Risk review

The board, supported by the risk committee, is responsible for risk governance to support the setting and achieving of strategic objectives. More information on risk governance and the group’s risk management framework and process is included in the corporate governance section of this integrated annual report.

Key risk areas

The table below outlines the current key risk areas that have a material impact on Grindrod’s ability to create value together with their risk ratings. These have been identified as part of the enterprise-wide risk identification and management system.

Key risk area Current risk rating Rating reported in 2016   Section
Commodity exposure   B B   Commodity exposure
Global shipping markets   B A   Global shipping markets
SHERQ   B C   SHERQ
Political and sovereign   B A   Political and sovereign
Liquidity   B C   Liquidity
Loss of key management staff   C B   Loss of key management staff
Supplier/partner concentration   C B   Supplier/partner concentration
Empowerment/B-BBEE   C B   Empowerment/B-BBEE
Strategy implementation   D Not reported   Strategy implementation
Business reputation   E D   Business reputation
Investment risk   E D   Investment risk

Residual risk heat maps

Risk management

Risk management is embedded, within an approved and group-wide applied framework, in business operations and decision-making processes across the group.

Risk-management processes are designed based on the ISO 31000 standard for risk management, to identify, quantify, prioritise, respond to and monitor the consequences of an agreed risk schedule that encompasses both internal and external risks.

Risk-management measures are aimed at countering significant economic, social and environmental business risks within the context of the six capitals of value creation in conjunction with identifying related business opportunities which could undermine or favourably influence the achievement of business objectives.

Management is accountable for the design and implementation of the systems and processes underpinning risk management and for monitoring and reporting to the board. Risk-management measures include accountability for risk management as a key performance area of line managers.

The group risk management function performs its duties in terms of the risk-management framework and a formalised risk-management plan. The function engages with management across all operations to identify key risks and monitor the processes and plans to manage them. Key risks are consolidated into key risk areas and evaluated based on their potential impact and probability in terms of the likelihood of occurrence and managed within board-approved risk appetite and tolerance limits. Comprehensive reporting provides a basis for the monitoring and review by the appropriate sub-committees of the board and the board at its quarterly meetings.

The effectiveness of risk-management efforts is assessed in terms of the group’s King IV-aligned combined assurance model, providing five levels of assurance:

Roles and responsibilities

In 2017 the risk-management framework was revised, which revision included enhanced oversight through assigning specific risks to relevant board sub-committees. This provides a basis for:

  • Enhancing strategic planning through the identification of risks that may pose threats to Grindrod’s strategic objectives and opportunities that may strengthen the prospects of Grindrod achieving its strategic objectives.
  • Encouraging a proactive approach to issues likely to negatively and positively impact Grindrod’s ability to achieve its strategic objectives.
  • Improving the quality of decision-making by providing structured methods for the exploration of risks and opportunities, and allocating resources.
  • Supporting consistent behaviours and decision-making with respect to risks and opportunities across the group.
  • Facilitating more robust risk assessment by identifying recurring/strong themes and developing a comprehensive understanding of causes, effects and consequence, leading to a complete risk response.
Role Responsibility
Board Retains the ultimate responsibility for risk governance, including compliance and performance-related aspects, and for determining the appropriate level of risk that Grindrod is willing to accept and opportunities it is willing to pursue in relation to the achievement of strategic business objectives.
Risk committee Assists the board in carrying out its risk-governance responsibilities.
Audit committee Ensures the integrity of internal financial controls and identifies and manages financial risks.
Social and ethics committee Assists the board in discharging its corporate governance responsibilities relating to sustainable development, good corporate citizenship, ethics, the environment, health and public safety, legal compliance, stakeholder relations, labour and employment.
Nomination committee Reviews the skills and experience base and performance of the board and its committees, oversees executive management succession planning to promote business continuity and oversees the selection processes for appointments to the board.
Executive management Designs, implements and monitors integrated risk-management processes and encourages a risk-conscious business culture by embedding agreed internal controls and mitigating actions through all levels of management and supervisory staff.
Divisional executives Develop and implement risk-management systems and processes within their divisions.
Group risk management Co-ordinates risk-management activities throughout the group and continually reviews the system and process of risk management against accepted standards and best practices.
Employees Report on risks and opportunities they become aware of.
Internal audit Performs an objective assessment of the effectiveness of risk governance.

RISK 1 – Commodity exposure

Description

Grindrod is exposed to the risk of cyclical commodity demand and prices, which result in volatility of its earnings and asset utilisation.

Current risk rating Exposure
High

Reason for movement in exposure

Good progress has been made in engaging with mineral commodity customers to address the cost of the supply chain and to ensure continuity of supply.

Potential impacts

  • Volatile earnings and returns on investments in infrastructural assets.
  • Impact on enterprise and stakeholder value.

