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corporate governance report


New 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.

Board of directors

Board charter

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.

Board composition

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.

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. 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.

Board evaluation

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.

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.

Board committees

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.

Audit committee

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.

Remuneration committee

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.

Risk management committee

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.

Governance committee

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).

Nominations committee

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.

Transformation committee

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.

Group executive committee

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:

Remuneration

Remuneration policy

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:

Executive share incentive scheme

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.

Board attendance

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 Resigned 23 January 2006
Resigned 31 December 2005

Directors’ remuneration

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  

Total directors’ remuneration

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  
Directors’ fees

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
  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    
Directors’ shareholdings

The beneficial interests of the directors of New Clicks Holdings at 31 August 2006 are set out below:

Shareholdings
   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  

Internal accountability

Risk management

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:

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

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.

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 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.

Personal share dealings

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.

Ethical behaviour and values

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.

Financial statements and external review

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.

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

Independence of external auditors

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: