Presentation of the risk situation

We have classified METRO GROUP’s overall risk portfolio into risk groups. In addition to general risks, the Management Board of METRO AG identified and assessed the especially relevant risks (gross risks) to METRO GROUP during the reporting period. These are listed in the following overview along with their changes since the previous year: in financial year 2013/14, risk number 13 (geopolitical situation in Russia/Ukraine) was included in the particularly relevant risks for the first time.

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Risk group

No.

Particularly relevant risks 2013/14

Change since 2013

Risks related to the business environment

 

 

 

Macroeconomic and sociopolitical risks

13

Geopolitical conflict in Russia/Ukraine

New

Environmental risks

 

 

 

Sector risks

 

 

 

Risks related to the retail/wholesale business

1

Challenge of the business model/change in consumer habits

Unchanged

 

2

Loss of customers with relatively low sales volumes (C customers) at METRO Cash & Carry

Unchanged

 

3

Inadequate customer-oriented food and non-food strategy at METRO Cash & Carry

Probability of occurrence has fallen from “likely” to “possible”; expansion of risk monitor to food strategy

 

8

Inadequate implementation of strategic projects

Unchanged

Real estate risks

4

Unprofitable use of selling space

Unchanged

Risks related to business performance

 

 

 

Supplier and product risks

 

 

 

Supply chain risks

 

 

 

Financial risks

 

 

 

 

7

Unexpected deviations from the budget or outlook

Unchanged

 

11

Impairment of goodwill and other assets

Unchanged

 

12

Multiple rating downgrades with a negative impact on liquidity and group financing

Probability of occurrence lowered from “unlikely” to “low”

Other risks

 

 

 

Risks from portfolio changes

 

 

 

Information technology risks

5

Business interruptions caused by IT system failures

Unchanged

Human resources risks

6

Inadequate development and support of talented employees

Unchanged

Legal and tax risks

10.1

Violations of antitrust or competition law

Unchanged

Compliance risks

10.2

Corruption

Unchanged

 

9

Inadequate or ineffective internal control systems in store, purchasing, expansion and construction processes

Unchanged

These particularly relevant risks are classified as follows on the basis of loss potential (before risk limitation steps) as well as on the basis of probability of occurrence:

Classification of particularly relevant risks (graphic)

Unlike in the previous year, the circles in the image denoting the individual risks were placed in the middle of the accordant probability of occurrence ring to clearly convey the fact that the assessment of probability of occurrence is only conducted within the specified range.

In the process, we only list risks with a low probability of occurrence (< 10 per cent) if a particularly relevant risk from the previous year has changed in this area.

The following sections outline the individual risk groups as well as key management measures and the especially relevant risks. In principle, all group segments are affected. For specific issues, the respective business segments are indicated.

Risks related to the business environment

Macroeconomic and sociopolitical risks

As an international company, METRO GROUP is dependent on the political and economic situation in the countries in which it operates.

The global economy did pick up speed somewhat during financial year 2013/14. Overall, though, the recovery that followed two years of economic crisis remained modest. Economic momentum slowed considerably in many emerging countries in Eastern Europe and Asia. At the same time, many political crises and conflicts intensified during the year, particularly in the Middle East.

In Europe, the Ukraine conflict cast a long shadow over the political agenda. This conflict slowed the economies of both Ukraine and Russia.

During the current financial year, we expect to see only a slight improvement in economic conditions. At the same time, global economic risks have risen as a whole. Furthermore, the effort to consolidate government debt in the eurozone is a drawn-out process that will continue to suffer setbacks. Overall, the global economy has not yet returned to a path of sustainable economic growth following the financial and sovereign debt crisis.

Compared with the previous year, the risk and opportunities profile for the short-to-medium-term development of the retail sector and thus for METRO GROUP has once again improved only slightly. We are continuing to systematically expand in the growth regions of Asia and Eastern Europe to reduce potential risks posed by the regional differences in economic performance.