Risk mitigation

  • Improve capacity utilisation through commodity, customer and geographic diversification.
  • Include commodity-price participation clauses in contracts to benefit from commodity price upsides.
  • Engage major customers and suppliers to optimise logistics solutions and align objectives to mutually beneficial levels.
  • Continuously reconfigure infrastructural assets to be able to manage improved volumes more efficiently.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 2 – Global shipping markets

Description

Grindrod is exposed to volatility in the market sectors in which the Shipping division operates. Charter rates are influenced by global seaborne trade growth against net increases in the shipping fleet. Prolonged periods of weakness in global shipping markets adversely influence revenue streams and the return on assets.

Current risk rating Exposure
High

Reason for movement in exposure

During 2017 dry-bulk shipping rates improved considerably and stability in the global fleet capacity is anticipated with a reduction in the delivery of forward-ordered newbuilds and continued increase in demand for seaborne cargo.

Potential impacts

  • Below-budgeted income, with resultant liquidity and loss-making consequences.
  • Failure to achieve acceptable returns on shipping assets.

Risk mitigation

  • Measure long-term exposure to charter and spot markets utilising established and annually reviewed robust risk and liquidity models.
  • Monitor shipping market dynamics on a continuous basis.
  • Optimise market penetration through charter and pooling arrangements.
  • Manage fleet efficiency in terms of cost and returns through a structured fleet-replacement programme.
  • Renegotiate funding terms and covenants when required.
  • Taking cargo and contract cover at opportune times in the market.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 3 – SHERQ

Description

Grindrod operates in an environment that exposes its employees, other stakeholders and the environment to potential risks. The group’s governance framework supports a safe and secure working environment, minimises negative impacts on the environment and communities, provides goods and services that meet appropriate quality requirements and complies with relevant legislation, regulations and voluntary adopted frameworks.

Current risk rating Exposure
High

Reason for movement in exposure

Two fatalities occurred within the Freight Services division during the year. During the previous year shipping reported one fatality.

Potential impacts

  • Fatalities and injuries.
  • Significant environmental events.
  • Reputational damage.
  • Reduced enterprise and stakeholder value.

Risk mitigation

  • Drive compliance to SHERQ and sustainability policies.
  • Monitor SHERQ through transparent structures which include the group SHERQ management committee and the social and ethics board sub-committee.
  • Implement SHERQ and legal-compliance KPIs at senior employee levels.
  • Develop integrated ISO management systems and a rigorous procedure for incident reporting, investigation and remedial-action.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 4 – Political and sovereign

Description

Grindrod operates in countries where political decisions, conditions or events, as well as foreign-exchange-related decisions or changes, may affect the viability or value of its business.

Current risk rating Exposure
High

Reason for movement in exposure

Whilst at an early stage, there has been improvement in the political climate in both Mozambique and South Africa.

Potential impacts

  • Operational disruption caused by political turmoil.
  • Value erosion as a result of credit-rating downgrades in countries in which the business operates.
  • Expropriation of assets or concessions.

Risk mitigation

  • Perform thorough country and investment assessment aligned with the group investment policy prior to board approval of investments.
  • Insure political risk where appropriate.
  • Engage collaboratively and consultatively with regional governments and communities.
  • Invest in meaningful social upliftment initiatives.
  • Partner with local businesses that are knowledgeable, reputable and follow the Grindrod investment philosophy.
  • Maintain a centralised treasury hub to minimise foreign exchange risks multi-currency operations.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 5 – Liquidity

Description

Grindrod’s ability to meet the funding requirements for operations, projects and acquisitions may be negatively affected by restricted liquidity.

Current risk rating Exposure
High

Reason for movement in exposure

The business generated cash in the past year and gearing remains low. During the preparation for the Spin-off of the Shipping division, the various funders were engaged to ensure the two remaining businesses’ funding requirements are in place.

Potential impacts

  • The inability to fund and execute strategic acquisitions and projects.
  • A request to repay existing facilities.
  • Cost and risk implications in the case of funding-term mismatches.

Risk mitigation

  • Manage businesses to continue generating cash from operations.
  • Drive working-capital management to ensure optimal stocks, minimal work-in-progress and timely customer collections.
  • Maintain an optimal balance between equity and debt funding and committed and uncommitted bank facilities.
  • Renegotiate funding terms and covenants when required.
  • Each business should meet its applicable debt covenants.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 6 – Loss of key management staff

Description

Grindrod’s reputation as a preferred provider hinges on the skills and experience of key management staff, the loss of which could jeopardise continuity of the business and its reputation.

Current risk rating Exposure
Medium

Reason for movement in exposure

Increased risk during the year due to group restructure was adequately managed resulting in no change in exposure.

Potential impacts

  • Business stability and continuity in the implementation of the business strategy.
  • Reduced enterprise and stakeholder value.

Risk mitigation

  • Engage with key managers on the group’s vision and future direction.
  • Clearly communicate the strategy, key focus areas and status of the group.
  • Implement targeted retention strategies for key members of the senior and executive management teams.
  • Prioritise talent-management and performance-development initiatives.
  • Implement succession planning for top executives and monitor at board level.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 7 – Supplier/partner concentration

Description

Grindrod operations that rely on agreements with suppliers and partners to optimise infrastructure utilisation and business outcomes could be jeopardised by a distortion in sustainable income in the case of a default.

