The Holding Company monitors the risks of
each business and of all Algar companies
Risk management integrated to the management process helps us optimize the use of resources and choose opportunities to maximize value creation. The process focuses on identifying, assessing and mitigating internal and external factors that may affect the Group’s results and the execution of the strategy in each business.
Through the Holding Company, the Algar Group monitors and consolidates the risks of each businesses in an integrated manner by developing and implementing measurement and control methodologies and models. Risks and risk trends are monitored by the Board of Directors with the help of the Audit and Risk Management (RM) Committee.
The Algar Group’s risks were consolidated into a map divided into four categories: Strategic, Financial, Operational and Compliance Risks as follows:
Risk to the sustainability and longevity of the business due to an inability to set rules of coexistence and succession for shareholders, executives and institutional relations, thus leading to the company take the wrong direction and affecting its future prospects. Among the mechanisms to mitigate the governance risk, we point out the existence and effectiveness of the Family Council and of the Board of Directors.
These are risks inherent in the process of designing and executing strategies; they involve factors that may compromise the company’s goals, especially in the long term. The Algar Group reviews its strategic plan every year; it assesses and discusses scenarios in each business and competition, as well as the risks that they pose to investment decisions.
Risk markets involve the possibility of losses due to commodity price volatility in the spot and futures markets, as well as changes in exchange and interest rates. The risk of commodity price changes affects only Algar Agro, which tackles it with the appropriate policies and hedge operations. There is also a foreign exchange risk since soybeans are priced in dollars. In turn, part of the investments in Algar Telecom are exposed to foreign exchange risk because part of the debt connected with equipment purchased is indexed to the dollar. Foreign exchange exposures and transactions in foreign currency are monitored by the Holding Company.
Liquidity risk would be the Group's inability to honor its obligations, with an impact on its daily operations and cash. This would lead to significant losses because it could be impossible to raise funds at the right time; in addition, leverage ratios and financial charges would rise due to the perception of increased risk. The Group manages its liquidity risk by monitoring cash levels on a daily basis and scheduling its payments. On the corporate level, the banks with which the companies may conduct transactions and their respective limits are set in the Corporate Policy for Temporary Cash Investments.
Credit risk is the possibility of incurring losses if a counterparty fails to meet its obligations under the established terms. It also involves miscalculating limits, guarantees and sureties, thus leading to costs in renegotiating debts or recovering receivables. Credit risk is managed in a decentralized manner. Credit is granted based on credit analysis and information provided by credit bureaus. As a result, each company adopts the policies and rules most in line with its clients’ credit ratings. The companies’ default rates are monitored by the Holding Company in regular meetings with financial departments.
Management risk arises because the companies’ performance is not monitored or is poorly monitored, or strategic projects are executed unsuccessfully with regard to targets, results, deadlines and strategies. We have adopted the BSC – Balanced Score Card management methodology to integrate strategies and operations. The purpose is to allow the executives to discuss the performance of each area vis-à-vis the strategic goals, as well as propose alternatives when needed.
Risk related to operational capacity and continuity, insufficient and obsolete assets and facilities, inappropriate processes and logistics flow leading to losses, interruptions of operations or loss of product quality. Operational risk management focuses on improving process efficiency and reducing losses. The quality of products and services is measured through operational indicators and, in some cases, performance targets agreed upon with the ANS (Acordo de Nível de Serviço, or Service Level Agreement) with customers. The companies from the Telecom and Agribusiness segments follow certain performance standards set by regulatory bodies and are subject to penalties in case of non-compliance.
Risk of unauthorized access to company data and information arising from vulnerabilities related to logical access controls, or lack or breach of policies and statements of responsibility leading to external attacks, interruptions of IT services, changes in, or improper disclosure of, information. We monitor and provide for our associates the Information Security Policy, Code of Conduct and Statements of Responsibility for the use of information, which set guidelines for the use of e-mail, internet, systems and corporate network. Since 2012, the Holding Company has been coordinating the IT Corporate Committee to make uniform and standardize security practices in the companies, disseminate guidelines and create an environment conducive to discussions about risks and actions.
Risk arising from the difficulty in attracting and retaining talents with the necessary skills due to external and internal factors, such as competition and the organizational climate, thus compromising the company’s goals. The risks related to Attracting and Retaining People, and Executive Development and Succession are monitored through Turnover indicators and an annual Climate and Engagement Survey to assess the effectiveness of the initiatives to improve the work environment, associate satisfaction and retention continuously. The compensation and benefit plan is updated periodically so that the companies remain attractive in relation to the market.
Damage caused by extreme weather (droughts, wildfires, rain, pests, etc.) or scarcity of natural (water, electric, solar, wind) resources that may affect the supply of raw materials and other inputs. Operational risk management, which includes the environmental factor, involves measures such as obtaining insurance policies, developing Business Continuity Plans and monitoring the availability of the operation. Assessing and monitoring this risk also takes into account the potential impact on the companies’ image.
Compliance risk refers to non-compliance with environmental, labor and tax laws or regulations and lack of good practices exposing the company to legal action by regulatory bodies. The materialization of this risk may lead to penalties, such as fines, punitive damage payments, ceasing profits, injunctions to stop construction works or other activities, and mar the company’s image. In accordance with the tax and labor laws, we have a low number of labor and tax lawsuits and contingencies recognized in the balance sheet. The Holding Company is responsible for monitoring and consolidating the Group's tax burden; tax, labor, civil and regulatory contingencies; as well as coordinating the Corporate Tax Management Committee, which meets on a quarterly basis. The goal is to align the guidelines with the companies and discuss legal issues that can impact business significantly.