Risk Management
As the Company continues its massive growth and expansion to various territories all over the country, the Company also maintains its commitment and adherence to the highest standards of corporate governance and risk management.
Alongside the growth of the business, the Company’s risk management program had seen signifcant milestones in 2016, all geared towards ensuring that the Company can deliver on its 2020 vision while being fully cognizant of the risks that accompany such growth. Among such milestones is the full review of the risks previously identifed for each strategic business unit and integration of more efective strategies, controls and risk mitigation activities, as well as the establishment of Key Risk Indicators for all the major risks identifed and confronting the Company.
The Risk Committee played an integral role in ensuring that the Company exercises sound risk management practices and activities, consistent with its Board oversight function of reviewing and evaluating the adequacy and effectiveness of the Company’s risk management activities and processes.
Two Risk Committee meetings were held in 2016 to review the results of the risk assessment done by the Chief Risk Ofcer (CRO), including the risks identifed, their impact or potential impact on the Company’s business and the corresponding measures to address such risks.
To further underscore the Company’s commitment to Risk Management and to guarantee its advancement to an integrated and systemic approach, the Company participated in the Ayala-group wide risk maturity external assessment conducted by Aon Global Risk Consulting. Aon has partnered with the Wharton School of the University of Pennsylvania to develop its Risk Maturity Index (RMI) and conduct joint research on the relationships between risk management practices and actual performance.
Te result of the external assessment shows the Company obtaining the highest score of 5.0 (Advanced) in the Aon RMI scale of 1-5. Advanced maturity, as defned in the scale, means that the Company has a well-developed ability to identify, measure, manage and monitor risks; our risk management processes are dynamic and adapt to changing risks and business cycles; risk and risk management information is explicitly considered in decision processes and is viewed as providing a competitive advantage with a focus on optimizing risk-reward trade-ofs. Tis result shows the Company outperforming the global average of 3.0 and the real estate industry benchmark of 3.0. Against internal benchmarks, the Company also leads the Ayala Group across all components. Similarly, the Company appeared to outperform the industry peers at all RMI components.
Te high rating is by no means signaling the Company’s end to pursuing a higher level of risk management practice but will be used in moving forward to search for other opportunities to further improve on the management of risks, uphold a strong reputation for integrity and good corporate governance and to further create long-term value for its stakeholders.
The Risk Committee has specifically been created to support the Board in the performance of its oversight functions of the Company’s risk management activities through continuous input, evaluation and feedback on the effectiveness of the Company’s risk management process. This is a big step in ensuring that adequate focus and emphasis is given to the Company’s risk management activities through periodic meetings and reports to the Risk Committee. Related to the creation of a separate Risk Committee, a new Risk Committee Charter was crafted and approved by the Board in 2014, which spells out the structure as well as the authority, roles and responsibilities of the Committee.
Enterprise-Wide Risk Management(EWRM) Activities
The Company continues to implement its EWRM program and further works on enhancing its activities through periodic reviews with the strategic business units (SBU) and key support groups through a “top down, bottom-up” approach. This approach enabled the Company to have full visibility of the wide range of risks that the Company is facing both from the perspective of Management and from the operational side of the business, finding commonalities and disparities, and integrating both perspectives to arrive at a holistic view of the Company’s risk profile.
The Risk Management Process
Facilitated risk review and control assessment sessions with each of the Company’s strategic business units were conducted. The outcomes of these facilitated sessions, which included identification of key risks both at the corporate level and at each of the business units, as well as control processes, strategies and improvement plans to mitigate the key risks identified, were presented and communicated in separate meetings to the Management Committee and the Risk Committee for review and consideration.
With the key risk areas and key risk mitigation strategies across the Company identified, monitored and periodically reported, business decisions are able to consider and incorporate the following:
Key Risk Themes and Risk Mitigation Activities
The Company continues to benefit from the improved performance of the construction industry, particularly in the residential and retail sectors. And as the Company continues to expand its footprint all over the country, continuing pressures are felt on the following areas, among others: maintaining developmental costs within competitive levels, getting qualified and reliable contractors and suppliers in the market, ensuring that quality standards are consistently being enforced across all projects in different geographies.
Standardization and streamlining of processes to achieve increased operating efficiencies, complete partnering agreements on critical materials with suppliers, aggregation, advance buying for critical commodities to avoid delays and continuous external sourcing are among the major mitigation activities being done by the Company to meet project execution and delivery targets.
To address contractor and supplier risks, the Company, through its construction arm MDC, engages AAA contractors. It also taps local contractors registered with the Philippine Contractor’s Association (PCA) to expand its vendor base. As of December 2016, the Company already has 283 micro subcontractors as a result of a program to expand the pool of micro contractors.
On top of these, the Company is continuously improving its self-perform and self-manufacture capability for better quality control in its developments.
The growth of the local real estate industry and specific business sectors like hotels and resorts, which is part of the growing portfolio of the Company, is largely driven by the country’s overall political and economic situation. And as the Company continues to expand into different growth centers, there is an increased need to cultivate good relationships with local government entities within these growth centers. The recent changes in both the local and international political landscape pose volatility in the market which may potentially have adverse effects in some business lines and the Company’s overall operational capabilities and growth plans.
The Company continues to enjoy healthy national and local government relationships in both Metro Manila and provincial growth centers. Maintaining positive and supportive relations with government entities and regulators as well as sound corporate governance practices and strict compliance to internal policies and procedures, enabled the company to manage this risk at acceptable levels.
As we expand to new growth areas, there is an increased need to cultivate relationships with local regulatory entities within these areas and one way to gauge health of our relationships and regulatory compliance is the processing of critical permits. At present, we are well within our acceptable thresholds and timelines. However, the Company is still taking further steps in making permit-related improvements such as (1) more rigorous monitoring of permit renewals and deadlines to avoid payment delays and penalties and (2) the continuous review of permit processes to ensure permits are processed and released within acceptable timeframe thereby helping in preventing serious project delays.
The Company faces significant competition in its major lines of business. As the Company expands its land bank and mixed-use developments, competitors are likewise continuing their massive expansion in all segments of the real estate industry and have significantly improved their capabilities and quality of products addressing various price points.
To manage this risk, the Company continues its active land acquisition and development activities in key growth centers and its aggressive build-up of recurring income within tried and tested estates through its integrated mixed-use model versus pocket developments. Particular to the leasing business, one of the major drivers of competition is the Company’s ability to attract and retain merchants and tenants—which is generally dependent on the location of the leasing properties, price offerings to the tenants and merchants, as well as the quality of service provided by the Company’s property management team. And for this, the Company continues to do the following: (1) Active land acquisition in key geographies and partnering with other developers; (2) Continue current mixed-use model versus pocket developments; (3) Gathering market intelligence and translating information into competitive proposals and (4) Hard push for the timely opening of new properties/developments.
Since the inception of the Company’s risk management program, the Management Committee has consistently emphasized the need for a higher level of safety and security awareness and diligence to ensure that customers have pleasant experiences in our shopping centers and other managed properties and estates.
Also, the importance of adequate and effective maintenance practices and procedures is always advocated to prevent serious and unscheduled operational losses such as equipment breakdown and to maintain quality standards in our owned and managed properties. In 2016, the year-end equipment uptime for all managed properties was at 99.4 percent versus an internal target of 99.0 percent. Vendor performance evaluation of contracted services and customer feedback ratings of 93.0 percent was also well within the 80.0 percent threshold.
Product and service quality and safety risks are well managed in ongoing construction projects from safety-related incidents up to quality or workmanship issues. In 2016, the Company achieved a 0.17 Total Disabling Injury Rate (TDIR), a significant improvement from previous years and better than comparable international construction companies. Likewise, it has attained a 92 percent Safety Maturity and Engagement score, a rating that is higher than global norms, based on Employee Health and Safety survey conducted by Towers Watson. This is made possible through the strengthened controls and mitigation activities being employed by the Company. Among such controls are:
(1) adequate supervision and safety inspections for all critical and hazardous activities
(2) ensuring that workers are provided with pre-activity trainings on safety before any construction work can commence
(3) empowering the Safety Officers to declare work stoppage and to override project managers if
they see that things are not being done in accordance with the Company’s safety standards and practices
(4) stricter monitoring of all EHS permits and licenses for all projects and
(5) engagement of MDC for project supervision even for projects that are sub-contracted to
third parties.
Controls that have been existing prior to 2016 are the following: establishment of geographic
Sub-Crisis Management Teams, establishment of Occupational Safety and Health Committee and development of plans to respond to potential project emergencies.
As the Company continues to ramp up its operations, it recognizes that its people are its most critical asset. Thus, achievement of the Company’s growth and strategic objectives largely depend on the strength of its human resources. Organizational processes, systems and performance metrics were also identified as among the risk drivers crucial to the success of the company.
This is the main rationale for keeping Organizational Development a top priority. The Company continues to tap various sources to make sure that there are adequate and quality personnel to meet the demands of the business and to ensure that employees are valued for their contribution to the Company and are continuously empowered through professional development opportunities. The Company periodically conducts Organizational Climate Surveys to determine employee engagement and provide added controls to address areas with less than ideal engagement results.
Among the completed risk mitigation activities was the full organization structure review which enabled the Company to enhance, build and acquire core competencies needed especially for the new businesses, consolidate similar functions and outsource transactional activities to streamline process and create efficiencies.
The Company acknowledges the risk of Ayala Land’s operating properties and ongoing projects being impacted by adverse environmental issues such as natural disasters, water shortage, effects of climate change, earthquake, and other similar events. To mitigate the risk of changing environmental and site conditions, and as part of a more thorough due diligence process, all land acquisitions and project launches need to pass a thorough technical due diligence process and environmental scanning to identify all other potential risks that the Company may be exposed to. These technical due diligence reports include, but are not limited to, environmental studies not just for the specific land parcels but for adjacent areas, as well.
The Company has established 24/7 Operation Centers all throughout the country that continuously monitor and track weather situations to facilitate early mitigation and quick response during typhoons, flood incidents, earthquakes and other natural or manmade disasters.
To protect the company assets and to ensure cost recovery for property damages and business interruption losses during these disasters, the Company has put in place insurance programs for both operating properties and construction projects.
In 2016, a major review of the Company’s major business lines was conducted to identify the most critical business activities and the potential business impact on the business unit should these activities be interrupted over varying timeframes. This information is critical in helping the Company determine the timeframes within which critical business activities must be resumed following a disruption, as well as the resources required for business continuity.
The Company has consistently affirmed its commitment and fidelity to its values and to doing things the right way. However, the Company recognizes that opportunities for committing fraud exist because of extensive dealings with vendors and contractors and because the industry is generally prone to this type of risk. To help mitigate this risk, the Company has established a Code of Ethical Behavior for all employees, a Code of Ethical Procurement Conduct for all those who influence the procurement process, as well as a Vendor’s Code of Ethics to promote a culture of transparency within the company and to guide both employees and vendors in determining acceptable and ethical business activities and conduct.
Through the Internal Audit Division, the Company’s whistleblowing policy and Business Integrity Channel have likewise been formed. And as these controls were institutionalized, the instances of fraud related audit findings have significantly been lessened.
To support the Company’s growth plans in the coming years, major financial decisions are geared towards capital and cash flow efficiency and availability. With the P85.4 billion capital expenditures in 2016 and the steady increase in project launches, it is critical to ensure that the Corporation has an adequate funding capacity. To centrally manage financial risks, the Treasury Division has established a three-layered approach to liquidity through prudent management of sufficient cash, money market placements and high-quality and marketable securities, a continuous program for the sale of receivables, and the maintenance of ample short-term revolving facilities from both local and foreign banks. The Company employs scenario analysis and contingency planning to proactively manage its liquidity position.
Accordingly, the Company has set counterparty bank limits for its investable funds to ensure that its funds are invested only with counterparties of high credit standing. Each counterparty’s credit worthiness is determined through the Company’s internal rating system covering the areas of liquidity, capital adequacy and financial stability, as well as available international credit ratings.
The Company also closely monitors developments relating to counterparty banks. Based on these, exposures are adjusted accordingly to adhere to the pre-approved limits that are tracked on a daily basis.
In addition to the maintenance of ample short term revolving facilities, the Company obtains on a timely basis and at appropriate terms and conditions, long-term debt funding. To mitigate exposure to interest rate, refinancing and concentration risks, the Company actively monitors and manages within pre-determined limits prescribed by Management the mix of fixed and floating-rate borrowings, its debt maturity profile, as well as the amount of debt the Company has or can prospectively have outstanding with any one of its relationship banks.
Due to the increasing incidence of cyber-attacks and data security breaches in large global firms, as well as the increased digital access and use of personal mobile devices, the company recognized the probability and greater opportunity for malwares to go unchecked. And thus, identified this as an emerging risk that has to be regularly monitored and reported to the Risk Committee.
To address this risk, ALI Internet Perimeter defense has been established and standard gateway policies have been updated, Implementation of Desktop Lockdown, Roll out of one-drive (cloud storage) for backup of Personal computers. The company also invested in technology solutions in 2016 with the acquisition of anti-Advanced Persistent Threat Solution (APT), deployment of Mobile Device Encryption Advance Protection, evaluation of Managed SOC (Security Operation Center) and SIEM (Security Information Event Management) Service, to name a few.
The company has also reviewed and strengthened its IT policies and manuals and ensured greater company-wide IT security awareness through monthly release of Security Bulletins and Briefings conducted with SBU CFOs and ALI IT Council.
As a result of these activities, outbound malware traffic has been consistently going down and blocked malware communications have been detected thus preventing critical data from being stolen from our system.
Business Continuity Management (BCM)
As a major risk management strategy of the company, the BCM program has consistently been given special focus, with a great deal of planning done at SBU levels to ensure critical services or business operations continue in spite of disaster occurrences based on loss scenarios and a methodology conforming to global standards and at par with best practices.
An important aspect in the BCM program which the company also focused on was in the area of Crisis Communications. In 2014, localized Crisis Management teams have been formed and oriented to handle different levels of crisis events. Trainings, workshops, as well as desktop and actual drills were conducted as part of the training program with serious attention to at least 22business units which included major malls deemed to be highly probable and prime locations for crisis handling.
Learnings from past events said training activities were then gathered and consolidated for future consideration and reference.
Establishment of the Company’s Occupational Safety and Health (OSH) Program
In 2014, the Company has established its central OSH Committee to enhance Ayala Land’s safety program at a brand level. The Committee was primarily intended to ensure both regulatory compliance and improvement of the Company’s performance on safety, as well as protecting the health of its most valuable asset–its people.
As a major start, an overall Ayala Land Corporate OSH Program has been drafted and cascaded for development to the Company’s subsidiaries for program alignment and standardization. This OSH program was developed in accordance with the framework of occupational safety and health management which the Department of Labor and Employment (DOLE) of the Philippines throughits Bureau of Working Conditions (BWC) is regulating and driving.
To achieve the Company’s objectives in safety and health management, the Company’s management shall ensure that programs and actions are in place and are being done religiously via the following;
• Ensuring that all employees and engaged workers (including contracted workers) receive proper orientation and needed training onwork and workplace safety before and during their employment or service engagement and as deemed necessary, based on the nature or gravity of the hazard/s in the workplace or activity.
• Putting in place a continuing communications program to keep the level of awareness on occupational safety and health of all employees and contracted workers high, eliminating complacency in job execution and keeping abreast with latest development and learning related to preventing occupational injury and illness and enhancing wellness promotion.
• Providing a system to properly assess, screen and detect workers psycho-physical state, capability and limitations in performing work safely and efficiently before employment or work engagement as well as to effectively monitor employees health and well being with respect to work and workplace hazard or exposures.
• Establishing and consistently enforcing a system of motivating positive attitude and recognizing proper behavior towards contributing to safe work conduct, good health protection and maintenance in all workplaces as well as penalizing improper work behavior or negligent action resulting to occupational injury and/or illness.
• Ensuring that all workplace hazards are proactively and continuously identified and that needed reasonable corrective measures are in place to prevent or control physical, biological, ergonomic and chemical hazards existing in all work areas or those which are developed as a result of operations or day-to-day activities.
To further promote and effectively ensure adherence to the belief and aspirations of the Company towards occupational safety and health, management shall integrate accident prevention and occupational health maintenance in evaluating the performance of both business and support units. OSH performance shall also be a regular item to be monitored and reported in the Risk Committee meetings and a regular agenda item in the regular Safety Council meetings.