Clover’s risk universe

Clover determined the Group’s material inherent risks in achieving strategic short-, medium- and long-term value creation goals in the context of the Six Capitals. The management risk committee consisting of senior management and executives regularly reviews the risk management process to improve identification, assessment and monitoring of risk to ensure Clover responds timeously in a continuously changing business environment.

Capital	Principal risk	Context	Mitigating actions
Intellectual capital	Inability to recover above-inflation input costs negatively impacting sales volumes and prices	The prolonged drought and rand volatility resulted in above-inflation input costs which could not be recovered through revenue price increases as consumer sentiment was subdued and competitor pricing aggressive. Clover’s price increases during April 2017 and a comparatively wetter and cooler summer negatively impacted sales volumes. Furthermore, the proposed sugar tax on beverages expected to be implemented during the latter part of 2017 may place further pressure on Clover’s profit margin.	Clover is actively participating in promotional activity to stimulate volume growth and market shares, improving product profitability. Management is driving cost efficiencies through optimisation initiatives. Price premiums are monitored closely to ensure minimal impact on volumes. System readiness assessments to be performed following publication of draft Health Promotion Levy on sugar is published. Expected to be levied similar to existing excise duties.
Financial capital	Financial underperformance against market expectations compared to its peer group constraining share price leading to higher cost of capital	The market compares Clover’s financial performance against those of diversified branded FMCG companies, as opposed to the performance of food producers per se. Price and volume pressure have constrained Clover in reaching its growth targets, with lower profit attributable to shareholders. Clover needs to maintain its attributable profit base, as a risk of not doing so would make its operating model questionable which could lead to structural changes that may necessitate a business model change	Deliver against profit forecasts by stimulating volume growth and market share as described in Intellectual Capital above Manage expenditure and ensure that capital expenditure incurred render projected returns as stated in each business case. Extensive cost saving initiatives have been implemented for the new budget year to June 2018 Cost savings to be driven through optimisation initiatives Gearing managed optimally
Human capital	Unstable labour environment with increased pressure on labour costs	Due to the perishable nature of our products, industrial action can potentially severely impact revenue generation and the supply chain Wage negotiations negatively impacted by demands from two largest unions vying for members	Communication channels with labour are being enhanced to address business risks. Business continuity plans have been updated to mitigate potential industrial action. Arbitration channels employed to amicably settle wage disputes
Manufactured capital	The protracted drought and rising input costs continued to place pressure on producers, impacting viability of primary industry	Clover increased the price it pays for raw milk to ensure sustainability of the primary industry Limited growth opportunities for producers Ingredient and concentrates costs substantially increased.	Clover continuously monitors the milk price to feed cost ratio to ensure a market-related price is paid to secure milk supply. New growth markets are being pursued through Clover Fonterra Ingredients (CFI) and our African expansion initiatives. Formation of DFSA to enable farmers participation across the production chain and create further volume growth opportunities
Manufactured capital	Maintenance of excess manufacturing capacity in expectation of volume returns and sub-optimal location of some manufacturing lines impacted ROE	Clover deliberately maintained its rejuvenated high-volume infrastructure as it was unclear if volumes would return, and fixed costs were therefore relatively stable compared to inflation. Following a thorough strategic review of the business environment, and Clover’s internal capacities, it was concluded that the muted environment will be extended for some time and structural changes in Clover's infrastructure have therefore been introduced to balance its supply and demand expectations in future.	Project Sencillo is focusing on opportunities to drive improved efficiencies in Clover’s supply chain with various consolidation considerations. Consolidation is expected to lead to better by-product utilisation as well as increase efficiencies and subsequent cost savings considerably.
