Corporate Governance Report

Introduction

New Clicks is committed to adopting sound corporate governance practices throughout its business to protect the interests of the group and its stakeholders.

The group endorses the Code of Corporate Practices and Conduct contained in the King Committee Report on Corporate Governance (King ll). The directors believe New Clicks complies with both King ll and the Listings Requirements of the JSE Limited.

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

Enhancing corporate governance

Governance processes and structures are regularly reviewed to reflect internal developments and to ensure alignment with best practice. During the year governance structures were enhanced in the following ways:

  • The board of directors was strengthened with the appointment of three black female directors (two independent non-executive directors and an executive director).
  • These appointments further enhanced board transformation and gender diversity, with black representation now 36% and female directors comprising 27% of the board.
  • Following a review of the board committee structure, the mandate of the risk committee has been enhanced to incorporate governance and sustainability.
  • A legal compliance officer was appointed during the year.
  • An information technology audit was undertaken to ensure legislative compliance and the maintenance of superior governance standards.

Board of directors

Board composition

New Clicks has a unitary board structure with 11 directors, including four full-time executive directors and seven non-executive directors. Biographical details of the directors appear here.

The following changes were made to the board during the year:

  • Professor Fatima Abrahams and Fatima Jakoet were appointed as independent non-executive directors and Bertina Engelbrecht, the group human resources director, was appointed as an executive director (1 March 2008).
  • Lucia Swartz retired as a director and did not stand for re-election at the last annual general meeting (29 January 2008).
  • Roy Smither resigned from the board (31 January 2008).
  • Subsequent to the year-end, Robert Lumb resigned as a director with effect from 30 November 2008 and John Bester was appointed to the board as an independent non-executive director effective 1 October 2008.

Six of the seven non-executive directors, including the chairman, are independent in terms of both the King ll definition and the guidelines outlined in the JSE Listings Requirements. The remaining non-executive director, Professor Peter Eagles, provides specialist consulting services to the group and is therefore not currently classified as independent. The consulting contract with Professor Eagles is due to come to an end in the 2009 financial year.

As the majority of non-executive directors are independent, this provides the necessary objectivity for the effective functioning of the board.

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.

The non-executive directors have extensive business experience and specialist skills across a range of sectors, including accounting, finance, 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 direct shareholder representation on the board.

The board meets at least four times a year. Additional meetings are convened to consider specific business issues which may arise between scheduled meetings.

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:

  • Approving strategic plans;
  • Monitoring operational performance and management;
  • Ensuring effective risk management and internal controls;
  • Legislative and regulatory compliance;
  • Approval of significant accounting policies and annual financial statements;
  • Selection, orientation and evaluation of directors;
  • Appropriate remuneration policies and practices;
  • The ongoing sustainability of the business; and
  • Balanced and transparent reporting to shareholders.

Board appointment

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 (AGM). Directors appointed during the year are required to have their appointments ratified at the following AGM.

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. This includes visits to stores and distribution centres.

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 for the implementation of the strategy and the ongoing management of the business. The group executive consists of 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
  • Identifying and mitigating risk.

Company secretary

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 current company secretary, Allan Scott, has elected to retire with effect from 31 March 2009.

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 results of these reviews are discussed with each director and the chairmen of the board sub-committees. One of the key issues to emerge out of the evaluation process was the need to address the structure and composition of the board committees, which has resulted in several changes as outlined below.

Board and committee structure

The board revised the committee structure with effect from 1 October 2008. The mandate of the risk committee has been expanded to incorporate the functions of the governance committee which has been disbanded. The risk committee will also be responsible for ensuring the group’s compliance with the sustainability principles contained in King ll.

The composition of the board committees has also been reviewed to embrace the skills of the newly-appointed directors, with new chairpersons being appointed for the audit, risk and transformation committees. All board committees are chaired by independent non-executive directors.

The committees all have clearly-defined 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.

Board and committee structure
* Will assume chairmanship of the committee on 1 December 2008 following the resignation of Robert Lumb effective 30 November 2008.

Audit committee
Role: Ensure that management has created and maintained an effective control environment in the group.
Functions
  • Review and approve the appropriateness of accounting and disclosure policies in the annual financial statements and related financial reporting;
  • Assess the effectiveness of internal controls;
  • Review actions taken on major accounting issues;
  • Oversee the functioning of the internal audit department, which reports to the audit committee;
  • Ensure no limitations are imposed on the scope of the internal and external audits;
  • Confirm the nomination and appointment of the group’s auditors and be satisfied that the auditors are independent;
  • Approve the terms of engagement and fees paid to the auditors;
  • Ensure the appointment of the auditor complies with the relevant legislation;
  • Determine the nature and extent of any non-audit services which the auditors may provide to the company; and
  • Ensure that any non-audit services provided to the company by the auditors are pre-approved by the audit committee.
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.
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.
Risk committee
Role: Assess risk management processes and procedures adopted by management and ensure compliance with governance and sustainability principles contained in King ll.
Functions
  • Review risk management processes;
  • Assess the risk tolerance levels of the business;
  • Review the risk philosophy, strategies and policies;
  • Evaluate the basis and adequacy of insurance cover;
  • Ensure internal audit is aligned with risk management processes;
  • Identify emerging areas of risk;
  • Ensure ongoing compliance with good governance principles;
  • Identify areas of governance non-compliance and propose remedial action; and
  • Oversee the group’s sustainability management practices.
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 attendance

Board Audit Remuneration Risk Governance Nominations Transformation
Number of meetings 4 4 2 3 1 5 2
David Nurek 4 4 2 1 5 2
Fatima Abrahams ^ 2/2 1/1 3/3 1/1
Peter Eagles 4 2 3 2
Bertina Engelbrecht ^ 2/2 1/1
Michael Harvey 4 2
Fatima Jakoet ^ 1/2 2/2 2/2 1
David Kneale 4 3 1 2
Robert Lumb 4 4 3 4/5
Martin Rosen 4 2 3
Roy Smither # 2/2 1/1 1/1
Lucia Swartz * 0/1 0/1 1/1 1/1
Keith Warburton 4 3 1
Attendance at meetings
2008 (%) 95 100 88 100 100 93 100
2007 (%) 87 85 100 79 100 100 100
^ Appointed 1 March 2008 # Resigned 31 January 2008 * Retired 29 January 2008

Internal accountability

Risk management

The board, through the risk committee, is responsible for setting risk policies, risk tolerance levels and ensuring that appropriate risk management processes have been implemented by management. Further details are contained in the Risk Management Report.

Internal audit

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:

  • Effectiveness of the systems of internal control;
  • Means of safeguarding assets;
  • Reliability and integrity of financial and operating information;
  • Efficient management of the group’s resources;
  • Efficient conduct of the operations; and
  • Compliance with applicable laws and regulations.

The internal audit function reports to the audit committee and has the support of the board and management. Operationally, the head of internal audit reports to the chief financial officer who in turn reports to the chief executive officer. The head of internal audit has direct and unrestricted access to the chairman of the audit committee. The head of internal audit is appointed and removed by the audit committee, which also determines and recommends remuneration for the position.

Internal control

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 is 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.

No incidents have come to the attention of the board that would indicate any material breakdown in these internal controls during the year. 

Legislative and regulatory compliance

Legislative and regulatory compliance is monitored by an in-house legal adviser and a contracted legal compliance officer who was appointed during the year to focus on compliance with existing and new legislation. Emphasis has been placed on reviewing the following legislation:

  • Pharmacy Act and Good Pharmacy Practice Rules
  • National Health Amendment Bill
  • Medicines and Related Substances Control Amendment Bill
  • Regulations amending the Medicines and Related Substances Control Act
  • Electronic Communications and Transactions Act
  • Regulation of Interception of Communications Act
  • Companies Bill
  • Consumer Protection Bill

The Companies Bill is expected to be enacted towards the end of 2009, although it is anticipated that the bill will change in various respects from its current status before being enacted. The legal department has focused on the amendments relating to directors’ and officers’ duties and the additional burden which will be placed on directors and officers in terms of personal liability to shareholders and other third parties.

A comprehensive information technology compliance audit was undertaken which included a review of all legislative requirements, with a specific focus on patient confidentiality in pharmacies. The audit highlighted that the group is largely compliant.

The Consumer Protection Bill will be enacted shortly and role-players will have 12 months to implement its far-reaching provisions. Workshops will be conducted for the areas of the business likely to be affected by the new legislation. The legal department will provide ongoing support throughout the implementation of the new legislation.

Two cases of non-compliance resulted in penalties being imposed on the group during the year:

  • Musica was found guilty of negligence in not taking reasonable steps to verify the authenticity of certain gaming controllers and memory cards sold in two stores in March 2007. A fine of R170 000 was imposed under the Counterfeit Goods Act. Musica was found not guilty on the charge of having intentionally sold counterfeit goods. The case arose out of Musica being supplied with counterfeit controllers and memory cards by Dolphin Enterprises. Dolphin was found guilty and fined for supplying counterfeit goods. Legal proceedings have been instituted against Dolphin to recover damages.
  • A fine of R68 000 was levied on the Clicks Group Medical Scheme for late submission of annual financial statements to the Council of Medical Schemes.

As a result of the Musica case the group obtained a compliance opinion from external attorneys and their recommendations have been implemented. In addition, a verification process has been adopted for approving new suppliers for Clicks and Musica to ensure the business only deals with reputable suppliers and that all goods are genuine.

Personal share dealings

The group’s insider trading policy precludes directors and staff from trading in New Clicks Holdings 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 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.

Ethical behaviour 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 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. 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. Every reported incident is investigated.

2008 2007
Reported incidents* 87 126
Incidents investigated** 87 126
Resultant dismissals/resignations 21 25
Employees counselled 8 16
Other disciplinary action 13 9
* Discom no longer included in 2008    
** 15 cases under investigation at year-end    

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 (IFRS).

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.

Going concern

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 presented here have accordingly been prepared on a going concern basis. The board is apprised of the group’s going concern status at board meetings.

External audit

The audit committee confirms that it has carried out its functions in terms of the Corporate Laws Amendment Act by:

  • Confirming the nomination of KPMG Inc. as the group’s registered auditor and being satisfied that they are independent of the company;
  • Approving the terms of engagement and the fees to be paid to KPMG;
  • Ensuring that the appointment of the auditor complies with all legislation relating to the appointment of auditors;
  • Determining the nature and extent of any non-audit services which the auditor may provide to the company; and
  • Ensuring that any non-audit services to be provided to the company by the auditors are pre-approved by the audit committee.

The company has received confirmation from the external auditors that the partners and staff responsible for the audit comply with all legal and professional requirements with regard to rotation and independence, including the stipulation that they should not hold shares in New Clicks Holdings.

The board, on the recommendation of the audit committee, has undertaken to introduce a periodic review of the appointment of the external auditors as a good governance practice. The first review will be undertaken during the 2009 financial year. KPMG and other major auditing firms will be invited to participate in this process. Any decision on the appointment of auditors for the 2010 financial year will follow the necessary regulatory and shareholder approval process.

Policy on non-audit services

In terms of the group’s policy on the provision of non-audit services by the external auditors, non-audit services may not exceed 25% of the total audit fee and should exclude any work which may be subject to external audit and which could compromise the auditor’s independence. During the year KPMG received fees of R54 000 for non-audit services.

KPMG satisfied the audit committee that appropriate safeguards have been adopted to maintain the independence of the external auditors when providing non-audit services.