Corporate governance report

INTRODUCTION

The principles contained in the King Code of Governance (King III) are reflected in the group’s corporate governance structures. These are reviewed from time to time to accommodate regulatory and organisational changes, as well as international developments in the field of corporate governance.

			BUSINESS LANDSCAPE AND STRATEGY Imperial businesses operate in diverse geographic, socio-economic, political, regulatory, technological, industry and market environments. As increasingly ubiquitous real time information accelerates the development of opportunities and threats, these environments must be closely monitored and addressed with strategies that ensure robust competitive positions. Formal and informal environmental scanning is one of the everyday responsibilities of executives and the Imperial board is regularly and formally apprised of developments that could have a bearing on the performance and sustainability of the group. Similarly, executive management responds tactically to everyday shifts in the environment and defines annually, for approval by the board, the strategic choices necessary to create value and sustain a long term competitive advantage. Imperial’s assessment of the general business landscape is contained in the Chairperson’s, Chief Executive’s and Chief Financial Officer’s reports on pages 26 to 41, with more specific commentary on the environments facing the five divisions on pages 50 to 95.
			FOR MORE INFORMATION Imperial’s strategic role as a holding company is clarified on pages 31 and 32 of the Chief Executive Officer’s Report. The competitive strategies of the five divisions are defined on pages 50 to 95.
			GOVERNANCE Imperial subscribes to the principles of good governance as defined by King III and all relevant laws and regulations. The foundation of Imperial’s governance is the board, which comprises mainly independent non-executive directors, and its sub-committees which are constituted with the requisite expertise and experience. Authority, responsibility and accountability is held and, as appropriate, formally delegated and devolved by the board to the CEO and in turn to his direct reports and sequentially throughout the organisation. The diversity of Imperial’s operations necessitates differences in the nature, structure and processes of delegation other than on capital expenditure where authority levels are consistent with hierarchies across the group. The leadership of Imperial is mindful that entrepreneurial creativity and responsiveness is a competitive necessity and every effort is made to integrate governance processes in the least bureaucratic manner possible.
	www.imperial.co.za In accordance with guidance issued by the JSE, the group applie d the 75 key principles in chapter 2 of King III. The board is continually assessing its governanc e practices and procedures against King III and makes adjustments where necessary. A register of t he group’s application of King III can be found at www.imperial.co.za.
			RISK MANAGEMENT Risk management model In line with its policy of aligning group corporate governance with international best practice to safeguard the interests of stakeholders, Imperial has implemented an enterprise risk model to identify and assess relevant risks facing the group at strategic, business and operational levels. The group’s risk model is based on ISO 31000:2009 – Risk Management Principles and Guidelines. Risk is, however, not viewed only from a negative perspective. The assessment process also identifies areas of opportunity, for example where effective risk management can be turned into a competitive advantage or where taking certain risks could result in reward for the group. Any risk taken is considered within the group’s risk appetite and tolerance levels, which are updated annually.
	The group consists of five divisions, each with different market, operating and financial characteristics. Risk management responsibility and accountability therefore remains largely with divisional management structures, reporting to the divisional finance and risk review committees, which are overseen by the board risk committee. The group risk committee formalises, standardises and monitors this process by guiding management and assessing their effectiveness in implementing the approved risk management framework.
			The board determines the level of acceptable risk and requires operations to manage and report accordingly. Material issues and circumstances that could affect the group’s reputation and financial affairs constitute unacceptable risk. A system of internal control has been implemented in all key operations and is tailored to suit the specific circumstances of each business. It provides reasonable, rather than absolute, assurance that the group’s business objectives will be achieved within prescribed risk tolerance levels. The associated risk areas and control processes are monitored and reported on across the group. Internal audit aligns its procedures with the risks identified. Formal feedback is provided to both divisional finance and risk review committees, as well as to the quarterly risk committee meeting. The group also maintains a comprehensive insurance programme to ensure that material financial consequences of risk incidences do not result in undue financial impact on group businesses. In reviewing risk management reports and internal controls, the board has: > Considered what the group’s risks are and how they have been identified, evaluated and controlled > Assessed the effectiveness of the related process of risk management and, particularly, reports of significant failings or weaknesses in the process > Considered if the necessary action is being taken in time to rectify any significant failings or weaknesses > Considered whether results from the review process indicate that more extensive monitoring is required An independent review of the group’s risk management alignment with King lll was undertaken by our internal audit function, based on the previous assessment undertaken by PriceWaterhouseCoopers. This concluded that Imperial has applied the principles set out in King lll.

Key group risks

Imperial has identified key risk categories that affect the group as a whole in addition to the business and industry-specific risks identified by divisions. The overall group risk categories and strategies taken to mitigate these risks include:

RISK		STRATEGIES IMPLEMENTED
South African currency weakness impact on direct imports of new vehicles		> Established hedging policy > Diversification of business models and territories to minimise the overall impact of currency risks
Acquisition and business integration		> Clearly-defined expansion areas > Strong group mandate relating to investments > Regular review of acquisition risks and criteria at executive level > Formal post-acquisition reviews
Labour disruptions		> Active participation in industrial labour councils > Agility and diversification of supply chain channels > Review of operational labour plans to ensure continuity of sevices > Diversification and spread of risk across industries and geographies
Succession		> A talent management programme focused on the group’s top 100 senior leaders is in place. The programme involves building on our current leadership skills and ensuring strategic alignment with our future requirements
Credit extension and client affordability in the retail markets		> Market assessment of client affordability > Monitoring of bank appetite to extend credit > Alliance with more than one bank > Grow annuity revenue streams
Slow growth in the South African and European economy		> Focus on niche products and services in our current offerings > Agility in our operating model > Growth and acquisition strategies > Diversification across sectors and geographies
Talent management		> Identification of key current and future skills required and alignment with development programmes > Divisional and group training and upliftment programmes > Establishment of specialist training academies and skills development programmes > Coordinated transformation philosophy, policies and focused projects > Promotion and upliftment of internal candidates > Expansion of our current recruitment base
Third-party dependence and reliance		> Proactive relationship and contract satisfaction management with key suppliers and clients > Formalised and proactive management of service and product level expectations > Ongoing oversight and monitoring of contract renewals and negotiations
Reputation and brand perception		> Group-wide branding and marketing strategy for the Imperial brand > Ongoing review of compliance to group ethics and legal requirements
Regulatory and compliance		> Centralisation of selected specialist areas where compliance risk is high > Proactive monitoring, input and operational implementation plans and frameworks on emerging legislation > ncreased resource allocation to legal and compliance units
Failure to achieve group and national emissions targets		> Group-wide sustainability strategy implemented > Proactive involvement with industry and governmental bodies > Non-financial reporting systems to ensure ongoing monitoring and reporting of key targets and initiatives
Valuation of assets		> Active management and investment in optimising inventory and fleet levels > Regular review and application of latest accounting and business principles > Enhanced governance oversight > Active review and monitoring of the realisable value of assets

Internal controls THE BOARD:   Is accountable for the process of risk management and the system of internal control, which is regularly reviewed for effectiveness.   Is accountable for establishing appropriate risk and control policies and communicating these throughout the group.   Is satisfied that there is an ongoing process of identifying, evaluating and managing the significant risks faced by the group. This process is in place.   Is satisfied that there is an effective system of internal controls and that groupwide strategies are in place to mitigate the consequences and impact of significant risks faced by the group to an acceptable level.

