ECONOMIC SUSTAINABILITY

ENTERPRISE GOVERNANCE AND COMPLIANCE

Nedbank Group remains committed to the management of funds in our care and the diverse investments made across the group. Competitive governance and compliance remain strategic imperatives and the commitment to good governance is at the heart of operations linking corporate governance and compliance to performance management.

Nedbank Group's Enterprise Governance and Compliance (EGC) Division is headed by Advocate Selby Baqwa, who also serves as a member of the Nedbank Group Executive Committee (Group Exco), reports directly to the Chief Executive and has direct access to the Chairman of the Nedbank Group Board. A strong network of divisional governance and compliance officers work closely with the central EGC Division in implementing projects, fulfilling monitoring and training requirements and creating a governance and compliance culture throughout the group.

The EGC framework ensures a consistent focus on day-to-day governance requirements, while maintaining a focus on the long-term and sustainable growth and profitability of the group. Coupled with our commitment to complying fully with regulatory requirements and maintaining well-governed, carefully monitored internal policies and procedures, the group adopts a governance and compliance approach that is enabling for the whole of Nedbank Group.

The growing cost of compliance in terms of resources, system changes and staff training has resulted in an ever-increasing focus on governance and compliance structures and processes by the group.

Director evaluation

Internal committee evaluations were conducted during 2009.

An independent appraisal of the boards of Nedbank Group Limited and Nedbank Limited was undertaken in 2009. The appraisal was performed by Ratings Afrika, the governance ratings agency. Its opinions on the boards classify them as 'very effective'. The appraisal included evaluations of the effectiveness of the boards and their committees, and evaluations of the Chairman as well as other boardmembers individually. These were all conducted on an interactive basis and the boards have received full feedback. The boards will actively address those matters raised as areas for further improvement.

Director training

In accordance with board policy, as well as the South African Reserve Bank (SARB) requirement that all directors should continue with formal and informal development, the directors have undergone various training initiatives internally and externally through the Gordon Institute of Business Sciences (GIBS).

Training initiatives undertaken at committee level included the following:

• FSC and dti Codes.
• Salient features of the Companies Act.
• Basel II developments and ICAAP.
• Liquidity risk management.
• Registrar of Banks' 2008 Annual Report.
• Trading risk measurement and methodologies (which include interrelationships between market risk limits and economic-capital measures).
• Common hype cycles, including trends in banking systems.
• Ongoing accounting and disclosure items.
• Tax accounting – structured deals.
• Accounting for derivatives – grossups/movements.
• Fair value through profit and loss accounting – accounting mistakes and valuing own credit.
• Asset/Liability management and risk management processes and controls and reporting to ALCO, and the link to IFRS and financial statement disclosures.
• Basel II credit returns and reporting, and related architecture built within the FPA for this.
• Accounting and disclosure for long-term incentives and BEE shares (IFRS 2-related).
• Update on accounting for portfolio and specific provisioning under IFRS versus Basel II.

All boardmembers are encouraged to attend board committee meetings, even if they are not members of such committees. Arrangements can also be made with the relevant committee secretary should a boardmember wish to attend just the training portion of any particular committee meeting.

KING II IMPLEMENTATION PLAN

As part of its compliance with the Code of Corporate Practices and Conduct of the King Committee (King II), Nedbank Group has a comprehensive implementation and monitoring plan to meet all of its requirements and recommendations. This plan – the implementation of which is monitored by the Directors’ Affairs Committee and EGC – covers all the corporate governance requirements relating to the Banks Act as well as the recommendations of King II and has been approved by the board.

At 31 December 2009 the group complied substantially with King II, with the only areas of non-compliance being the following:

• The group’s Chairman, Reuel Khoza, is a non-executive director, but not independent. This is due to his position at Aka Capital, a strategic business partner of Nedbank Group through its broad-based black economic empowerment (BBBEE) transaction concluded in 2005. He is also a non-executive director of the group’s holding company, Old Mutual plc, which precludes him from being classified as independent.
• Mustaq Enus-Brey is Chairman of the Group Risk and Capital Management Committee and not classified as an independent chairman as a result of his relationship with one of the group’s black business partners. The Chairman of the Directors' Affairs Committee, Reuel Khoza, is not independent as discussed in the previous paragraph.

The Nedbank Board is satisfied that these areas of non-compliance do not impair the governance integrity or perceptions of the group.