Our international position requires us to address possible economic, legal and political risks. The situation in individual countries can change rapidly. Unrest, changes in political leadership, terrorist attacks or natural disasters can endanger METRO GROUP’s business in the affected country. In this context, the Ukraine conflict in particular is important to note for the reporting period (risk number 13, new). Risks emerging from this conflict for METRO GROUP pertain to the loss or destruction of property/real estate, exchange rate fluctuations, restrictions on the movement of goods and regulatory changes. We insure ourselves as far as possible and to the appropriate extent against the loss of tangible assets and business interruptions that, for example, are the result of political unrest. Professional crisis management allows for a fast response and crisis management. In this regard, we have responded rapidly and effectively to the ongoing crisis in Ukraine, implementing our crisis reaction plan for the METRO Cash & Carry stores impacted by the violence. This plan includes evacuation guidelines, training and standard operating procedures for local employees. As a result, we were able to keep our employees and customers from harm and compensate the losses incurred through business interruptions and destroyed property through existing insurance policies (risk number 13, new). Our international presence provides us with the opportunity to offset economic, legal and political risks as well as fluctuations in demand between individual countries.

To limit the risks of expansion as much as possible, we plan each investment and each market entry based on a structured process and proven methods. We identify risks and opportunities by using feasibility studies that consider legal, political and economic conditions. We only enter new markets when risks and opportunities are deemed to be manageable. Even though we base our expansion decisions on the best information available, we cannot rule out the possibility that the growth momentum in individual countries will fall short of our expectations in the coming years. Difficulties in dealings with local authorities represent another risk, particularly in emerging markets. Occurrence of these risks would result in lower-than-forecast sales and earnings.

In financial year 2013/14, METRO GROUP took a number of different steps designed to further optimise internal processes related to expansion decisions and their successful implementation and, thus, to counteract the corresponding risks (risk number 9, unchanged since last year). Committees from the sales lines are involved in the decision-taking process regarding the efficient use of investment funds for expansion. The coordination processes are being continuously improved. Furthermore, previously taken investments decisions are being carefully monitored in a revised process.

For more information about our assessment of the development of the economic environment, see chapter 13 Report on events after the closing date and outlook.

Environmental risks

METRO GROUP is aware of its responsibility for the environment and has firmly embedded the principle of sustainable business in its corporate strategy. Environmentally harmful practices along the supply chain can seriously damage our image over the long term and endanger our business. This is why we implement numerous measures to ensure environmentally responsible business practices.

Specific environmental risks are discussed in the sections “Supplier and product risks” and “Real estate risks”.

For more information about environmental protection, see chapter 8 Sustainability management.

Sector risks

Risks related to the retail/wholesale business

The saturated markets of Western Europe, in particular, are characterised by rapid change and intense competition. The resulting conditions can influence business development and represent natural business risks. A fundamental business risk is consumers’ fluctuating propensity to consume.

Changes in consumer behaviour and customer expectations pose high risks, among others, in the face of demographic change, rising competition and increasing digitisation. Failing to adequately consider customer trends and price developments or missing trends in our assortments and with respect to appropriate sales formats and new sales channels can have a negative impact on group sales and jeopardise our growth objectives (number 1, unchanged since last year). To counter these risks, we are expanding our sales channels based on a multichannel strategy tailored to our different sales lines. In the process, we are strengthening our online activities and expanding our delivery service. In addition, we are developing new stores for METRO Cash & Carry on the basis of a franchise concept while intensifying our competitor analyses. Through the application of an array of different strategies, we are working to further improve our purchasing and sales processes and to create added value for our customers.

The METRO Cash & Carry sales line faces the risk of losing customers with relatively low sales volumes, also known as C customers (number 2, unchanged from last year). We have started to implement systematic assortment, price, communication and marketing measures to counter this risk. These steps include a change in the communication model and concentrate on the continued digitisation and modification of marketing campaigns. Thanks to its cutting-edge IT technologies, METRO Cash & Carry can increasingly employ new forms of interaction with customers – including social media and other new digital communications channels.

In principle, METRO Cash & Carry faces the potential risk of not meeting customers’ needs in the food and non-food business (risk number 3). To create a broad overview, we have added the food strategy to our year-on-year risk assessment in this reporting period. To address this risk and to provide targeted product ranges, we continuously optimise our sales concepts and refine them to cater to the needs and shopping behaviour of our customers. In one reflection of this, we are expanding our range of regionally traded products in all sales lines and increasingly gearing our assortments to meet our customers’ increasing demands with regard to environmental, social and health considerations. The probability of occurrence for risk number 3 has fallen from “likely” last year to “possible” now that the steps we have taken to create an improved, customer-oriented assortment design are taking effect.

We pursue transformation programmes aimed at boosting long-term sales and earnings and protecting the intrinsic value of our assets. In this context, risks emerge from the insufficient implementation and execution of strategic projects (risk number 8, unchanged since last year). To limit these risks, we have set up a comprehensive system that monitors project progress in the national subsidiaries and have created training programmes that are designed to facilitate project implementation.

To recognise market trends and changing consumer expectations at an early stage, we regularly analyse internal and external information. In the process, the group’s own market research draws on qualitative market and trend analyses as well as on quantitative methods such as time series analyses or forecasts of market developments derived from analyses of sales data and the results of panel market research. Time series analyses also include the observation of product segments on the market over a certain period of time.

Real estate risks

Various factors pose a risk to the intrinsic value of METRO GROUP’s store network. These include

  • the unprofitable use of selling space; this also includes the risk emerging from unused selling space for which no further useful purpose can be found (risk number 4, unchanged since last year),
  • intense competition for suitable properties during expansion,
  • the risk of incorrect decisions in the selection of business locations and
  • a deterioration in the profitability of a location, for example due to social-demographic changes in the catchment area.

To prevent maintenance and repair backlogs in stores, a far-sighted maintenance plan has been put into place. In addition, some locations may suffer loss of rental income as a result of a tenant’s bankruptcy or possible deficient rental cover. We counteract this risk by continuously monitoring rental income and conducting new negotiations at an early stage. In addition, we get involved in the search for new tenants with good credit histories and in the development of new usage concepts for our real estate. In some regions, our real estate portfolio is also exposed to such natural disasters as earthquakes, flooding and storms. We seek protection against their potential effects by introducing structural measures and by taking out insurance.

We counter these risks through strategic and operational real estate management, far-sighted investment planning and technical risk management. Our active real estate management is primarily designed to increase the value of our entire real estate portfolio and is based on continuous market monitoring, transparent profitability audits and strategic decisions. In all countries, we select our locations on the basis of an intense examination. Since we continually monitor the profitability of our network of locations, we can identify adverse developments at individual stores or retail outlets early on and respond quickly. Should the measures we have taken not produce any successful results and should we think that a long-range improvement of the situation at the particular store or outlet is unlikely to occur, we will close the location, ensuring the continuous optimisation of the store network in the process.

In our real estate operations, we also intend to assume our responsibility for the environment and address possible risks (see the section “Environmental risks”). In this manner, we reduce the ecological footprint of our business locations. By 2020, we will reduce our specific greenhouse gas emissions by 20 per cent from their level in 2011. To achieve this goal, we are investing in such things as technical energy-saving solutions and in programmes designed to change the behaviour patterns of every employee. With the help of these energy-saving measures, we can also reduce our energy costs or at least cap them in the face of rising prices.

Risks related to business performance

Supplier and product risks

As a retail company, METRO GROUP depends on external producers and providers for the supply of goods and services. We choose our suppliers very carefully, especially in the own-brand area. We place a particularly high priority on the reliability of our own-brand suppliers in terms of product quality and compliance with safety and social standards as well as suppliers’ own efforts with regard to compliance. Defective or unsafe products, an exploitation of our environment or inhumane working conditions as well as failure to adhere to our compliance standards would cause continuous damage to the image of METRO GROUP and pose a long-range threat to the company’s success. For this reason, we continuously monitor our own-brand suppliers to determine whether they adhere to METRO GROUP’s high procurement and compliance policy standards. In particular, these include the quality standards tested by the Global Food Safety Initiative (GFSI), such as the International Food Safety Standard and the GLOBALGAP certification for agricultural products. They help to ensure the safety of foods on all cultivation, production and sales levels.

We are not the only ones who have these concerns. Our customers place priority on quality and safety and are becoming increasingly interested in the environmental and social sustainability of the products sold in our stores and of the processes used to make these products. In light of this shift, METRO GROUP approved a group-wide, cross-product purchasing policy for sustainable supply chain and procurement management at the end of 2013.

In addition, METRO GROUP has been committed to promoting humane working conditions at its suppliers for many years and conducts a broad range of measures in support of this goal. For example, our own-brand suppliers are required to protect fundamental human rights and to guarantee fair working conditions. As proof of this, our supplier contracts demand an audit based on the BSCI (Business Social Compliance Initiative) standard or an equivalent standard. This requirement applies to own-brand suppliers of non-food articles who manufacture end products in high-risk countries as defined by the BSCI. With systematic training programmes, we help suppliers, particularly in emerging countries, to create fair and humane working conditions. As part of our effort to support the international fire safety agreement for increased building safety in the Bangladesh textile industry, the Bangladesh Accord on Fire and Building Safety, we are working to increase building safety in the factories of all of our producers in Bangladesh. Our requirements on suppliers are contractually regulated. We regularly check to determine whether the requirements are being met. Violations of conditions can lead to exclusion from our supplier network or, in case of unacceptable production methods such as sandblasting of jeans, which is harmful to health, to a procurement ban on a product. In this way, we further minimise our supplier risk. Should, however, an incident related to quality occur, the process steps described in our manual on incidents and crises take effect. Our top priority is to correctly manage the incident in the customers’ best interest. In addition, we examine possible improvements to our quality assurance systems.