Internal financial controls and financial reporting The directors acknowledge that they are responsible for instituting internal control systems that provide reasonable assurance on safeguarding assets and preventing their unauthorised use or disposal, as well as maintenance of proper accounting records that give reasonable assurance on the reliability of financial information produced. The group’s internal controls and systems are designed to provide reasonable assurance on the integrity and reliability of the annual financial statements and operational management information to ensure that assets are adequately safeguarded against material loss and that transactions are properly authorised and recorded. Internal controls also provide assurance that the group’s resources are utilised efficiently and that the activities of the group comply with applicable laws and regulations. Financial results are reported monthly to the executive committee and quarterly to the board. Each division prepares detailed monthly management accounts, budgets and a three-year plan that are approved by the board. Performance against budget is monitored and variances analysed. Profit and cash flow forecasts are reviewed, which include an analysis of material changes. A comprehensive system enables management to monitor trends and measure productive use of capital. Accounting policies are disseminated throughout the group and monitored to ensure compliance. Internal audit The internal audit department’s responsibilities are defined in a written charter approved by the board. Internal audit is an independent, objective assurance and consulting activity established to add value and improve the group’s operations. It assists the group to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the adequacy and effectiveness of risk management, control and governance processes. The internal audit activities of the group are coordinated by the group internal audit executive based at the corporate office. He reports administratively to the CFO, but directly to the chairperson of the audit committee. He has unrestricted access to the group CEO and audit committee chairperson. The group internal audit executive reports formally at all audit committee meetings during the year. The audit plan for the wider group uses a risk-based approach and is approved by the group audit committee. The group internal audit executive also attends and coordinates the activities of all quarterly divisional finance and risk review committees and attends all group risk committee meetings. Based on the internal audit work performed in terms of the approved combined internal audit plan for the year, the scope of work, the results of evaluations and the overall audit opinion ratings for the audited areas, together with feedback on follow-up audits, internal audit concluded that nothing came to its attention to indicate that there was any material breakdown in the system of internal or financial control in the group during the year. The risk management maturity self assessment conducted during the year at divisional and group level confirmed the sound implementation of risk management across the group, as well as the degree to which management had embraced risk management.

Combined assurance

The group’s combined assurance model ensures:

The combined assurance model aligns with our integrated governance model, with key assurance provider roles overlapped.

COMPLIANCE Legal compliance As a multinational group, Imperial is subject to a wide range of legislation, which it monitors to ensure compliance, with approximately 200 pieces of legislation material to the group. The group has a legal compliance programme designed to increase awareness of, and enhance compliance with, applicable legislation. Legal compliance is reported regularly to divisional boards and risk committees and quarterly to the group audit and risk committees. Each division, depending on its risk profile and industry, employs legal and compliance officers. Divisions regularly conduct assessments to highlight the impact of legislation on their businesses and to ensure that operational controls have been implemented. To maximise synergies and cooperation, the compliance and legal officers meet in a quarterly forum. Key objectives of the forum are to: > Monitor and report on emerging and key legislative and compliance matters > Formulate group plans to facilitate the implementation of new legislation > Where applicable, coordinate group responses to draft legislation

Contract compliance

Divisions have dedicated legal functions to review contract terms and conditions and to monitor compliance with these on an ongoing basis. Existing contracts are monitored to ensure they are up to date and in line with legislative changes.

Conflicts of interest

The group has a formal conflicts of interest policy that guides directors to act in the best interest of the company, with due care and diligence in discharging their responsibilities as directors, to declare and avoid conflicts of interest with the company in accordance with the Companies Act, 2008, and to account to the company for any advantages gained in discharging their duties on behalf of the company.

Insider trading

No group director or employee with inside information about the group may deal, directly or indirectly, in Imperial’s securities, which include allocations of and dealings in the group’s share incentive schemes. Imperial’s closed periods are from the 1st of January until results reporting date and the 1st of July until results reporting date. In addition, the group has adopted a policy requiring directors, executive committee members, the company secretary and directors of major subsidiaries to obtain permission from designated individuals before trading in the group’s securities.

No infringements were reported during the year.

Whistle-blowing hotlines and tip-offs

Whistle-blowing hotlines have been implemented in all the regions in which the group operates. This service, operated by independent service providers, enables
all stakeholders to anonymously report concerns.

It is the responsibility of all employees and stakeholders to report known or suspected unethical or illegal conduct. Retaliation against whistle-blowers is not tolerated.

All reported matters are coordinated by internal audit. Tip-offs are also sent to the CEOs of the respective divisions and investigated accordingly. Detailed feedback is given at the respective financial review committees and group audit committee. Currently only one tip-off received in the last quarter of the year is still under investigation.

