New Clicks Holdings subscribes to the principles of sound corporate governance to promote and protect the interests of the company and its shareholders. In order to achieve the highest governance standards, the group embraces the principles of integrity, transparency and accountability in its dealings with stakeholders and seeks to incorporate appropriate governance practices into every aspect of its business.

The board is satisfied that the group complies in all material respects with the provisions and spirit of the Code of Corporate Practices and Conduct recommended by the second King Report (King ll) and the JSE Limited Listings Requirements.

The group believes that corporate governance is far more than a "tick box" exercise to meet minimum formal standards. An effective governance structure is a working system which in substance encompasses the development of an appropriate strategy, determining achievable targets, empowered decision-making and the monitoring of compliance and performance.

The Governance committee of the board is responsible for ensuring compliance with King ll and monitors governance practices throughout the group. Governance structures and processes are regularly reviewed to take account of changes within the group and best practices in the corporate governance arena.

During the year the governance process was enhanced with the board evaluation being extended to include reviews of individual directors by the chairman as well as reviews of the board sub-committees. A policy was developed on the provision of non-audit services by the external auditors.

New Clicks is also committed to ensuring the long-term sustainability of the business and acknowledges its broader role in community upliftment. The Corporate Citizenship Report outlines the progress that has been made on non-financial performance and the group's relationship with its stakeholders on social, economic and environmental issues.

BOARD OF DIRECTORS

Board Charter

The board has a formal, documented charter which states that the directors of New Clicks Holdings retain overall responsibility and accountability for the group, its strategic direction, the annual business plan and budget. It is also ultimately responsible for legal and regulatory compliance, risk management, accounting policies and practices, performance measurement, transparency and communication with stakeholders.

A clear division of responsibility is embedded in the board charter. Authority has been delegated to the chief executive and the senior leadership team for the implementation of the strategy and the ongoing management of the business. The directors are apprised of progress through both regular reporting at board meetings and ongoing communications.

Board composition and features

Key features of the board and its composition are as follows:

• New Clicks has a unitary board structure comprising eight directors, including two executive directors and six non-executive directors. Raymond Godfrey, an executive director, has resigned from the board with effect from 31 December 2005 as he is taking early retirement from the group. Biographical details of the directors appear under Board of Drectors.
• Five of the six non-executive directors, including the chairman and deputy chairman, are independent in terms of the King ll classification. The remaining non-executive director, Allen Zimbler, provides professional consulting services to the group on a contractual basis and is therefore not classified as independent. The majority of independent non-executive directors provide 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, Trevor Honneysett, are separate and clearly defined. The 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 company has no controlling shareholder or group of shareholders, and there is no shareholder representation on the board.
• The non-executive directors have extensive business experience across a diverse range of sectors, enabling 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 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 and evaluation

• Newly-appointed directors are required to undergo a formal induction programme which outlines their fiduciary duties and provides them with an in-depth understanding of the company and its operations.
• Directors do not have a fixed term of appointment, although executive directors are subject to a 12-month notice period. 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 retire from the board at the age of 65, while there is no prescribed retirement age for non-executive directors.
• The directors believe that the effective functioning of the board is a cornerstone of sound governance and therefore undertake an annual self-assessment review of the board and its sub-committees, assessment of individual directors by their peers and senior management and an evaluation of the chief executive to benchmark performance against best practice. The chairman discusses the results of these reviews with each director and chairman of each sub-committee.

Company secretary

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 availed themselves of this right during the year. Directors also have unrestricted access to all company information, records, documents and property.

The company secretary ensures that board papers and other relevant documentation is circulated timeously to the directors, giving them sufficient time to consider the issues on the agenda, and enable them to make informed decisions at board meetings. He is also responsible for co-ordinating the induction programme for newly appointed directors and 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 board of directors has delegated specific responsibilities to five sub-committees to assist the board in the discharge of its duties and responsibilities:

• Audit committee;
• Remuneration committee;
• Governance committee;
• Nominations committee; and
• Risk management committee.

These committees are all chaired by independent non-executive directors and have clearly-defined mandates. The directors confirm that the committees have operated in accordance with these written terms of reference during the financial year.

Audit committee

Role:

The board entrusts the Audit committee to ensure that management has created and maintained an effective control environment in the group.

Function:

• Reviews and approves the appropriateness of accounting and disclosure policies in the annual financial statements;
• Assesses the effectiveness of internal controls;
• Reviews action taken on major accounting issues;
• Ensures that management imposes no limitation on the scope of the audits; and
• Monitors the independence of the external auditors, including the determination of a policy for the provision of non-audit services by the external auditors.

Composition:

The committee consists of four independent non-executive directors. Executive management, internal audit staff and the external audit partners and staff attend meetings at the invitation of the committee. The committee also meets privately with the external auditors.

