acquiring certain skills in line with AECI’s employee diversity requirements is also a challenge.
 
1. Succession planning and talent identification and development.
2. Promoting and entrenching the Group’s position as the employer of choice through inter alia several training and development initiatives, remuneration and long-term incentives that reward excellence and provide career advancement opportunities.
3. Implementation of a “back to base” strategy to give employees from other countries the opportunity to experience South Africa and improve their understanding of the way AECI conducts its business.

STRATEGIC
 
Local and international competitor activity in countries and markets where AECI operates, which could have a negative impact on the Group’s growth strategy.
 
1. Continue to offer existing and potential customers value-adding product and service solutions backed by world-class technology and a globally competitive cost base.
2. Maintain an unwavering customer-centric focus.
3. Demonstrate a sustained commitment to BOLD and INNOVATIVE product and service solutions.

EXTERNAL
 
Global commodity price and currency exchange rate fluctuations, leading to higher operational costs and a decline in absolute contribution and margins.
 
1. Implement the Group’s detailed policy (hedging process) on exposure to foreign exchange movements, especially on asset acquisitions.
2. Defend margins.
3. Monitor key commodity prices.
4. Drive the diversification strategy in terms of full product and service offerings and countries of operation.

EXTERNAL
 
Political, economic and regulatory uncertainty, leading to difficulties in establishing or maintaining businesses and product lines in AECI’s chosen markets. Recent challenges include tax reforms and indigenisation programmes in a number of African countries, and socio-political unrest in others.
 
1. Geographic diversification strategy.
2. Acquisition strategy.
3. Ongoing country risk monitoring.
4. Ongoing participation in key industry bodies to ensure input/knowledge of current/future regulatory changes and challenges.
5. Leverage the knowledge and expertise of the Compliance function Group-wide.

EXTERNAL
 
Uncertainty regarding electricity supply in South Africa and in some other African countries, leading to business disruption for AECI and its customers. Similarly, potential supply chain interruptions for water, gas and certain raw materials would also be disruptive.
 
1. AECI’s main manufacturing sites in South Africa are on the National Key Points list that prioritises electricity supply.
2. Develop supply contingency agreements and plans.
3. Review key suppliers’ business continuity plans, as agreed contractually with them.

EXTERNAL
 
Protracted industrial action affecting customers and core business sectors.

Such action is disruptive and has a negative impact not only on AECI but also on the economy, investor confidence, the industries affected, and the people employed in those industries and businesses.
 
1. Ensure that contingency plans are in place.
2. Industry context monitoring.
3. Regular liaison with customers and reporting to management regarding trends and industry strikes.
4. Drive the Group’s diversification strategy in terms of geographies of operation and the customer base.

EXTERNAL
 
Extreme weather events and failure to mitigate against/adapt to climate change, leading to drought or flooding, water supply interruptions and reduced agricultural output.

The El Niño weather pattern is having a severe impact on Southern Africa, with many countries facing extended periods of extreme drought conditions.

 
1. Manage inventory levels in line with customer demand.
2. Monitor effects and react appropriately in the circumstances.
3. Pursue resource-saving initiatives in line with AECI’s GOING GREEN value.
4. Diversify geographically.

EXTERNAL
 
Rapid spread of infectious diseases on a global scale, leading to operational and travel disruptions in the countries in which the Group operates. The Ebola virus remains a threat, particularly in West Africa, and the Zika virus has been declared a global emergency by the World Health Organisation.
 
1. Provide up-to-date safety information to AECI employees working in and/or travelling to high risk areas.
2. Continue to monitor developments.
3. Pull back employees if/when the threat arises.

 

 

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