board of directors
corporate governance reportNew Clicks is committed to the principles and practice of good corporate governance to safeguard the interests of the company and all its stakeholders. The board acknowledges the relationship between high quality governance and long-term equity performance, recognising that investors afford premium ratings to well-managed businesses.
The group endorses the Code of Corporate Practices and Conduct contained in the King Committee Report on Corporate Governance (“King ll”). The directors believe that New Clicks complies with the principles and spirit of King ll and the provisions of the Listings Requirements of the JSE Limited.
The Governance committee of the board is responsible for ensuring compliance with King ll and monitors governance practices across the group. Governance structures and processes are regularly reviewed and continually improved for the benefit of all stakeholders.
During the year the governance process was enhanced with the establishment of a board Transformation committee to accelerate empowerment in the group.
New Clicks recognises its responsibility to the broader society and communities in which it operates. Details of the group’s relationships with its stakeholders on social, economic and environmental issues are outlined in the Corporate Citizenship Report.
The board has a formal documented charter which confirms that the directors retain overall responsibility and accountability for:
In line with best governance practice, the roles of the independent non-executive chairman, David Nurek, and the chief executive officer, David Kneale, are separate and clearly defined. This division of responsibilities at the helm of the company ensures a balance of authority and power, with no one individual having unrestricted decision-making powers.
Executive management and the board work closely together in determining the strategic objectives of the group. Authority has been delegated to the chief executive officer and the group executive for the implementation of the strategy and the ongoing management of the business. The directors are apprised of progress through reporting at board meetings and regular communications with management.
During the year the board of directors was restructured and strengthened with the appointment of five new directors, including three executive directors. The changes were aimed at elevating the board’s expertise in the areas of professional pharmacy and retailing, as well as acknowledging the role of the senior executives in leading the group.
David Kneale (chief executive officer), Keith Warburton (chief financial officer) and Michael Harvey (managing director of Clicks) were appointed as executive directors. Professor Peter Eagles and Martin Rosen were appointed as non-executive directors.
Executive directors Raymond Godfrey (31 December 2005) and Trevor Honneysett (23 January 2006) resigned from the board after deciding to take early retirement from the group. Non-executive directors Peter Swartz and Allen Zimbler resigned from the board with effect from 10 April 2006.
Subsequent to the year-end, Roy Smither was appointed as an independent non-executive director.
The board now consists of 10 directors, including three executive directors and seven non-executive directors. Biographical details of the directors appear in the directorate.
Six of the seven non-executive directors, including the chairman, are independent in terms of the King ll classification. The remaining non-executive director, Peter Eagles, provides specialist consulting services to the group and is therefore not classified as independent. As the majority of non-executive directors are independent, this provides the necessary objectivity for the effective functioning of the board.
The non-executive directors have extensive experience across a diverse range of sectors, including accounting, law, retailing, pharmacy 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 shareholder representation on the board.
The board meets at least four times a year in Cape Town, and additional meetings are convened at short notice to consider specific business issues. During the year the board met five times.
Directors do not have a fixed term of appointment. One-third of the directors are required to retire by rotation each year and are eligible for re-election by shareholders at the annual general meeting. Executive directors are subject to an 18-month notice period in terms of their conditions of employment. Executive directors retire at the age of 65, while there is no prescribed retirement age for non-executive directors.
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.
As the effective functioning of the board is critical for sound governance to be practised in the company, the directors undertake an annual review of the board and its sub-committees. This includes an assessment of individual directors by their peers and senior management, as well as an evaluation of the chief executive, to benchmark performance against best practice. The results of these reviews are discussed with each director and chairman of each board sub-committee.
The company secretary is responsible for ensuring that board procedures and all relevant regulations are fully observed. He also provides guidance to the directors on governance, compliance and their fiduciary responsibilities.
All 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 board assessment process. The appointment and removal of the company secretary is a matter for the board and not executive management.
The directors have delegated specific responsibilities to six sub-committees to support the board in meeting its oversight responsibilities. These committees are all chaired by independent non-executive directors. Each committee has a clearly-defined mandate and the directors confirm that the committees have functioned in accordance with these written terms of reference during the financial year.
The Audit committee ensures that management has created and maintained an effective control environment in the group. The responsibilities of the committee include:
The committee consists of four independent non-executive directors, namely Robert Lumb (chairman), David Nurek, Eliot Osrin and Roy Smither. Executive directors, finance and internal audit staff, as well as the external audit partners and staff attend meetings at the invitation of the committee. The committee also meets separately with the external auditors.
In addition to the two formal meetings of the Audit committee, an internal audit committee meets quarterly and is attended by members of the Audit committee.