Current risk rating Exposure
Medium

Reason for movement in exposure

Relationships with key suppliers and partners continue at a good level, with the improvement in the economy assisting with engagements.

Potential impacts

  • A loss of sustainable income if a crucial supplier or partner defaults on an agreement.
  • Reduced enterprise and stakeholder value.

Risk mitigation

  • Engage constructively with relevant suppliers and partners at strategic and operational levels to ensure mutual commitment to unlock the potential of infrastructural assets.
  • Continuously assess concentration risk against established risk models.

Risk governance matrix

Resources impacted

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 8 – Empowerment/B-BBEE

Description

Grindrod is exposed to increasing empowerment and transformation compliance requirements, at legislative and industry-charter levels, in the southern African countries in which it operates. Adequately addressing these requirements is integral to retaining and growing the group’s position as a preferred service provider, whilst also contributing to a structured and transformed economy that enables meaningful participation by the majority of citizens.

Current risk rating Exposure
Medium

Reason for movement in exposure

In South Africa, compliance receives priority but risk from legislative changes and group changes will increase. Grindrod continuously monitors developments in other Southern African countries to ensure compliance.

Potential impacts

  • Loss of existing client business.
  • Failure to secure new business to drive organic growth.
  • Fines imposed due to non-compliance.
  • Reputational damage.
  • Reduced enterprise and stakeholder value.

Risk mitigation

  • Drive transformation and equity compliance across the group.
  • Investigate and secure partnerships with like-minded B-BBEE companies through shareholding at group level or partnerships at operational level.
  • Focus on demographically aligned human-capital development and supply-chain management initiatives.
  • Mitigate country-specific risks through compliance with local legislation, regulations and other mandatory requirements.
  • Focus on stakeholder engagement.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 9 – Strategy implementation

Description

Grindrod’s share price has continued to trade at a substantial discount to the underlying asset value. The group’s ability to unlock shareholder value can be adversely influenced by factors that are integral to the implementation of key strategies to promote future growth of continuing operations.

Current risk rating Exposure
Medium N/A

Reason for movement in exposure

This risk was identified during the Spin-off of the Shipping division and included in the risk register for the first time during the year.

Potential impacts

  • Failure to adequately effect the Spin-off of Shipping into a separately listed company.
  • The inability to successfully implement key strategies to achieve organic and inorganic growth in continuing operations.
  • Reduced enterprise and stakeholder value.

Risk mitigation

  • Intensify board participation and key executive focus to meet the requirements and processes for successful Spin-off.
  • Implement targeted retention strategies to address the unique needs of executive and key senior managers.
  • Focus on stakeholder engagement.
  • Appoint independent specialist advisors to facilitate compliant and efficient strategy execution and optimise value-add after Spin-off.
  • Develop a focussed strategy to optimise value-add at divisional level post-Spin-off in conjunction with the disposal of non-core assets.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 10 – Business reputation

Description

Grindrod’s tangible and intangible asset base has supported the establishment of its brand and global recognition as a reputable integrated logistics service provider. Events that impact negatively on the group’s resources could tarnish the market perception of Grindrod as a responsible corporate citizen.

Current risk rating Exposure
Medium

Reason for movement in exposure

Good progress has been made addressing the risk. Grindrod received indirect negative publicity in respect of its role in the SASSA payment process. Grindrod continues to perform its specific role to the best of its ability and in terms of the agreed mandate.

Potential impacts

  • Litigation and/or claims from customers.
  • Loss of key personnel and associated intellectual capital.
  • Fines from regulators.
  • Loss of competitive advantage.
  • Reduced enterprise and stakeholder value.

Risk mitigation

  • Enforce sound governance structures to prevent adverse situations as a result of inadequate management and operational controls.
  • Formalise a reputational risk management strategy.
  • Focus on stakeholder engagement.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers:

RISK 11 – Investment risk

Description

Grindrod invests in large, long-term projects and assets in terms of a board-approved investment policy. Flawed investment decisions may impact negatively on business sustainability.

Current risk rating Exposure
Medium

Reason for movement in exposure

Successful mitigation and management of the risk resulted in no movement in the exposure to the company.

Potential impacts

  • Value erosion through lower returns, reduced cashflows and a depreciating share price.

Risk mitigation

  • Consider capital investment opportunities within the context of the six capitals of value creation in accordance with the Grindrod investment policy and in terms of the limits of authority framework.
  • Obtain input from the investment committee to challenge the risk parameters and ensure that no opportunity is overlooked.

Resources impacted

Risk governance matrix

The board and the risk committee are, in addition to engagement with the executive management and group risk-management function, supported in their risk-governance responsibilities by board sub-committees and internal and external assurance providers: