Derwent London aims to deliver above average long-term returns to shareholders whilst operating in accordance with the Group’s risk appetite. The Board uses the Group’s risk management system to ensure that risks to the Group’s strategy are identified, understood and managed, recognising that such risks are inherent in running any business.
Overall responsibility for risk management and the Group’s system of internal controls rests with the Board which has delegated responsibility to the Audit Committee and the Risk Committee. Executive management is responsible for developing the Group’s risk management system and for designing, implementing, maintaining and evaluating the systems of internal control. The following diagram illustrates the Group’s risk management structure:
Risk management and culture
The Board is responsible for managing the Group’s risk profile in an environment that reflects the culture and organisation of the business. Key matters to note in this regard are:
- Senior management encourages an open and transparent culture throughout the business.
- The close day-to-day involvement of the Directors in the business allows any system weaknesses to be identified quickly.
- The Group mainly operates out of a single office in central London which is within close proximity to most of its properties.
- The senior management team is experienced and stable and overall staff turnover is low.
- The Group has a Whistleblowing Policy which is supported by an independent advice line.
The Group’s risk management framework was prepared within the context of this operating environment and consists of its Risk Appetite Statement, a Risk Management Policy document and a Risk Management Process document. The Board’s approach to risk management recognises that not all risk can be eliminated at an acceptable cost and that there are some risks that, given its experience, the Board will choose to accept.
The Risk Register, which is prepared by the Executive Committee, is the core element of the Group’s risk management process. The first stage in its preparation is for the Committee to identify the risks facing the Group. An assessment is then made collectively by the Committee of the following matters:
- The likelihood of each risk occurring.
- The potential impact of the risk on each different aspect of the business.
- The strength of the controls operating over the risk.
This approach allows the final assessment to reflect the effect of the controls and any mitigating procedures that are in place. The Register and its method of preparation have been reviewed by the Risk Committee. In order to gain a more comprehensive understanding of the risks facing the business and the management thereof, the Risk Committee periodically receives presentations from senior managers.
Code Provision C.2.3. of the 2014 version of the UK Corporate Governance Code requires the Board to monitor the Company’s risk management and internal control systems. To comply with this requirement, the Executive Committee undertook an interim review of the Risk Register and the operation of the Group’s key controls in August 2015. In addition the Risk Committee considered the adequacy of the controls operating over the top nine risks facing the Group to supplement its annual review of the Risk Register and controls.
Following these extra processes, the Board is satisfied that the Group’s risk management and internal control systems operated effectively throughout the period.
For 2016 the Group intends to introduce a set of key risk indicators to enhance its assessment of the operation of the key controls.
The Group’s Risk Register includes 44 risks split between strategic risks, operational risks and finance risks. The principal risks and uncertainties facing the Group in 2016 include one new risk namely the risk of default by a contractor or sub-contractor. Three key risks from 2015 are no longer
included in the list. These are:
- Shortage of future development opportunities.
- Inefficient systems.
- Tenant default.
As shown by the Average risk by category graph below, the average weighted risk score is lower in 2015 than in 2014. The Board has considered whether this is a reasonable change and concluded that it reflects three main factors:
- As the Group’s net asset value has increased, it becomes inherently more resilient to the financial effect of a number of risks that in the past would have represented a higher impact to the Group.
- As the Group’s rental income increases and its portfolio of tenants becomes more diverse, the risk presented by any one tenant defaulting is reduced.
- During 2015 some controls and mitigating measures relating to key risks were revised and improved so reducing the risk weighting of those particular risks.