Board succession and appointment

Directors are appointed based on their skills, experience and expected level of contribution to, and impact on, the activities of the group.

The board decides on the appointment of directors based on recommendations from the nomination committee.

New directors are formally inducted to facilitate their understanding of the group.

Board and board committees

The board has established a number of sub-committees, including statutory committees, all of which operate within written terms of reference. The performance of each committee and compliance with its terms of reference is regularly assessed in accordance with their terms of reference. No instances of non-compliance were noted.

Board focus areas for the year

• Transformation and strategic realignment of the group.
• Restructuring of the group's portfolio of businesses and disposal of assets not aligned with the strategy.
• Response to Covid-19.

Key activities for F2020

• Reviewed board composition, tenure and succession.
• Reviewed executive succession plans.

GOVERNANCE IN ACTION — FROM THE ALCO CHAIR

ALCO is responsible for implementing best-in-class asset and liability risk management policies, and monitoring the sophisticated practices that bring them to life in the group.

Management's sound and decisive responses to Covid-19, especially in dealing with the disruption in financial markets, attest to many years of developing and refining the group's capital management advantage. Imperial finds itself in an enviable position in its asset-liability balance and this is – in some part – thanks to energetic and forward-thinking leadership. This committee has a good relationship with executives, operating as a sounding-board on what is financially viable and what may be too ambitious. Covid-19 has certainly revealed the intangible benefits of high functioning teams, where the shared wisdom of the group is more than the sum of knowledge of individual members.

A recent visit to five African countries in which Imperial has operations, gave committee members a heightened feel for the opportunities the continent offers Imperial. It was enlightening to put human stories to the numbers, and to better understand the implications for our people, communities and countries of the group's commitment to growing enduring value equitably in Africa. Observers frequently bemoan the lack of investment into Africa and the crowding out of funds for already developed parts of the globe. But it seems that with a little imagination, carefully nurtured relational capital, and prudent allocation of monetary capital, Africa promises exciting business opportunities for Imperial.

It is one of the committee's tasks to interrogate new growth prospects, questioning if investments are aligned to strategy, if we have the managerial and financial capacity to make them work and if we can successfully integrate them into Imperial operations while making them value accretive. Typically, it is not the first question that counts, but the second, third and fourth questions that are meaningful and ensure that our deliberations lead us to decisions that are logical, reasonable and responsible, even and especially if it appears to be counter-intuitive.

'Vivid' is a word that often characterises our discussions, especially when the mechanics of considering the indicators is dealt with and our focus turns to the big capital decisions that move our strategy forward. Such decisions demand a clarity of vision, an attention to detail, of a higher order. 'Vivid' hints at the standards we demand in seeing the picture of asset growth in sharp focus; in understanding the various moving parts and grasping the knowable risks.

The committee considers socio-political instability to be the most ominous risk to our assets. Conversely, the yearning for self-improvement and social betterment on our continent is also our greatest opportunity. It is evident that in some areas of operation, logistical systems and practices are more advanced than in our South African home base. What can we learn from how our Kenyan operation delivers medical supplies, or how our Nigerian operations leverage brand loyalty? The continuing challenge must be to assist in sharing best practice across the group's operational footprint.

Investment decisions may only be proven good or bad in years to come. One of our tasks is to ensure that we get to those decisions in a rational and consistent manner that is cognisant of past mistakes. Where, after investing, a differing set of facts emerge that may be evidence of possible value destruction, the challenge is always to assist management in taking those brave, sometimes counter-intuitive decisions in mitigation.

This committee would like to believe that when it comes to making decisions about assets and liabilities, Imperial's executives are being held accountable to the right questions that get well beneath the skin of the salient financial data, to the benefit of both our organisation and - to the extent possible - the financial and social ecosystem that we grow and grow within.

GOVERNANCE IN ACTION — FROM THE ARC CHAIR

ARC assists the board in fulfilling its fiduciary duty to shareholders by overseeing the trustworthiness of our financial reporting, reviewing the internal and external audit process and assessing the functionality of internal controls and setting our appetite and tolerance for risk. The committee also takes an active role in determining if the group's risk management systems are adequate.

Our audit and risk processes withstood the disruption of Covid-19, but we have learnt some important lessons. Risk practitioners tend to focus on sovereign, market and operational risks, while broader global issues are far more difficult to assess. The Covid-19 pandemic has sensitised us to the higher likelihood of global 'black swan' events, with complex and compounding impacts, and has encouraged a more searching approach to analysing business resilience. Covid-19 has, therefore, necessitated a more inclusive, systemic and long-term approach to risk.

