ENTERPRISE GOVERNANCE AND COMPLIANCE

This governance framework entails far more than compliance with legislation, and has been developed with the aim of enabling Nedbank Group to attain a number of very clear objectives and goals, which include:

• Maximising efficiency and profitability within acceptable risk parameters.
• Implementing the group’s strategy within defined compliance requirements.
• Adhering to correct and proper corporate behaviours.
• Balancing, within a framework of effective accountability, the interests of shareholders and other stakeholders who may be affected by the conduct of directors or executives of the group.
• Minimising or avoiding conflicts of interest between the business interests of the group and personal interests of directors or executives.
• Disclosing matters that are material to the business of the group or the interests of stakeholders timeously and accurately.
  
• Balancing conformance with governance constraints and an entrepreneurial spirit appropriately.
• Achieving balanced and integrated economic, environmental, social and cultural performance (integrated sustainability) and implementing integrated sustainability across the business.
• Ensuring the efficient and effective functioning of the Enterprisewide Risk Management Framework.
• Complying in substance, not just in form, with the provisions of the Code of Corporate Practices and Conduct of the King III Report on Corporate Governance 2010 and the main acts and regulations affecting the financial services industry.

ADHERENCE TO KING III
Integral to Nedbank Group’s commitment to good governance is compliance with recognised best-practice codes worldwide. King III is recognised as the definitive code for listed and unlisted companies in South Africa and is, therefore, the main code of conduct to which Nedbank Group and its subsidiaries subscribe.

Since the inception of King III in March 2010, Nedbank Group has endeavoured to apply the principles of King III and has reviewed its practices against these principles. Where King III practices or principles are not applied within the business, this is clearly explained to stakeholders and, where necessary, other controls put in place to ensure good governance.

In 2010 the board was satisfied with the group's compliance with King III and its explanation of instances where alternative governance had been put in place. During 2010 the group implemented further enhanced compliance to King III in the following areas:

• A board ethics statement was introduced for review by the board on an annual basis. In addition awareness was created of the group’s Code of Conduct that incorporates the Code of Ethics and the Conflicts of Interest Policy.
• An integrated sustainability strategy and supporting business plans were submitted and approved by the Group Executive Committee, with the integrated report and the group’s support of the Equator Principles being examples of effective collaboration with stakeholders on integrated sustainability.
• A board continuity programme is in place that addresses the skills, experience and other qualities required for the effective functioning of the board, processes around the selection and appointment of directors, induction and ongoing training of directors, evaluation of directors’ performance, and directors’ succession planning. Succession planning for non-executive directors is discussed and monitored by the Group Directors’ Affairs Committee on an ongoing basis.
• With regards to board composition, at 31 December 2010 altogether 14 of the 17 boardmembers were non-executives, with eight of these being independent (57%).
• Board evaluations are completed and charters reviewed annually.


The Nedbank Risk Appetite Policy takes a ‘zero tolerance’ approach to compliance risk. The Compliance Policy takes this stance even further by mandating compliance with all regulatory requirements. Compliance is monitored via the Group Directors’ Affairs Committee, a board committee established in terms of the Banks Act, 94 of 1990.

Group Audit Committee members are elected by shareholders and the board.

EXPLANATION OF NON-ADHERENCE WITH KING III AND ALTERNATE GOVERNANCE APPLIED

• The current Chairman is not independent as defined by the governance codes as he also serves on the board of the group’s parent company, Old Mutual plc. The Chairman is also a shareholder and director of Aka Capital, one of the partners in the Nedbank Eyethu black economic empowerment (BEE) transaction. Recognising and responding to this aspect of non-adherence, an independent director, Chris Ball, was appointed to fulfil the role of lead independent director in 2007.
  
• The board of directors has deliberated over the King III requirement that non-executive remuneration should comprise a base fee and an attendance fee per meeting. The board is of the view that this requirement is less pertinent to non-executive directors of Nedbank Group due to the responsibilities associated with being a director of a bank and the requirement for boardmembers to provide input on an ongoing basis, over and above attendance of board meetings.

UK COMBINED CODE
Nedbank Group is listed as a SA company on JSE Limited, however, the group is required to apply codes and practices applicable to its parent company, Old Mutual plc. Old Mutal plc subscribes to the UK Combined Code and, as its subsidiary, Nedbank Group strives to adhere to this code. Below are the current main areas of non-compliance:

• As stated previously, the group Chairman, Reuel Khoza, is a non-executive director but not independent. Recognising that the Chairman is not an independent director, and in line with the recommendations of the UK Combined Code, the position of senior independent director was created in 2007, with this position currently being held by Chris Ball. However, Mr Ball sits on more than one committee, which is also not in line with the code. The board is of the opinion that it is both efficient and effective for the same independent director to be a member of most board committees in order to assist the committees in avoiding any duplication of their activities and ensure that important issues are not overlooked.
• The UK Combined Code recommends that half of the board, excluding the Chairman, should be independent to provide the necessary checks and balances and to ensure that the bank operates in a safe and sound manner. At 31 December 2010 the Nedbank Group board consisted of eight independent directors out of 17 directors (excluding the Chairman). A vacancy exists and will be filled when an appropriate candidate is secured.
• The UK Combined Code identifies crossdirectorships as relationships that could appear to affect the independence of directors. The following crossdirectorships exist within the Nedbank Group board that affect the independent directors:

INDEPENDENCE OF DIRECTORS
The board is of the view that the non-executive directors all have a high degree of integrity and credibility, and the strong independent composition of the board provides for independent and objective input into the decisionmaking process, thereby ensuring that no one director holds unfettered decisionmaking powers.

During 2010 the board formally assessed the status of the Nedbank Group independent non-executive directors and satisfied itself that these boardmembers met the criteria of independent directors in terms of King III. The directors come from diverse backgrounds and bring to the board a wide range of experience in commerce, industry and banking. The directors have access to management whenever required.

BOARD APPOINTMENTS AND EVALUATIONS
Board appointments and evaluations are conducted in a formal and transparent manner, in line with the board appointment policy. This process is undertaken by the board as a whole, assisted by the Group Directors’ Affairs Committee.

Any appointments to the Nedbank Group board are made with due cognisance of the need to ensure that the board comprises a diverse range of skills, knowledge and expertise, the requisite independence, appropriate demographic representation, and a relevant balance between skills and expertise and the professional and industry knowledge necessary to meet the group’s strategic objectives. Directors are given no fixed term of appointment, while executive directors are subject to short-term notice periods. An executive director is required to retire from the board at age 60, while a non-executive director is required to retire at age 70, unless otherwise agreed.

Reappointment of non-executive directors is not automatic. Executive directors are discouraged from holding a large number of directorships outside the group. An independent appraisal of the boards of Nedbank Group Limited and Nedbank Limited was undertaken in 2010. The appraisal included an evaluation of the effectiveness of the board committees, and evaluations of the Chairman as well as other boardmembers individually. These were all conducted on a questionnaire basis and the boards have received full feedback, which will inform their actions regarding areas for further improvement. An assessment of the board’s performance by management was included in the process.

The Chief Executive’s performance is also evaluated according to his performance scorecard, which is approved annually by the Group Remuneration Committee, with the input of the Group Chairman and Old Mutual plc. The feedback from this board evaluation process contributes to the production of the Regulation 39(18) Report addressing the state of corporate governance in the organisation.

The Commonwealth Business Council (CBC)-African Business Awards is the key annual event for the African business world and its accolades are much sought after by Africa’s leading companies and entrepreneurs. Organised by African Business magazine and the CBC, it is a platform to celebrate excellence and best practices in African business and recognises those who are driving Africa’s rapidly transforming economy. The aim of the awards is to recognise business leaders and companies that have excelled in Africa over the past year. The winners will have made an outstanding contribution to the development of the continent, the economic aspirations of its citizens and the transformation of Africa’s image in international markets. High profile business and industry representatives, entrepreneurs, government officials and diplomats from Africa, Asia, Europe and the United States gather once a year at the CBC-African Business Awards to honour the achievements of the business community in Africa. Nedbank Group has won the award for ‘Best Corporate Governance’ at the African Business Awards 2010 after the group had submitted its first entry for corporate governance in April 2010.

THE BOARD OF DIRECTORS
ROLE AND COMPOSITION
In line with the recommendations of King III Nedbank Group has a unitary board structure. At 31 December 2010 the Nedbank Group board comprised 17 directors as follows:

INDEPENDENT NON-EXECUTIVE DIRECTORS (8)

NON-EXECUTIVE DIRECTORS (6)

CHAIRMAN AND CHIEF EXECUTIVE
In line with best practice the roles of Chairman and Chief Executive are separate. The Chairman, Reuel Khoza, leads the board and the executive management of the group is the responsibility of the Chief Executive, Mike Brown. This ensures a balance of authority and power, so that no one individual has unrestricted decisionmaking powers. At the same time the board and executive management work closely together in determining the strategic objectives of the group.