The head of internal audit has direct access to the Audit committee and the role of internal audit is contained in the committee’s charter.
New Clicks is committed to remunerating employees on a fair and equitable basis. The primary functions of the committee are to:
The committee consists of three independent non-executive directors – David Nurek (chairman), Lucia Swartz and Martin Rosen – and non-executive director Peter Eagles. The chief executive officer attends by invitation.
The committee assists the board in ensuring material compliance with the principles of risk management, as outlined in King ll, by:
The committee consists of four independent non-executive directors – Robert Lumb (chairman), Eliot Osrin, Martin Rosen and Roy Smither – and non-executive director Peter Eagles. The three executive directors attend all meetings.
The board has mandated this committee to monitor compliance in both substance and form with the recommendations of King ll and to incorporate best governance practice into the business.
The committee comprises the chairman of the board (David Nurek), the chief executive officer (David Kneale), chief financial officer (Keith Warburton) and company secretary (Allan Scott).
The committee ensures that the board functions optimally, overseeing the composition of the board, the appointment of directors and succession planning.
The role of the committee is to:
The committee consists of the chairman of the board, David Nurek, and independent non-executive directors Robert Lumb, Eliot Osrin and Lucia Swartz. The chief executive officer attends by invitation.
As part of the board’s commitment to accelerating the pace of transformation both internally and externally, a Transformation committee was established. The committee is responsible for monitoring progress across all areas of strategic empowerment, including employment equity, affirmative procurement, compliance with industry charters and ownership and control.
The committee comprises two independent non-executive directors, David Nurek (chairman) and Lucia Swartz, and non-executive director Peter Eagles. The chief executive officer, managing director of Clicks and the group director human resources attend the meetings along with other members of operational management.
The management of the group has been delegated by the board to the chief executive. He is supported by the group executive committee which is responsible for the implementation of strategy and the operational performance of the group. During the year under review the group executive was restructured and now comprises:
New Clicks aims to remunerate employees fairly in relation to the services provided and to reward them for performance at or above targeted levels through the payment of short-term performance bonuses.
The executive level of management is key to the future performance of the group. New Clicks therefore strives to develop, attract, retain and motivate executives of a high calibre. The remuneration package of the senior executives seeks to be competitive in the local retail sector and to align the incentive schemes with group performance in relation to the agreed short and long-term targets and objectives.
The packages of senior executives are structured as follows:
In 2005 the group introduced an incentive programme for senior executives which is directly linked to share price performance, aligning executive performance with the creation of shareholder value. Six million share appreciation rights were allocated under the scheme, with 50% vesting after three years and 50% after five years. A similar scheme was implemented in 2006 and 550 000 of the one million rights were allocated during the year.
The “exercise price” of the rights is dependent on the performance of the share price. Details of the target share price and exercise prices are contained in note 21.
The attendance at board and board sub-committee meetings during the year was as follows:
| Board | Audit | Remuneration | Risk | Governance | Nominations | Transformation | ||||||||
| Number of meetings | 5 | 2 | 4 | 3 | 1 | 2 | 1 | |||||||
| David Nurek 1 2 4 5 6 | 5/5 | 2/2 | 4/4 | – | 1/1 | 2/2 | 1/1 | |||||||
| Peter Eagles* 2 3 6 | 2/2 | – | 2/2 | 2/2 | – | – | 1/1 | |||||||
| Robert Lumb 1 3 5 | 5/5 | 2/2 | – | 2/3 | – | 2/2 | – | |||||||
| Eliot Osrin 1 3 5 | 5/5 | 2/2 | – | 3/3 | – | 2/2 | – | |||||||
