CORPORATE REPORTS

Corporate Governance Report

Striving for best governance practice

Introduction
Clicks Group is committed to adopting sound corporate governance practices throughout its business to protect the interests of the group and its stakeholders.

The group endorses the Code of Corporate Practices and Conduct contained in the King Committee Report on Corporate Governance (King ll). The directors believe Clicks Group complies with both King ll and the relevant governance provisions in the Listings Requirements of the JSE Limited.

Clicks Group also recognises that sustainable development is a core component of corporate governance and embraces practices which contribute to the long-term sustainability of the business and society. The group’s progress on social, economic and environmental management is contained in the Sustainability Report.

Governance enhancements in 2009

Governance processes and structures are regularly reviewed to reflect internal developments and to align with local and global best practice. During the year the following enhancements were made to governance structures:

The mandate of the risk committee was extended to include responsibility for governance and environmental sustainability, and the terms of reference of the committee are being amended accordingly.
The risk management process was further embedded into the group’s annual business planning cycle, with a risk methodology being developed and detailed risk registers compiled for the group and individual business units.
Owing to the increasing regulatory and governance requirements facing companies, a decision was made to build legal capacity within the group. An experienced attorney was appointed to the newly created position of head of group legal counsel and this role was combined with the position of company secretary.
During the year a legal compliance officer was appointed to monitor compliance with existing and new legislation and regulation.
An evaluation was undertaken to assess the group’s processes relative to the provisions of the new Companies Act 2008 which has been promulgated and is expected to be implemented in 2010.
An analysis of the new Companies Act was presented to the board by the group’s attorneys, with particular reference to the directors’ responsibilities under the new Act.
Ongoing liaison between the head of group legal counsel, the legal compliance officer and head of internal audit has ensured that compliance and risk issues are integrated into the company’s structures.
An analysis of current and pending legislation and regulation is presented at each meeting of the board, audit committee and risk committee.
An audit committee report has been prepared for the first time and is included in the annual report, in compliance with the requirements of the Companies Act as amended by the Corporate Laws Amendment Act.
Shortly after the end of the reporting period, the King lll Report was published. The head of group legal counsel and head of internal audit are reviewing the provisions of the new code relative to the group’s practices.

Board of directors

Board composition

Clicks Group has a unitary board structure with nine directors, including four salaried executive directors and five non-executive directors. Biographical details of the directors appear here.

The following changes were made to the board during the year:

John Bester was appointed to the board as an independent non-executive director effective 1 October 2008.
Robert Lumb resigned as a director with effect from 30 November 2008 and Professor Peter Eagles resigned with effect from 29 June 2009.

All the non-executive directors, including the chairman, are currently considered to be independent in terms of both the King ll definition and the guidelines outlined in the JSE Listings Requirements. As all the non-executive directors are independent, this provides the necessary objectivity for the effective functioning of the board.

The roles of the independent non-executive chairman, David Nurek, and the chief executive officer, David Kneale, are separate and clearly defined. This division of responsibilities at the helm of the company ensures a balance of authority and power, with no one individual having unrestricted decision-making powers

The non-executive directors have extensive business experience and specialist skills across a range of sectors, including accounting, finance, law, retailing and human resources. This enables them to provide balanced and independent advice and judgement in the decision-making process.

Non-executive directors have direct access to management and may meet with management independently of the executive directors.

The company has no controlling shareholder or group of shareholders and there is no direct shareholder representation on the board.

The board meets at least four times a year. Additional meetings can be convened to consider specific business issues which may arise between scheduled meetings. No additional meetings were required during the year.

Board charter

The scope of authority, responsibility, composition and functioning of the board is contained in a formal charter which is regularly reviewed. The directors retain overall responsibility and accountability for:

Approving strategic plans;
Monitoring operational performance and management;
Ensuring effective risk management and internal controls;
Legislative and regulatory compliance;
Approval of significant accounting policies and annual financial statements;
Selection, orientation and evaluation of directors;
Appropriate remuneration policies and practices;
The ongoing sustainability of the business; and
Balanced and transparent reporting to shareholders.

Board appointment
The nominations committee considers directors for appointment to the board and motivates these candidates to the board in a thorough and transparent process.

Newly appointed directors undergo a formal induction programme which outlines their fiduciary duties and provides an in-depth understanding of the group and its operations. This includes meetings with business unit heads and visits to stores and distribution centres.

Directors do not have a fixed term of appointment. One-third of the directors are required to retire by rotation each year and are eligible for re-election by shareholders at the annual general meeting (AGM). Directors appointed during the year are required to have their appointments ratified at the following AGM.

The chief executive officer is subject to a 12-month notice period, and the other executive directors a six-month period.

Executive directors retire at the age of 63, while there is no prescribed retirement age for non-executive directors.

Group executive committee

Executive management and the board work closely together in determining the strategic objectives of the group. Authority has been delegated by the board to the chief executive officer and the group executive committee for the implementation of the strategy and the ongoing management of the business. The group executive committee comprises the four executive directors. The board is apprised of progress through reporting at board meetings and regular communications with management.

The responsibilities of the group executive include:

Developing and implementing the group strategic plan;
Preparing budgets and monitoring expenditure;
Monitoring operational performance against agreed targets;
Adhering to financial and capital management policies;
Determining human resources policies and practices; and
Identifying and mitigating risk.

Company secretary
The company secretary is responsible for ensuring that board procedures and all regulations and governance codes are observed. He also provides guidance to the directors on governance, compliance and their fiduciary responsibilities.

Directors have unrestricted access to the advice and services of the company secretary. They are entitled to seek independent professional advice at the company’s expense after consultation with the chairman of the board. No directors exercised this right during the year. Directors also have unrestricted access to all company information.

The company secretary co-ordinates the induction programme for newly appointed directors, as well as the annual board evaluation process. The appointment and removal of the company secretary is a matter for the board and not executive management.

Allan Scott retired as company secretary with effect from 31 March 2009. With effect from 1 July 2009, he was replaced by David Janks who was appointed as head of group legal counsel and company secretary. During the interim period ahead of Mr Janks’ appointment, Annalize Booysen, the group tax manager, served as the company secretary.

Board evaluation
An annual questionnaire-based evaluation is undertaken by the directors which includes an assessment of the performance of the board, the chairman, the chief executive officer, individual directors and all board committees. The key issues covered include the board role and agenda setting; the size, composition and independence of the board; director orientation and development; and board meetings. The chairman of the board discusses the results of these reviews with the board, the chairpersons of the board committees and with each director.

Board and committee structure
The directors have delegated specific functions to committees to assist the board in meeting its oversight responsibilities. The committees all have clearly defined mandates which are reviewed annually and the directors confirm that the committees have functioned in accordance with these written terms of reference during the financial year. All board committees are chaired by independent non-executive directors.

Audit committee

Role:

Ensure that management has created and maintained an effective control environment in the group. Further detail is contained in the audit committee report.

Functions

Review and approve the appropriateness of accounting and disclosure policies in the annual financial statements and related financial reporting;
Assess the effectiveness of internal controls;
Review actions taken on major accounting issues;
Oversee the functioning of the internal audit department, which reports to the audit committee;
Ensure no limitations are imposed on the scope of the internal and external audits;
Confirm the nomination and appointment of the group’s auditors and be satisfied that the auditors are independent;
Approve the terms of engagement and fees paid to the auditors;
Ensure the appointment of the auditor complies with the relevant legislation;
Determine the nature and extent of any non-audit services which the auditors may provide to the company; and
Ensure that any non-audit services provided to the company by the auditors are preapproved by the audit committee.

Remuneration committee

Role:

Ensure the group has a competitive remuneration policy to attract, retain and reward quality staff.

Functions

Ensure that the group has a remuneration policy which is aligned with the group strategy and performance goals;
Assess and review remuneration policies, employee short-term and long-term incentive schemes and performance bonuses;
Approve the remuneration of executive directors and senior management;
Propose fees for non-executive directors, which are tabled for shareholder approval at the annual general meeting; and
Determine executive and staff participation in the long-term incentive schemes.

Risk committee

Role:

Assess risk management processes and procedures adopted by management and ensure compliance with governance and sustainability principles contained in King ll.

Functions

Review risk management processes;
Assess the risk tolerance levels of the business;
Review the risk philosophy, strategies and policies;
Evaluate the basis and adequacy of insurance cover;
Ensure internal audit is aligned with risk management processes;
Identify emerging areas of risk;
Ensure ongoing compliance with good governance principles;
Identify areas of governance non-compliance and propose remedial action; and
Oversee the group’s environmental sustainability management practices.

Nominations committee

Role:

Ensure optimal functioning of the board, oversee the composition of the board, the appointment of directors and succession planning.

Functions

Advise on the composition of the board, review the board structure, size and balance between non-executive and executive directors;
Identify and recommend qualified candidates for directorships;
Ensure that the board has an appropriate balance of skills, experience and diversity;
Co-ordinate the board evaluation process;
Develop effective succession planning for senior management; and
Ensure that the performance of the board, individual members and sub-committees is reviewed formally and regularly.

Transformation committee

Role:

Monitor progress across all areas of strategic empowerment, including ownership and control, employment equity, affirmative procurement, as well as compliance with transformation codes.

Functions

Ensure appropriate short and long-term targets are set by management;
Monitor progress against targets; and

Board and committee attendance

Board

Audit

Remuneration

Risk

Nominations

Transformation

Number of meetings

David Nurek

Fatima Abrahams

John Bester*

Peter Eagles#

3/3

Bertina Engelbrecht

Michael Harvey

Fatima Jakoet

David Kneale

Robert Lumb^

1/1

Martin Rosen

Keith Warburton

Attendance at meetings (%) 2009

100

Attendance at meetings (%) 2008

100

+	Chair			#	Resigned 29 June 2009
*	Appointed 1 October 2008			^	Resigned 30 November 2008

Internal accountability

Risk management
The board, through the risk committee, is responsible for setting risk policies, risk tolerance levels and ensuring that appropriate risk management processes have been implemented by management. Further details are contained in the risk management report.

