During the 2016 reporting period the Group continued to practise corporate governance at a high level, aimed at adding value to the business as well as facilitating the Group's sustainability, generating long-term shareholder value and benefiting other stakeholders.
In an environment of voluminous and changing regulation, and in the context of both acquisitive and organic growth, the Group has worked to attain an appropriate balance between the governance expectations of stakeholders, and the requirement to generate consistent and competitive financial returns.
Governance in the Group goes far beyond a box-ticking process, with compliance with codes, legislation, regulations and listings requirements being a minimum requirement. Management has adopted sound corporate governance principles and appropriate governance structures and policies, and believes it has embedded into operations a business-wide culture of good governance that is aligned to the Group's business philosophy.
An independent assessment of the Group's standard of governance is provided by the annual evaluation process for the FTSE/JSE Responsible Investment Top 30 Index (in prior periods the JSE's Socially Responsible Investment (SRI) Index was the benchmark), which relies on publicly available information. In the reporting period the Group qualified for inclusion in the Index attaining 100% (2015: 100% on JSE SRI Index) for the elements of the governance pillar of the FTSE environmental, social and governance (ESG) ratings scorecard.
The directors confirm that during the 2016 reporting period the Group has in all material respects voluntarily applied the 2009 King Code of Governance Principles (King III) and complied with the mandatory corporate governance provisions in the JSE Listings Requirements. A schedule of how the Group has applied the King III principles can be viewed on www.truworths.co.za/investors.
This report is a summary of corporate governance matters within the Group and should be read in conjunction with the more detailed Corporate Governance Report available on www.truworths.co.za/investors.
Governance adding value
Corporate governance can be viewed as a compliance overhead that adds little tangible value, and is costly in terms of resource utilisation.
The Group's approach to corporate governance, however, is to aim for the relevant policies, structures and processes that may have been brought into existence initially to ensure adherence with applicable regulation and codes of conduct, to contribute to improved operational decision-making and corporate performance. This aim is achieved by:
- considering the governance requirements critically and with a view to determining how they could be implemented within the Group in a value-adding way;
- identifying opportunities in governance requirements for enhanced accountability, improved decision-making, better risk mitigation and more comprehensive disclosure;
- conducting a thorough debate and enquiry process before putting into place the applicable policies, reporting and monitoring mechanisms, and committee structures that are hallmarks of a sound corporate governance framework; and
- periodically reviewing these elements and benchmarking the Group's initiatives against comparable organisations and recommended best practice.
Improved corporate performance arising from sound corporate governance manifests itself in a number of ways in the Group, including:
- diversity and independence of opinion in board decision-making, with the aim of ensuring sound outcomes;
- improved operational decision-making that takes into account a diversity and broadness of perspectives;
- maintenance of discipline and integrity in management's reporting to the board;
- enhanced levels of accountability and transparency by management to the board;
- meaningful risk management and controls that are embedded in day-to-day operations and decision-making;
- better and more integrated reporting of both financial and non-financial aspects to stakeholders;
- improved levels of assurance regarding the reporting by management to shareholders; and
- achievement of an appropriate balance in meeting the expectations of the different stakeholders of the Group.
It is the view of the board that the improved corporate performance achieved through its sound governance framework has created value for the business and its stakeholders, in the form of lower risk, improved sustainability, consistency of financial performance, sound stakeholder relationships, high levels of legislative compliance and reputational integrity.
