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sustainability and governance: corporate governance

Introduction

The directors endorse the principles of effective corporate governance and accept responsibility for ensuring that it is consistently practiced throughout the group. In discharging this responsibility, the board has ensured that the company complies in all material respects with the requirements of the Code of Corporate Practices and Conduct as set out in the second King Report on Corporate Governance (King II).

Governance developments

The board believes that the corporate governance structure should be appropriate for the size and nature of the group, its overall structure and to be able to monitor the business risks and challenges facing the group. This is an on-going assessment and appropriate adjustments to the governance practices are continuously made in response to changing circumstances.

During the year, the following developments in the governance practices were implemented:

• Formation of an Audit and Risk Committee for the group’s insurer, Monarch Insurance Company Limited. While the group’s Audit and Risk Committee has hitherto adequately addressed Monarch’s issues, it was agreed that a separate audit committee be formed by Monarch with the required set of specialised skills to oversee Monarch’s financial reporting, internal control and risk management.
• The composition, functions and responsibilities of audit committees as set out in the Corporate Laws Amendment Act of 2006, have been integrated into the workings and charter of the group’s Audit and Risk Committee.
• Successful implementation of the National Credit Act into all the business processes of the group.
• Continuing compliance with legislation and regulations and monitoring of proposed legislation to assess its impact on the business.
• Compliance with JSE Listings requirements.
• Continual review of existing governance practices to ensure its appropriateness to our circumstances and to benchmark against best practice.

Board and board committees

The board

Membership

Non-executive members: D M Nurek (chairman), H Saven, B J van der Ross and Professor F Abrahams

Executive members: A J Smart (chief executive officer), L A Davies (chief financial officer)

The directors do not have fixed terms of appointment and all directors are subject to retirement by rotation and re-election by shareholders at least every three years.

Directors are selected to serve on the board, based on their knowledge, experience, independence, the contribution they can make and attention they can devote to the role.

Purpose and function

In terms of its charter, the board’s responsibilities include the following:

• adoption and oversight of strategic plans;
• matters considered crucial for business success;
• 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 effective regulatory compliance;
• assessing the sustainability of the group as a going concern;
• approving the annual and interim financial statements; and
• ensuring balanced and understandable communication to stakeholders.

The board has defined levels of materiality recorded in a written delegation of authority, setting out decisions it wishes to reserve for itself.

A self-evaluation of the board’s performance is undertaken annually.

Meetings

The board meets four times a year. The charter allows for additional meetings when it is considered necessary.

Meetings are conducted in accordance with formal agendas, ensuring that all substantive matters are properly addressed and monitored. Any director may request additional items be included on the agenda. Meaningful, relevant and complete information is disseminated prior to board meetings to facilitate in-depth discussion.

Non-executive directors bring an independent view and enjoy significant influence at the meetings. In addition, there is on-going communication between the executive and non-executive directors outside of the formal meetings.

The directors have unrestricted access to information and management and may seek independent professional advice at the group’s expense, after consultation with the chairman.

Newly appointed directors are taken through an induction programme, outlining their fiduciary responsibilities and the necessary company and industry specific background information.

Attendance
		May	Aug	Nov		Mar
		2007	2007	2007		2008
D M Nurek
H Saven
B J van der Ross			Apologies
Prof F Abrahams
A J Smart
L A Davies

Board committees

The board of directors has delegated specific responsibilities to board committees, each with their own charter and terms of reference. The board committees meet independently and report back through their chairman. Minutes of committee meetings are distributed to the board. The secretary for these committees is the company secretary.

The board structure is illustrated below:

Audit and Risk Committee

Membership

Members: H Saven (chairman), D M Nurek, B J van der Ross.

In terms of its charter, the committee consists of the independent non-executive directors. The directors are financially literate and suitably qualified to perform their role.

Purpose and function

The committee is responsible for:

• 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 as to the extent of services other than audit to be provided. 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 compliance with regulatory requirements;
• assessing the sustainability of the group in terms of economic, environmental and social considerations; and
• reviewing the financial reporting system, evaluating and approving accounting policies and the financial information issued to the stakeholders in terms of International Financial Reporting Standards.

Meetings

The committee meets four times a year. Committee meetings are also attended by the group’s chief executive officer, chief operating officer, chief financial officer, the company secretary, the group’s internal audit manager and the external auditors, PricewaterhouseCoopers Inc.

The charter and meeting agendas have been aligned with the Corporate Laws Amendment Act of 2006.

Attendance
		May	Aug	Nov		Mar
		2007	2007	2007		2008
H Saven
D M Nurek
B J van der Ross			Apologies

Remuneration and Nomination Committee

Membership

Members: D M Nurek (chairman), H Saven, B J van der Ross, Professor F Abrahams

In terms of the charter, all members must be independent non-executive directors.

Purpose and function

The committee is responsible for the following:

• developing a remuneration philosophy;
• ensuring senior executives are fairly rewarded;
• succession planning;
• ensuring the Board has the required mix of skills, experience and other qualities to effectively manage the group; and
• identifying and nominating candidates to fill board vacancies. Before nominating individuals, appropriate reference checks are performed.

Meetings

The committee meets twice a year. At the invitation of the committee, the chief executive officer attends the meetings except when matters relating to his own compensation are under discussion.

The committee reviews and approves the compensation of the executive directors, non-executive directors and senior executives. All awards under the group’s share incentive plans are approved by the committee. The committee in its discretion may engage independent and professional advice in reviewing remuneration policies.

Attendance
		Aug		Mar
		2007		2008
D M Nurek
H Saven
B J van der Ross		Apologies
Professor F Abrahams

Transformation Committee

Membership

Non-executive members: Professor F Abrahams (chairperson), D M Nurek

Executive members: A J Smart (chief executive officer), J Enslin (chief operating officer), D Loudon (general manager: merchandising), J Horn (general manager: human resources)*, S Röhm (corporate social responsibility manager)

* Resigned 31 May 2008

Purpose and function

The committee is responsible for:

• developing and maintaining a transformation strategy;
• to set targets appropriate to the group in terms of the Codes of Good Practice issued by the Department of Trade and Industry (“DTI”);
• approve the programme of transformation;
• ensure that an annual evaluation of the group’s performance in terms of the DTI’s scorecard and a comparison to the targets set by the Committee are made; and
• confirm that legislation has been complied with.

Meetings

The committee meets twice a year. Reports on employment equity, training, procurement and the corporate social responsibility programme are presented by the respective executive members at every meeting. The committee reviews the progress that is being made towards achieving the group’s targets in respect of DTI’s codes of good practice.

Attendance
		Aug		Mar
		2007		2008
Professor F Abrahams
D M Nurek
A J Smart
J Enslin				Apologies
D Loudon				Apologies
J Horn
S Röhm

Monarch Insurance Company Limited

The board

Membership

Executive members: A J Smart (chairman), L A Davies

Non-executive members: D M Nurek*, R L Shaw and R I Sanger

Alternate director: H Saven* (for D M Nurek)

*Appointed 23 July 2007

Monarch Insurance Company Limited is the group’s short-term insurer. With due cognisance of this, selection of directors is made based on their knowledge and experience, particularly with respect to short-term insurance, creditability and the contribution they can make to this board.

R L Shaw and R I Sanger provide insurance advisory services to Monarch.

Purpose and function

The board performed the following functions:

• approval and oversight of strategic plans for the insurer within the parameters of the overall strategic direction of the group;
• approval of budgets (component of the group budget);
• monitoring operational performance against approved budgets;
• regular review of underwriting criteria;
• adoption of asset allocation strategies for the investment portfolio, based on recommendations from Sanlam who manage the portfolio on Monarch’s behalf;
• review of the performance of the investment portfolio against benchmarks;
• ensuring regulatory compliance, specifically with respect to the Short-term Insurance Act of 1998;
• ensuring effective risk management and internal control;
• assessing director selection, orientation and evaluation;
• approving significant accounting policies; and
• approving the annual financial statements

Meetings

The Monarch board meets four times a year.

Meetings are conducted with a formal agenda, ensuring that all substantive matters are dealt with. Any director may request additional items be included on the agenda. Meaningful, relevant and complete information is disseminated prior to board meetings to facilitate in-depth discussion.

At every meeting, a formal report from Sanlam regarding the investment portfolio is presented and discussed. The report covers the following:

• current market conditions and future expectations;
• asset allocations considering the above;
• returns under each asset category;
• detailed review of the equity portfolio and the positioning of the bond portfolio; and
• recommendations of the asset manager going forward.

The board considers their recommendations. The investment strategy is then formulated for the following quarter and the chief financial officer is then given authority to implement the approved strategy.

Attendance
		Jul	Sep	Nov		Mar
		2007	2007	2007		2008
A J Smart		Apologies
L A Davies
D M Nurek
R L Shaw
R I Sanger

Audit and Risk Committee

Membership

Members: R L Shaw (chairman), D M Nurek and R I Sanger

The committee was constituted in accordance with section 22 of the Short-term Insurance Act of 1998. Its first meeting was held in September 2007.

Purpose and function

The committee is responsible for:

• reviewing the company audit plan of the external auditor and its context within the group audit plan. Providing guidance as to the extent of non-audit services to be provided;
• ensuring compliance with regulatory requirements, particularly the Short-term Insurance Act of 1998. The scope of the committee’s monitoring of compliance with legal and regulatory requirements has been extended to include group compliance with the Financial Advisory and Intermediary Services Act (“FAIS”);
• reviewing the financial reporting system, evaluating and approving accounting policies and approving the financial statements of the company; and
• addressing risks specific to the company that have been identified in the group risk management policies.

Internal control review and internal audit work is done in terms of an overall group plan. The group Audit and Risk Committee refers any matter relating to Monarch to this committee for its consideration.

Meetings

The committee meets four times a year. These meetings are attended by the chief executive officer, chief financial officer, the company secretary, the group’s internal audit manager and the external auditors, PricewaterhouseCoopers Inc.

Attendance
		Sep	Nov		Mar
		2007	2007		2008
R L Shaw
D M Nurek
R I Sanger

Other governance structures

Executive Committee

The chief executive officer, Alan Smart is responsible for formulating, implementing and maintaining strategic directions, as well as ensuring that the day-to-day activities are appropriately supervised and controlled.

The responsibility for the implementation of strategy and management control over the activities of the group rests with the Executive Management Committee. The committee is chaired by the chief executive officer and consists of 12 senior members of the executive team which includes the six directors of Lewis Stores (Pty) Ltd.

The Executive Committee meets regularly and is responsible for assisting the chief executive officer in the management of the group, is accountable for the performance of the group and makes policy proposals to the board for consideration and adoption.

Company secretary

The company secretary acts as adviser to the board and plays a pivotal role in ensuring compliance with statutory regulations and the Code, the induction of new directors, tabling information on relevant regulatory and legislative changes, and giving guidance to the directors regarding their duties and responsibilities. The directors have unlimited access to the advice and services of the company secretary.

The appointment and removal of the company secretary is a matter of the board. On 18 March 2008, P B Croucher resigned as company secretary to move into another role within the group and M G McConnell was appointed in his stead.

Internal controls and auditing

Internal Control

The group’s internal controls and systems are designed to provide reasonable, but not absolute assurance as to the integrity and reliability of the annual financial statements, to safeguard and maintain accountability of its assets, to minimise fraud, loss and material misstatements and to ensure compliance in all material respects with applicable laws and regulations.

The systems of internal control are based on established organisational structures, written policies and procedures and includes the preparation of budgets and forecasts and the subsequent comparison of actual results to these budgets and forecasts. These systems and procedures are implemented, maintained and monitored by appropriately trained personnel with suitable segregation of authority, duties and reporting lines and by the comprehensive use of computer technology.

The effectiveness of the systems of internal control is monitored by the senior executives, general managers and the internal auditors. These reviews indicate that the systems of internal control are appropriate and satisfactory and in addition, no material loss, or misstatement arising from a material breakdown in the functioning of the systems has occurred. The board is of the view that current controls are adequate and effective to mitigate, to an acceptable level, the significant risks faced by the group.

Internal audit

The internal audit department reports to the Audit and Risk Committee and has direct access to the chairman of the Audit and Risk Committee. For day-to-day matters, it reports to the chief financial officer.

It provides assurance that management and business processes are adequate to identify and monitor significant foreseeable risks. It monitors the effective operation of the established internal control systems and is responsible for establishing credible processes for feedback on risk management to the board.

The internal audit department’s charter has been approved by the Audit and Risk Committee and is consistent with the Institute of Internal Auditors’ requirements for internal auditing. The audit coverage plan is reviewed annually and all significant findings and recommendations are reported to executive management and the Audit and Risk Committee.

The internal audit department co-ordinates with the external auditors, as far as practically possible, to ensure proper coverage of financial, operational and compliance controls and to minimise duplication of effort.

External auditors

The external auditors provide an independent assessment of the annual financial statements and express an opinion on the fair presentation of the financial disclosures.

The external auditors have free and unrestricted access to the Audit and Risk Committee.

The annual audit plan prepared by the external auditors is reviewed by the Audit and Risk Committee to ensure that all significant areas are covered, without infringing on the external auditor’s independence and right to audit.

The external auditors report their audit findings to the Audit and Risk Committee and executive management. The committee ensures that the matters identified and significant differences of opinion between management and the external auditors are considered.

Non-audit services provided by the external auditors are reported to the Audit and Risk Committee on a biannual basis.

Compliance and codes of conduct

Legislative compliance

We consider compliance with applicable laws, industry regulations and codes an integral part of conducting business. The group facilitates compliance through analysing statutory and regulatory requirements and ensuring that the implementation thereof is in accordance with the applicable laws and regulations.

The implementation of the National Credit Act (“NCA”) at the beginning of June 2007 was successful. All the group’s business processes were re-engineered, where appropriate, to comply with the various aspects of the NCA. One of the main implications of the NCA was the affordability criteria which requires credit providers to ensure that customers can afford the credit being offered. Lewis has been applying very similar criteria for a number of years and, therefore, compliance with NCA requirements required little change.

Proposed legislation that may impact the group going forward include the following:

• Consumer Protection Bill
• Companies Bill
• Insurance Law Amendment Bill

Management will monitor the progress of these Bills and make continual assessments of their impact on group compliance.

Behavioural code

The group is committed to a culture of the highest levels of professionalism and integrity in its business dealings with stakeholders. The behavioural codes set out standards of honesty, integrity and mutual respect. Employees are expected to act within this code at all times.

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

A hotline is available to all employees to report suspected incidents for investigation. Employees are guaranteed confidentiality and protection from victimisation for reporting such incidences.

Conflict of interest

Directors or senior executives once aware of any conflict of interest are required to disclose such a conflict immediately and are precluded from voting at meetings on conflicted matters.

Share dealing

An insider trader policy exists. During closed periods, the directors, officers and defined employees may not deal in the shares of Lewis.

Directors are required to obtain written clearance from the chairman of the board before dealing. If the chairman wishes to deal, he is required to obtain written permission from the chairman of the Audit and Risk Committee.

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

Stakeholder communication

In all communications with stakeholders, the board aims to present a balanced and understandable assessment of the group’s position. This is done through adhering to principles of openness and substance over form and striving to address material matters of significant interest and concern to all stakeholders. Proactive communication is maintained with institutional investors and investment analysts. The board encourages shareholder attendance at general meetings and provides understandable explanations of the effects of resolutions to be proposed.