Tip-off statistics
Total number of tip-offs per division July 2013 to June 2014		Tip-off categories

BOARD AND COMMITTEES Board The group has a unitary board comprising 11 non-executive directors and eight executive directors. Board of directors   Non-executive directors Executive directors TS Gcabashe* (Chairperson) MJ Lamberti (CEO) HR Brody** M Akoojee T Dingaan* OS Arbee (CFO) RL Hiemstra MP de Canha S Engelbrecht* PB Michaux P Langeni* GW Riemann (German) MJ Leeming* JJ Strydom MV Moosa M Swanepoel RJA Sparks*   A Tugendhaft (Deputy chairperson)   Y Waja*   * Independent ** Non-executive director from 1 April 2014. Previously an executive director Directors are appointed on the basis of skill, experience and their 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 remuneration and nomination committee. New directors are provided with formal induction material to facilitate their understanding of the group. The board of directors determines the direction of the group through establishing strategic objectives and key policies. Board meetings are held at least quarterly, with additional meetings called when necessary. The quorum for meetings is a majority of directors. In addition to directors, other senior executives are invited to attend meetings, as required, to ensure comprehensive reporting to the board. The responsibilities of the board are clearly defined in a written charter. The board has also adopted, and regularly reviews, a written policy governing the authority delegated to group management and matters reserved for decision by the board. The responsibilities of the board include issues of strategic direction, business plans and annual budgets, major acquisitions and disposals, changes to the board and other matters with a material effect on the group or required by legislation. The board regularly performs assessments of its performance and of the performance of individual directors, including the chairperson. An assessment was conducted during the year. Matters identified during the process requiring further attention are: > Succession planning > Exposure of non-executive directors to next-tier management > More detailed strategy discussions > Risk awareness It was also agreed to perform a facilitated review in the next year led by an independent facilitator. Seven of the non-executive directors, including the chairperson, are independent. www.imperial.co.za For more information on the board charter, refer to www.imperial.co.za. At least one third of directors retire by rotation each year and may stand for re-election at the annual general meeting in accordance with the Memorandum of Incorporation (MOI). Directors who retire are selected in accordance with a rotational register and are those who have been in office the longest since their appointment or re-election. Directors standing for re-election were appraised by the board and their re-election is recommended by the board. This year, Messrs S Engelbrecht, TS Gcabashe, RJA Sparks, A Tugendhaft and Ms P Langeni will retire by rotation and are standing for re-election at the AGM to be held on 4 November 2014. In addition, Messrs M Akoojee, MJ Lamberti, PB Michaux and JJ Strydom who were appointed during the year are proposed for confirmation by shareholders at the AGM. The table outlines attendance at board meetings during the year. Board attendance   Regular meetings Annual strategy meeting   TS Gcabashe (Chairperson) 6/6 1/1   MJ Lamberti* 1/1 –   M Akoojee* 4/4 1/1   OS Arbee 6/6 1/1   SL Botha** 1/1 –   HR Brody 6/6 1/1   MP de Canha 6/6 1/1   T Dingaan 5/6 1/1   S Engelbrecht 6/6 1/1   RL Hiemstra 5/6 1/1   P Langeni 6/6 1/1   MJ Leeming 6/6 1/1   PB Michaux* 1/1 –   MV Moosa 5/6 1/1   GW Riemann 6/6 1/1   RJA Sparks 6/6 1/1   JJ Strydom* 4/4 1/1   M Swanepoel 6/6 1/1   A Tugendhaft 6/6 1/1   Y Waja 5/6 1/1   * Appointed during the year ** Resigned during the year

The chairperson

The chairperson’s role is to set the ethical tone of the board and to ensure that the board remains efficient, focused and operates as a unit. The board has continued to operate under the guidance of Mr TS Gcabashe in this reporting period. Mr Gcabashe is an independent non-executive chairperson and his role is clearly defined and separated from that of the CEO through the provisions on the board charter. Mr Gcabashe provides overall leadership to the board without limiting the principle of collective responsibility for board decisions.

While the board may delegate authority to the CEO in terms of the board charter, the separation of responsibilities is designed to ensure that no single person or group can have unrestricted powers and that appropriate balances of power and authority exist on the board. Through membership of the remuneration and nomination committee, the chairperson is also responsible for the annual appraisal of the CEO’s performance, as well as participating in the succession planning of executive directors.