To prevent disruptions in the supply of goods and to avoid becoming dependent on individual companies, we work with a variety of suppliers and ensure that we do not become dependent on individual companies. By taking this approach, we ensure that the desired product is practically always in stock in the desired quality and quantity and, in the process, achieve high levels of customer satisfaction.

Our success also depends heavily on the purchase prices of the products offered for sale. In many cases, our large purchasing volumes in numerous countries have a positive effect. Product prices are based on the availability of the required raw materials that may temporarily or continually become scarce. This can drive up purchase prices or lead to a certain level of volatility. We address procurement risks by continuously optimising the purchasing process. Such steps include joint procurement and the negotiation of terms with our suppliers. Prompt implementation of these improvements is a key success factor.

Over the medium term, such global challenges as climate change, the overfishing of the world’s seas and access to clean water could restrict the availability of raw materials, including reductions in populations of certain types of fish. These trends can trigger price increases. For this reason, METRO GROUP has been supporting standards for more sustainable fishing and fish farming for years and has been working with relevant suppliers.

Another example is METRO GROUP’s decision to join the Roundtable on Sustainable Palm Oil (RSPO) in 2011. The organisation, which includes companies and non-governmental organisations, promotes the sustainable cultivation of palm oil, a raw material primarily used in cosmetics and sweets. METRO GROUP plans to only use certified sustainable palm oil in its own-brand products beginning in 2020.

Other examples of product risks include supply bottlenecks after natural disasters, longer delivery times and price increases. METRO GROUP’s purchasing and supply chain management create the structures that are needed to ensure the availability of goods at all times.

METRO GROUP comprehensively reports about the risks and opportunities resulting from climate change as part of its annual participation in a survey conducted by the independent non-governmental organisation CDP (formerly: the Carbon Disclosure Project). The CDP assessment shows whether companies are effectively addressing the effect of climate change on their business processes and whether they provide transparent information on these efforts.

For more information about our work to create a sustainable supply chain, see chapter 8 Sustainability management.

Supply chain risks

The responsibility of the supply chain is to ensure maximum product availability at optimised cost structures while considering aspects related to sustainability, such as energy and fuel consumption.

The growing variety of items in the product range and high merchandise turnover, however, result in organisational, IT, logistics and inventory risks. The growing internationalisation of our suppliers and the focus on regional and local product assortments increase these risks. The lack of active inventory management conducted on the basis of adequate planning parameters can result in significantly higher warehousing costs, above-average write-downs on products and, in exceptional cases, in the destruction of goods. Disruptions in the value chain, including in the transport of goods from the supplier to our stores or customers (during delivery), can intensify this effect. We counteract this by optimising inventory and product group management.

Inadequate regular communications regarding future product volume as a result of such things as non-existent or incorrect projections can result in insufficient product availability and inefficiencies in logistics. We respond to this risk by systematically reassigning and bundling responsibilities for customer order processing, procurement planning and master data administration in the Supply Chain Planning department.

Incomplete or poorly managed product and customer master data can lead to serious delays and disruptions in the inclusion and removal of products as well as the product supply to our customers. For this reason, we have intensified our efforts to ensure the completeness and accuracy of master data by taking such steps as regularly monitoring relevant performance indicators.

Additional challenges arise from the expansion of our online activities, our multichannel business, delivery options and the increased complexity that results from these activities as well as other innovative sales formats. We address the resulting risks by intensifying cooperation among the affected departments. We also expect to produce synergies with joint supply chain solutions.

We prevent unnecessary complexity in the portfolio of our external logistics service providers and thus excessively high total costs by harmonising business partners. In the process, we also work to prevent dependencies on individual service providers from emerging.

Another logistics risk arises from the generally complex and at the same time underdeveloped supply structures that prevail in particular in emerging and developing markets. In many cases, these go hand-in-hand with particularly challenging climatic conditions that can result in food spoilage on the way from the producer to the store. METRO GROUP creates the necessary structures to ensure consistently high quality in the supply chain at all times. We conduct qualification programmes to prepare our suppliers and logistics providers in emerging markets for these logistics requirements. In this way, we also make a lasting contribution to local food supplies and counter the problem of food waste.