COMPANY SECRETARY AND DIRECTOR DEVELOPMENT
All directors have access to the advice and services of the Company Secretary, the Chief Governance and Compliance Officer and the Chief Risk Officer, who are responsible for ensuring that board procedures and applicable rules and regulations are fully observed. Further to this the board has an established procedure in the furtherance of its duties, whereby directors may obtain independent professional advice at the group’s cost.

New directors are informed of their duties and responsibilities by way of induction courses, which are presented by the Company Secretary and other experts on board effectiveness, corporate governance, risk management, banking and other technical subjects.

A formal, ongoing director development programme focuses on keeping all members of the board and board committees up to date with local and international industry developments, technology issues, risk management and corporate governance best practice. All business cluster heads also undertake regular presentations to update the board on progress and key issues in their businesses.

In accordance with board policy, as well as the South African Reserve Bank requirement that all directors should continue with formal and informal development, the directors have participated in training initiatives, internally and externally.

SUCCESSION PLANNING
Succession planning is an important focus area at board, executive and senior management level. Detailed and intensive planning is conducted through the Chairman’s Office in consultation with the Group Directors’ Affairs and Group Remuneration Committees. The Chief Executive is required to report regularly to the board on the group’s management development and employment equity programmes.

BOARD MEETINGS
The Nedbank Group board met 10 times in 2010. The record of attendance at all 2010 board and board committee meetings for Nedbank Group Limited and Nedbank Limited is included at the end of this Enterprise Governance and Compliance Report on page 202.

BOARD CHARTER
The board has a formal written charter that is reviewed on an annual basis. In terms of this charter the main functions of the board are as follows:

• Determining the overall objectives for the group.
• Developing strategies to meet those objectives in conjunction with management.
• Formulating company policies.
• Rating the group’s own performance.
• Assuming overall responsibility for risk management.
• Appointing a chief executive for the group.
• Evaluating the performance of the group’s directors.

The charter also formalises policies regarding board membership and composition, board procedures, the conduct of directors, risk management, remuneration, board evaluation and induction.

BOARD COMMITTEES
The board committee structure is designed to assist the board in the discharge of its duties and responsibilities, and was largely unchanged during 2010. Each board committee has formal written terms of reference that are reviewed on an annual basis and effectively delegated in respect of certain of the board’s responsibilities. The board monitors these responsibilities to ensure effective coverage of, and control over, the operations of the group.

The directors confirm that the committees functioned in accordance with these terms of reference during the financial year under review. With the exception of the Group Directors’ Affairs and Group Finance and Oversight Committees, there are several relevant group executive management committees that support, and are aligned with, the board committees.

Except for the Executive Credit Committee that is chaired by an independent non-executive director, Ms Wendy Lucas-Bull, as required by banking regulation, all group executive committees are chaired by members of Group Executive Committee (Exco). During 2010 the following board committees operated within Nedbank Group:

The Group Information Technology (IT) Committee
The Group IT Committee has the broad responsibility to monitor all issues pertaining to IT, both operational and strategic, and aims to ensure alignment of IT development spend and investment with overall group strategy and direction.

Group Audit Committee (GAC)
The GAC assists the board in its evaluation and review of the adequacy and efficiency of the internal control systems, accounting practices, information systems and auditing processes applied within Nedbank Group, and introduce measures to enhance the credibility and objectivity of financial statements and reports prepared.

Group Credit Committee (GCC)
The GCC is tasked with the approval of the group’s credit philosophy and policies, the setting of credit limits and guidelines, confirmation of procedures to manage, control and price credit risk, approval of the adequacy of interim and year-end provisions impairments and monitoring of credit risk information, processes and disclosure. The Large-exposure Approval Committee approves large credit exposures as defined by banking legislation.

Group Directors’ Affairs Committee (DAC)
The DAC considers, monitors and reports to the board on reputational and compliance risk, compliance with King III and the corporate governance provisions of the Banks Act. It also acts as the nominations committee for board appointments.