Manufactured capital	The release to market of potentially harmful products or products not conforming to specification	Contamination is possible through incorrect use of chemicals, inhibitors, pathogens or other harmful substances and is most often caused by human error, negligence or incompetency.	All South African Clover factories are HACCP certified and accredited by third-party auditors. Accredited systems and processes are in place according to which Clover products are produced in line with international best practices for quality, hygiene and food safety. Clover implemented a programme during the year under review to upgrade all our quality systems to comply with the latest and world-wide accepted FSSC 22000 Quality Management system.
Intellectual capital	Non-compliance with legislation	Non-compliance with legislation could lead to material penalties, fines or imprisonment. Considering the financial impact of transgression and limited ability to enforce and monitor compliance, a material risk remains despite mitigants such as training. The Competition Commission is seeking to step up its actions against anti-competitive behaviour to discourage potential collusion in especially the private sector.	Clover established a Competition Law Policy with continuous compliance monitoring and training of personnel Clover established the Competition Law Centre of Excellence and is supported by Herbert Smith Freehills LLP
Intellectual capital	Retail centralisation leading to a sub-optimal distribution network, with principal income also under pressure	The retail industry is evolving to an average daily rate of sale, whereby future customer orders are based on point of sale data. This allows retailers to take control of ordering and instore planning. As a result, low periodic product sales volumes may cause the retailer to stop ordering a certain non-performing product line. A large retailer has embarked on implementing a process that requires Clover to deliver to its distribution centre only, while all distribution to its stores will henceforth be done by the retailer.	Clover is focussed on enhancing its distribution model to extract efficiencies. Management will continue to identify new principals and alternative distribution opportunities. Expansion opportunities of Clover’s merchandising services is currently being considered as a growth area Clover has embarked on a Section 189 restructuring process, effective from 1 July 2017 to reduce drivers and driver assistants because of retailer centralisation and a general reduction in sales volumes in view of the current economic climate.
Financial capital	Challenges in the global and South African economy impacting Clover's operating environment	Although current statistics suggest a more stable global economic environment, the domestic market remains exposed to policy and political uncertainty, rising interest rates, further Rand weakness, credit rating downgrades and a world-wide trend towards nationalism and protectionism. Domestically, difficult economic conditions are expected to continue for the first half of 2018 with regulatory changes such as sugar tax and expected higher than inflation utility increases impacting consumers further.	Clover places forward cover on foreign exchange needs, where appropriate, but will only gain a short-term benefit should exchange rates remain at weakened levels. Supplier agreements are continuously renegotiated to improve cost efficiencies. Commodity prices are monitored monthly through the CFI trading desk to realise optimal pricing.
Intellectual capital	Cyber security	Ransomware may be uploaded to Clover’s information systems through irregular use, exposing the Company to malicious viruses and the possibility of hijacking for ransom.	Clover IT has implemented a variety of security tools to monitor its infrastructure and activity on the network. These include scans that identify and rate the infrastructure’s external and internal vulnerabilities, enabling Clover to take immediate action should security threats be identified. Clover has a Security Information and Event Management (SIEM) tool used for real-time analysis of security alerts, supported by a comprehensive antivirus system and a firewall that protects against advanced digital threats.