Non-executive directors

The group’s non-executive directors are individuals of high calibre and credibility who contribute to the board’s deliberations and decisions. Their diverse backgrounds ensure a wide range of experience in commerce, finance, law, industry and engineering. They have the necessary skills and experience to bring judgement to bear, independent of management, on areas such as strategy, performance, business development, transformation, diversity, ethics and environmental management.

Non-executive directors are required to devote sufficient time to the affairs of the group. While no limitations are imposed by the board charter, or otherwise, on the number of other appointments directors may accept, approval from the chairperson must be obtained prior to acceptance of additional commitments which may affect the time directors can devote to the group.

Messrs P Langeni, MJ Leeming and Y Waja have served on the board for a period in excess of nine years. An internal evaluation of their independence, character and judgement was performed and the assessment confirmed them to have remained independent.

CVs of the board members are provided on pages 16 to 19.

The chief executive officer

The board defines the group’s levels of authority, reserving specific powers for the board, while delegating others to management. The collective responsibility for the executive management of the company’s operations vests with the chief executive officer, Mr MJ Lamberti, who reports to the board on the group’s objectives and strategy. Mr Lamberti plays a critical role in the operations and success of the company. The CEO is accountable to the board and consistently strives to achieve the group’s goals within the framework of delegated authority.

The company secretary

The company secretary is Mr RA Venter. He has a BCom, LLM and is an admitted attorney.

Directors have unlimited access to the services of the company secretary, who is responsible to the board for ensuring that proper corporate governance principles are adhered to.

In terms of JSE Listings Requirements, the board of directors must consider the competence, qualifications and experience of the company secretary on an annual basis. King III also recommends that the company secretary should maintain an arm’s-length relationship with the board of directors and that the company secretary should ideally not be a director. After conducting a formal review which formed part of the annual board evaluation process, the board concluded that there were no direct or indirect relationships between the company secretary and any of the board members which could compromise an arm’s-length relationship with the board of directors. The company secretary is not a director of the company.

The board confirmed that the company secretary is adequately qualified and experienced and has effectively performed and carried out his duties during the year.

Committees

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

The table below outlines the board committees at the time of publication post the year-end. The rest of the Corporate Governance Report outlines the committee memberships and activities during the year to 30 June 2014.

FOR MORE INFORMATION Refer to pages 110 to 111 for information on the board committees.

Executive committee

The group’s executive committee is responsible for:

The members of this committee are appointed by the board. The committee consists of eight members and meets at least once a month.

The table below outlines attendance of executive committee meetings during the year.

Audit committee

The group audit committee consists of non-executive directors, one of whom is appointed as chairperson. The membership of the committee will be tabled at the next annual general meeting for approval by shareholders. The committee meets at least four times per year.

Details of the workings of the committee and attendance of meetings are contained in the Audit Committee Report on pages 143 to 145 of the Integrated Annual Report.

Risk committee

The risk committee sets the group risk culture, framework and strategy and ensures that a robust risk management process is in place. Refer to page 102 of the Integrated Annual Report for more detail on the risk processes in the group.

The committee comprises both non-executive and executive members and is chaired by a non-executive director.

The committee had four meetings during the financial year.

The table outlines attendance of committee meetings during the year.

Remuneration and nomination committee

Details of the workings of the committee and attendance of meetings are contained in the comprehensive Remuneration Report on pages 116 to 117 of the Integrated Annual Report and in the committee charter which may be found on the group website at www.imperial.co.za

Subsequent to the year end, a decision was taken to reconstitute the committee as a separate remuneration committee chaired by Mr RJA Sparks and a nominations committee chaired by the group chairperson, Mr TS Gcabashe. This aligns the committees with King III.

Social, ethics and sustainability committee

The role of the social, ethics and sustainability committee encompasses all aspects of sustainability.

The committee performs statutory duties, as set out in the Act for the group and on behalf of subsidiary companies. In addition to its statutory duties, it assists the company in discharging its social, ethics and sustainability responsibilities and implementing practices consistent with good corporate citizenship, with particular focus on the following:

Transformation remains a key area of focus and the committee will continue to guide Imperial in its goal of increasingly reflecting the diversity of the country.