In case of product incidents, our logistics systems must be prepared to trace the product’s itinerary and origin within a very short time. This is done with the help of modern technologies and product identification standards. We are actively involved in various international organisations to foster the developments of these standards and promote the introduction of innovative technologies for improved product identification.

Financial risks

The risk of price changes (interest rate risks, currency risks, share price risks), liquidity risks, credit risks in dealings with counterparties in the context of financial transactions and risks arising from cash flow fluctuations may have a significant negative impact on our financial result. For this reason, the financial risks of METRO GROUP are centrally managed.

Ensuring METRO GROUP’s unlimited access to the capital markets is integral to the management of financial risks. Multiple rating downgrades would have a significant negative impact on our liquidity and group financing (risk number 12). To prevent this, our current strategy focuses on debt reduction. Among other things, this is achieved by continuously optimising our net working capital and focusing our investment funds on measures that add value to the company. In this way, we gain additional flexibility to finance the transformation of our business models in response to the continuously changing needs and demands of our customers while allowing for a stabilisation and medium-term improvement of our rating. In comparison to last year, the probability of occurrence of risk number 12 has fallen from “unlikely” to “low” because the debt has been further reduced and rating-relevant metrics have improved slightly.

Another identified risk concerns unexpected deviations from our budget or outlook (risk number 7, unchanged since last year). This could mean we would not hit our target figures and would have to revalue our assets, including our goodwill. In turn, this would have a negative impact on our asset and earnings position (risk number 11, unchanged since last year). For this reason, we attach a high priority to measures designed to limit these risks. In one reflection of this, we are implementing systematic strategic earnings improvement measures for the sales lines of METRO GROUP, focusing in particular on countries that are subject to impairment risk.

In addition, the steps we take to counter this risk include careful monitoring of risks and opportunities as well as the effective internal controls for the budget and forecast process. The Internal Audit department regularly reviews the effectiveness of the internal control system as part of its audit schedule. During the past financial year, we further intensified the planning and the related internal coordination process. The change of financial year has resulted in additional early planning security because our very profitable Christmas business now takes place at the beginning of the financial year, instead of at the end of it. Finally, the outlook offers far-reaching insights into the group’s expectations for business development during the coming financial year.

For more information about financial risks and their management, see the notes to the consolidated financial statements in no. 43 Management of financial risks.

Other risks

Risks from portfolio changes

METRO GROUP aims to continuously optimise its portfolio. All portfolio changes and the related strategic and investment or divestment decisions are guided by their contribution to the company’s success in terms of value-based management. We can reduce risks related to the intrinsic value of our assets – both in terms of individual groups of assets and in terms of our overall portfolio – through value-based management.

In financial year 2013/14, the disposal of the Eastern European business of the Real sales line (excluding Turkey) with the sale and subsequent deconsolidation of Real Poland was concluded after fulfilment of the final condition precedent. The disposal of Real’s business in Turkey was also completed during the reporting period following the review of antitrust authorities in the summer of 2014. As a result of inadequate market opportunities, the Management Board of METRO AG decided to pull METRO Cash & Carry out of Denmark. As part of this decision, two stores will be sold, subject to the approval of antitrust authorities. The three remaining stores will close on 31 December 2014. The closure of METRO Cash & Carry’s business in Egypt was completed in the first quarter of 2013/14. METRO GROUP also decided to sell METRO Cash & Carry’s operations in Vietnam. The disposal of METRO Cash & Carry’s business in Vietnam is expected to be concluded in financial year 2014/15 and is still subject to fulfilment of the usual conditions of execution and approvals by the responsible authorities. These transactions will increase the flexibility of METRO GROUP and facilitate investments in future growth. Risks resulting from these portfolio changes are reflected in the financial statements to the extent that this is required in the balance sheet.

During financial year 2013/14, METRO GROUP also acquired a 75 per cent stake in the Spanish food service distribution company MIDBAN. The aim of the transaction is to grow the food service distribution business at METRO Cash & Carry Spain and to sustainably secure the company’s excellent market position.

Information technology risks

The demands of our information technology (IT) have markedly increased as a result of new formats and sales channels and their increasing importance to the group’s business, such as online retail and deliveries. Other tasks of information technology include real-time analyses of business processes and timely monitoring and management of goods flows. Regulations such as those regarding data protection in credit card processing, the use of customer-specific information in big data solutions that are associated with an increased public debate about misuse as well as the growing complexity of IT generate additional risks for our company.