Nedbank's Enterprise Governance Framework incorporates a full range of governance objectives and individual responsibilities are clearly delineated at board, board committee, group executive committee (Group Exco) and management levels.

In other respects, as far as compliance with King II is concerned:

• the Group Directors’ Affairs Committee consists entirely of non-executive directors, of whom the majority are independent;
• the Group Audit Committee (GAC) consists entirely of non-executive directors, all of whom are independent;
• the Group Remuneration Committee consists entirely of non-executive directors, the majority of whom are independent; and
• the Group Risk and Capital Management Committee consists entirely of non-executive directors, the majority of whom are independent.

KING III – IMPLEMENTATION PLAN

Nedbank Group embraces the recommendations of the King III code and would use best endeavours to attain full application and compliance. In the event that the company cannot apply the letter of the code, adequate explanations and mitigating measures will be provided in future annual reports. At the date of this report the board is of the opinion that Nedbank’s governance practices meet some of the most significant requirements of King III as follows:

1. A lead independent non-executive director, Chris Ball, was appointed in 2007. The role of chairman is formalised. The Chairman’s performance is evaluated annually.
2. An overview of the appraisal process of the board, Chairman and peers, results and action plans are disclosed in this report.
3. The committees are appropriately constituted, and the composition and the terms of reference are disclosed in the 2009 Annual Report.
4. As of 2009 Nedbank’s strategy and business planning process includes a formal risk planning component. 
5. The board is assuming the responsibility of information technology (IT) governance and this requirement is currently met within the Nedbank IT governance structures. Primary governance forums include the Board Strategic Innovation Management Committee (SIMCO), with links to Group Audit Committee and Group Risk and Capital Management Committees (GRCMC), the Executive SIMCO, cluster representation at IT enterprisewide risk committees (ERCOs), project steering committees, prioritisation forums and the Project Review Board. Furthermore the financial component of IT is managed independently by the Group Finance Division.
6. Currently eight of 14 non-executive directors on the board are independent directors, which constitute a majority.

Areas where Nedbank does not comply with King III will be addressed when the code becomes effective on 1 March 2010. These areas include:

Board and directors

1. The board will consider a mentorship plan for new directors. Board induction and formal training tailored to suit the needs and experience of new directors appointed to the board is in place.
2. An overview of the appraisal process of the Nedbank Board, results and action plans are to be disclosed in the 2009 Annual Report.
3. An aggregate of the salaries of the three most highly paid employees will be published in the 2010 Annual Report.
4. The board of directors deliberated on the requirement of King III that non-executive fees should comprise a base fee and an attendance fee per meeting.  The board is of the view that this requirement is less pertinent to directors of Nedbank due to the practicalities and responsibilities of being a director of a bank, and the need for boardmembers to provide their inputs on an ongoing basis, even when they are not able to attend a board meeting in person.

Group Audit Committee

1. Group Audit Committee (GAC) members are currently not elected by shareholders but by the board. This will be addressed in the annual general meeting to be held on 3 May 2010.
2. The sustainability report is not reviewed and recommended for approval by GAC at this stage, but is reviewed and approved by the Transformation and Sustainability Committee. An external assurance provider is engaged and reports to the members of the board via the Transformation and Sustainability Committee. It is recommended that GAC review the external assurance provider and key performance indicators.
3. The code requires that specific statutory duties of the Group Risk and Capital Management Committee (GRCMC) need to be reviewed in compliance with the Banks Act.  The code requires that the GAC charter set out its responsibilities regarding risk management. GAC is not responsible for risk management, as this falls within the ambit of the GRCMC. The GRCMC gives feedback and assurance to GAC and the board. GAC reviews financial reporting risks and internal financial controls, but such reviews need to be formalised. The Group Executive is of the opinion that the output of the Financial Controls Initiative, an Old Mutual plc-led project, will aid formal documentation and the testing of financial controls.

Governance of risk

1. The evaluation by the board of the Group Risk and Capital Management Committee will take place during 2010. Committee self-assessments do take place.
2. As of 2009 Nedbank’s strategy and business planning process includes a formal risk planning component as required by King III.
3. The Chairman of the Risk Committee is not independent. The Nedbank Board is satisfied that this area of non-compliance does not impair the governance integrity of the group or perceptions of the group.