| Lucia Swartz 2 5 6 | 3/5 | – | 1/4 | – | – | 1/2 | 1/1 | |||||||
| Peter Swartz+ 1 2 | 3/3 | 0/1 | 2/2 | – | – | – | – | |||||||
| Martin Rosen* 2 3 | 2/2 | – | 2/2 | 2/2 | – | – | – | |||||||
| Allen Zimbler+ 2 3 | 3/3 | – | 1/2 | 0/1 | – | – | – | |||||||
| Trevor Honneysettº | 3/3 | – | – | – | – | – | – | |||||||
| Raymond Godfrey§ | 0/1 | – | – | – | – | – | – | |||||||
| David Kneale* 4 | 2/2 | – | – | – | 1/1 | – | – | |||||||
| Michael Harvey* | 2/2 | – | – | – | – | – | – | |||||||
| Keith Warburton* 4 | 2/2 | – | – | – | 1/1 | – | – |
| 1 | Member of the Audit committee | 4 | Member of the Governance committee | * | Appointed 10 April 2006 |
| 2 | Member of the Remuneration committee | 5 | Member of the Nominations committee | + | Resigned 10 April 2006 |
| 3 | Member of the Risk committee | 6 | Member of the Transformation committee | º | Resigned 23 January 2006 |
| § | Resigned 31 December 2005 |
2006 Executive directors’ remuneration
| R’000 | Salary | Bonuses | Australian bonus¥ | Pension fund | Other benefits | Contractual payments | Total | |||||||
| Raymond Godfrey§ | – | – | 1 053 | – | – | 431 | 1 484 | |||||||
| Michael Harvey* | 610 | 274 | – | 61 | 46 | – | 991 | |||||||
| Trevor Honneysettº >> | 1 384 | – | 1 053 | 267 | 141 | 10 288 | 13 133 | |||||||
| David Kneale* | 1 415 | 406 | – | 127 | 36 | – | 1 984 | |||||||
| Keith Warburton* | 675 | 265 | – | 62 | 41 | – | 1 043 | |||||||
| Total | 4 084 | 945 | 2 106 | 517 | 264 | 10 719 | 18 635 |
| >> | Trevor Honneysett elected to take early retirement with effect from 30 April 2006 after 35 years’ service with the group. In terms of his service contract, he was subject to a 12-month notice period. The board agreed to pay salary in lieu of serving out his notice period. In addition, Mr Honneysett will receive a gratuity in accordance with company policy which will be paid on 1 May 2007. The full present value of these benefits is included in the above table. |
2006 Non-executive directors’ remuneration
| R’000 | Directors’ fees | Consultancy fees | Total | |||
| David Nurek | 364 | – | 364 | |||
| Peter Eagles* = | 51 | 319 | 370 | |||
| Robert Lumb | 210 | – | 210 | |||
| Eliot Osrin | 150 | – | 150 | |||
| Martin Rosen* | 51 | – | 51 | |||
| Peter Swartz+ | 108 | – | 108 | |||
| Lucia Swartz^ | 114 | – | 114 | |||
| Allen Zimbler+ | 84 | – | 84 | |||
| Total | 1 132 | 319 | 1 451 | |||
|
||||||
| R’000 | 2006 | 2005 | ||||
| Executive directors | 18 635 | 16 986 | ||||
| Non-executive directors | 1 451 | 1 901 | ||||
| Total directors’ remuneration | 20 086 | 18 887 | ||||
2005 Executive directors’ remuneration
| R’000 | Salary | Australian bonus¥ | Pension fund | Other benefits | Contractual payments | Total | ||||||
| Raymond Godfrey§ | 1 942 | 2 217 | 343 | 382 | 5 411 | 10 295 | ||||||
| Trevor Honneysettº | 3 224 | 2 217 | 610 | 640 | – | 6 691 | ||||||
| Total | 5 166 | 4 434 | 953 | 1 022 | 5 411 | 16 986 |
| * | Appointed 10 April 2006 | ¥ | Contractual payments made to executive directors in terms of an incentive scheme relating to former subsidiary, New Clicks Australia (refer page 35 of the 2005 annual report) | = | Professor Peter Eagles consults to the group on professional pharmacy and healthcare issues on a contractual basis with the University of the Western Cape (UWC) where he is employed as professor of pharmaceutical chemistry. During the year R189 000 was paid directly to Professor Eagles and R130 000 to UWC | ^ | Lucia Swartz’s directors’ fees are paid to her employer, Sappi Limited |
| § | Resigned 31 December 2005 | ||||||
| º | Resigned 23 January 2006 | ||||||
| + | Resigned 10 April 2006 |
2005 Non-executive directors’ remuneration
| Directors’ | Consultancy | |||||
| R’000 | fees | fees | Total | |||
| David Nurek | 324 | – | 324 | |||
| Robert Lumb | 187 | – | 187 | |||
| Eliot Osrin | 133 | – | 133 | |||
| Peter Swartz+ | 159 | – | 159 | |||
| Lucia Swartz^ | 101 | – | 101 | |||
| Allen Zimbler+ # | 122 | 875 | 997 | |||
| Total | 1 026 | 875 | 1 901 |
Non-executive directors receive fees for their services as directors and for serving on board sub-committees. These fees reward the directors fairly for the time, service and expertise provided to the group. The non-executive directors no longer participate in the company share incentive scheme, although one non-executive director continues to hold share options which were allocated under a previous share incentive scheme.