Members:

• Robert Lumb (chairman)
• David Nurek
• Eliot Osrin
• Peter Swartz

Meeting frequency:    Meetings in 2005:

Twice annually                 Two

Besides the formal meetings of the Audit committee, an internal audit committee meets quarterly, and members of the Audit committee participate in these meetings. The internal audit manager has direct access to the chairman of the Audit committee. During the year, an independent evaluation of the internal audit function was conducted by an external consultant. The report and recommendations were considered and adopted by the group.

Remuneration committee

Role:

The committee ensures that the remuneration philosophy of the group is aligned with the group strategy and performance goals.

Function:

• Assesses and reviews remuneration policies, employee share incentive schemes, performance bonuses and service contracts;
• Approves the remuneration of executive directors and senior management;
• Proposes fees for non-executive directors, which are tabled for approval at the annual general meeting; and
• Determines the award of share options to executives and staff.

Composition:

The committee consists of three independent non-executive directors and one non-executive director. The chief executive attends meetings at the invitation of the committee but is not entitled to vote on any issues and does not participate in discussions regarding his own remuneration.

Members:

• David Nurek (chairman)
• Lucia Swartz
• Peter Swartz
• Allen Zimbler

Meeting frequency:    Meetings in 2005:

At least twice annually     Two 

Governance committee

Role:

The committee's role is to ensure compliance in both substance and form with the recommendations of King II and to incorporate best governance practice into the business.

Function:

• Monitors governance practices throughout the group.

Composition:

The committee comprises the chairman of the board and the chief executive officer, together with the chief financial officer and the company secretary.

Members:

• David Nurek (chairman)
• Trevor Honneysett
• Allan Scott (company secretary)

Meeting frequency:    Meetings in 2005:

Ad hoc                              One

Risk management committee

Role:

The committee assists the board in ensuring material compliance with the principles of risk management as outlined in King ll.

Function:

• Reviews the risk management processes;
• Assesses the risk appetite of the business;
• Reviews the risk philosophy, strategies and policies;
• Reviews the basis and adequacy of insurance cover; and
• Identifies emerging areas of risk.

Composition:

The committee consists of two independent non-executive directors and a non-executive director, together with the chief executive and key members of operational management.

Members:

• Robert Lumb (chairman)
• Eliot Osrin
• Allen Zimbler
• Trevor Honneysett

Meeting frequency:     Meetings in 2005:

At least twice annually       Two 

Nominations committee

Role:

The committee ensures that the board functions optimally, overseeing the composition of the board, the appointment of directors and succession planning.

Function:

• Oversees the evaluation process of the board, individual board members and sub-committees;
• Identifies suitable candidates for directorships, and makes recommendations to the board;
• Advises on the composition of the board, reviewing the board structure and size; and
• Ensures effective succession planning for senior management.

Composition:

The committee consists of the chairman of the board and three other independent non-executive directors. The chief executive attends by invitation.

Members:

• David Nurek (chairman)
• Robert Lumb
• Eliot Osrin
• Lucia Swartz

Meeting frequency:     Meetings in 2005:

Ad hoc                               Two

BOARD ATTENDANCE

The attendance of the directors at board meetings and sub-committee meetings for the year was as follows:

GROUP EXECUTIVE

The board has delegated authority to the chief executive and he is supported by the group executive which is responsible for the operational performance of the group, including implementation of strategy and review of the brands and shared services performance. The members of the group executive are Trevor Honneysett (chief executive), David Kneale (deputy chief executive with effect from 1 January 2006), Keith Warburton (chief financial officer) and Michael Harvey (managing director of Clicks).

REMUNERATION

Remuneration policy

The remuneration policy of the group is 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 economic value-added (EVA) performance bonuses.

The executive level of management is key to the performance of New Clicks and the group 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:

• a basic remuneration package including benefits (pension, medical aid, long-service awards, housing loans, education loans, disability and funeral benefits under the pension fund, and an additional week's leave after five years' service);
• a short-term incentive EVA bonus scheme (based on the year-on-year improvement in profits relative to the asset employed. The bonus is calculated for the full year with an interim payment being made at half-year. All permanent employees participate in the scheme, excluding UPD staff who participate in a company-specific bonus scheme); and
• long-term share/phantom share incentive schemes.

During the year the group introduced an incentive programme for senior executives which is directly linked to share price performance and therefore aligns executive performance with the creation of shareholder value. Six million share appreciation rights have been made available under the scheme, with 50% vesting after three years and 50% after five years. The "exercise price" of the rights depends on the performance of the share price. If the share price appreciates by 15% to 20% per annum, the exercise price of the rights will be R8.36 (the price on the date of commencement of the scheme), a 20% to 25% per annum growth will reduce the exercise price to R4.16 while the exercise price for a share price rise of more than 25% per annum will be R0.01 (refer to note 17.1 for further details on the target share price and exercise prices). A total of 3.8 million rights had been granted by year-end to nine employees.

