Materiality summary

Governance

The Hotels and Leisure sector is subject to strong regulatory pressure, especially for the gaming, cigarettes and alcohol subsectors, and further fuelled by increasingly empowered consumers reacting against externalities related to gambling, smoking and drinking. Tobacco, brewers and distillers tend to demand close attention to asset management and productivity, utilising assets efficiently and managing large workforces across complex operations. Thus, board balance and effectiveness, leadership selection and preparation, remuneration and incentives, system integrity and energy/water management all register above average levels of materiality. CFR receives additional materiality weighting given Rupert family control, lower board independence and the change in distribution model towards vertical integration with the retail channel. Following recent failures, such as at Steinhoff, and the noise around KPMG’s alleged involvement in corrupt practices, audit independence is emerging as an issue of above-average importance. Companies in the South African market have generally been reactive to these issues. Differences in board vulnerability relate mainly to major and controlling shareholders.

Ethics

Anti-competitive behaviour is a potential vulnerability for companies with market dominance, such as ANH and BTI, and both have been, or are in litigation. Bribery of officials (theft, fraud and corruption) is a vulnerability for companies in the gaming industry (TSH and SUI), as well as for companies requiring licenses to operate, such as BTI, ANH and DST.

Labour

Given the high number of employees working for relatively low wages in the hotel and tourism sub-sectors, and the prevalence of high absenteeism levels, fair labour issues that include engagement and working conditions, as well as skills development, are material concerns that can impact on long-term profitability. Low-wage and readily exploitable labour are particularly vulnerable amongst the farm operations supplying tobacco leaf, grapes, barley, wheat, hops and other inputs to BTI, ANH and DST. Skilled artisans in the luxury goods market are also subject to disruption from robotic manufacturing techniques. Brewers, distillers and cigarette manufacturers work with hazardous products, while the logistics of distribution also exposes employees and contractors to occupational health and safety risks. Human rights is a concern in the luxury goods supply chain, for example child labour in the mining of ‘blood diamonds’ (this aspect is given more weight under CUSTOMERS: product suitability).

Society

Hotels are heavily invested in the communities where operations are located, and gaming operations have further negative impact on communities through the loss of income and depressive effects of gambling. Similar effects are observed around liquor outlets and public houses (shebeens in the informal sector).  Societal concerns of community impact & relations, and internal and industry equity (B-BBEE) are of above-average significance. Companies doing business in South Africa have raised vulnerability to equity and empowerment obligations. Local beneficiation (industry equity) is a relatively modest societal obligation for the jewellery sector (CFR). External societal risks include illicit tobacco trafficking and the illegal liquor trade, both of which also impact on excise tax – a major source of revenue for governments and a license condition for the whole sector (except CLH).

Customers

Gaming, tobacco, beer and liquor companies are all participants in the so-called sin-industries, characterised by significant harmful effects on consumers (product suitability). This can take the form of direct harm to health (pulmonary diseases from smoking and alcohol poisoning from liquor), indirect harm (drunk driving accidents, abusive behaviour) and the consequences of addiction. Responsible marketing, advertising and labelling, especially to prevent harm to children, is a significant vulnerability in this industry (treatment of customers).

In the luxury goods industry, the authenticity of high quality items (product suitability) is both vital to brand preservation, but also open to abuse through false claims of provenance, a vulnerability for CFR. Treatment of customers is also of emerging importance for CFR given increased vertical integration, resulting in increased online and physical customer touchpoints, compared to previous model of wholesale distribution through agents.

Environment

Consistent with the demands for production and logistics efficiencies, the efficient usage of energy, followed by conservation of water and containment of bio-physical impacts are significant environmental issues. For brewers and distillers, where water forms part of the product itself, quality of water is of high material significance. Hotels and casinos often exploit a natural setting for their attraction, while brewers, distillers and cigarette manufacturers exploit agricultural land, raising the significance of bio-resources. External environmental risks related to extreme weather events (and possibly climate change), have a low materiality weighting.