Governance of technology

1. The protection of information technology is not covered explicitly in the Board SIMCO agendas; however, the protection of intellectual property is covered in specific contracts with Group Technology suppliers. There could be improved oversight in this area, where the standard supplier clauses are approved/reviewed by Board SIMCO and deviations declared/noted as and when they are signed by management.
2. GAC should consider IT for the financial and going-concern reporting of the company, largely achieved with the section 39 letters of representation. IT and its capabilities are considered, but further formalisation of this as a consideration in the going-concern statement could be beneficial.

UK COMBINED CODE

Old Mutual plc subscribes to the UK Combined Code. As a subsidiary of Old Mutual plc, Nedbank strives to adhere to this code. If there is non-compliance, a comprehensive explanation is given. However, the primary code Nedbank is required to apply, at 31 December 2009, is King II.

• The Chairman, Reuel Khoza, is a non-executive director, but not independent due to his position at Aka Capital, a strategic business partner in terms of the group’s BBBEE transaction. He is also a director of the group’s holding company, Old Mutual plc. 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. The position is currently held by Chris Ball. However, Mr Ball sits on more than one committee, which is not in line with the code. The board is of the opinion that it is both efficient and effective that the same independent director be a member of most board committees to assist the committees in avoiding any duplication of their activities, and it also assists in ensuring that 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 2009 the Nedbank Group Board consisted of eight independent directors out of 17 directors (the Chairman excluded). On 20 February 2010 Bob Head resigned and there are currently 16 directors (the Chairman excluded). While we aspire to adhere to the requirements of the UK Combined Code, it is not always possible to do so with the limited availability of experienced independent directors. In South Africa the King code is therefore accepted as representing best practice.

In terms of the UK Combined Code independence is compromised if a director has served on the board for more than nine years. Four directors who served for more than nine years, namely Messrs MM Katz, ML Ndlovu, JB Magwaza and ME Mkwanazi, resigned in October/November 2009.

The UK Combined Code also identifies cross-directorships as relationships that could appear to affect the independence of directors. The following cross-directorships exist within the Nedbank Board, which affect the independent directors:

Chris Ball: Imperial Bank Limited
Nomavuso Mnxasana: Imperial Bank Limited

Tom Boardman: Vodacom Group (Pty) Limited
Jabu Moleketi:  Vodacom Group (Pty) Limited

Prof Brian Figaji: Development Bank of Southern Africa
Wendy Lucas-Bull: Development Bank of Southern Africa
Jabu Moleketi: Development Bank of Southern Africa

The board is of the opinion that these directors are independent of character and judgement with regard to these relationships.

Board meetings

In 2009 the Nedbank Group Board met eleven times. Full details of attendance are included in the 2009 Nedbank Annual Report.

 

Board committees

The board committee structure remained largely unchanged in 2009, other than amendments to the reporting line, mandate and membership of the Executive Credit Committee. All the board committees have charters that are reviewed on an annual basis and monitored by the board to ensure effective control over the operations of the group. The key structures used to oversee corporate governance in the group are as follows:

• Nedbank Group Board of Directors
• Boards of directors of subsidiary companies
• Group Remuneration Committee
• Group Audit Committee (GAC)
• Group Transformation and Sustainability Committee (TRANSCO)
• Directors' Affairs Committee
• Group Risk and Capital Management Committee (GRCMC)
• Group Credit Committee (the Executive Credit Committee reports to both the Group Credit Committee and the Group Exco)
• Board Strategic Innovation Management Committee
• Group Finance and Oversight Committee

Company Secretary

All directors enjoy full access to the Company Secretary, whose statutory obligations include:

• providing the directors with guidance as to their duties, responsibilities and powers;
• making the directors aware of all relevant legislation and regulations;
• reporting at shareholders' meetings or directors' meetings any failure to comply with such legislation and regulations;
• ensuring that minutes of all shareholders' meetings, directors' meetings and meetings of board committees are properly recorded;
• certifying in the annual financial statements that the company has lodged with the Registrar of Companies all required returns and that these are true, correct and up to date; and
• ensuring that a copy of the company's annual financial statements is sent to every person who is entitled thereto in terms of the Companies Act.

The Company Secretary also ensures that all board rules and procedures are observed and that new directors are inducted in a way that provides them with complete knowledge of both the business's and their responsibilities.

 

 

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