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 confirm that the group has in all material respects applied the recommendations of the King Code of Governance Principles 2009 (King lll) to achieve the overarching corporate governance philosophies of fairness, accountability, independence, responsibility and transparency.

Governance enhancements

Governance processes are reviewed on an ongoing basis to align with legislative and regulatory changes and to reflect developments within the business. The following changes and enhancements were made to governance processes during the past year:

  • The members of the audit and risk committee were elected by shareholders for the first time at the January 2012 annual general meeting (AGM).
  • As recommended by King lll, the group’s remuneration policy was proposed to shareholders for a non-binding advisory vote at the AGM, and the policy was approved by 100% of the votes cast.
  • The independence of non-executive directors was again reviewed, and this practice will be undertaken annually.
  • The terms of reference of the board committees were updated to comply with the requirements of King III and the Companies Act
  • The structure of the board committees was amended with effect from 1 September 2011. The remuneration and nominations committees were combined into a single committee.
  • A social and ethics committee was established with effect from 1 September 2011, in compliance with the Companies Act. The previous transformation committee was incorporated into the social and ethics committee.
  • The group’s processes have been aligned with the Companies Act, which came into effect on 1 May 2011. The group’s memoranda of incorporation (MOIs) have been approved by the JSE, in accordance with their Listings Requirements, and the company’s MOI will be proposed for approval by shareholders at the 2013 AGM.
  • A Competition Act compliance review was conducted at all material levels of the group’s businesses, and no areas of non-compliance were identified. This review is undertaken annually.
  • An environmental and sustainability compliance review was conducted by external attorneys to analyse regulatory compliance. No significant areas of non-compliance were identified in the review.
  • The first Integrated Annual Report was published for the 2011 financial year, as required by King lll.

Application of King lll principles

The group has applied the principles of King lll, and has elected to explain the principles that are not applied. Detail of the group’s application of each King III principle is available on the website.

The chairman of the board, David Nurek, currently serves on the audit and risk committee. He will not be standing for re-election to the committee at the AGM in 2013. This addresses the previous non-application of the King lll principle that the chairman of the board should not serve on the audit committee.

King lll recommends that sustainability reporting and disclosure should be independently assured. The external auditor has assured the annual financial statements and an accredited specialist agency has verified the disclosure on broad-based black economic empowerment. Internal audit has provided assurance on selected sustainability indicators contained in the Integrated Annual Report. The group has implemented a combined assurance framework that considers the assurances provided by the external auditor, internal audit and specialist agencies.

The nominations committee is not chaired by the chairman of the board, as required by King III. Following the amalgamation of the remuneration and nominations committees, the combined committee is now chaired by Professor Fatima Abrahams, an experienced academic and human resources specialist with extensive expertise in the field of remuneration. However, the chairman of the board is a member of the remuneration and nominations committee.

Board of directors

Board composition

Clicks Group has a unitary board structure with nine directors, including three salaried executive directors and six non-executive directors. The only change to the board composition during the year was the resignation of Michael Harvey as an executive director in June 2012.

The board elected the chairman after the AGM in January 2012 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 that may arise between scheduled meetings. No additional meetings were required during the year.

Biographical details of the directors appear here.

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 non-executive director for 15 years.

The remuneration and nominations committee conducted an evaluation of the independence of the chairman and non-executive directors during the year. All relevant factors that 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 remuneration and nominations committee believes there are no factors that 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 that 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
  • balanced and transparent reporting to shareholders

The board charter will be aligned with the requirements of the Companies Act once the revised MOI has been approved by shareholders.

Board appointment

The remuneration and 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 that 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.

Ongoing director development includes regular updates and information sessions on legislative and regulatory changes. 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 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 three 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
  • 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 coordinates 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 that are relevant to the group’s businesses.

Board evaluation

An annual questionnaire-based evaluation is undertaken by the directors that 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 remuneration and nominations committee.

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

Board and committee meetings

  Board  Audit and risk  Remuneration 
and nominations 
Social 
and ethics 
Number of meetings
David Nurek 4+ 2+
Fatima Abrahams   3+
John Bester 4+  
Bertina Engelbrecht    
Michael Fleming      
Michael Harvey 3*      
Fatima Jakoet    
David Kneale    
Nkaki Matlala  
Martin Rosen    
Meeting attendance (%) 2012 100  94  100  100 
Meeting attendance (%) 2011 98  89  100  92 
         
+ Chair
* Resigned 12 June 2012
       

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 that 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.

Remuneration and nominations committee

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 that is aligned with the group’s 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
  • 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
  • Ensures the adequacy of the board evaluation process
  • Monitors 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 on remuneration governance is contained in the Remuneration Report.

Composition

The committee comprises four independent non-executive directors. The chief executive officer and the group human resources director attend meetings by invitation. The group’s external remuneration consultant attends certain of these meetings by invitation.

Audit and risk committee

The committee structure and composition was unchanged during the financial year. David Nurek will not be standing for re-election as a member of this committee at the forthcoming AGM. The remaining three independent non-executive directors who are currently members of the committee will be proposed for election to the committee by shareholders at the AGM.

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

Social and ethics committee

Role

Monitor activities relating to ethics, stakeholder engagement and the social impact of the group 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 Social and Ethics Committee Report and the Stakeholder Engagement Report.

Composition

The committee comprises three independent non-executive directors, the chief executive officer and the group human resources director.

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 that 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 last year regarding the effectiveness of the risk management process and adequacy of the risk methodology. Both were considered to be adequate. The internal audit department provided assurance over the risk process in 2012.

Responsibility for risk management

The board is responsible for the oversight of the risk management process, and has delegated this 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 is responsible for designing and implementing the risk management process and monitoring ongoing progress. The group executive regularly reviews the group’s 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, facilitating workshops with all levels of management and, where appropriate, presentations by external consultants on the environment, regulatory issues and market conditions. An external assessment of environmental regulatory compliance was undertaken by specialist external attorneys during the financial year.

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 and Risks report.

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 27 and 28 to the annual financial statements. Derivative financial instruments are used to hedge certain risk exposures, including 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 28 of the annual financial statements on the website.

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.

Internal control

Systems of internal control are designed to manage, rather than eliminate, the risk of failure to achieve business objectives and to provide reasonable, but not absolute, assurance against misstatement or loss. The audit and risk committee considers the results of the formal documented annual review of the company’s system of internal financial controls and risk management, including the design, implementation and effectiveness of the internal financial controls conducted by internal audit function. Further detail is included 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, which 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 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.

An IT steering committee reports to the chairman of the audit and risk committee. The steering 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 and the compliance officer. An analysis of current and pending legislation and regulation is presented at each meeting of the board, the audit and risk committee, and the social and ethics committee.

Legislation and regulation that could impact on the group’s business was reviewed and analysed by the internal legal and compliance departments during the year. This included healthcare legislation and regulation including the Pharmacy Act and revisions and amendments to the Medicines and Related Substances Act and Regulations.

The Consumer Protection Act has a significant impact on the group and ongoing training and education is provided to staff.

An external assessment of environmental regulatory compliance was undertaken by specialist attorneys during the financial year. No significant areas of non-compliance were identified.

The Protection of Personal Information Bill is due to be promulgated in the new financial year. In preparation for the new legislation, members of the group’s legal and internal audit departments attended seminars presented by auditing firms and external attorneys. A risk management plan based on the latest draft of the Bill will be formulated towards the end of 2012 and finalised once the legislation has been promulgated.

The compliance officer is responsible for providing advice to the operational business units; monitoring and assessing legislative updates; running or arranging compliance training programmes; investigating any reports of possible compliance violations and initiating appropriate corrective action; meeting group-level reporting obligations, and embedding and managing the complaints process.

There were no cases of material legislative or regulatory non-compliance 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 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 that is not in the public domain.

Directors and the company secretary 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 Directors’ Report.

Ethics and values

The group subscribes to the highest ethical standards of business practice. A set of values and a behavioural code of conduct requires 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 social and ethics committee is responsible for monitoring ethics practices and the report of the committee appears here.

The group has implemented various documented policies that 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.

Political party donations

While the group supports the democratic system in South Africa, it does not make donations to or endorse 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. A Competition Act compliance process is undertaken every 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.

Governance focus areas for 2013

The Protection of Personal Information Act is expected to be promulgated during the 2013 financial year. The compliance officer will monitor the implementation of and compliance with this legislation across the group. Training will be provided to ensure all executives and senior management are aware of the impact of the Act on the group and the data processed by the businesses.

A coverage plan will be compiled by the compliance officer to monitor and assess high risk legislation to identify material risks and ensure sufficient controls are in place to mitigate against these risks.