During the year, the committee discharged its statutory duties to monitor the company’s activities relating to:

The committee comprises non-executive directors who are not involved in the day-to-day business of the group, executive directors and other members of the management of the company. It is chaired by a non-executive director.

The table outlines attendance of committee meetings during the year.

Assets and liabilities committee

The assets and liabilities committee (ALCO) is responsible for implementing best practice asset and liability risk management policies. Its primary objective is to manage the liquidity, interest rate and exchange rate risk of the group within an acceptable risk profile.

The table outlines attendance of committee meetings during the year.

			MANAGEMENT COMMITTEES The size and diversity of Imperial’s operations has led to all sizable entities being managed through divisional boards and executive committees. While the Imperial board’s delegation of authority is through the group CEO to his direct reports and in turn to theirs, the group executive committee and the subsidiary boards exercise structured oversight of assets and control of performance within the bounds of Imperial board-approved strategies and budgets, with executive committees controlling day-to-day operating performance.
			PEOPLE, PROCESS AND TECHNOLOGY People The successful implementation of Imperial’s corporate governance initiatives is reliant on competent, ethical people at many levels of the organisation. Industry, technical and subject matter expertise is necessary to translate general principles into everyday actions that ensure the protection of stakeholder interests. To this end Imperial employs and invests in the development of suitably qualified and experienced individuals to implement and sustain the requisite levels of governance throughout the group. The start of a breakdown in governance is very often a relatively minor ethical infraction which occurs long before laws are broken or regulations transgressed. In recognising that successful governance relies on matters of character as much as structure and process, Imperial strives to establish and inculcate high ethical standards by means of Imperial’s Code of Ethics.

Code of Ethics Our core value is to act with uncompromising honesty and integrity. Our Code of Ethics provides guidance to all employees of Imperial and its subsidiaries on adhering to our core values, although we recognise that no single code can address every situation individuals are likely to encounter. This code is therefore not a substitute for employees’ responsibility and accountability to exercise good judgement and obtain guidance on appropriate business conduct. To assist employees, training and induction programmes include ethics content. In addition, a group-wide culture survey conducted in this year included questions to assess both the perception of the standard of ethics applied by the group and the standard of ethical conduct by employees.

Our Code guides employees to: 1. Respect others and avoid any form of discrimination. 2. Abide by the laws of the country in which we operate and comply with the Code of Conduct of all professional and industry bodies to which we belong. 3. Avoid any waste, damage and private use of company assets and resources (including time). 4. Neither give nor receive bribes. 5. At the earliest opportunity, disclose in writing to the appropriate management all gifts received from clients or suppliers beyond a token value. 6. Not divulge any confidential information to any party, or improperly use company and client information. 7. Market our products and services accurately and charge the agreed fee or a fair fee where no fee was agreed. 8. Not seek to advance personal interests at the expense of the company or our clients. 9. Not engage in any activity, directly or indirectly, which results or might result in a conflict of individual interests with the interests of the group. 10. Not participate, or involve the company in any way, in any scheme that would cause embarrassment to the company or harm its reputation.

Processes

Processes are critical to ensure that governance strategy is aligned with governance management and implementation in the group. To achieve this, processes are integrated at all levels. Processes encompass governance and risk oversight policies and procedures, reporting and measurement, as well as decision-making processes. Based on the decentralised nature
of the group, it does not regulate operational processes in divisions, although minimum standards are set.

Technology

Most aspects of governance are reliant on underlying management information systems and Information Technology (IT). Conversely, the investments and risks of information systems require dedicated oversight and judgement.

Aligned to our decentralised management model, Imperial has therefore implemented an umbrella IT governance framework. The framework was developed and adopted by the divisions in respect of key components and requirements set out in current best practice benchmarks. Each operation is therefore measured against the group minimum standard.

The objective of our standardised IT governance framework is to ensure the following:

The Imperial operational IT governance framework is built around five principles:

		> IT strategy and responsibilities > Role and benefits of IT (internal and external) > Standards and core policies
		> People capacity and development > Internal processes and measures
		> Formalised service level agreements > Structured commercial agreements
		> Business impact analysis > Testing of back-up and recovery
		> Data privacy, security and access control > Internal control monitoring

Operational IT strategies implemented to address IT risks include: