CORPORATE GOVERNANCE REPORT

Audit and risk
committees
amalgamated
New independent non-executive director appointed

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 “apply or explain” principle of the King Report on Governance for South Africa 2009 (King lll) to achieve the overarching corporate governance philosophies of fairness, accountability, independence, responsibility and transparency.

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

The directors believe Clicks Group complies with King ll, the Companies Act of 1973 and the governance provisions in the Listings Requirements of the JSE Limited. The group is currently implementing the recommendations of King lll and the only areas of the new code still to be implemented include items specific to the new Companies Act, the stakeholder engagement process and external assurance of the sustainability report.

The group has adopted the "apply or explain" principle of King III

Apply or explain principles of King lll
All JSE-listed companies are required to report and disclose the application of the King lll principles in their annual reports covering periods commencing on or after 1 March 2010. While the group therefore only needs to report in compliance with King lll for the 2011 financial year, the board has elected to adopt the integrated reporting principles of King lll and explain the principles that have not been applied:

  • Principle 3.2 of King lII recommends that the chairman of the board should not be a member of the audit committee. The chairman of the board, David Nurek, currently serves on the audit and risk committee. The nominations committee considered the issue and recommended to the board that Mr Nurek should remain a member of the audit and risk committee owing to his skills, knowledge and experience which allow him to make a significant contribution to the committee. The board accepted the recommendation that he continues to serve on the committee; and
  • Principle 2.26 of the code recommends that companies should disclose the salaries of the three most highly paid employees who are not directors. The group has chosen not to disclose the salaries or identify the most highly paid individuals for competitive reasons.

Governance enhancements

Governance practices are regularly reviewed to align with legislative and regulatory changes and to reflect developments within the business. While the major focus has been on the implementation of King lll, the following changes and enhancements were made to governance processes:

  • The audit committee and risk committee were combined and the terms of reference of the newly constituted audit and risk committee have been approved by the board. The committee’s mandate has been extended to incorporate the relevant audit and risk-related aspects of King III, as well as responsibility for governance and environmental sustainability;
  • The terms of reference of the other board committees are being amended to comply with the requirements of King III;
  • A sub-committee of the board comprising executive management and non-executive directors evaluated the principles of King lll against current governance practices. A gap analysis was prepared and discussed at board and committee meetings;
  • A compliance process framework has been devised and will be implemented throughout the group during the new financial year;
  • The Companies Act of 2008 is expected to be implemented during the first half of 2011 and the evaluation to assess the group’s processes relative to the Act continued. Once the terms of the Companies Act and its regulations have been finalised, the group’s processes will be aligned with those required by the Act;
  • Ongoing liaison between the head of group legal counsel, the legal compliance officer and group head of internal audit has ensured that compliance and risk issues are integrated into the company’s structures; and
  • A report of the audit and risk committee has been included in this report, in accordance with the requirements of the Companies Act and King III.

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 appointment of Dr Nkaki Matlala as an independent non-executive director on 24 August 2010. Biographical details of the directors appear here.

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 independent non-executive directors who have served on the board for more than nine years to be subjected to a rigorous review of their independence. This applies to the chairman of the board, David Nurek, who has served as a director for 13 years.

The nominations committee is tasked with evaluating the independence of the chairman and to consider factors which could impact on his independence and performance. The committee will be required in the forthcoming financial year to consider his independence.

The six non-executive directors are all independent in terms of both the King ll definition and the guidelines outlined in the JSE Listings Requirements. The review of the independence of the non-executive directors as required by King lll will be undertaken by the nominations committee in January 2011.

The board will be adopting the practice with effect from January 2011 of electing the chairman after the annual general meeting (AGM).

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.

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 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
  • Monitoring and managing risk.

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 of 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 executive management.

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

The main recommendations arising out of the board evaluation process were:

  • To amalgamate the audit committee and risk committee: these committees were combined with effect from 29 July 2010 to form the audit and risk committee; and
  • To appoint further healthcare expertise to the board: Dr Nkaki Matlala, an experienced surgeon and healthcare executive, was appointed as an independent non-executive director with effect from 24 August 2010.

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. During the year Fatima Abrahams was appointed as chair of the remuneration committee.


Audit and risk committee

As detailed earlier in the report under “Governance enhancements”, the audit committee and risk committee were combined to form a single committee.

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

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 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.

Detail on the group’s remuneration philosophy and policies are contained in the Remuneration Report.

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
  • Monitor changes in the application and interpretation of empowerment charters and codes.

Board and committee attendance            
  Board Audit* Remuneration Risk* Nominations Transformation
             
Number of meetings 4 4 3 2 2 2
David Nurek 4+ 4 3 2 2+ 2
Fatima Abrahams 4   3+   2 2+
John Bester 4 4+ 3 2    
Bertina Engelbrecht 4     2   2
Michael Harvey 4         2
Fatima Jakoet 4 4   2+    
David Kneale 4     2   2
Nkaki Matlala** 0/0          
Martin Rosen 4       2  
Keith Warburton 4     2    
Attendance at meetings (%) 2010 100 100 100 100 100 100
Attendance at meetings (%) 2009 100 100 100 93 100 100

Internal accountability

Risk management

The board is responsible for the risk management process and management is accountable to the board for designing, implementing and monitoring the process of risk management in the day-to-day activities of the group. Further details are contained in the Risk Management Report.

Internal audit

The internal audit function provides information to assist in 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 audit and risk committee terms of reference and in the internal audit charter. Details of the internal audit function are contained in the audit and risk committee report.

Legislative and regulatory compliance

Legislative and regulatory compliance is monitored by the head of 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.

The following legislation and regulation which could impact on the group’s business has been reviewed and analysed by the internal legal and compliance department.

  • The Medicines and Related Substances Act and Regulations: revisions and amendments;
  • Revised regulations for dispensing fees for pharmacists;
  • The Companies Act 2008 which was assented to in April 2009;
  • The Competition Amendment Act;
  • The Foodstuffs, Cosmetics and Disinfectants Act;
  • The Standards Act; and
  • The Consumer Protection Act. The administrative aspects and section 61 of the legislation came into operation in April 2010 and the remaining provisions relating to the consumer will be effective from March 2011.

There were no cases of 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 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 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 Directors’ 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.

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 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 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 a continued increase in the number of reported incidents owing to awareness campaigns through presentations, a quarterly newsletter and competitions, as well as staff recognising management’s zero tolerance approach to misconduct and reporting incidents before significant losses are incurred.

  2010 2009
Reported incidents 170 120
Resultant dismissals/resignations 16 39
Employees counselled 18 7
Other disciplinary action 29 22

Anti-competitive conduct

Clicks Group does not engage in practices that could prevent others from 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.

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. These attorneys are currently developing a competition compliance framework and programme for the group.

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.

Political donations and affiliations

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

Directors are required to disclose any political affiliations or exposure. The only director with political affiliations is Dr Nkaki Matlala who is a member of the African National Congress.

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.

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 each board meeting.

Investor relations

Clicks Group is committed to regular and transparent communication with the investment community while providing information equally and simultaneously to all market participants.

The group has an active investor relations programme focused on fund managers, analysts and potential investors both locally and internationally. An investor relations consultancy is retained to coordinate and advise management on all aspects of the investor relations and financial communications programmes.

Investor relations activities include interim and final results presentations to investors which are webcast and broadcast nationally to provide access to investors locally and offshore, post-results investor roadshows and hosting visits to stores and distribution facilities. During the year management held 173 (2009: 116) meetings with local and international fund managers and analysts, participated in five broker conferences domestically and abroad, and undertook investor roadshows to the United States and United Kingdom. Currently 10 brokerages publish research on the Clicks Group.

The group’s major shareholders and the geographic distribution of shareholders are detailed here.

Clicks Group is committed to regular and transparent
communication
with the investment community