The fee structure for directors has been adjusted with effect from September 2006 and is subject to approval by shareholders at the annual general meeting in January 2007. In addition to an average annual increase in fees of approximately 5.5%, the proposed structure brings the fees of the Risk management committee in line with those of the Audit committee and introduces fees for directors serving on the Nominations and Transformation committees.
| Proposed fees | Fees paid | |||
| Board position | for 2006/7 | in 2005/6 | ||
| Chairman of the board | 295 000 | 280 000 | ||
| Board member | 95 000 | 90 000 | ||
| Chairman: Audit committee | 76 000 | 72 000 | ||
| Audit committee member | 38 000 | 36 000 | ||
| Chairman: Remuneration committee | 50 000 | 48 000 | ||
| Remuneration committee member | 25 000 | 23 500 | ||
| Chairman: Risk management committee | 76 000 | 48 000 | ||
| Risk management committee member | 38 000 | 23 500 | ||
| Chairman: Nominations committee | 50 000 | – | ||
| Nominations committee member | 25 000 | – | ||
| Chairman: Transformation committee | 50 000 | – | ||
| Transformation committee member | 25 000 | – |
The beneficial interests of the directors of New Clicks Holdings at 31 August 2006 are set out below:
| Director | Direct beneficial interest | Indirect beneficial interest | Total | |||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||
| Executive | ||||||||||||
| David Kneale | 100 000 | – | – | – | 100 000 | – | ||||||
| Michael Harvey | 10 000 | – | – | – | 10 000 | – | ||||||
| Keith Warburton | – | – | 5 000 | – | 5 000 | – | ||||||
| Non-executive | ||||||||||||
| David Nurek | – | 29 682 | 29 682 | – | 29 682 | 29 682 | ||||||
| Peter Eagles | – | – | – | – | – | – | ||||||
| Robert Lumb | – | – | 20 000 | – | 20 000 | – | ||||||
| Eliot Osrin | 135 413 | 135 413 | – | – | 135 413 | 135 413 | ||||||
| Martin Rosen | – | – | – | – | – | – | ||||||
| Lucia Swartz | – | – | – | – | – | – | ||||||
| Total | 245 413 | 165 095 | 54 682 | – | 300 095 | 165 095 | ||||||
| Issued shares = 355 488 165. Percentage of issued share capital held by directors is 0.08%. | ||||||||||||
Share options |
||||||||||||
| Issue date | Issue price | David Nurek | Michael Harvey | Total | ||||||||
| January 1999 | 5.35 | 500 000 | – | 500 000 | ||||||||
| July 1999 | 7.80 | – | 20 000 | 20 000 | ||||||||
| September 2000 | 9.30 | 500 000 | 100 000 | 600 000 | ||||||||
| April 2001 | 7.40 | – | 150 000 | 150 000 | ||||||||
| July 2002 | 6.70 | – | 495 000 | 495 000 | ||||||||
| August 2003 | 6.30 | – | 740 000 | 740 000 | ||||||||
| Total | 1 000 000 | 1 505 000 | 2 505 000 | |||||||||
The board, through the Risk management committee, is responsible for setting risk policies, risk tolerance levels and ensuring that appropriate risk management processes have been implemented by management. The group has identified the following key risks:
The group is exposed to the HIV/AIDS risk through both employees and customers. An employee impact assessment was undertaken by Metropolitan Life and HIV/AIDS management has been incorporated into a comprehensive employee wellness programme. The potential impact of the disease on the group’s business has not been quantified. Clinics attached to dispensaries in many Clicks stores provide an HIV/AIDS counselling service to customers.
New Clicks recognises that transformation and BEE have become increasingly relevant in the South African business landscape, particularly in the healthcare sector. During the year a board transformation committee was established to monitor progress of the group’s BEE strategy. An evaluation of the group’s BEE status was undertaken by empowerment rating agency, Empowerdex, and specific plans have been developed to address areas identified in the rating. A survey is being conducted to determine the BEE credentials of all merchandise and non-merchandise suppliers.
After a protracted period of uncertainty, the revised pharmacy dispensing fees should bring stability to the Clicks pharmacy business and clarity to customers. Clicks had, however, implemented strategies to limit the impact of the interim pricing regulations. While Clicks has welcomed the new fee structure, the response from community pharmacy has been less favourable and may result in pharmacy closures. As this could potentially impact on UPD as a supplier to independent pharmacies, steps have been taken to mitigate the risk, including the development of the Multicare banner group to increase loyalty levels to UPD. The proposed capping of logistics fees could also impact on UPD’s total income. New Clicks has developed constructive relationships with the Department of Health and continues to engage on regulatory issues.
