LEWIS ANNUAL REPORT 2010 - GOVERNANCE AND SUSTAINABILITY

CORPORATE GOVERNANCE

INTRODUCTION

Lewis Group is committed to maintaining a culture of effective corporate governance to ensure the long-term sustainability of the business. The group therefore embraces the principles of integrity, transparency and accountability in its dealings with all stakeholders.

Governance structures and processes are regularly reviewed in response to changing requirements and to ensure alignment with best practice.

The board confirms that the company complies with all relevant legislation, regulation and codes, including the Code of Corporate Practices and Conduct as set out in the second King Report on Corporate Governance (King ll) and the JSE Listings Requirements.

The group welcomes the introduction of the King lll Report and plans to move to full compliance with the code. An evaluation of the principles of King lll against current practice has been completed and amendments and enhancements to governance processes will take place in the new financial year.

As part of the implementation of King lll, the board approved changes to its governance structure at the end of March 2010. These changes include separating the current Audit and Risk Committee into specific committees for audit and for risk, as well as splitting the Remuneration and Nomination Committee into separate committees.

GOVERNANCE STRUCTURE

The following board and committee structure applied for the period under review:

BOARD OF DIRECTORS

Board responsibilities
A formal board charter confirms that the directors are accountable to shareholders and are responsible for the following:

adopting strategic plans;
approval of budgets;
monitoring operational performance against approved budgets;
ensuring effective risk management and internal control;
overseeing director selection, orientation and evaluation;
approving significant accounting policies;
ensuring legislative and regulatory compliance;
assessing the sustainability of the group as a going concern;
approving the annual and interim financial statements;
ensuring balanced and understandable communication to stakeholders; and
matters considered crucial for business success.

A clear division of responsibility is embedded in the board charter. The board has delegated authority to the chief executive officer and the directors of Lewis Stores for the implementation of the strategy and the ongoing management of the business.

Board composition
Lewis Group has a unitary board structure consisting of seven non-executive directors and two full-time, salaried executive directors. Background information on the directors appears here.

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

Alan Smart, the chief executive officer, retired on 30 September 2009 and continues to serve on the board as a non-executive director.
Johan Enslin succeeded Alan Smart as chief executive officer with effect from 1 October 2009 and was appointed to the board as an executive director.
Zarina Bassa and Sizakele Marutlulle were appointed as independent non-executive directors from 1 October 2009.

Six of the non-executive directors, including the chairman, are currently classified as independent in terms of both the King ll definition and the guidelines of the JSE Listings Requirements. The remaining non-executive director, Alan Smart, is not classified as independent as he has served as an executive of the group within the last three years.

Directors do not have a fixed term of appointment and all directors are subject to retirement by rotation and re-election by shareholders at least every three years. Directors appointed during the year are required to have their appointments ratified at the following AGM. Executive directors are subject to a 12-month notice period.

Directors are invited to serve on the board based on their knowledge, experience, independence and ability to contribute to board level debate.

Board meetings
The board meets at least four times a year and further meetings may be convened. No additional meetings took place during the year under review. Meetings are conducted in accordance with formal agendas, ensuring that all substantive matters are addressed and monitored. Any directors may request additional items to be included on the agenda.

Newly-appointed directors participate in an induction programme which outlines their fiduciary responsibilities and provides company and industry background information.

Board evaluation
All directors participate in the annual evaluation of the board’s performance. The questionnaire-based evaluation covers the board’s role and agenda setting; the size, independence and composition of the board; director orientation and development; board meetings; board committees; board accountability and governance practices. The process also includes an assessment of the performance of the chairman and the chief executive officer. In addition the chairman has individual sessions with each director.

Company secretary
The company secretary acts as adviser to the board and plays a pivotal role in ensuring compliance with regulations, the induction of new directors and providing advice to directors on governance, compliance and their fiduciary responsibilities.

The directors have unrestricted access to the advice and services of the company secretary. They are entitled to seek professional advice at the company’s expense after consultation with the chairman of the board. Directors also have unrestricted access to all company information and may meet independently with management.

BOARD COMMITTEES

The board of directors has delegated specific responsibilities to three board committees. The committees are all chaired by independent non-executive directors. Each committee has a charter and terms of reference and the directors confirm that the committees have functioned in accordance with these written terms of reference during the financial year.

Lewis Group Audit and Risk Committee
Purpose and function	Composition
Approving the internal audit plan and reviewing the activities and findings of the department. Evaluating the performance of the internal audit function. Reviewing the audit plan of the external auditors, providing guidance on non-audit services. Assessing the independence and objectivity of the external auditors. Considering significant differences of opinion between management and external auditors. Reviewing the adequacy of internal control and risk management. Ensuring regulatory compliance. Assessing the economic, environmental and social sustainability of the group. Reviewing the financial reporting system, evaluating and approving accounting policies and the financial information issued to stakeholders in terms of IFRS.	Chairman – Hilton Saven The committee consists of four independent non-executive directors. The directors are financially literate and suitably qualified to perform their role. Meetings are also attended by the chief executive officer, chief financial officer, company secretary, internal audit executive and the external auditors.
	Meetings Four per year

Lewis Group Remuneration and Nomination Committee
Purpose and function	Composition
Developing a remuneration philosophy. Ensuring senior executives are fairly rewarded. Reviewing and approving compensation of executive directors, non-executive directors and senior executives. Recommending non-executive directors’ fees for shareholder approval. Approving the award of share incentives. Succession planning. Ensuring the board has the required mix of skills, experience and other qualities to effectively manage the group. Identifying and nominating candidates to fill board vacancies.	Chairman – David Nurek The committee consists of four independent non-executive directors. The chief executive officer attends meetings at the invitation of the committee.
	Meetings Twice per year

Lewis Group Transformation Committee
Purpose and function	Composition
Developing and maintaining a transformation strategy. Approving the transformation programme. Setting targets in terms of the Codes of Good Practice of the Department of Trade and Industry (DTI). Evaluating the group’s performance against the DTI scorecard. Confirming legislative compliance.	Chairperson – Fatima Abrahams The committee consists of two independent non- executive directors, together with the chief executive officer, merchandising director, human resources director and corporate social responsibility manager.
	Meetings Twice per year

MONARCH INSURANCE COMPANY LIMITED (MONARCH)

Monarch is the group’s short-term insurer. Knowledge and experience of short-term insurance is considered in appointing directors to the board. Two of the non-executive directors, Robert Shaw and Ray Sanger, provide insurance advisory services to Monarch.

A formal report on the investment portfolio by Sanlam Investment Management is presented at each board meeting, covering market conditions and expectations, asset allocation, investment returns, review of the investment portfolios and recommendations on the investment strategy.

Monarch Board
Purpose and function	Composition
Approval and oversight of strategic plans for the insurer within the parameters of the overall strategic direction of the group. Approval of budgets. Monitoring operational performance against budgets. Regular review of underwriting criteria. Adoption of asset allocation strategies for the investment portfolio, based on recommendations from Sanlam Investment Management who manages the portfolio on Monarch’s behalf. Review of the performance of the investment portfolio against benchmarks. Ensuring regulatory compliance. Ensuring effective risk management and internal control. Assessing director selection, orientation and evaluation. Approving significant accounting policies. Approving the annual financial statements.	Chairman – Alan Smart The board consists of four non-executive directors and one executive director.
	Meetings Four per year

Monarch Audit and Risk Committee
Purpose and function	Composition
Reviewing the audit plan relative to the group’s audit plan. Providing guidance on non-audit services. Ensuring regulatory compliance. The committee is also responsible for the group’s compliance with the Financial Advisory and Intermediary Services Act. Reviewing the financial reporting system, evaluating and approving accounting policies and approving the financial statements. Addressing risks specific to the company that have been identified in the group risk management policies.	Chairman – Hilton Saven The committee consists of four non-executive directors. Meetings are attended by the chief financial officer, company secretary, the group’s internal audit executive and external auditors.
	Meetings Four per year

LEWIS STORES (PTY) LIMITED

Lewis Stores (Proprietary) Limited is the main trading subsidiary of the group and operational responsibility has been delegated to the Lewis Stores board for the ongoing management of the business.

Lewis Stores Board
Purpose and function	Composition
Adoption of strategic plans. Providing strategic direction to senior management. Monitoring operational performance and management. Preparation and integrity of financial statements and all related information. Maintaining adequate accounting records. Adequately safeguarding, verifying and maintaining accountability of assets. Monitoring key performance indicators of the business. Ensuring regulatory and legislative compliance. Risk management. Developing a corporate code of conduct. Assessing composition and effectiveness of board.	Chairman – Johan Enslin The board consists of six executive directors, namely chief executive officer, chief financial officer, directors of credit risk, merchandising, human resources and information technology.
	Meetings Four per year

Governance committees of Lewis Stores

Executive Committee consists of 14 members, including the six directors of Lewis Stores, and the heads of key areas of operation within Lewis. The committee meets three times a year in conjunction with the Lewis Stores board meetings.
Risk Working Group (RWG) conducts a risk self-assessment on a biannual basis to evaluate any change in business risks and identifies emerging risks which may require mitigation. Following each assessment an appropriate course of action is agreed to mitigate or manage the risks identified. Responsibility for each risk is assigned by the RWG to the appropriate executive or line manager (refer to the Risk Management Report).
Business Continuity Planning Steering Committee manages the business continuity plan (BCP) which assesses potential environmental disasters, disruptions, loss of utilities and services, equipment or system failure, serious information security incidents and other emergency situations. The BCP covers all the key business processes identified as critical to the functioning of the group. The plan is tested periodically in a simulated environment. The committee comprises the chief executive officer, chief financial officer and IT director.
Information Technology Steering Committee meets quarterly and comprises the chief executive officer, chief financial officer, IT director as well as business systems and IT operations executives. The committee focuses on the following IT-related issues: strategic alignment of the business; delivering value by optimising expenditure and proving value; IT risk management which provides for disaster recovery as well as the safeguarding of IT assets; and unlocking of business knowledge. The committee also oversees progress on strategic projects to ensure efficient delivery of new systems.

BOARD AND COMMITTEE ATTENDANCE

Lewis Group

			Remuneration
Non-executive directors	Board	Audit and Risk	and Nomination	Transformation
Number of meetings	4	4	2	2
D M Nurek+	4	4	2	2
F Abrahams	4		2	2
Z Bassa*	1/2	1/2
S Marutlulle*	2/2
H Saven	4	4	2
A J Smart #	4	4°	1/1§
B J van der Ross	4	4	2
Executive directors
J Enslin*	4	4°	1°	2
L A Davies	4	4°
Management
N Jansen				2
D Loudon				2
S Röhm				2


+	Chairman
*	Appointed 1 October 2009
#	Retired as chief executive officer with effect from 30 September 2009 and appointed as a non-executive director from 1 October 2009
°	By invitation
§	Also attended the other meeting by invitation as he was the chief executive officer

Monarch Insurance Company Limited

Non-executive directors	Board	Audit and Risk
Number of meetings	4	4
A J Smart+	4	4
D M Nurek	4	4
R I Sanger	4	4
H Saven	4	4
R L Shaw	4	4
Executive director
L A Davies	4	4°


+	Chairman. Retired as chief executive officer with effect 30 September 2009 and appointed non-executive director from 1 October 2009
°	By invitation

Lewis Stores (Proprietary) Limited

Directors	Board
Number of meetings	3
A J Smart*	2/2
J Enslin	3
L A Davies	3
C Irwin	3
N Jansen	3
D Loudon	3
B van Aswegen	3
* Retired 30 September 2009

COMPLIANCE AND CODES OF CONDUCT

Regulatory and legislative compliance
New and proposed legislation impacting the group includes the following:

Insurance Laws Amendment Act: This legislation mainly affects the group’s insurer, Monarch Insurance Company Limited, and the relevant provisions of the Act were implemented during the year.
Consumer Protection Act: An analysis of the legislation has been concluded and owing to the high ethical standards adopted by the group in its dealings with customers, limited refinements are required. The Act contains a number of transitional provisions which allows for businesses to effect implementation by October 2010.
Companies Act 2008: Comment was submitted on the Companies Act Regulations and the group awaits the finalisation of the Companies Act.
Financial Advisory and Intermediary Services Act: Implementation of the Act relating to the fit and proper requirements for staff is in progress.

The group had no instances of significant non-compliance, fines or prosecution in the period.

Behavioural code
The group conducts its business with the highest levels of professionalism and integrity. The Lewis Group pledge is a behavioural code which outlines the standards of honesty, integrity and mutual respect which employees are required to observe.

The corporate fraud policy sets out the responsibility of staff and management towards the detection and prevention of fraud.

A confidential hotline is available to all employees to report suspected incidents of fraud or dishonesty.

All employees who interact with suppliers or are involved with entities conducting business with the group are required to sign a declaration of conflict of interest. The declaration covers issues ranging from employees owning shares in a supplier to receiving gifts from suppliers. The declaration by employees has been noted in the group’s risk register.

Personal share dealings
An insider trading policy restricts directors and specifically identified staff from dealing in the shares of Lewis Group during closed periods. The closed periods are effective from the end of the interim and annual reporting periods until the financial results are disclosed on SENS. Embargoes are also placed on share dealing when the group is trading under a cautionary statement.

Directors are required to obtain written clearance from the chairman of the board prior to dealing. The chairman is required to obtain written permission from the chairman of the Audit and Risk Committee.

It is also mandatory to notify the company secretary of any dealings in the company’s shares. This information is then disclosed to the JSE Limited within 48 hours of the trade being effected and the details published on SENS.

A register of share dealings by directors is maintained by the company secretary and reviewed by the board.

Shareholder communications
The group is committed to regular and transparent communication with the investment community to provide a fair assessment of the financial position to all stakeholders. Management has an active contact programme with institutional investors and investment analysts, including interim and final results presentations in Cape Town and Johannesburg, post-results roadshows to investors, regular meetings with local and international fund managers and analysts, store visits as well as participation in broker conferences locally and offshore. An investor relations consultancy is retained by the group to advise on financial communications and investor relations.

Governance and sustainability