|BLUE LABEL INTEGRATED ANNUAL REPORT 2011|
The board regards corporate governance as fundamentally essential to the success of the company’s business and is unreservedly committed to applying the principles of good corporate governance in directing and managing the company. The board is the focal point for, and custodian of, the company’s corporate governance system through its relationship with management, shareholders and other stakeholders of the company. The board remains ultimately accountable and responsible for the performance and affairs of the company.
The board is committed to sound and transparent business practices and senior management continues to develop its governance policies, practices and procedures in line with an integrated approach to governance, risk and compliance as recommended by King III. This approach ensures that the company balances its long-term social, environmental and economic interests with the primary requirement to maximise shareholder wealth.
The formal assessment of Blue Label’s adherence to the principles and practices of best governance as contained in King III was completed towards the end of January 2011. Board and senior management have focused on the following key findings of the assessment, most of which will continue to be relevant for the ensuing financial year:
Each of the aspects above is highlighted in this integrated report in the section where it best applies.
ETHICAL LEADERSHIP AND BUSINESS CONDUCT
Good corporate governance is essentially about effective and responsible leadership. This is characterised by the ethical values of responsibility, accountability, fairness and transparency. The typical aspects of corporate governance, such as the role and responsibilities of the board and directors individually, internal audit, risk management and stakeholder engagement rest on a foundation of ethical values.
To this extent Blue Label’s ethical standards are encapsulated in its ethics statement which provides a template for ethical reasoning as a guide to all employees in their dealings with both internal and external stakeholders. The ethics statement applies to employees across the group, as well as to customers, business partners, suppliers and other stakeholders. Each is requested to uphold the ethical reasoning of the statement, thereby enabling us to live our values.
The purpose of the ethics statement is to:
From an ethical perspective Blue Label reiterates its stance on the following matters:
The company’s ethical business conduct is set out on page 6 of this report.
Employees are expected to demonstrate ethical business practices. All new staff members undergo an induction programme that includes training on the above “code of business conduct”, including the function of the ethics hotline, such as what should be reported and how to report unethical behaviour via this channel. The ethics hotline is outsourced to KPMG Ethics Line, a division of KPMG, and has been certified by EthicsSA as fulfilling the External Whistle-blowing Hotline Service Provider Standard EO1.1.1. This standard is a best-practice set of guidelines or norms for the professional and ethical conduct of external whistle-blowing hotline service providers operating their own centres or facilities.
The ethics hotline awareness campaign was rolled out to all group companies in July/August 2010. All incidents reported during the period under review were all human resource related matters which were resolved by the group human resources manager.
An overview of the group governance framework is provided below.
BOARD STRUCTURE AND DIRECTORS
Board composition and appointments
Blue Label’s governance is underpinned by effective leadership exercised by the directors in their individual capacities and collectively as a board. The board comprised 11 directors: four executive directors, three non-executive directors and four independent non-executive directors. The chairman is an independent non-executive director.
The directors, with the support of the Remuneration and Nomination Committee in terms of its mandate, ensures that the board collectively possesses the skills, experience, diversity in demographics and mix of personalities appropriate for the strategic direction of the company and necessary to secure its sound performance. Directors are selected and appointed by the board based on the recommendation of the Remuneration and Nomination Committee. Changes in the board composition during the year under review included the resignation of Mr Mansour in October 2010, and following the recommendation of the Remuneration and Nomination Committee, the appointment of Mr Nyati (managing director of Microsoft South Africa). Post year end the following changes to the board composition were recorded:
All directors are subject to retirement by rotation every three years in accordance with the company’s memorandum of incorporation. In this regard Messrs Pamensky and Rivkind will be retiring at the forthcoming annual general meeting and being eligible, have made themselves available for re-election. The detailed categorisation of the directors as well as a brief curriculum vitae of each director appears on pages 10 to 13 of this report.
The Remuneration and Nomination Committee is actively canvassing to strengthen the board with individuals, particularly from historically disadvantaged groups, whom it believes can make an active and positive contribution to the continuing development and growth of the company.
Independent non-executive chairman and lead independent director
King III requires the board to be led by an independent non-executive chairman and makes a number of points pertinent to this matter:
Mr Nestadt is the independent non-executive chairman of Blue Label and has held this position since the company’s listing in November 2007. For this reason the board has not appointed a lead independent director.
The board has a formally approved charter which is reviewed annually to ensure its continuing compliance with local and international best practices and changes to the South African regulatory environment. The board charter provides, inter alia, an overview of the policies and practices of the board with regard to matters such as board composition, meeting procedures, board governance, dealings by directors in securities, disclosure and conflicts of interest and the nomination, appointment, induction, training and evaluation of directors and members of board committees.
The charter notes the following key board responsibilities in alignment with King III:
A minimum of four board meetings are held during a financial year with additional board meetings convened as required. Where directors are unable to attend meetings personally, teleconferencing facilities are made available to enable their participation.
Attendance by directors of the meetings held during the year under review is detailed below:
The non-executive directors bring leadership, judgement and insight to the board. They have access to management and may meet separately with management with or without the attendance of executive directors. A non-executive director has no fixed term of appointment and no service contract with the company. Fees are independent of the company’s financial performance and they receive no bonus and do not participate in the company’s Forfeitable Share Plan.
Both Messrs Harlow and Lazarus SC earn advisory fees for strategic input as well as corporate finance advice and, in the case of Mr Lazarus SC, legal consultancy services as well. Fees paid during the year under review in respect of consultancy services rendered by the said directors amounted to R1.3 million in respect of Mr Harlow (2010: R0.3 million) and R4.6 million in respect of Mr Lazarus SC (2010: R2.6 million). The majority of the fees paid to Mr Lazarus SC pertained to legal consultancy services in regard to litigation which the group is involved in together with commercial negotiations and contracts relating to the business of the group and certain corporate finance services in respect of acquisitions and disposals.
Executive directors are bound by a three-year employment contract, each of which commenced in November 2007. Contracts were renewed in November 2010 for a further three-year period. Details of the contract terms are set out in the Remuneration report on page 50.
Performance assessment of the board collectively, directors individually and the various board committees is conducted annually in November, with the next evaluation due to be done in November 2011. The assessment is conducted internally and focuses on strategy and planning, board structure and role, meeting process, independence of the board and its committees, performance monitoring, board and director responsibilities, board culture and relationship. The process is managed by the chairman, whose own performance is assessed by the Remuneration and Nomination Committee. The Chairman presents his report on the assessment to the Remuneration and Nomination Committee for their appropriate recommendation to the board, which in turn, then considers the recommendations of the Remuneration and Nomination Committee.
Board committees play an active and pivotal role in assisting the board to discharge their duties and responsibilities. The responsibilities delegated to each board committee are formally documented in terms of reference duly approved by the board.
The membership and principal functions of the committees are set out below.
Audit, Risk and Compliance Committee (“ARCC”)
The report from the ARCC is contained on page 54 of this report.
Remuneration and Nomination Committee (“RNC”)
Members: NN Lazarus SC (Chairman), GD Harlow and KM Ellerine
Composition and meeting procedures: Messrs BM Levy, MS Levy and DB Rivkind attend meetings by invitation, but do not participate in discussions and decisions regarding their own remuneration and benefits. The chairman, at his discretion, may invite other executives or employees to participate in meetings of the committee. Meetings are held at least twice a year. The quorum for an RNC meeting is two members present throughout the meeting. During the year under review, the board discussed the composition and chairmanship of the committee in relation to the requirements of King III. The board confirmed the position of Mr Lazarus SC as chairman of the RNC and was satisfied that he was most suitably qualified to perform the role and acted with the required independence by expressing opinions, exercising judgement and making decisions impartially.
Role and functions: The RNC role and responsibilities are set out in its terms of reference, a summary of which are to:
Attendance at meetings:
Investment Committee (“IC”)
Members: GD Harlow (Chairman), NN Lazarus SC, JS Mthimunye, BM Levy, MS Levy, MV Pamensky, DB Rivkind, DA Suntup and DR Hilewitz (consultant)
Composition and meeting procedures: Meetings are held as the committee considers appropriate, but at least two meetings are held during a financial year. The quorum for an IC meeting is four members, of which two are executives and two non-executives, present throughout the meeting. Group Legal Counsel attends meetings by invitation only.
Role and functions: The responsibilities of the IC include:
Transformation Committee (“TC”)
Members: GD Harlow (Chairman), KM Ellerine, LM Tyalimpi, BM Levy, DB Rivkind (alternate to BM Levy)
Composition and meeting procedure: Meetings are held at least twice per year and a quorum for a TC meeting is two members of the committee present throughout the meeting. The chairman, at his discretion, may invite other executives or employees to participate at meetings of the committee. Ms Hindley (group human resources and transformation manager) is a mandatory attendee of the TC meetings.
Role and functions: The responsibilities of the TC include:
Attendance at meetings:
Executive committee (“Exco”) and the Strategy Implementation Committee
Members: MS Levy (Chairman), BM Levy, MV Pamensky, DB Rivkind
Composition and meeting procedures: Meetings of Exco take place weekly. Mr Suntup (financial director of The Prepaid Company (Pty) Ltd) and the group legal adviser attend Exco meetings by invitation.
Role and function: Exco is responsible for managing and monitoring the business affairs of the company in line with boardapproved plans, budgets, delegations and limits of authority, prioritising the allocation of capital and other resources, reviewing and approving acquisitions, disposals and investments, and establishing best management and operating practices. Exco is also mandated, empowered and held accountable for implementing the strategies, business plans and policies determined by the board. The board at its meeting held on 21 February 2011 approved an increase in the limit of authority granted to the Exco in terms of acquisitions, disposals and general investments from R20 million to R40 million. The rationale for the increase was that the authority level was set more than three years ago, and that there were few meaningful investments that did not exceed the existing authority level.
The Strategic Implementation Committee, which operated throughout the previous year, was dismantled during the year under review in favour of a more decentralised and streamlined approach, with responsibility for implementation of strategy now vesting with subsidiary boards and their executive committees.
Ms E Viljoen is the group company secretary for Blue Label and administers and monitors the statutory and governance compliance of its subsidiary companies. It is the responsibility of the group company secretary to ensure that the company complies with the JSE Listings Requirements and statutory requirements, as well as the implementation of governance practices and procedures as applicable to the company. The group company secretary is also responsible for ensuring that the proceedings and affairs of the directorate, the company itself, and where appropriate, owners of securities in the company, are properly administered in accordance with relevant laws. It is her responsibility to provide the board as a whole, and directors individually, with guidance as to how their responsibilities should be properly discharged in the best interests of the company. She also fulfils the role of compliance officer in ensuring compliance with applicable statutes, regulations and internal policies and procedures. As compliance officer she reports directly to the Audit, Risk and Compliance Committee. All directors have access to the advice of the company secretary and may liaise with her on agenda items for board meetings.
GOVERNANCE OF RISK
The board accepts responsibility for risk governance and is committed to managing risks in order to achieve key objectives and protect the core values of the company. The ARCC has been mandated to assist the board in carrying out its risk responsibilities. Management is accountable to the board for designing, implementing and monitoring the process of risk management and integrating it into the day-to-day activities of Blue Label. The Internal Risk and Compliance Committee (IRCC) supports the enterprise-wide risk approach by identifying, evaluating and measuring group-wide risks and compliance in all functional areas of the group and implementing and maintaining adequate internal controls. The IRCC reports to the ARCC on a quarterly basis.
Blue Label has adopted an enterprise-wide approach to risk management, which means that key risks in the group are identified, assessed and monitored in a structured and systematic process of risk review and management. The risk management plan forms part of the annual internal audit plan approved by the ARCC. The approved plan for the ensuing financial year comprise inherent and residual risk assessments on a quarterly basis as well as the compilation and review of a separate IT related risk register to ensure complete visibility of all IT risks in the group by segment.
Management conducts group-wide risk assessments on a quarterly basis. This entails the identification and prioritisation of risks in accordance with the impact and likelihood of these risks. In line with the group’s risk framework, the potential impacts of the risks are quantified on a five-point scale comprising catastrophic, critical, serious, significant and minor/ insignificant. Risks are then further quantified in terms of the probability of occurrence in accordance with probability factors viz almost certain, likely, possible, unlikely and rare. Internal controls to mitigate the identified risks are evaluated to establish the appropriateness and adequacy of the existing controls to ensure that they perform the required risk mitigation. Management decides on the acceptance of the identified risk or exposure and, if considered high, an action plan and timeframe are put in place to reduce the level of risk to a more acceptable level.
The group’s material impacts and risks are listed on page 60 on this report.
The Blue Label internal audit function is outsourced to KPMG Services (Proprietary) Limited (KPMG). The ARCC is responsible for reviewing and approving the internal audit charter and internal audit plans. Internal audit plans are compiled with input from management and balance risk-based and compliance reviews so as to maximise audit coverage while addressing the requirements of management. To ensure independence, internal audit functionally reports to the ARCC. The ARCC is satisfied that the independence of the internal audit function has not been impaired in any way.
Internal audit activities are performed by teams of appropriate qualification and experience. Internal audit conducts its work in accordance with internal auditing standards set by the Institute of Internal Auditing (IIA). Progress against the internal audit plan and the results of reviews were presented at ARCC meetings throughout the year.
The board recognises the importance of a sound system of internal control that supports the achievement of the group’s objectives. The board acknowledges its overall responsibility for Blue Label’s system of internal control. As recommended by King III, internal audit provided a written assessment of the system of internal controls and risk management to the board and a written assessment of internal financial controls to the ARCC.
GOVERNANCE OF INFORMATION TECHNOLOGY
King III defines IT governance as “a framework that supports the effective and efficient management of IT resources to facilitate the achievement of strategic objectives”. IT governance is the responsibility of the board and management is responsible for the implementation of all structures, processes and mechanisms to execute the IT governance framework
Dr Roussos is the chief information officer of Blue Label and is head of the Technology segment of the group. The group’s IT framework includes:
IT governance is a focus area for the company in the ensuing 12 months to align the group with the principles of King III.
Blue Label is committed to maintaining high standards of integrity, professionalism and ethical behaviour in all its relationships. This commitment is supported by the company’s code of conduct set out above. Besides complying with the law, it is essential that each employee is sensitive to any improper conduct. The way in which each employee conducts the company’s business directly affects the public image and reputation of the group.
On the recommendation of the ARCC, the board approved a corporate compliance policy, the objective of which is to provide a framework within which the board and management can operate in order to reinforce a compliance culture throughout the group. The corporate compliance policy focuses on the fundamental principles of business conduct supporting group values, and details the roles, authority and responsibility of key players.
The governance structure and reporting lines supporting the compliance function is depicted below:
During the year Blue Label re-defined its regulatory universe and a focus area in the ensuing financial year will be on the implementation of a management tool to assist in evaluating the group’s compliance with its regulatory universe, and the compilation of risk management plans to ensure that risks are mitigated effectively. The compliance process involves risk identification, risk assessment, compliance risk management and compliance risk monitoring.
No material judgements, damages, penalties or fines were recorded and/or levied against the group during the year under review for non-compliance with any legislation.
CONFLICTS OF INTERESTS
All group directors are required to disclose details of any external shareholdings, directorships and interests in material contracts involving group companies, so as to identify and manage conflict of interests. These declarations are assessed and tabled at the beginning of each quarterly board meeting. Board members are required to make appropriate disclosures when participating in deliberations or decision-making processes which could in any way be affected by vested interests and, if the circumstances require, must recuse themselves from participation.
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