| Risk management
The need to assess risks and the consequences they may have for our business strategy is an item that is continually on senior and executive management agendas. This is no guarantee, however, that things will turn out as expected. Indeed economic conditions can change so quickly and the markets are so volatile that assessing the possible consequences remains challenging. One of the principles that we always sought to abide by is to have a conservative financing structure, with sufficient buffers to enable us to withstand difficult periods. If something unimaginable happens, we will then normally have sufficient resources at our disposal in the form of an extremely healthy balance sheet and committed banking facilities to enable us to deal with that unimaginable event.
Risk management and control systems
In 2008 we appointed a special officer to focus solely on our administrative organisation and internal control, alongside the departments that remain responsible for these processes. ‘To measure is to know’ is a key principle of risk management. If you know what is happening, you can amend your policies accordingly. And our central data warehouse, where practically all our operating and financial data are recorded, is of great benefit to us in this respect. All our business units are or are being integrated into the group’s central information and control system. In 2008 we once again devoted huge amounts of time and energy to integrating the whole administration and management of the EM-TÉ activities into the system, following the substantial efforts undertaken in 2007. We have based our work in this respect on the proven ‘in control’ approach used in Sligro’s cash-and-carry outlets, where the administrative systems are similarly structured. We expect to have all these systems operating in line with our quality standards in 2009.
With the exception of Inversco, all our related back-office activities, including finance, are carried out at the head office. Indirect supervision of our business activities is consequently limited. Most of our processes are supervised and recorded directly in specialised central departments. And this, in combination with our use of ICT systems, ensures efficiency.
This is the basis for assessing the proper operation of our internal risk management system and associated internal controls, as seen in the finance department’s monitoring of the overall cash and goods flows and their interrelationships. This monitoring means we can be sure that our sales are properly and correctly recorded and generate the correct incoming cash flows. It also means we can be assured that outgoing payments to suppliers are correct.
As Sligro Food Group operates from many different locations, we also make intensive use of internal benchmarking. In this way our management information supports our internal controls and vice versa. Overall controls identify possible gaps in internal controls associated with the informal and entrepreneurial nature of the business culture that has contributed over the years to the commercial success of Sligro Food Group. These processes are, of course, continually evolving, with acquisitions usually prompting changes.
As well as our own internal checks, the external auditors also examine the operation of the administrative and internal control structures as part of their audit of the financial statements.The auditors’ findings are discussed with the Executive Board, and also in a meeting with the Supervisory Board that is not attended by the Executive Board.
As a result of the centralised approach and very close management and monitoring of business activities by the Executive Board and head-office staff, Sligro Food Group is rarely faced by administrative ‘surprises’ in its activities using the central information systems. Regular reporting has been shown to provide reliable information on business performance. There is no need for any significant changes other than those resulting from the integration of newly acquired businesses. We regard improving the reliability of our management information as an ongoing process.
Based on the above summary, we believe that our internal risk management and control systems provide a reasonable degree of certainty that the financial statements do not contain any material misstatements and that these systems functioned properly during the year under review, as stated in the directors’ statement of responsibilities on page 57. We have no indications to suggest that the systems will not function properly during the current financial year
We view the following as the most critical risks in our activities.
Despite all the precautions taken and due diligence procedures completed beforehand, there is still a greater degree of risk involved in growth through acquisitions than in organic growth, as shown by the many mergers and acquisitions that fail to meet objectives. Risks arise both before and during the acquisition process, but also and primarily in the post-acquisition phase. Cultural differences, employees with differing agendas, problems in integrating ICT systems and so on can all destroy substantial amounts of value. Rather than bringing in people from outside, Sligro Food Group has a policy of immediately setting up a multidisciplinary integration team comprising people from its own ranks and from the business that has been taken over, and this approach has proved effective in dealing with many of these risks.
- ICT systems
Properly functioning ICT systems are the lifeblood of our business in the same way, for example, as electricity is. Managing the risks in these systems involves far more than simply safeguarding the continuity of data processing. It also means protecting the integrity of data and software and the associated decision-making process. The multitude of customers, products, locations, suppliers and their mutual interdependencies mean this is a complex process. At the same time, however, these systems can also create a clear competitive advantage. Systems failing to work or not operating well can threaten the continuity of the whole business within a relatively short period of time. In 2008 we invested substantial amounts in optimising various ICT tools, including the continuity matrix, test tools and a second data back-up centre, and we will continue investing significant amounts in 2009.
Government measures can sometimes have a major impact on our activities and result in threats to some activities within a relatively short space of time. Environmental measures in particular can have a significant impact on activities, and this is not always beneficial to the environment. Political decisionmaking is sometimes highly unpredictable, as evidenced, for example, by decisions taken on staff Christmas hampers, the anti-smoking policy in bars and restaurants and the packaging tax. Intervention by regulators can also have a serious impact on operating processes.
- Financial markets
In 2008, we once again saw the far-reaching effects that developments in the financial markets can have on business activities. Scenarios that had previously seemed unthinkable suddenly became reality, while instruments designed to hedge risks no longer proved effective because of doubts about counterparty creditworthiness. Suddenly a solidly funded pension fund turned out to be less solid, despite sound academic studies, while some parties have found it nigh on impossible to refinance their borrowing facilities.
Risk management as explained in the 2008 Annual Report on pages 100 to 104. Click here
for the risk review in pdf.