Governance of risk

Effective risk management aligns risk and opportunities to Clover’s vision and mission. Proactive risk management practices ensure governance mechanisms are effective across the value chain, and focusses on both strategic and operational risks, while aligning enterprise-wide risks and opportunities. Growing shareholder value forms the basis of our risk management strategy and allows Clover to take calculated risks in a manner that does not jeopardise the direct interests of stakeholders. Clover’s risk profile stipulates a prudent approach to risks, as shown in decisions on risk tolerance and mitigation.

Clover’s Board assumes full responsibility for the governance of risk through a formal risk management framework. It effects its duties through the Audit and Risk Committee.

To ensure a consistent approach to risk management throughout Clover, the Board annually approves the Enterprise Wide Risk Management (“ERM”) Framework and Policy that defines Clover’s risk-bearing capacity, risk appetite and risk tolerance. This policy and framework incorporates generally accepted risk management practices and the integrated framework on Enterprise Risk Management disseminated by the Committee of Sponsoring Organisations (COSO), while strengthening the link between risk and strategy. The policy and framework is essential to embed risk management into key decision processes of all subsidiaries, support functions, processes, projects and entities controlled by Clover.

Management continues to mature and integrate risk processes into business processes, and risk limits are reviewed annually. This exercise includes setting authorisation thresholds for pursuing strategies within the predetermined levels of risk appetite, as well as setting risk tolerances for operational functions. These risk limits are used to compile the risk impact categorisation table, which is used for measuring and prioritising risks according to the materiality of the risk’s potential impact values.

Management has been charged with the design, implementation and monitoring of Clover’s risk management structures. Each business unit conducts quarterly risk assessments to monitor the efficiency of these structures. Clover records and manages its risk universe on the BarnOwl risk management system, which prioritises material, inherent and residual risks.

The Management Risk Committee meets each quarter to table Clover’s key risks as well as the status of mitigating action plans. Key risks and mitigating actions are reported to the Audit and Risk Committee quarterly. On material inherent risks, dependent on effective control measures in keeping residual risks at acceptable levels, Clover annually revises its combined assurance plan for material risks to gain assurance from internal and/or external identified assurance providers in accordance to the four levels of defence.

In the 2016 financial year, Deloitte was appointed by Clover as part of the internal audit coverage plan to review the maturity and effectiveness of risk management function against Clover’s Enterprise Wide Risk Management Framework and the principles of the King III Code. Deloitte was tasked with providing appropriate recommendations for improving Clover’s risk management policy and processes. Deloitte concluded that management had solidly embedded risk management processes across the organisation to establish a well-defined risk function. Based on its review of risk management in other organisations, Deloitte concluded that Clover is generally more advanced in its risk management processes than comparable organisations. Deloitte has, however, made several recommendations to further embed risk management practices for deeper insights into risks and incidents.

Clover runs ongoing fraud awareness campaigns at branch level across all levels of staff to raise awareness of Clover’s Ethics Policy, the use of the ethics hotline and the fact that all calls to this line are treated confidentially by an independent party. Tip-offs received are actively investigated, followed-up on and resolved. The Board, assisted by the Audit and Risk Committee, are satisfied with the effectiveness of Clover’s risk management function.

Governance of Information Technology (IT)

Information technology is an integral part of the business and fundamental to ongoing operations. In view of the strategic importance of IT, Clover aligned its business reuirements to available IT resources and technology to ensure appropriate IT. Strategy is formulated to improve Clover’s competitiveness for its future sustainability. Clover’s IT department (Clover IT) developed an IT Governance Framework that considers relevant structures and processes for meeting Clover’s business requirements. Relevant IT best practises, such as those in the COBIT framework, have been adopted to ensure appropriate mitigation of IT risks.

IT governance is a set of business processes that imposes management and control disciplines on IT activities to help ensure the integrity and protection of IT operations, while achieving business goals. This requires a system in which all stakeholders, including the Board, internal customers, and in particular departments such as finance, have the necessary input into the decision-making process.

The Board is responsible for IT governance, which is included in the Board’s work plan. The Board delegated the responsibility to implement the IT Governance Framework to management under the oversight of the Audit and Risk Committee, which considers the major IT risks and opportunities quarterly In this financial period, Deloitte conducted an independent high-level assessment of Clover’s current cyber security capabilities, maturity and processes in order to determine the current state of cyber security in the organisation. The purpose of the assessment was to identify the immediate areas for improvement in relation to Clover’s cyber resilience and capabilities and to recommend improvements on the deficiencies identified, considering current and future threats.

Cyber Security Maturity Assessment
- The cyber maturity assessment indicated that most areas within the environment were well-defined.
- Clover has strong governance (with well-established Information Security Policies) and strategy components, for cyber security in place.
  - Clover have established processes to detect (such as use of MimeCast email scanning software) and respond to cyber security events such as phishing emails;
  - A mature vulnerability scanning capability, to identify security weaknesses in the Clover network, is in place.
- Threat Landscape Assessment
  - The Threat Landscape Assessment did not highlight any significant areas of concern.
- Attack and Penetration testing
  - Ernst & Young also conducted Attack and Penetration testing against Clover’s external and internal networks and related infrastructure in order to discover the risk of exposure to security threats and vulnerabilities. Clover’s infrastructure were tested both from an internal and external perspective:
    
    External penetration testing:
  - The objective of the test was to identify security issues that were present within Clover’s externally-facing network and communication infrastructure
    
    Internal penetration testing:
  - The objective of the test was to identify security issues that were present within Clover’s internal network and communication infrastructure.