Attracting and retaining high-calibre employees is critical to the delivery of the group’s strategies and objectives. The human resources function has been strengthened and strategies developed to position New Clicks as an employer of choice. The group is focusing on creating a performance-based culture, with reward systems being more closely aligned to performance and the creation of shareholder value.
There is a shortage of healthcare professionals globally and South Africa is no exception. In order to attract and retain quality pharmacists, Clicks has developed several programmes to overcome the lack of availability of pharmacists. These include offering an accredited training academy for pharmacy assistants, continued professional development of pharmacists, more effective utilisation of qualified pharmacy assistants and incentivisation programmes for pharmacists.
The high level of crime manifests itself through loss of merchandise and cash, increased security costs and traumatisation of employees exposed to armed hold-ups. Operational management is strongly focused on preventative measures to reduce incidents of crime while appropriate insurance cover has been effected to mitigate losses. Shrinkage remains an area of risk and is being addressed through improved operational controls, enhanced systems capability and more effective inventory management.
Stores are dependent on uninterrupted support facilities and structures. The risk of disruption has been assessed and comprehensive business continuity plans have been developed for all distribution centres and an information technology disaster recovery plan is in place. Business continuity plans at the national store support centre in Cape Town are being continually enhanced.
Following the implementation of the new systems platform, systems stability issues were addressed by adapting business processes to the requirements of the new system. Operational compliance is being achieved through training, standardisation of operating procedures and score-carding.
Musica is exposed to the impact of rapidly changing technology on the music industry. Strategies have been developed to ensure the sustainability and ongoing profitability of the business, while at the same time capitalising on these changes for business advantage. This includes transforming Musica into a broader entertainment brand, developing an online e-commerce platform and introducing a digital downloading offering.
Internal audit is an independent, objective appraisal and assurance function which is central to the group’s governance structures. The role of internal audit is contained in the Audit committee charter and the internal audit charter. Internal audit encompasses the review of the
The internal audit function reports to the Audit committee and has the support of the board and management. Operationally, the internal audit manager reports to the chief financial officer who in turn reports to the chief executive officer. The internal audit manager has direct and unrestricted access to the chairman of the Audit committee.
The board is accountable for systems of internal control which are designed to provide reasonable – but not absolute –assurance of the accuracy of financial reporting and the safeguarding of assets.
The Audit committee has reviewed the effectiveness of the systems of internal control. The board has been satisfied that management has a system of controls and procedures of a high standard to ensure the accuracy and integrity of the accounting records and to effectively monitor the group’s businesses and performance.
The implementation of the enterprise-wide systems platform proved challenging. After addressing systems stability issues in the early months of the financial year, business processes were adapted to the requirements of the new systems. Operational compliance with these processes has taken longer than expected. As a result, the year-end financial reporting and audit process took longer to complete than anticipated. As compliance with the systems improves, the group anticipates further benefits in the quality of reporting and analysis.
No incidents have come to the attention of the board that would indicate any material breakdown in these internal controls during the year.
The group has an insider trading policy that precludes directors and staff from trading in the shares of New Clicks Holdings 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 if directors and executives have access to price-sensitive information which is not in the public domain.
Directors are required to obtain written clearance from the chairman prior to dealing in the company’s shares. The chairman is required to obtain approval from the chairman of the Audit committee before undertaking any share dealings. It is also mandatory for directors to notify the company secretary of any dealings in the company’s shares. This information is then disclosed on SENS within 48 hours of the trade being effected. These dealings are also reported retrospectively at board meetings.
The group subscribes to the highest ethical standards of business practice. A set of values and behavioural principles 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.
A fraud policy ensures that a firm stance is taken against fraud and the prosecution of offenders. This policy outlines the group’s response to fraud, theft and corruption committed by staff and external parties against the company. A forensic auditor in 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.
Whistle-blowing is encouraged and staff can report suspected fraudulent or unethical behaviour via a toll-free telephone number. Every reported incident is investigated and during the year 52% of tip-offs uncovered unethical conduct. These cases resulted in disciplinary action ranging from formal warnings to corrective behaviour, dismissal and criminal prosecution.
The directors accept ultimate responsibility for the preparation of the financial statements and related financial information that fairly represent the results of the group.
The financial statements have been prepared in accordance with International Financial Reporting Standards for the first time for the year ended 31 August 2006.
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 directors are satisfied that the group has adequate resources to continue operating for the next 12 months and into the foreseeable
future.
The
financial statements have
accordingly been prepared on a going concern basis. The board is apprised of the group’s going concern status at board meetings.
The Audit committee has considered the independence of the group’s external auditors, KPMG Inc, and are satisfied that they are independent. In particular, the Audit committee is satisfied that: