‘Harsh and valuable lessons have no doubt been learnt from the crisis where the attraction of short-term gains caused so many businesses to lose their moral compass.’
Dr Reuel J Khoza
As economies and business the world over start to recover and rebuild after the widespread recession brought on by the global financial crisis, business leaders and companies need to focus their attention once again on ethical behaviour and on adopting sustainable business practices.
Harsh and valuable lessons have no doubt been learnt from the crisis where the attraction of short-term gains caused so many businesses to lose their moral compass. It is hoped that this will be the catalyst for a return to values-based management, with a focus on building businesses that are sustainable in the long term, and greater adherence to codes of ethics and conduct.
In South Africa we welcomed the introduction of the King Report on corporate governance (King III), which is effective from March 2010. While the new code is in no way a response to the fallout from the global financial crisis, King III has introduced the concept of apply or explain, where businesses will receive credit or be sanctioned for their governance practices.
The first two reports of the King Committee have contributed to the governance standards of some local companies being elevated to worldclass levels, at the same time making these companies increasingly attractive to international investors.
Nedbank continually evaluates its governance practices and standards and will strive to adhere to the new code.
The board acknowledges the relationship between high-quality governance and long-term equity performance, recognising that investors afford premium ratings to well-managed businesses.
Economy and banking environment
The local banking industry experienced an exceptionally tough and volatile year as a result of the impact of the global recession, combined with credit stress in the local market following two years of economic slowdown.
Demand for credit slowed dramatically and retail impairments increased significantly as consumers came under severe pressure from falling income, job losses, declining asset prices and record-high debt burdens. The SA Reserve Bank reduced interest rates by a total of 450 basis points in 2009 to cushion the effects of a rapidly slowing economy and increasing unemployment, and to stimulate growth.
Corporate demand for credit lost momentum due to weak global and local demand. This eroded corporate profits through weaker pricing power, lower commodity prices and a strong rand. Support came from increased government spending, boosted primarily by the public sectors infrastructure drive and preparations for the 2010 FIFA World Cup.
Despite the negative economic trends dominating much of 2009, underlying trading conditions showed early signs of improvement around the third quarter. This was led by a rebound in growth in emerging markets, especially China and India, and was followed by initial indications of recovery in most industrialised countries, chiefly brought about by unprecedented government intervention and massive fiscal and monetary stimulation. Improved commodity prices and global demand brought an element of relief to domestic export manufacturers, lifting South Africa out of official recession in the third quarter. There are early signs that the sharp drop in interest rates is starting to revive household credit demand as house prices showed modest signs of a slow recovery towards the end of the year.
Job creation will support household income and lead to some improvement in consumer finances and therefore spending. The rebound is likely to be slower than in previous cycles given weak consumer and business confidence and tighter lending criteria.
South Africas political leadership faces several challenges in addressing economic progress, with the immediate priorities being job creation and restoring the country on a growth path. After job losses of nearly one million during the downturn, employment showed early signs of stabilising in the latter stages of 2009. However, there are other fundamental issues that require urgent attention to stimulate economic progress:
- The productivity of the public sector needs to be addressed as a priority and we would urge government to ensure that public administration is merit-based to change the prevailing culture of mediocrity. Our public sector needs to be staffed by excellent people in order to become more efficient and productive. Government employees need to be selected according to clearly defined criteria related to skills and qualifications and occupy positions based on merit, rather than on political considerations.
- There is an urgent need for policy clarity on the roles of the ministries of Finance, Economic Development, Trade and Industry, and the national planning commission in the Office of the President. Policy clarity and alignment of the roleplayers should hopefully again raise our countrys level of competitiveness, which has unfortunately slumped in recent times.
- A further area of concern is the over-politicisation of public assets. It is imperative for economic development that state-owned enterprises are operated along the same business lines as private sector companies. Professional management needs to be installed to rescue many of these state-owned assets and transform them into commercially sound enterprises.
Board of directors
The composition of the board underwent several changes with the appointment of eight new directors and the retirement or resignation of six directors during the year.
We are committed to maintaining a majority of independent directors and welcomed four outstanding personalities in Alan Knott-Craig, Jabu Moleketi, Wendy Lucas-Bull and Malcolm Wyman onto the board. These new directors are all accomplished in their fields: Alan is well-known as one of the pioneers of the mobile telephone technology industry with Vodacom and is strong on technology innovation, which is becoming increasingly relevant to banking; Jabu held senior political office and served as the countrys deputy minister of finance for four years; a highly experienced banker, Wendy was previously chief executive of FirstRands retail business; and Malcolm is an executive director and Chief Financial Officer of global brewer, SABMiller plc.
Two executives of our parent company, Old Mutual plc, were appointed as non-executive directors, namely Julian Roberts, Group Chief Executive, and Don Hope, Head of Strategy Development.
Following the restructuring of the Group Executive Committee (Group Exco) as part of the succession process for the new Chief Executive, Graham Dempster was appointed to the newly created position of Chief Operating Officer and as an executive director. Graham is one of the most experienced bankers in the group and his wide-ranging expertise is well suited to this position. We were pleased to have attracted Raisibe Morathi as Chief Financial Officer to succeed Mike Brown when he was appointed Chief Executive Designate. Raisibe has held senior positions in banking, development finance and insurance and we are pleased to have appointed our first black female executive director onto an already highly transformed board.
We said farewell to some of our longest standing directors. Following the adoption of a policy that non-executive directors should not serve on the board for more than nine years, board stalwarts Michael Katz, JB Magwaza and Mafika Mkwanazi retired from the board. We also took leave of Bob Head and Rosie Harris, both executives of Old Mutual plc, and Lot Ndlovu. These directors served the board with distinction. We thank them for their collective contribution to the affairs of Nedbank Group and wish them well into the future.
We are delighted that Tom Boardman accepted the invitation from the board to serve as a non-executive director after his retirement as Chief Executive.
The board now comprises 17 directors, with eight independent non-executive directors, six non-executive directors and three executive directors. It should be noted that three of the non-executives, including myself, are not considered independent in terms of King II and the JSE Listings Requirements owing to our shareholdings in the groups broad-based black economic empowerment scheme and to two non-executives representing Old Mutual plc on the board.
Tom Boardman is not classified as independent as he has served as an executive of the group. We do not believe that these classifications inhibit the directors from exercising their independent judgement or thinking at board level.
The complex and regulated nature of a bank requires us to have more board committees than most large corporates. We believe that the board is of optimal size to enable us to have sufficient qualified directors to serve on these committees.
The process of identifying a successor to Tom Boardman was initiated during 2008 and an extensive search was conducted where the board considered international, local and internal candidates, influenced by a desire to appoint a black candidate. Mike Brown was the natural choice based on very strong credentials.
We were particularly pleased to appoint an internal candidate with such extensive banking and financial expertise as Mike. In his capacity as Chief Financial Officer Mike worked very closely with the board and the Chief Executive for over five years, and made a considerable contribution to the strategic direction of the group, the enhancement of capital and liquidity management, as well as the groups internal and external reporting.
The appointment was announced in March 2009 and this allowed for a year-long transition in the Chief Executives office from Tom to Mike.
Mike is committed to transformation and this has been demonstrated in the composition of his new Group Exco which has 44% black representation, the second highest among the four major banks, and at 38% the highest African representation relative to our peer group.
My board colleagues join me in wishing Mike every success in his new role that commenced on 1 March 2010.
Our Chief Executive, Tom Boardman, retired at the end of February 2010. When one looks back at what Nedbank achieved under Toms leadership it is hard to believe that he was only in this position for little more than six years. After a baptism of fire following his appointment in late 2003, he immediately set about implementing a turnaround strategy for the bank, which was successfully delivered. His unwavering commitment to creating a values-based organisation saw a dramatic improvement in staff morale and an alignment of values. Toms focus on sustainability saw the group becoming one of the most transformed companies in the country, cementing its position as the green bank and creating a platform for long-term growth. We will miss Toms incredible passion and energy in leading the bank, but are pleased to retain his wisdom and sagacity on the board in his capacity as a non-executive director.
In closing I would like to thank my fellow directors for sharing their wisdom and knowledge with the group and for their active participation in boardroom debates. It is indeed a privilege to lead this forum.
The group has continued to show its resilience under extreme pressure and on behalf of the board I thank Tom and the Group Exco for ensuring that we have weathered the storm and are positioned well for the eventual upturn in the economy. At the same time we wish the new team under Mikes leadership every success for the year ahead.
Again we thank the Banking Regulator for his oversight and guidance of our industry in these trying times and for the constructive manner in which he engages with the bank.
The achievements outlined in this annual report would not have been possible without the commitment and dedication of our staff and we thank everyone at headoffice and at our offices and branches across the country and further afield for their contributions.
Dr Reuel J Khoza
24 February 2010