Corporate governance report 

Clicks Group strives to achieve the highest standards of corporate governance and follows stringent legislative and regulatory compliance practices to ensure the sustainability of the business.

The directors recognise that sound governance can benefit long-term equity performance and enhance shareholder value. In an environment of increasing regulatory and legislative requirements and reporting, the board aims to maintain a balance between compliance and the need to deliver sustainable performance to shareholders.

The group acknowledges that it is the duty of directors and officers to discharge their legal responsibilities with care, skill and diligence, and also to comply with their fiduciary duties to the company. The group has adopted the King Code of Governance Principles 2009 (King lll) to achieve the overarching corporate governance philosophies of fairness, accountability, independence, responsibility and transparency.

The group has implemented the recommendations of King lll, including the recommendations which are impacted by the implementation of the Companies Act No. 71 of 2008, as amended (the Companies Act).

Governance enhancements

Governance practices are regularly reviewed to align with legislative and regulatory changes and to reflect developments within the business. A major focus of the past financial year has been on the implementation of King lll and the Companies Act. A subcommittee of the board comprising executive management and non-executive directors evaluated the principles of King lll against current governance practices and developed a plan to implement the relevant recommendations.

The following changes and enhancements were made to governance processes during the year:

• The terms of reference of the board committees were amended to comply with the requirements of King III.
• The group has adopted integrated reporting to provide a balanced view to shareholders on the sustainability of the business.
• The independence of non-executive directors has been reviewed and this practice will be undertaken annually.
• The members of the audit and risk committee will be proposed for election for the first time at the January 2012 annual general meeting (AGM).
• As recommended by King lll, the group’s remuneration policy will be proposed to shareholders for a non-binding advisory vote at the AGM.
• A compliance process framework has been implemented throughout the group.
• The structure of the board committees has been amended with effect from 1 September 2011. The remuneration and nominations committees were combined into a single committee. This committee comprises the directors who were members of the respective remuneration committee and nominations committee prior to 31 August 2011.
• In line with the requirements of the Companies Act, the board has established a social and ethics committee, with effect from 1 September 2011. The transformation committee has been incorporated into the social and ethics committee.
• The Companies Act came into effect on 1 May 2011 and the group’s processes are being aligned with those required by the Act. The revised memorandum of incorporation (MOI) will be implemented prior to 30 April 2013 and it is anticipated that the revised MOI will be proposed to shareholders for approval at the 2013 AGM.
• The board determined that the prescribed officers in terms of the Companies Act are the members of the group executive which comprises the four executive directors. These are the people who exercise general executive control and management of the whole or a significant portion of the group’s businesses and activities. All other senior management report to members of the group executive.

Board of directors

Board composition

Clicks Group has a unitary board structure with 10 directors, including four salaried executive directors and six non-executive directors. The only change to the board composition during the year was the resignation of Keith Warburton as group financial director and chief financial officer (CFO) and the appointment of Michael Fleming as group financial director and CFO.

The board elected the chairman after the AGM in January 2011 and will continue to follow this practice after the AGM each year.

The roles of the non-executive chairman and the chief executive  officer are formalised, 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, healthcare 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.

Independence of directors

King lll requires the board to review the independence of long-serving non-executive directors. This applies to the chairman of the board, David Nurek, who has served as a director for 14 years.

The nominations committee conducted an evaluation of the independence of the chairman and non-executive directors. All relevant factors which could impact on their independence and performance were considered, in particular the factors outlined in King lll and the Companies Act. Based on the feedback from this evaluation, the nominations committee believes there are no factors which prevent the directors from exercising independent judgement or acting in an independent manner. All six non-executive directors, including the chairman, are therefore appropriately classified as being independent in terms of both the King Ill definition and the guidelines outlined in the JSE Listings Requirements.

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:

• ensuring the sustainability of the business;
• approving strategic plans;
• monitoring operational performance and management;
  
• ensuring effective risk management and internal controls;
• legislative, regulatory and governance compliance;
• approval of significant accounting policies and annual financial statements;
• selection, orientation and evaluation of directors;
• appropriate remuneration policies and practices;
• monitoring transformation and empowerment; and
• balanced and transparent reporting to shareholders.

In the year ahead the board charter will be aligned with the requirements of the Companies Act.

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. The remuneration and nominations committee has assumed this responsibility from 1 September 2011.

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, being those longest in office, are required to retire by rotation each year and are eligible for re-election by shareholders at the 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;
• monitoring and managing risk; and
• communicating with stakeholders.

Company secretary

The company secretary ensures 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. As an experienced attorney, the company secretary is also head: group legal counsel and provides legal advice and services to the group.

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 for executive management. The company secretary provides training and updates to the board at all meetings by reporting on new and amended legislation and regulations which are relevant to the group’s businesses. During the year under review the directors were informed of legislative and regulatory developments in regard to inter alia the Consumer Protection Act, the Protection of Personal Information Bill, the Competition Act, the Medicines and Related Substances Act and the proposed logistics fees regulations under the Act, the Companies Act, the Pharmacy Act, the Income Tax Act and proposed changes to various labour laws. Director development programmes are available to the board at the request of any director.

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’s 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. The chairman receives feedback on his performance from the nominations committee.

The main recommendation arising out of the 2011 board evaluation process was to streamline the committee structure and amalgamate the nominations committee and the remuneration committee. This will allow the combined committee to function more efficiently and avoid duplication across the two committees. These committees were combined with effect from 1 September 2011 to form the remuneration and nominations committee.

The responses from the evaluation process indicated that the board is well balanced and the size of the board is adequate for the group. The board has the relevant knowledge relating to the group’s business and has strengthened its knowledge base in relation to the pharmacy business. The directors believe board meetings are well organised, efficiently run and all relevant aspects of the company’s businesses are dealt with thoroughly by the board and its various committees which have all discharged their responsibilities adequately.

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 documented 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.

Board and committee attendance
	Board	Audit and Risk	Remuneration	Nominations	Transformation
Number of meetings	4	5	2	2	2
David Nurek	4+	5	2	2+	2
Fatima Abrahams	3		2+	2	2+
John Bester	4	5+	2
Bertina Engelbrecht	4				2
Michael Fleming*	2/2
Michael Harvey	4				2
Fatima Jakoet	4	4
David Kneale	4				2
Nkaki Matlala	4	2/3^			1/2^
Martin Rosen	4			2
Keith Warburton**	2/2
Meeting attendance (%) 2011	98	89	100	100	92
Meeting attendance (%) 2010	100	100	100	100	100
+ Chair
* Appointed 31 March 2011
** Resigned 31 March 2011
^  Appointed 26 January 2011

The board and committee structure with effect from 1 September 2011 is as follows:

BOARD OF DIRECTORS
Six independent non-executive directors Four executive directors
Remuneration and nominations committee		Audit and risk committee		Social and ethics committee
Fatima Abrahams (chair)		John Bester (chair)		David Nurek (chair)
John Bester		Fatima Jakoet		Fatima Abrahams
David Nurek		Nkaki Matlala		Nkaki Matlala
Martin Rosen		David Nurek		Bertina Engelbrecht
				Michael Harvey
Directors attending		Directors attending		David Kneale
by invitation		by invitation
Bertina Engelbrecht		Bertina Engelbrecht
David Kneale		Michael Fleming
		Michael Harvey
		David Kneale

 

Remuneration and nominations committee

As detailed earlier in the report, the board approved the amalgamation of the remuneration and nominations committees with effect from 1 September 2011. The committee comprises four independent non-executive directors. The group’s external remuneration consultant attends certain of these meetings by invitation.

Role

Ensure the group has a competitive remuneration policy to attract, retain and reward quality staff, and to ensure the board’s composition and functioning meets the needs of the group.

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 long-term incentive schemes and short-term 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 AGM. Determine executive and staff participation in the long-term incentive schemes. The committee has assumed the following functions which were previously within the mandate of the nominations committee: 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. Ensure that the performance of the board, individual members and sub-committees is reviewed formally and regularly. Further detail is contained in the Remuneration Report.

Audit and risk committee

The committee structure and composition is unchanged and the four independent non-executive directors will be proposed for election to the committee by shareholders at the forthcoming AGM.

The roles, functions and responsibilities of the committee are detailed in the Audit and Risk Committee Report.

Social and ethics committee

The transformation committee has been merged with the newly constituted social and ethics committee with effect from 1 September 2011. The committee comprises three independent non-executive directors and three executive directors.

Role

Monitor activities relating to ethics, stakeholder engagement and the social impact of the company on communities within which it operates. Monitor progress across all areas of strategic empowerment as well as compliance with transformation codes.

Functions

Monitor the company’s activities relating to social and economic development, good corporate citizenship, the environment, and health and public safety. Ensure appropriate short and long-term targets are set by management. Monitor progress against targets. Monitor changes in the application and interpretation of empowerment charters and codes. Monitor those functions referred to and required in terms of the Companies Act and its regulations. Refer to the Transformation Report and the Stakeholder Engagement report.

Risk management

Clicks Group aims to achieve an appropriate balance between risk and reward, recognising that certain risks need to be taken to achieve sustainable growth and returns while at the same time protecting the group and its stakeholders against avoidable risks.

A disciplined approach is followed in evaluating risks and developing appropriate strategies to mitigate and manage the risk.

The risk attitude of the group, which is the level of risk acceptable to the directors and management, is reviewed annually. The group adopts a conservative risk attitude which the directors believe is appropriate given the nature of the group’s business in the healthcare retail and supply market.

In compliance with King III the board obtained assurance regarding the effectiveness of the risk management process and adequacy of the risk methodology. Both were considered to be adequate.

Responsibility for risk management

The board is responsible for the oversight of the risk management process and has delegated responsibility to the audit and risk committee. This committee is responsible for ensuring the group has implemented an effective policy and plan for risk, and that disclosure regarding risk is comprehensive, timely and relevant. The role, functions and composition of the committee are included in the Audit and Risk Committee Report.

The group executive committee is responsible for designing and implementing the risk management process and monitoring ongoing progress. The group executive regularly reviews the group risks to ensure mitigation strategies are being implemented by the business units. Group internal audit monitors the progress of the group and business units in managing risks and reports its findings to the audit and risk committee biannually.

Risk management process

Risk management is embedded in the group’s annual business planning cycle. In determining the strategic and operational plans for the year ahead, each business unit is required to review its risk register. This includes a review of the risks of the previous financial year, considering new or emerging risks, facilitated workshops with all levels of management and, where appropriate, presentations by external consultants on the environment and market conditions.

A risk framework sets out the various risks that should be considered as part of the risk identification process. These potential risks are updated annually to ensure all relevant industry issues are considered.

Risk ratings

Each risk on the register is assigned an impact and probability rating. The impact assigned to a risk is assessed on a ten-point scale and considers the financial, compliance, reputation and people effects on the group. The probability of a risk materialising is measured on a five-point scale.

The impact and probability ratings are then multiplied to determine the inherent (gross) risk rating and its significance to the group. Detailed risk mitigation plans are developed for each risk which then determines the level of residual (net) risk. Residual risk ratings are then assigned to each risk.

The key risks facing the group are detailed in the Material Sustainability Issues.

Financial risk management

Through its business activities the group is exposed to a range of financial risks, including market risk (currency, interest rate and price risk), credit risk and liquidity risk. The group’s exposure to these risks and policies for measuring and managing the risk are included in notes 28 and 29 to the annual financial statements. Derivative financial instruments are used to hedge certain risk exposures, including the long-term incentive schemes and foreign exchange risk on the import of merchandise. Foreign exchange risk is mitigated by entering into forward exchange contracts which are matched with anticipated future cash flows in foreign currencies. Details of the group’s forward exchange exposure is contained in note 29.

Accountability and compliance

Internal audit

The internal audit function provides information to facilitate the establishment and maintenance of an effective system of internal control to manage the risks associated with the business. The role of internal audit is outlined in the terms of reference of the audit and risk committee and in the internal audit charter. Details of the internal audit function are contained in the Audit and Risk Committee Report.

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.

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. The role of the external audit function is covered in the comprehensive Audit and Risk Committee Report.

Going concern

The board is satisfied that the group has adequate resources to continue operating for the next 12 months and into the foreseeable future. The financial statements presented here have been prepared on a going concern basis. The board is apprised of the group’s going concern status at the board meetings coinciding with the interim and final results.

Information technology governance

Information technology (IT) governance is integrated into the group’s operations, and governance practices and frameworks are reviewed as part of the annual internal audit plan.

During the year IT governance practices were reviewed as the group is implementing the King III principles relating to IT. An IT steering committee has been established, reporting to the chairman of the audit and risk committee. The committee meets quarterly to review governance issues as recommended by King III, including IT standards, governance frameworks, results of internal audit reviews and specific IT risks.

The governance framework includes alignment of IT to support business strategy and operations, deliver value and manage performance, information security, managing IT risk and compliance, and business continuity management.

Legislative and regulatory compliance

Legislative and regulatory compliance is monitored by the head: group legal counsel. An analysis of current and pending legislation and regulation is presented at each meeting of the board, and the audit and risk committee.

Legislation and regulation which could impact on the group’s business has been reviewed and analysed by the internal legal and compliance departments and this includes:

• The Companies Act
• The Competition Act and the Competition Amendment Act
• The Consumer Protection Act
• The Medicines and Related Substances Act and Regulations: revisions and amendments
• Revised regulations for dispensing fees for pharmacists
• The Foodstuffs, Cosmetics and Disinfectants Act
• The Standards Act
• The Pharmacy Act
• Regulations relating to the labelling of foodstuffs and foodstuffs products
• The Advertising Standards of SA Codes
• The Cosmetics, Toiletries and Fragrances Compendium
• The Film and Publications Act.

The Consumer Protection Act has a significant impact on the group. Extensive training and education was provided to staff following an analysis of the group’s retail operations and an assessment of the changes required by the new legislation. Compliance with the Consumer Protection Act is ongoing.

There were no cases of material legislative or regulatory non-compliance during the year and no penalties or sanctions were imposed on the group or any of its directors or officers during the year. No requests for information were withheld by the group in terms of the Promotion of Access to Information Act.

Personal share dealings

The group’s insider trading policy precludes directors and staff from trading in Clicks Group’s 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 approval prior to dealing in the company’s shares. The chairman is required to obtain approval from the chairman of the audit and risk 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. Details of all dealings by directors during the reporting period are contained in the Director’s Report.

Ethics 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.

The group has implemented various documented policies which require all employees to adhere to ethical business practices in their relationships with one another, suppliers, intermediaries, shareholders and investors. These policies also set stringent standards relating to the acceptance of gifts from third parties and declarations of potential conflicts of interests.

A fraud prevention 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 arising 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. Awareness of this facility is created through presentations, a quarterly newsletter and competitions, and by encouraging staff to report incidents before significant losses are incurred.

	2011	2010
Reported incidents	172	170
Resultant dismissals/resignations	30	16
Employees counselled	8	18
Other disciplinary action	24	29

Political party donations

While the group supports the democratic system in South Africa, it does not make donations to individual political parties.

Anti-competitive conduct

Clicks Group does not engage in practices that could limit competition 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.

External attorneys were engaged to analyse the Competition Act and the Competition Amendment Act and to advise the directors and management of the content and issues arising from this legislation. A Competition Act compliance process was approved by the board and implemented across the group in the 2011 financial year.

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 and regulatory bodies. The constitution of the SA Retailers’ Association embodies the principle that competition should not be compromised and that no sharing of information may occur that could detract from retailers being able to compete with one another.

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