Risk management

Grindrod’s risk philosophy recognises that effective risk management is central to maintaining and improving a competitive advantage while adapting to changes in the business environment. Grindrod adopts a holistic approach to managing uncertainty, representing both risk and opportunity. The aim is to establish the acceptable level of risk in each area of business, which should be as low as reasonably practical, while taking full advantage of the highest returns possible to maximise shareholder wealth. In all risk management activities, compliance with the King III Code on Corporate Governance in South Africa is a fundamental principle. This report sets out the application of the King III principles as they relate to the governance of risks or explains where the code has not yet been applied.

Grindrod’s board retains ultimate responsibility for the governance of risk and ensuring that risks are adequately identified, calculated, monitored and managed. The updated group risk management policy sets out Grindrod’s risk management structure, the risk management framework, the standards and methodology used, risk management guidelines and details of the assurance and review of the risk management process as recommended by King III.

In addition to the quarterly assessments of risk at board meetings, a separate annual meeting of the board is held which focuses on the review of the group risk management process and approves the group risk management plan for the following year. The board and management reviews and assesses levels of risk tolerance and/or risk appetite specific to particular risks on an ongoing basis. While Grindrod has an effective risk management process, the board recognises that risk management is an ongoing process which requires continuous improvement in order to evolve, commensurate with the development and growth of the group’s activities. Accordingly, the 2011 risk plan will set out steps to further embed risk management within the culture of the group and in particular at every level an operation within the group.

Executive and operational management are accountable to the board for designing, implementing and monitoring the process of risk management and integrating it into the day-to-day activities of the group.

Risk reviews are facilitated at all subsidiary and joint venture companies. Risks are prioritised and ranked in risk registers to focus responses and interventions by management.

The group’s risk management framework governs the risk management process of risks inherent to the group, being:

•	Strategic;
•	Market;
•	Financial;
•	Operational;
•	Legal; and
•	Organisational.

The risk management processes followed are based on the ISO 31000 Standard for Risk Management.

Independent, objective assurance on the effectiveness of the risk management process is to be provided to Grindrod’s board by internal audit and Grindrod’s audit committee.

Business continuity management

Existing business continuity management (BCM) practises across the group are currently being enhanced. As the first stage in this process, Grindrod recently commissioned an external current state assessment of BCM activities and plans across the group.

Overview of key risks

There were no undue, unexpected or unusual risks taken during the period of review.

The following risks are identified as significant to the group:

Risk type

Management of risk

STRATEGIC RISK

–	understanding the markets the group operates in, sectorally and geographically;
–	obtaining adequate information about the market situation and the market cycle;
–	combined “through the cycle” experience within its executive and management team;
–	using an established supporting expertise base including financiers, insurers, agents, brokers and legal advisors;
–	operating within set financial limits, approval framework and board review; and
–	adherence to the group investment policy which ensures that all due diligence processes are fully followed for any acquisitions or projects.

MARKET RISK

Substantial decline in world shipping markets


–	management continually assesses shipping markets utilising their own experience and detailed research;
–	risks are managed through careful timing of fixed charters, timing of entry into markets, diversification of risk and a solid contract base; and
–	the board has set risk measurement benchmarks and the group’s risk model reflecting the exposure to shipping risk is updated quarterly. An annual review of the model’s assumptions and the benchmarks is also carried out.

Exposure to commodity price fluctuations

–	substantially all purchase and sales contracts are fully matched back-to-back trades; and
–	a commodity position trading policy is in place which includes a value at risk measurement of all open positions, stress testing and stop losses.

Counterparty/credit risk

–	a counterparty risk management policy is in place;
–	charter and contract counterparties are thoroughly investigated and third party advice is obtained to ensure that only reputable charterers are contracted;
–	regular monitoring of all counterparties in order to assess their ability to perform on contracts;
–	internal controls include a thorough credit approval process with regular management review;
–	debtors are reviewed monthly by management;
–	selective use of credit guarantee insurance;
–	operating within set financial limits;
–	significant exposures require board approval; and
–	the effectiveness of controls is assessed through the group’s internal audit process.

FINANCIAL RISK

Exchange/interest rate risk


–	the group’s exchange and interest rate policy is approved by the board;
–	a detailed review of the group’s foreign exchange and interest rate exposure is reviewed quarterly by the board and on a ongoing basis by management and;
–	the Rand/US Dollar exchange rate significantly impacts on the group’s results, however, it is not the group’s policy to hedge US Dollar operating cash flows generated by US Dollar-denominated businesses.

Risk of non-compliance with loan covenants

–	loan covenants are continually reviewed to ensure that current loans are well within loan covenant ratios.

Fraud risk

–	fraud risk factors and internal controls are regularly reviewed and assessed through the group’s risk management and internal audit process;
–	the fraud risk management strategy is continuously reviewed and updated;
–	the group fraud and corruption prevention policy and the fraud response plan ensure formal reporting and feedback; and
–	Grindrod subscribes to Tip-Offs Anonymous, the confidential whistle-blowing hotline service operated by Deloitte. During the year, 38 reports were received via this hotline. Incidents reported were procurement irregularities, misuse of assets, unauthorised expenditure and unacceptable employee behaviours. A substantial portion of these reports were unsubstantiated, however, perpetrators received appropriate sanctions and where necessary controls improved.

Funding risk

–	the group has a detailed funding plan and liquidity gap analysis in order to facilitate adequate funding for its expansion programme and to ensure that the group’s funding is at levels that result in an efficient cost of capital, while maintaining an acceptable level of risk; and
–	the forecast group liquidity position shows there is no cumulative liquidity gap over a five-year period. This scenario assumes forecast profits are achieved and takes into account dividend payments, capital commitments and committed facilities currently in place.

OPERATIONAL RISK

Financial claims from contractual exposures


–	internal controls are in place to minimise claims for damages in respect of cargo claims and third party negligence; and
–	insurance cover is in place in the event that a claim arises.

Loss or breakdown of key assets

–	management plays a key role in ensuring that adequate insurance cover is held for all key assets;
–	where necessary, such insurance has been extended to business interruption cover; and
–	management also ensures that strategic spare parts for equipment are held in storage and that high maintenance standards are upheld.

Significant off-hire or loss of a ship

–	the exposure to loss of charter income or revenue as the result of significant off-hire or loss of a ship is proactively managed by ensuring that high maintenance and safety standards are complied with and by using competent brokers and standard charterparty agreements;
–	provision is also made in the budget process for possible off-hire to minimise the effect of any lost charter income on the group’s results;
–	lost income as a result of the loss of an owned ship is not insured, but would generally be recovered as owned ships are insured in excess of replacement values; and
–	insurance is in place to cover the value of ships on charter for which the group holds purchase options and newbuildings under construction.

Piracy

–	the Shipping division is continually updated as to incidents of piracy and high risk trading areas;
–	loss of hire insurance;
–	existing insurance covers are sufficient in the event of a vessel and/or crew being hijacked and held for ransom;
–	a risk mitigation strategy is in place to reduce the risk of attacks by pirates;
–	vessels are required to join the transit regime and in doing so have to register with the Maritime Security Centre (Horn of Africa) and lodge their passage plan a number of days prior to entry; and
–	defensive measures employed on board are all passive measures and Grindrod does not enlist armed “private” escorts (on board or in convoy).

Newbuildings risk

–	experience and third party expertise;
–	the selection of shipbuilders, considering quality versus cost;
–	instalments are covered by refund guarantees although there are country risks that banks may not honour the refund guarantees and there may be difficulties in legally enforcing the refund guarantees. In addition, refund guarantees may expire before contracts are expired; and
–	warranties, once the ship has been completed and the final instalment paid, which is usually for a year.

Falling demand for commodities

–	this is managed through the use of take or pay agreements and minimum throughput guarantees.

Inadequate infrastructure risk

–	this can be managed in the long-term by promoting public-private partnerships (PPPs) in the port, terminal and rail sectors.

Environmental, climate change and health and safety risks

–	the application of high level safety standards and use of modern, high-specification ships greatly reduces the risk of oil pollution;
–	environmental cover is insured under P&I policies and oil pollution has coverage of up to US$1 billion per vessel per incident;
–	all environmental management efforts within group subsidiaries are guided by the board approved group-wide environmental policy. A more detailed review of the management of environmental risk is set out in the environmental performance section;
–	the board monitors compliance with the environmental policy through bi-annual quality, health, safety, security and environmental reports;
–	subsidiary companies are required to formulate key environmental objectives with achievable targets and to report on performance against these targets for the year;
–	climate change risk is managed through the group environmental and climate change committee. A more detailed review of the management of climate change risk is set out in the environmental performance section;
–	occupational health and safety is managed in terms of ship-based or site-level integrated safety, health, environment and quality (SHEQ) management systems and site level health and safety committees;
–	senior employees in the company are required to ensure that all legal requirements are complied with and this forms part of their personal assessment;
–	major contractors (e.g. shipyards) are audited in terms of SHE performance on an ongoing basis;
–	all serious incidents are reported to the board and dealt with in the most serious light, with full investigations conducted and appropriate remedial action taken in all cases; and
–	further health and safety initiatives undertaken during 2010 are detailed in the occupational health and safety section of this report.

LEGAL RISK

–	operating companies rely on service providers such as auditors and attorneys as well as trade associations and classification societies to keep them abreast of any significant changes in legislation; and
–	tax legislation and the numerous changes are regularly reviewed to ensure the group is in compliance with all relevant tax legislation. In addition, a detailed tax compliance review is carried out on a regular basis by internal audit.

ORGANISATIONAL RISK

Loss of key staff


–	this risk is managed by ensuring competitive remuneration packages and longterm incentives, a progressive work environment, career growth opportunities and succession planning.

Industrial action

–	this is managed by following the appropriate human resources and industrial relations procedures and encouraging a culture of open communication within the group. Further detail is set out in the labour relations section of the social performance report.

Information technology systems failure

–	centralised IT systems are backed up with a disaster recovery plan, while the group’s wide area network communications platform is serviced by a fully backed up, outsourced virtual private network (VPN);
–	the group invests in appropriate computer technology to ensure that business units improve efficiencies and remain globally competitive;
–	the targeted technology refresh cycle is between three to five years, thus avoiding the accumulation of legacy systems throughout the group; and
–	the information technology governance principles set out by the King III Code on Corporate Governance are addressed in the information technology section of this report.

RISKS RELATING TO FINANCIAL SERVICES

–	Grindrod Bank has a separate risk committee as required by the Banks Act, which has the responsibility to manage the risks facing the Bank. These include credit, liquidity, operational, market, compliance, reputational and insurance related risks; and
–	a risk committee charter is in place which defines the role, objectives, responsibilities, duties and authority of the risk committee of the Bank.