Before the pandemic struck, Imperial had partnered with a leading consulting firm to improve our financial management and reporting system and this initiative is now more urgent. An operating environment and operational context as complex as ours demands re-engineered and digital processes that deliver deep financial insight rapidly and accurately. The committee is overseeing the implementation of new systems in Imperial's finance function, which will improve visibility of our financial and operational health; enhancing confidence in our controls and governance and supporting swift strategic decision making. In the previous financial year, we appointed a non-executive director of the group onto each divisional financial and risk review committee (FRRC), which has improved our visibility and depth of understanding of the processes and issues.

The group's strategy of growth is bold, and the execution and implementation of the expansion does require management to make a logical and detailed case for each material investment. Executive leadership is aware of the risks of taking on too much too soon, in relation to capacity constraints in funds or human resources.

The board is aligned on the principle that not all strategic initiatives can be fulfilled in the next five years and careful prioritisation and sequencing will be key. The responsibility of ARC in this regard is to interrogate the controls and risks arising from planned investments.

The committee has considered the Independent Regulatory Board for Auditors (IRBA) mandatory audit firm rotation requirement to early rotate the group's external auditors, Deloitte & Touche, due to their current tenure. However, due to the challenges and uncertainties posed by Covid-19 and the current portfolio rationalisation and restructuring activity by the group, the committee decided to postpone the auditor rotation to F2022 for the F2023 financial year. In terms of the IRBA requirements, Imperial has to rotate auditors effective for financial years commencing on or after 1 April 2023.

The blend of committee members includes experience and youth, technical experts and generalists, capable of applying healthy scepticism. We apply a culture of no-fear debate, with views aired freely and reasonably. Similarly, discussions with executive directors are conducted in a frank tone and in a spirit of trust. We appreciate the openness of our discussions with executives and shareholders can take comfort that the CFO and his team handled currency fluctuations, changing interest rates, asset impairments and other challenges accentuated by Covid-19 exceptionally well. Their swift and decisive responses have bolstered our financial resilience in uncertain times, as has their credible relationships with our banking partners.

The committee is satisfied that Imperial has the necessary solvency and liquidity to meet its financial obligations over the next 18 months. The group also has the financial headroom and flexibility to invest in the medium-term growth and business transformation initiatives that will safeguard the success of our 'One Imperial' strategy in the difficult times that no doubt lie ahead.

GOVERNANCE IN ACTION — FROM THE REMCO CHAIR

Remco is primarily responsible for guiding the board on directors' remuneration, in a context of widening inequity in our environments. This includes setting and implementing remuneration policy, and administrating share-based incentive schemes.

The committee is alive to the ethical tightrope it must tread. Executives should not have to be incentivised to do their best in delivering shareholder gains and acting as stewards to the organisation. That is their job. And yet incentive schemes are standard practice in corporations. For proponents, incentive schemes are a legitimate shareholder tool to build a winning organisation; for cynics they are a necessary evil to attract and retain top talent.

The foundation of leadership is passion for organisational purpose, a bias for action and entrepreneurial intent. Our leaders are committed to this, regardless of incentive, but we acknowledge the reality of global skills mobility whereby the best talent can move to where the money is. Working within this reality, the committee is dedicated to an ethical and shareholder friendly remuneration policy.

At Imperial, in line with global trends, we are structuring key performance indicators (KPIs), and the associated thresholds and incentives, to be more strategically meaningful - in particular in including non-financial KPIs in the mix. One of the main criticisms of incentive schemes is that they promote short-termism or worse, greed. Our policy mitigates against this in various ways, even reserving discretionary powers to reduce payouts if our short-term incentive (STI) formula contradicts long-term value creation.

We are satisfied that our policy and its implementation is suitably benchmarked against peers, is in the interests of shareholders and balances the incentivisation of short-term profit with long-term value creation. However, this does not absolve us from asking tough ethical questions about global shifts in executive remuneration, with research in America suggesting a widening gap, such that "top CEOs make 300 times more than typical workers"2. The committee also recognises that we live in entrepreneurial times; incentives ensure executives have enough 'skin in the game' to promote a sense of ownership and accountability, and are a key factor in ensuring competitiveness in our reward structures. Indeed, one of our requirements, introduced in 2019, is that senior executives have a minimum shareholding requirement in addition to their share ownership via incentive schemes.

Covid-19 has created a new ethical landscape, with renewed emphasis on the power of trust. We want performing executives to enjoy the fruits of their expertise and dedication and to earn compensation at least in line with what they could command elsewhere; but not at the cost of a trust deficit with employees, shareholders and broader society. Our strategic ambition to be the 'Gateway to Africa' hints at the leadership role we intend to play on the continent; this should apply as much to remuneration as it does to our services. The risk in paying our performing executives too little, is that they get head-hunted by our competition; the risk in paying them too much is that we erode stakeholder trust.