Group Finance and Oversight Committee (GFOC)
The chairmen of the GAC, GCC, Group Risk and Capital Management Committee (GRCMC) and IT Committee, as well as Don Hope, are members of this committee, with the Chief Risk Officer attending by invitation. Its primary function is to provide a board discussion forum for the consideration of risks within the group, and to ensure that the board and the various board committees address those risks effectively.

Group Remuneration Committee (GRC)
This committee consists of non-executive directors only and is chaired by an independent non-executive director. The GRC is authorised to approve aggregate adjustments to remuneration of employees below executive director and managing executive levels. The committee also recommends adjustments to the total remuneration of members of Group Exco. The board, following recommendations made by the Group Remuneration Committee, approves the Group Executive Committee members’ total remuneration. This committee is also charged with the supervision of the Nedbank Group Employee Incentive Scheme.

GRCMC
In terms of the Banks Act a risk committee is required to assist the board of directors in:

• Evaluating the adequacy and efficiency of risk policies, procedures, practices and controls.
• Identifying the buildup and concentration of risk.
• Developing risk mitigation techniques.
• Ensuring formal risk assessment.
• Identifying and monitoring key risks.
• Facilitating and promoting communication through reporting structures.
• Ensuring the establishment of an independent risk management function and other related functions.

The GRCMC complies with these requirements and oversees the group’s risk management policies and procedures to ensure compliance with Basel II, which became fully effective in 2008. The GRCMC is tasked with groupwide risk monitoring, focusing primarily on the management and assessment of risk, including:

• market and trading risks;
• asset and liability management risks;
• processes and functions of the Group Asset and Liability and Executive Risk Committee;
• investment exposures; and
• risks related to the underwriting of share issues.
  
  

Group Transformation and Sustainability Committee (GTSC)
The GTSC has broad responsibility to monitor all issues pertaining to the integrated economic, environmental, social and cultural sustainability of the group. The committee also monitors progress made against the performance contracts with black business partners in terms of the Eyethu BEE transaction and assists the board in ensuring that the group proactively addresses the requirements and/or recommendations for integrated sustainability reporting as set out in King III and the Global Reporting Initiative.

INTERNAL AUDIT
Group Internal Audit (GIA) is a centralised independent assurance function, the purpose, authority and responsibility of which are formally defined in a charter approved by the board in line with stipulations of the Institute of Internal Auditors. GIA reports on its assessment of the adequacy and effectiveness of the group’s risk management, internal controls and governance processes at meetings of GAC and other board committees charged with risk monitoring.

The chief internal auditor reports functionally to the Chairman of the Audit Committee and administratively to the Chief Executive. GIA also works closely with Group Risk and Enterprise Governance and Compliance to ensure that audit issues of a risk management, ethical or governance nature are made known and are appropriately resolved.

GIA has dedicated teams that perform internal audits in the group’s various business operations, subsidiaries and joint ventures. Audits are conducted according to a risk-based approach, and the audit plan is approved by GAC and updated quarterly to reflect any changes in the risk profile of the group.

A TALE OF ETHICS AND ACCOUNTABILITY At Nedbank Group we recognise that the employment of a new staffmember, manager or director is more than a contract – it represents a significant fiduciary relationship. In return for agreed compensation and benefits the Nedbank Group employee promises to render appropriate services in good faith and in a way that helps to build a relationship of trust. To this end Nedbank Group requires all its employees to uphold high ethical standards, which not only serve the interests of the bank and its clients, but also build its reputation as an organisation that always does the right thing. Over the past five years the Enterprise Governance and Compliance Division has applied itself to establishing a solid ethical foundation across the group, including the revision of the Nedbank Board Ethics Statement, the creation of a userfriendly Nedbank Code of Conduct, and the development of a Nedbank Pledge for agreement by all staffmembers and directors. Considerable work has also gone into mentoring and guiding more than 10 000 employees in adopting and applying ethical business practices as well as the development of dedicated channels to reinforce positive, values-driven behaviour. There is no right way to do the wrong thing This simple, but undeniable truth lies at the heart of the ethics culture across Nedbank Group and has resulted, often directly, in many measureable achievements, possibly the most important of which are employees who: feel empowered to identify and report instances of fraud and misconduct; think before they act – thereby steadily decreasing instances of misconduct; have a passion for caring for communities and conserving the environment; and share their employer’s vision of becoming the most admired bank in Africa and are committed to realising this vision through integrity and accountability.