Tesco 2011 Annual Report Download - page 55

TESCO PLC Annual Report and Financial Statements 2011 — 51
Principal risks and uncertainties
BUSINESS REVIEW
Overview Business review Governance Financial statements
A successful risk management process balances risks and rewards and
relies on a sound judgement of their likelihood and impact. The Board
has overall responsibility for ensuring that the Group has an appropriate
approach to risk management and internal control within the context of
achieving the Group’s objectives. Our process for identifying and
managing risks is set out in more detail from page 71 of the Directors’
report on corporate governance.
The table below sets out the principal risks faced by the Group and
examples of relevant key controls and mitigating factors. The Board
considers these to be the most significant risks. They do not comprise
all risks associated with the Group and are not set out in any order of
priority. Additional risks not presently known to management, or
currently deemed to be less material, may also have an adverse effect
on the business.
Risk is an accepted part of doing
business. The real challenge for any
business is to identify the principal
risks it faces and to develop and
monitor appropriate controls.
Principal risks Key controls and mitigating factors
STRATEGY AND FINANCE
Business strategy
If our strategy follows the wrong direction or is not effectively
communicated then the business may suffer
• Diversification and pursuit of growth in emerging markets under
ourstrategy avoids reliance on limited business areas
• Regular review of strategic matters by Board and Executive
Committee; Board dedicates two full days a year to Group strategy
• Significant resource invested to communicate strategy effectively to
those delivering it
• Steering Wheel balanced scorecard system helps monitor delivery
• Structured stakeholder engagement programmes
Financial strategy and Group treasury risk (excluding Tesco Bank)
Risks relate to an incorrect or unclear strategy, availability of funds to
meet business needs, fluctuations in interest and foreign exchange
rates and credit risks relating to the risk of default by counterparties to
financial transactions. The principal risks associated with operating
Tesco Bank are covered below in this table in the Tesco Bank/Financial
Services Risks section. Further detail on the management of financial
risks by the Group and Tesco Bank can be found in the Financial Review
section following this table
• Regular review of strategy, risks and financial performance by Board
and Executive Committee, with external advice as required
• Financial risks relating to underlying business needs are mandated to
our Treasury function which has clear policies and operating
parameters and its activities are routinely reviewed and audited
• Internal Audit programme reports on financial control systems
Pension risks
Our IAS 19 deficit could increase if returns on corporate bonds are
higher than the investment return on the pension scheme’s assets
• Action taken to reduce risk in investment strategy
• Monthly review by Pensions and Treasury directors
• External advisers and pension fund trustees fully engaged to consider
deficit and fund performance
Competition and consolidation
Failure to compete on areas including price, product range, quality
and service in increasingly competitive UK and overseas retail markets
could impact our market share and adversely affect the Group’s
financial results
• Strategy to have broad appeal on price, range and store format to
allow us to compete in different markets
• Regular review of markets, trading opportunities and competitor
activities
• Performance tracked against relevant KPIs and measures that
customers tell us are critical to their shopping experience
• Constant monitoring of customer perceptions of Tesco and
competitors to ensure we can respond quickly as appropriate
• Monitoring of legal framework and compliance
REPUTATION, OPERATIONS AND PEOPLE
Reputational risk
Failure to protect the Group’s reputation and brand could lead to a loss
of trust and confidence, a decline in customer base and affect our
ability to recruit and retain good people
• Tesco Values embedded in how we do business at every level
• Group Code of Business Conduct guides our behaviour in dealing with
customers, employees and suppliers
• Stakeholder communication and engagement to understand their
views and reflect them in our strategy
• Commitment to tackling societal and environmental issues through
our Community Plan and activities
• Governance committees, including Corporate Responsibility and
Compliance Committees, guide and monitor policies