The outcome of these reviews indicated that Clover’s cyber security processes and procedures were adequate. Clover’s Information Technology security is to be continuously improved for effective execution in line with best practice

Compliance with Laws, Codes, Rules and Standards

The Company Secretary is responsible for facilitating compliance throughout Clover. An analysis of current and pending legislation and regulation relevant to the Group is presented at board meetings.

Clover ensures that all employees are inducted and have a consistent understanding of compliance policies and procedures.

Clover subscribes to various alerts, licenses and key sources of regulatory information and the Group’s legal and compliance department reviews compliance alerts on an ongoing basis. Regulatory changes affecting Clover, are communicated to the relevant internal stakeholders on an ongoing basis. As and when required, such changes are also incorporated into the Group’s risk management framework.

Clover reviews its regulatory universe on an annual basis. This includes assessing the completeness and accuracy of those regulatory requirements identified by management and industry experts.

During the year under review, the following acts and other regulations, in no particular order, have been identified as priority areas:

Competition Act 89 of 1998.
National Building Regulations and Building Standards Act 49 of 1995.
Consumer Protection Act 68 of 2008.
Foodstuffs, Cosmetics and Disinfectants Act No. 54 of 1972.
Income Tax Act 58 of 1962 (as amended).
JSE Listings Requirements (not an Act but considered relevant).
Occupational Health and Safety Act 85 of 1993.
Value-Added Tax Act 89 of 1991 (as amended).
Tax Administration Act 28 of 2011 (as amended).
Employment Equity Amendment Act 47 of 2013.
Labour Relations Amendment Act 2014.
Companies Act 71 of 2008.
Agricultural Product Standards Act No. 119 of 1990.

Compliance with provisions of the Consumer Protection Act and Competition Act

Clover trains its staff and promotes a culture of compliance through online educational campaigns on the requirements of the Competition Act and the Consumer Protection Act.

It is compulsory for all management employees and those who may be exposed to anti-competitive or collusive behaviour to complete the training.

Clover has established a Competition Law Centre of Excellence (CLCE), in conjunction with their Competition Law advisors. The CLCE has the function of ensuring proper standards of competition law compliance within Clover.

During the year under review, Jean Meijer, senior partner and competition law advisor at Bowman Gilfillan, resigned to take up a similar position at Herbert Smith Freehills LLP. Due to Ms Meijer’s extensive knowledge of the Clover business, and in order to keep continuity, it was decided to appoint Herbert Smith Freehills LLP as Clover’s competition law advisors. A full review of Clover’s compliance with the Competition Act did not identify any contravention of the Competition Act.

On 13 March 2014, the Acting Commissioner of the Competition Commission initiated a complaint against Clover Industries Ltd (Clover), Parmalat (Pty) Ltd (Parmalat) and Midlands Milk (Pty) Ltd (Midlands Milk), alleging that these three parties agreed, at some stage in or around 2012, to fix the purchase price of raw milk or trading conditions in terms of which the raw milk is purchased. This alleged transgression was in possible contravention of section 4(1) (b)(i) of the Competition Act 89 of 1998 (“Competition Act”), as amended. The complaint only came to Clover’s attention during March 2015 and Clover immediately conducted an internal investigation in conjunction with Bowman Gilfillan. Bowman Gilfillan’s investigation did not reveal any conduct on Clover’s part that suggests that in 2012 it directly or indirectly co-ordinated with Parmalat and Midlands Milk to fix the purchase price of raw milk, or trading conditions in terms of which the raw milk is purchased, as alleged by the Commission.

At the time of writing, Clover has received no further communication from the Commission with regard to the above complaint.