As a result, we have reinforced the organisational measures that ensure our compliance with internal and external IT regulations. We regularly check systems connected to the Internet for weak spots. We counter the high complexity of modern IT landscapes through clear management regulations and a centralised corporate architecture, known as enterprise architecture management.

Important business processes such as purchasing/product ordering, marketing and sales have used IT systems for many years. New systems for online retailing must be continuously available, as these systems are a prerequisite for unlimited access outside normal store hours. As a result, the continuous availability of the infrastructure is a critical factor in the development and implementation of our IT solutions. Systems that are essential business operations in the stores, especially checkouts, are largely self-contained and can continue to be used for some time, even during events such as network failures or the failure of central systems. In case of partial network failures, they can automatically reroute shipments or switch to redundant routes.

Modern technologies such as remote server management and cloud computing allow us to use our hardware efficiently. In addition, in the event of one or several server failures, centralised IT systems can be quickly restored. We operate several central computer centres, which even enable us to compensate for business interruptions and to limit them to a minimum. We have introduced a contingency plan to restore computer centres in Germany following longer-term outages (for example, as a result of fires, natural disasters or criminal actions) (risk number 5, unchanged since last year).

Information is a key resource for all companies of METRO GROUP. This means that it must enjoy the same protection as all other assets. For this reason, METRO AG developed a documented IT security management system (ISMS), which was launched at the start of 2013. The aim of this system’s framework is to ensure the confidentiality (access only for authorised users) and integrity (accuracy and completeness) of this information. Among other things, the management principles for IT security describe our operational and organisational structures. We have implemented IT security controls in accordance with the industry standard ISO 27000. For example, the IT security guideline sets out requirements for the assignment of passwords. In this way, we ensure that the data we process are correct and complete and can only be viewed by authorised staff. The necessary user accounts and access authorisations are administered centrally according to predefined, partially automated processes. We regularly review whether group specifications are followed in terms of critical user rights and provide centralised reports on the results of our examinations. Affected employees are made aware of IT security issues, prepared for these and kept up-to-date through regular, standardised training courses in accordance with ISO 27000. In addition, the key processes and IT systems of our central IT company METRO SYSTEMS are reviewed by internal audit and by external inspectors who examine and certify them in accordance with the international standard for audit reports of service organisations ISAE 3402 (International Standard on Assurance Engagements).

Awareness of the importance of data protection was further strengthened at all levels of our group. The commitment to adhere to the data protection standards of the German Federal Data Protection Act (BDSG) is part of all employment contracts. In particular employees of company units that have access to and handle sensitive data undergo on-site training on data protection. Employees with privileged access rights (for example, administrators) must sign an additional formal obligation.

Human resources risks

The expertise, dedication and motivation of our employees are key success factors that have a decisive impact on METRO GROUP’s competitive position. One prerequisite for achieving strategic goals are highly qualified experts and managers. It is an ongoing challenge to recruit and retain such valuable employees for the group, in particular in the face of demographic change and intense competition for the best people. Intra-company programmes for the continued qualification of employees and the strengthening of corporate culture are also indispensable. To ensure that our employees have the requisite expertise and leadership skills, we optimise training and professional development programmes at all levels. Training courses and effective human resource development measures promote entrepreneurial thinking and actions; variable pay components based on the attainment of corporate and individual objectives serve as an incentive. Direct participation in business success increases employees’ identification with METRO GROUP and enhances their awareness of opportunities and risks in all entrepreneurial decisions.

One thing is certain: METRO GROUP can only grow if we support our employees. This is reflected in annual performance reviews in which past achievements are assessed and future development measures are agreed upon with individual employees. With targeted training programmes, which we implement in cooperation with various partners, we manage to attract young people to METRO GROUP and to optimally develop their particular strengths. In Germany, in particular, METRO GROUP companies therefore place great value on their own training programmes for employees. With a share of 7.7 per cent in the reporting period, we are one of Germany’s largest providers of occupational training.

Succession planning at METRO GROUP, in particular in senior management positions, is guaranteed through customised career paths and development plans. All these measures serve to counter the key risks of insufficient talent development and promotion (risk number 6, unchanged since last year).