Internal audit
Internal audit is an independent appraisal and assurance function which is central to the group’s governance structures. The role of internal audit is contained in the audit committee charter and the internal audit charter. Details of the internal audit function are outlined in the audit committee report.

Legislative and regulatory compliance
Legislative and regulatory compliance is monitored by the head of group legal counsel. The following legislation and regulation which could impact on the group’s business have been reviewed and analysed:

A Code of Conduct for Pharmacists was published in October 2008 and a Disciplinary Code was published for comment. A set of Rules for Good Pharmacy Practice was also published during the period.
The Regulation of Interception of Communications and Provisions of Communication-related Information Act (RICA).
Proposed amendments to the Medicines and Related Substances Act.
Revised regulations for dispensing fees for pharmacists.
The Companies Act 2008 which was assented to in April 2009.
The Competition Amendment Bill was published for comment and assented to in September 2009.
The Foodstuffs, Cosmetics and Disinfectants Act.
The Standards Act.
The Consumer Protection Act. The administrative aspects of the legislation will come into operation in April 2010 and the provisions relating to the consumer will be effective from October 2010.
Complementary medicine draft regulations were published.

There were no cases of legislative or regulatory non-compliance during the year.

Personal share dealings
The group’s insider trading policy precludes directors and staff from trading in Clicks Group shares during two formalised closed periods. These closed periods run from the end of the interim and annual reporting periods until the financial results are disclosed on the Securities Exchange News Service (SENS).

Embargoes can also be placed on share dealings at any other time if directors or executives have access to price-sensitive information which is not in the public domain.

Directors are required to obtain written clearance from the chairman prior to dealing in the company’s shares. The chairman is required to obtain approval from the chairman of the audit committee before undertaking any share dealings. It is also mandatory for directors to notify the company secretary of any dealings in the company’s shares. This information is then disclosed on SENS within 48 hours of the trade being effected. These dealings are also reported retrospectively at board meetings.

Ethical behaviour and values
The group subscribes to the highest ethical standards of business practice. A set of values and behavioural principles require staff to display integrity, mutual respect and openness, and affords them the right and obligation to challenge others who are not adhering to these values.

A documented policy requires all employees to adhere to ethical business practices in their relationships with one another, suppliers, intermediaries, shareholders and investors. This policy also sets stringent standards relating to the acceptance of gifts from third parties and declarations of potential conflicts of interests.

A fraud policy ensures that a firm stance is taken against fraud and the prosecution of offenders. This policy outlines the group’s response to fraud, theft and corruption committed by staff and external parties against the company. The internal audit department manages the legal processes relating to fraud cases to ensure the highest possible level of recovery for the group from any fraudulent behaviour.

Tip-offs Anonymous
Staff are encouraged to report suspected fraudulent or unethical behaviour via a toll-free telephone service managed by an external service provider. All reported incidents are investigated. There has been an increase in the number of reported incidents over the past year owing to awareness campaigns and staff recognising that the facility is managed independently and anonymously.

	2009	2008
Reported incidents	120	87
Resultant dismissals/resignations	39	21
Employees counselled	7	8
Other disciplinary action	22	13

Anti-competitive conduct
Clicks Group competes fairly and does not engage in anti-competitive practices that could prevent others competing with the group or that could adversely impact on customers.

The directors are committed to ensuring that all group executives and employees understand the requirements of competition law and regulations. Robust risk management and supervisory oversight processes are in place to ensure adherence to these laws and regulations.

The group occupies a market-leading position in healthcare retailing and supply in South Africa and guards the confidentiality of intellectual property, customer and supplier data, business processes and methodologies.

As a member of the SA Retailers’ Association the group participates in forums with other retailers that require an industry response, such as representation to government. The principle that competition should not be compromised and that no sharing of information may occur that could detract from the capacity of any retailer to compete with one another, is encoded in the constitution of the SA Retailers’ Association.

The group has not been sanctioned for any anti-competitive practices or non-compliance with the Competition Act.

Financial statements and external review

The directors accept ultimate responsibility for the preparation of the annual financial statements that fairly represent the results of the group in accordance with the Companies Act and International Financial Reporting Standards (IFRS).

The external auditors are responsible for independently auditing and reporting on these financial statements in conformance with statements of International Standards of Auditing and applicable laws.

Going concern
The directors are satisfied that the group has adequate resources to continue operating for the next 12 months and into the foreseeable future. The financial statements presented on pages 58 to 118 have accordingly been prepared on a going concern basis. The board is apprised of the group’s going concern status at board meetings.

External audit
The role of the external audit function is covered in the comprehensive audit committee report .