Transparency helps us tread this fine line and the committee welcomes the high standards set by King IV in this regard; we will continue to meet or exceed them. Transparency is one safeguard against irrational and unjustifiable remuneration; the others are consistency, fairness, a feel for proportion, and sensitivity to our stakeholders. We value and invite robust discussion about remuneration, an issue that sparks strong feeling and one that demands not only a firm business rationale but also an ethical case that is beyond reproach.

GOVERNANCE IN ACTION — FROM THE SES CHAIR

The SES committee is the conscience of Imperial; it defines and outlaws any unethical behaviour and encourages an attitude of good corporate citizenship, which seeks no reward for improving the communities in which it operates.

The Covid-19 crisis has served as a timely reminder of our responsibilities not just as a business, but as a corporate citizen across our 26 countries of operation. As a South African listed company, South African governance standards are based on the principle that business draws legitimacy from society and long-term resilience depends on sound and enduring relationships with stakeholders; on an acknowledgement that we share a destiny. Ethical decisions, therefore, are those that enhance an intangible common good towards improving that destiny.

The committee is proud of how our people responded to Covid-19, stepping up to ensure logistics supply lines stayed open and that goods and services flowed to those we serve and those in need. In particular, the committee acknowledges the contributions and sacrifices thousands of our people made to deliver essential health and safety supplies to where they were needed - and continuing to meet high, service delivery levels. We were also able to provide ongoing support to all our staff, including paying salaries to every employee during lockdown periods and ensuring that stringent safety measures were in place at all operations. This is in addition to the voluntary salary and fee cuts taken by directors and executive management.

In keeping with its commitment to develop and support its communities and countries of operation at the time of most critical need, Imperial sourced and delivered thousands of cubic metres of personal protective equipment (PPE) and medical-grade sanitisers to the private and public sectors in South Africa and Europe, some on a cost recovery basis. Our contribution to humanitarian causes in South Africa included R5 million to the Solidarity Fund, R5 million to the Giving for Hope Foundation in support of small, medium and micro-enterprises (SMME) and R500 000 to Gift of the Givers. We also worked with charitable organisations to provide vehicles and resources to deliver food parcels and other basic needs to communities in South Africa most impacted by the crisis. One of our flagship CSI projects, Unjani Clinics, assisted government as an additional Covid-19 screening measure, reaching 75 000 patients.

The committee's job is to ask pointed questions about unintended consequences and unaccounted for impacts of our activities. For instance, how does a 'for profit' organisation, in answering to its shareholders, rationalise its contribution to society? Across many dimensions, this contribution invariably carries direct and immediate costs but produces incremental and intangible future returns. A credible response to this question is that business can be a force for social progress and human advancement and that this is good for business. The answer lies in the notion of sustainability and, more specifically, shared value.

We laud the fact that the 'One Imperial' strategy puts purpose at the heart of strategic decision making and is a galvanising vision for anyone who cares about progress and possibility. Similarly, 'One Imperial' speaks to the human desire for connection and belonging, to the sense of grand mission that a large organisation offers. Covid-19 has delivered a home truth: our resilience is built on strong relationships, on teams bound together by common cause, kindness and trust. This extends beyond the organisation to trusted relationships with key individuals within clients and principals, communities and governments. Our credibility with these stakeholders cannot be bought with high-minded phrase-making and must be grounded in truth-telling. This committee has tough, sometimes anguishing conversations that will have a lasting effect on people's lives. For example, during this time of economic contraction, right-sizing is a reality for Imperial. The committee ensures that retrenchments are only ever a last resort, and that this has been properly determined, and they are carried out not only lawfully, but also in a spirit of sensitivity.

'Transformation' is a positive word for Imperial, especially as we transform the business in accordance with our strategy, and with high expectations. In the South African context, 'transformation' sets minds racing for solutions to a difficult challenge, racial injustice is a prominent feature of South Africa's historical landscape. Our government has prioritised its promise to redress past wrongs and we align to this intent. Inclusion and collaboration are cornerstones in our culture journey. Efforts to create opportunities for local people, whether in Africa or elsewhere, have been emphasised and are part of improving our employee value proposition. Common decency demands that management challenges barriers of culture and race, and seeks and nurtures talent in underrepresented groups.

True diversity, beyond achieving required measures of race and gender representation, is achieved through valuing, combining and leveraging different perspectives, life experiences and ways of doing things for the good of Imperial's stakeholders, specifically our clients, people and local communities. The committee intends to ensure that real progress is made in understanding, and systematically removing, barriers to inclusion. As we strive to meet ambitious race, gender or other local requirements, we also commit to the guiding spirit behind the requirements, which envisages a country and a continent where all can aspire to dignified lives and equitable opportunity.