Health promotion concepts, occupational safety measures and locally coordinated programmes such as back therapy training, fitness classes, company sports activities, dietary tips, stress prevention training courses, ergonomic advice, computer glasses and employee counselling programmes provide for a safe, hazard-free work environment. We counter risks of non-compliance with applicable labour regulations by introducing clear guidelines and compliance rules in connection with a respectful approach to our employees. This effort is supported by guidelines on fair working conditions and social partnership. Our guidelines on occupational safety and health management aim to create a work environment characterised by respect, fairness and partnership.

For more information about METRO GROUP’s human resources policy, see chapter 6 Employees.

Legal and tax risks

Legal risks arise primarily from labour and civil law cases as well as from changes in trade laws. In addition, risks for METRO GROUP may arise from preliminary investigations, for example, possible infringements of antitrust or competition law (risk number 10.1, unchanged since last year). Antitrust law risks may arise in the context of business dealings with METRO GROUP suppliers in such areas as the resale price of retail goods. For pending antitrust law proceedings, where sufficiently substantiated, necessary risk provisions were created.

Tax risks mainly emanate from external audits which take a differing view of certain circumstances and transactions. In addition, risks may result from interpretations of sales tax regulations. The Corporate Group Tax department of METRO AG has established appropriate guidelines to ensure early detection and minimisation of tax risks. These risks are regularly and systematically examined. The resulting risk minimisation measures are coordinated by the Corporate Group Tax department of METRO AG and the national subsidiaries.

Control of Media-Saturn-Holding GmbH

Based on the arbitral award of 8 August 2012, the approval of this decision by the Higher Regional Court of Munich of 18 December 2013 as well as the binding ruling by the Munich court on 9 August 2012, the Management Board feels confirmed in its opinion that the consolidation of the Media-Saturn group of companies was rightfully effected according to the relevant IFRS (International Financial Reporting Standards) regulations, both in the past and in the consolidated financial statements as of 30 September 2014.

Through its fully owned subsidiary METRO Kaufhaus und Fachmarkt Holding GmbH (METRO KFH), METRO AG indirectly holds 78.38 per cent of the shares in Media-Saturn-Holding GmbH (MSH). In March 2011, the shareholders’ general meeting of MSH decided, with the votes of METRO KFH, to create an advisory board to strengthen the governance structures at MSH. The advisory board takes decisions by simple majority in number on operational measures proposed by the executive board of MSH that require approval. According to the Articles of Association of MSH, METRO AG, or METRO KFH, has the right to delegate one more member to the advisory board than the collective body of shareholders and therefore has a majority by number on the advisory board. The appellate court dealing with the appeal of a non-controlling shareholder ruled fully in favour of METRO AG, endorsing the effective establishment of an advisory board and determining that an arbitration court is the responsible authority for all issues of authority and majority requirements of the advisory board. Upon the appeal of METRO KFH, the arbitration court endorsed key aspects of METRO’s position in its arbitral ruling of 8 August 2012: the advisory board can take decisions by simple majority in number on operational transactions proposed by the executive board of MSH that require approval. However, a minority shareholder of MSH has appealed the ruling of the Munich court that endorsed the arbitral award to the German Federal Court of Justice.

In addition, the member of the advisory board appointed by the non-controlling shareholder has filed several legal challenges against MSH and raised questions about decisions taken by the advisory board of MSH. This concerns, among other things, the budget resolutions for 2012/13 and 2013/14. They particularly criticise that a majority of 80 per cent is required in the advisory board and that this majority had not been reached, representing a violation of the division of authorities determined in the articles of incorporation. Most of these actions – in connection with the approval of the preparation of the annual financial statements of MSH as of 30 September 2012 and in relation to budget resolutions for 2012/13 – have already been dismissed in the first instance. The relevant defeated claimant filed an appeal against these verdicts with the Higher Regional Court of Munich. Meanwhile, the Higher Regional Court of Munich decided that it intends to dismiss the appeal because the senate believed it was without merit. In response, the claimant in this case regarding the approval of the preparation of the annual financial statements has withdrawn the appeal. Furthermore, in connection with the budget resolutions for 2012/13, the Higher Regional Court of Munich dismissed the appeal on the basis of the previous resolution. The claimant filed a complaint relating to non-admission with the German Federal Court of Justice. In METRO’s view, the chances of success of the non-admission complaint and other challenges are also low. In particular, METRO does not expect the courts to deviate from the arbitration court’s decision regarding the majority voting requirement for the advisory board.