On 20 June 2017 a Mr Frank Wilcox (“Wilcox”), a director of Ndlovu Corporate Suppliers, filed a complaint with the Competition Commission, against an employee of Clover, Gawie Spies, in his capacity as Food Safety Initiative Manager, alleging that Clover offers more favourable prices for its UHT milk to wholesalers and retailers than to Wilcox. This alleged transgression was in possible contravention of section 9(c)(i) of the Competition Act. Clover immediately conducted an internal investigation in conjunction with Herbert Smith Freehills LLP. Herbert Smith Freehills LLP’s investigation did not reveal any conduct on Clover’s part that suggests that it or any of its employees contravened section 9(c)(i) of the Competition Act.

At the time of writing, Clover has received no further communication from the Commission with regard to the above complaint.

During the review period, Clover complied in all material aspects with all relevant legislation. Apart from several legal proceedings arising from the routine course of business, the Board is satisfied that Clover does not face any material pending or threatening legal actions.

Insider trading

The Board has approved a Price-Sensitive Information Policy and an Insider Trading Policy for Clover. Directors, officers, relevant employees and service suppliers have been informed that they are compelled to comply with these policies.

Salient features of these policies are:

no Clover employee may deal directly or indirectly in Clover shares on the basis of unpublished price-sensitive information regarding the business;
no director or officer of Clover may disclose trade information of the business; and
directors and officers are precluded from trading in Clover shares during closed periods or prohibited periods as determined by the Board.

Closed periods are imposed from:

the end of the first six-month period to the time of the publication of the interim financial results on the JSE’s Securities Exchange News Service (SENS);
the financial year-end date to the time of the publication of the final financial results on the JSE’s SENS.

Any director wishing to trade in Clover’s shares must obtain clearance from the chairman of the Board or the designated director prior to trading in these shares.

Consumer Goods and Services Ombud (“CGSO”) and Code

Clover is a committed participating member of the CGSO Ombud. The objective of the Ombud’s office is to operate as an alternative dispute resolution mechanism, aimed at safeguarding the interests of consumers.

INVESTOR RELATIONS

Clover’s investor relations policy aims to ensure compliance with all legislation, regulation and voluntary codes in relation to disclosure, communication and dissemination of information, while also protecting management and limiting reputational risk for the Group. Management is committed to engaging with local and international analysts and fund managers to enable informed decisions to be made about investing in the Group. The CE, CFO and Company Secretary are the only designated investor spokespersons. An investor relations consultant is retained to advise the Group on its investor relations strategy and activities.

The Group aims to ensure pro-active and timely communication with the investment community.

Internal Audit

Deloitte has been given responsibility for implementing the annual internal audit plan approved by Clover’s Audit and Risk Committee. As with any policy or protocol, there are inherent limitations to the effectiveness of any system of internal controls due to human error, or the deliberate circumvention or overriding of controls. Accordingly, an effective internal control system can provide only reasonable assurance with regards to preparing financial statements and safeguarding assets. Clover’s internal controls and systems are designed and monitored to provide reasonable assurance regarding the reliability of the financial statements and to protect, verify and maintain accountability for its assets. These controls are based on established policies and procedures, as implemented by trained personnel with segregated duties and responsibilities. Internal control systems are managed by way of a documented organisational structure with segregated responsibilities and established policies and procedures which are communicated throughout the business. Internal audit personnel are carefully selected, trained and developed to effectively execute their duties. Significant findings are reported to the Executive Committee as well as the Audit and Risk Committee, which will take corrective actions to address identified deficiencies in internal control.

During the review period, recommendations were made to mature certain aspects of the internal control environment, however, no material breakdowns in internal controls were reported within the overall environment. These evaluations were the main input considered by the Board in reporting on internal control effectiveness.

Clover’s external auditors, Ernst & Young Incorporated, performed a limited assurance review of management’s assessment of internal controls for financial reporting. This was a separate exercise done in addition to the internal audit conducted by Deloitte. No material findings were reported to the Audit and Risk Committee and nothing has come to the attention of the directors or the auditors that indicates any material breakdown in the effectiveness of the internal controls during the reporting period.

Disclosure of Compliance with Code

The Board has satisfied itself that Clover has conformed throughout the reporting period to all the principles of the King III Code of governance 2009 (King III) and the JSE Listing Requirements, with limited exceptions.

Jacques van Heerden
Company Secretary

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Governance, risk and compliance, and remuneration reports