Governance Developments in 2016
While the board believes the Group has achieved a suitably high level of maturity in relation to governance, its processes, policies and structures are continually reviewed and modified. The following enhancements were made to the Group's governance framework during the reporting period:
|Governance element||Governance development|
|Social and Ethics Committee||The committee reviewed the scope and breadth of management's reporting to the committee with the assistance of external advisers. As a consequence it has broadened and clarified its monitoring function to ensure that over a rolling period all matters required by regulation are suitably considered by the committee, or by the board, or other structures that report to the board.|
|Social and Ethics Committee||The charter of the committee was reviewed and changes thereto were adopted by the committee and the board.|
|Risk governance||The reporting by the Risk Committee to the board of the company has been amended to be more encompassing, and a revised format of the Group's top risk register incorporating an impact indicator both before and after the implementation of mitigating controls has been adopted and the risk register is presented routinely to the board together with a risk heat map.|
|Risk governance||The charter of the Risk Committee was reviewed and changes thereto, including providing for the committee to report to the company's board rather than to the board of its major subsidiary company and providing for the Office Risk Committee to report to it, were adopted by the committee and the board.|
|Risk governance in Office||A formal risk management process has been introduced in Office following its acquisition in December 2015. This includes the creation of a risk committee, the adoption of a committee charter, appointment of a risk officer, the conduct of a risk assessment process and the creation of a top risk register for the Office business.|
|Office Audit Committee||An audit committee has been established in Office, involving the appointment of committee members and the adoption of a charter.|
|Audit Committee||The charter of the Audit Committee was reviewed and changes thereto, including providing for the Office Audit Committee to report to it, were adopted by the committee and the board.|
|Remuneration Committee||The charter of the Remuneration Committee was extensively reviewed and changes thereto, including ensuring that the committee had suitable oversight of remuneration matters within Office, were adopted by the committee and the board.|
|Non-executive and Nomination Committee||The charter of the Non-executive and Nomination Committee was reviewed and changes thereto were adopted by the committee and the board.|
|Information technology (IT) governance||The ongoing development of IT governance processes, including the regular use of an IT governance scorecard, the ongoing involvement of the IT Audit Manager in promoting and monitoring IT governance, the routine consideration of IT governance matters on the agendas for board and committee meetings, and the embedding of good IT governance practices in day-to-day operations, have been witnessed.|
|Anti-bribery and corruption policies||The Group's policies, as well as contracts with suppliers, agents and employees aimed at combating bribery and corruption, were reviewed and suitably amended.|
|Supplier code of conduct||A supplier code of conduct has been introduced and communicated to suppliers which confirms the Group's zero-tolerance approach to any forms of bribery and corruption, and insistence on full legislative compliance.|
|Consumer and credit legislation compliance||Management implemented new processes and adopted revised policies to deal with consumer and credit legislation changes, including new affordability assessment regulations under the National Credit Act, and the code of conduct and Ombud scheme in terms of the Consumer Protection Act for the consumer goods and services industry.|
|Chief Executive Officer||The service contract with the Chief Executive Officer (CEO) has been extended, with a six-month notice period for either party, following the resignation in December 2015 of the Chief Executive Officer Designate.|
|Business continuity||The Group's business continuity plans were further developed and its disaster recovery capabilities as regards key information system applications were further tested and upgraded.|
|Office operational governance||The Group's operational governance within Office was enhanced through the adoption of the Group's change control policies and procedures, and the Group's lease and capital expenditure approval processes.|
|Tax risk governance||Management took to finalising its group-wide transfer pricing policy and inter-company agreements, to ensure intra-group cross-border transactions take place on an arm's length basis and the intra-group profit allocation reflects the underlying economic activities, and further reviewed its processes, including its tax return and tax payment review policy, for ensuring reliability, accuracy and timeousness as well as defensibility in areas of judgement in relation to key tax-related issues.|
2017 governance priorities
Governance priorities for the 2017 reporting period will include:
- Further developing the Group's understanding, and planning for the expected coming into force in November 2016, of the King IV Code of Corporate Principles.
- Continuing the development of an appropriate corporate governance framework within Office that complements the Group's corporate governance processes, practices and policies.
- Further improving the Group's understanding of and compliance with the regulatory requirements in the foreign territories in which it conducts operations, including further developing the effective functioning of the Group's Compliance Officer role.
- Reviewing and upgrading the Group's tax risk governance framework by consistently implementing the Group's transfer pricing policy and improving the reporting of material tax-related management information to the board.
- Further development of the reporting by management to the Social and Ethics Committee so as to broaden the scope of topics reported on and to incorporate a dashboard of progress on key environmental, social and governance issues, with a view to facilitating the effective monitoring required to be undertaken by this committee.
- The development by the board of a policy on the promotion of gender diversity at board level, including giving consideration to whether targets should be set for achieving such diversity.
Generally the board and management will continue to follow an approach of continuous incremental improvement as regards governance practices and structures, to ensure the reasonable expectations of stakeholders as regards the Group's corporate governance standards are met.