Moreover, the minority shareholder filed additional complaints against MSH – namely against resolutions of the shareholders’ meeting regarding the individual location changes implemented in the meantime and the minority shareholder’s aspired dismissal of a managing director installed by METRO. After MSH and METRO won the case involving the location changes before the Ingolstadt District Court, the Higher Regional Court of Munich upheld the appeal in part and demanded in concrete circumstances an individual content-related vote by METRO. MSH and METRO have filed a complaint relating to non-admission with the German Federal Court of Justice. The Ingolstadt District Court has not yet reached a decision on the complaint of the minority shareholder through which the shareholder aims to achieve the dismissal of a managing director installed by METRO. The Ingolstadt District Court has already dismissed the minority shareholder’s request for an injunction against the managing director that would have prohibited him from performing his duties. The minority shareholder has filed an appeal with the Higher Regional Court of Munich.

Furthermore, a METRO AG shareholder filed a nullity plea regarding the approved annual financial statements of METRO AG as of 31 December 2012, citing an alleged infringement of the regulations governing the structure of the annual financial statements due to the allegedly flawed consolidation of the Media-Saturn group of companies in the consolidated financial statements of METRO AG. On 3 April 2014, the Düsseldorf District Court ruled in METRO’s favour in a legally binding decision.

If, contrary to the expectations of the Management Board, the German Federal Court of Justice were to side with the minority shareholder, the arbitral verdict were invalidated and, in another procedural step, another arbitral court were to decide this matter to the disadvantage of METRO, or a court were to reach a ruling that contradicted the arbitral verdict in relevant issues as a result of other legal challenges filed by such individuals as members of the advisory board, the Management Board’s opinion on the full consolidation of the Media-Saturn group of companies would have to be reviewed. In that case, a deconsolidation of the Media-Saturn group of companies might become necessary if the sustained power to exercise control cannot be assumed any more. A deconsolidation of the Media-Saturn group of companies based on current values would lead to one-time non-cash deconsolidation income. Following the deconsolidation, the interest in the Media-Saturn group of companies would have to be recognised at equity. This change regarding the consolidation of the Media-Saturn group of companies could impact the company’s key financials.

For more information about legal issues, see the notes to the consolidated financial statements in no. 46 Other legal issues.

Compliance risks

The activities of METRO GROUP are subject to various legal stipulations and self-imposed standards of conduct. Legal requirements in the various jurisdictions as well as the expectations of our customers and the public regarding corporate compliance have generally continued to increase and become more complex. In response to these requirements, METRO GROUP has established a group-wide compliance system that it continuously refines. The aim of this system is to systematically and sustainably prevent regulatory infringements within the company. METRO GROUP regularly identifies behavioural corporate risks.

Our compliance management is primarily focused on preventing corruption and antitrust law risks. On the one hand, corruption risks arise in dealings with public authorities and public officials, for example, in the context of the company’s international expansion or authorisation processes. On the other hand, they can arise in business dealings with suppliers and other business partners (risk number 10.2, unchanged since last year). In addition, the group-wide compliance management system covers other relevant criminal and penal risks, data protection and labour law-related risks such as discrimination.

As part of the compliance management system, the necessary organisational structures are established in consideration of all identified and assessed compliance risks. The responsible departments consistently manage and control the risks within the existing structures.

METRO AG has introduced group-wide standards of conduct to manage the identified compliance risks, including a handbook on antitrust law that provides guidelines on supplier negotiations, among other areas. This handbook also contains templates for antitrust law-compliant communications with suppliers. In addition, METRO AG has introduced group-wide anti-corruption policies outlining standards of conduct for dealings with both authorities and public officials and with business partners. The anti-corruption guidelines also stipulate that a compliance check must be carried out before entering into a business relationship with business partners in high-risk areas.

Compliance guidelines are continuously updated and adjusted in a risk-based manner. These efforts are complemented by compulsory training courses, systematic and target group-oriented communications and the consistent, disciplined handling of compliance incidents and relevant follow-up measures. In addition, METRO GROUP employees, their business partners and customers have access to a professional reporting system that enables them to notify the company of compliance violations and potential violations in all group languages. If necessary, incidents may be reported anonymously. The compliance organisation ensures that all reported cases are investigated in an appropriate fashion.

By strengthening its internal control system, the company ensures that compliance and governance requirements are being increasingly integrated into its operational business and financial processes and reviewed.

In sensitive process areas, particularly expansion, construction, purchasing and store processes, we will continue to apply the improvements we initiated in the previous financial year (risk number 9, unchanged since last year). This is the reason that we conduct risk analyses as well as modify or expand our operational control structures. In addition, we increasingly assess the effectiveness of standard controls for specific processes.