Non-executive directors are paid fees for their services as directors as well as for serving on board committees. These fees are set in relation to the retail sector and aim to reward the directors fairly for the time, services and expertise provided. The non-executive directors no longer participate in the company share incentive scheme, although three of the non-executive directors still hold share options which were allocated under a previous share incentive scheme.

Directors' emoluments

Directors' fees

The fee structure for directors has been adjusted with effect from September 2005 and is subject to approval by shareholders at the annual general meeting.

Directors' shareholdings

The beneficial interests of the directors of New Clicks Holdings at 31 August 2005 are set out below.

Issued shares = 370 260 332

Percentage of issued share capital held by directors is 0.52% (2004: 1.2%). There has been no change since year-end.

 

ACCOUNTABILITY AND AUDIT

External audit

The group's external auditors are KPMG Inc. A policy on the provision of non-audit services by the external auditors was adopted by the Audit committee and the board during the year. Non-audit services with fees under R100 000 may be approved by the chief financial officer and any services above this amount require the approval of the Audit committee chairman. The policy also requires KPMG to satisfy the Audit committee that appropriate safeguards to maintain the independence of the external auditors are in place when providing non-audit services.

An amount of R12 000 of the total audit fee of R3.01 million was paid to KPMG for non-audit services (refer to note 20 in the financial statements). The non-audit services related to an accounting opinion required by the group. The Audit committee is satisfied that the provision of these non-audit services did not compromise the independence of the auditors.

Risk management

The board, through the Risk management committee, is responsible for setting risk policies and risk tolerance and for ensuring that management has risk management processes in place. Details of foreign exchange, credit and interest rate risk appear in note 31 of the financial statements.

Internal audit

Internal audit is an independent, objective appraisal and assurance function and forms a core element of the group's corporate governance structures.

Internal audit includes the review of the effectiveness of the systems of internal control, the means of safeguarding assets, the reliability and integrity of financial and operating information, the efficient management of the group's resources and the efficient conduct of its operations.

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 access to the chairman of the Audit committee. The procedure for the appointment and dismissal of the internal audit manager is in line with other executive positions, and is subject to the approval of the Audit committee.

Internal control

The board is responsible for the group's 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.

In August 2005 the group implemented new systems in a number of key areas, particularly those relating to sales control and reporting, inventory management and shrinkage, as dealt with in more detail in the Chief Financial Officer's Report. These have been areas of concern and it is anticipated that the new systems will significantly enhance controls.

The board has been satisfied that management has established 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 their performance.

Besides the concerns over sales and inventory systems, which are being addressed in the implementation of new systems referred to above, no incidents have come to the attention of the board that would indicate any material breakdown in these internal controls during the year.

Financial statements

The directors accept ultimate responsibility for the preparation of the financial statements and related financial information that fairly represent the state of affairs and the results of the group.

The financial statements have been prepared by management in accordance with South African Statements of Generally Accepted Accounting Practice. They incorporate full and reasonable disclosure and are based on appropriate accounting policies that are supported by reasonable and prudent judgements and estimates.

The external auditors are responsible for independently auditing and reporting on these financial statements in conformance with statements of International Standards on Auditing.

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.

PERSONAL SHARE DEALINGS

Directors and staff are restricted 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 announced on the Securities Exchange News Service (SENS).

Embargoes are also placed on share dealings when the group is involved in corporate activity which results in the directors and executives having access to price sensitive information. The company secretary advises all directors and employees prior to the start of the closed periods of the restrictions on share dealings.

Directors and members of senior management are required to obtain written clearance from the chairman prior to dealing in the company's shares. The chairman in turn is required to obtain approval from the deputy chairman prior to any share dealings. It is also mandatory for directors and senior executives to notify the company secretary of any dealings in the company's shares. This information is then disclosed to the Listings Division of the JSE Limited and published on SENS within 48 hours of the trade being made. These dealings are also disclosed at the quarterly 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. These values are shared with all new staff as part of the formal induction programme and staff undertake to abide by the values.

The group has adopted a firm stance against fraud and the prosecution of offenders. A fraud policy has been developed which outlines the group's response to fraud, theft and corruption committed by staff and external parties against the company. The internal audit department has appointed a forensic auditor to manage the legal processes relating to fraud cases and to ensure the highest possible level of recovery for the group from any fraudulent activity.

Whistle blowing is encouraged and staff can report suspected fraudulent or unethical behaviour via a toll-free hotline. Every reported incident is investigated and during the year 42% of the tip-offs uncovered unethical conduct, which resulted in disciplinary action ranging from formal warnings to corrective behaviour and dismissal.