risk report

Risk philosophy

The risk philosophy of New Clicks is to strive to create an appropriate balance between risk and reward for the benefit of stakeholders. The directors recognise that certain risks must be taken in pursuing business opportunities, but the group needs to be protected against avoidable risks. Risks encountered in growing revenue and seeking improved returns will always be evaluated and appropriate strategies developed to manage or mitigate the risk.

The group’s medium-term financial objective of achieving a return on equity of 30% to 35% is achievable through a clear focus on sustained organic growth and asset management of the existing businesses within an appropriate level of debt. The directors believe that the pursuit of this goal will not increase the group’s level of risk.

Responsibility for risk management

The group has adopted the risk management principles outlined in the King ll Report. While the board has overall accountability for risk management, the Risk committee assists the board in discharging its responsibilities. Operating under written terms of reference, the Risk committee reports to the board and elevates any risks which it deems necessary for discussion and evaluation by all directors.

The role, functions and composition of the Risk committee are detailed in the Corporate Governance Report.

Identifying risks

A formal process of identifying risks is conducted annually by executive management who are responsible for the identification and management of risks. The process established by management includes evaluating the status of existing major risks, the likelihood of occurrence and the potential impact of the risk on the business. Emerging risks, such as legislative changes, are also identified. This ensures that senior management in each business unit formally review risks and this process is aligned with the business planning cycle.

It is also recognised that in a dynamic business environment new risks and opportunities need to be identified and managed on an ongoing basis.

The major risks and related mitigation strategies are contained in the accompanying table.

Insurance

Insurance forms a key element of the risk management process to protect the group against the adverse consequences of risk. The group recognises that although insurance is a means of mitigating the impact of certain identified risks, management has responsibility to manage these risks with the purpose of limiting their occurrence and their impact. It is the policy of the group to insure assets to replacement value, carry appropriate levels of self-insurance and only contract with reputable insurance companies.

The Risk committee approves the annual insurance renewal, cover levels and the schedule of uninsured and uninsurable risks.

Major group risks

Risk	Implications for business	Management and mitigation of risk
Healthcare legislation	Lack of clarity on the implementation of the dispensing fee for retail pharmacy and logistics fee and benchmark pricing for wholesale distribution has a potential impact on revenue and profitability, as well as creating investor uncertainty	Ongoing engagement with industry stakeholders, including Department of Health Diversification of UPD income base Strong focus on growing volumes in Clicks and UPD and increasing market share
Attraction and retention of pharmacy professionals in Clicks	Shortage of healthcare professionals remains an industry challenge and limits business growth and increases costs	Clicks is being positioned as an employer of choice through Continuous professional development Code of ethical practices Training initiatives with educational bodies, including funding studies for pharmacy students and learners
Attraction and retention of key talent	Inability to attract and retain people in key positions can ultimately compromise service delivery	Increased focus on employee development, performance management and career path planning New short- and long-term incentive schemes introduced
Crime	High levels of crime result in loss of revenue and assets, risk to staff and increased costs relating to crime detection and prevention	Internal control systems regularly reviewed Target high levels of operational compliance Appropriate levels of insurance cover Adopt zero tolerance policy on crime Internal forensic department investigates incidents of crime and fraud Subscribe to Tip-Offs Anonymous
Disruption of distribution and support centres	Incidents including industrial action could result in the disruption of the Clicks and UPD distribution centres and the head office, which could affect supply and service levels to customers	Disaster recovery plans developed and regularly reviewed Management of risk areas in distribution facilities Appropriate levels of insurance cover
Impact of technology on entertainment industry	Musica is exposed to the impact of rapidly changing technology in the entertainment industry which can affect the product offering and profitability. This is both a risk and an opportunity	Shifting business model and product mix to broader entertainment offering Continual review of international developments
HIV/AIDS	The group is exposed to the HIV/AIDS risk through employees and customers. The business is affected by a loss of staff and increasing staff-related costs, as well as a potential decline in the customer base	External assessment and impact study undertaken Employee wellness programme implemented in 2006 HIV/AIDS testing and counselling provided by Clicks clinics
Transformation	Compliance with BEE regulations is fundamental to the sustainability of the business	Transformation strategy developed with defined three-year targets Targets integrated into operational plans for all business units
Damage to reputation	An event or management action could compromise the group’s reputation and result in a loss of confidence by shareholders, customers and staff, with adverse financial implications	Policies to ensure operational and professional compliance Crisis communications plan developed Appropriate levels of insurance cover
Financial risk	Failure to manage financial risks could impact negatively on profitability and ultimately lead to the destruction of shareholder value	The group has a comprehensive financial risk management policy covering treasury, foreign exchange, credit and interest rate risk. Details are included in note 29 of the annual financial statements.