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Corporate governance

The provisions of King III became effective on 1 March 2010. The group is committed to applying these principles to all its subsidiaries as appropriate. However, Exxaro understands that effective governance practices should be embedded in all its business processes rather than following a simple tick-box approach.

As proposed in King III, the office of the company secretary is responsible for implementing and monitoring compliance to corporate governance best practices across the group. Our company secretary, Mrs MS Viljoen, serves as a member of the executive committee (Exco); she reports directly to the CEO and has direct access to the chairman. She works closely with internal audit, the acting group risk manager, the chief audit executive and our outsourced legal advisers to promote a culture of good governance and compliance in the group.

The independent corporate governance compliance review conducted in 2008 was followed by an independent King III readiness assessment in 2009, undertaken by our independent sustainability and governance advisers. Through independent advice, we ensure we continue to improve our well-established corporate governance processes and remain abreast of the latest industry developments.

Key objectives for 2010	Progress
Identify and appoint a chairman in line with our BEE status	Dr D Konar was appointed chairman of the board on 23 February 2010, and re-elected for one year on 22 February 2011.
Awareness programmes to the board and key business units	Presentations were made to the board, Exco and major business units and subsidiaries on the key requirements of King III. The Exxaro sustainability and assurance steering committee was established to drive integrated reporting in the group.
Conduct an independent King III readiness assessment to ascertain compliance gaps	Review concluded in June 2010 with findings presented to the board and management. The status of compliance and action steps for continuous improvement are discussed in the table below.
Initiate an integrated risk and compliance process adhering to best-practice standards, supported by enabling technology	A project was initiated in conjunction with our risk management advisers to address current shortcomings of our risk management methodology and to align with industry best practices such as ISO 31000. The first phase of the project - identifying relevant gaps and making recommendations - is complete. The second phase – refining the current methodology and implementing enabling technology - is under way.
Review current board committee structures, composition and terms of reference against best-practice requirements	The review was completed in December 2010 and comparative benchmarks obtained for implementation in 2011.
Review organisational structures and processes to address governance, risk and compliance in an effective, integrated and consistent manner	As part of the Siyaya programme it was proposed that governance, risk and compliance be merged into a single business unit to ensure all related processes are integrated and that monitoring risk and compliance is done independently.
The review and adoption of a new fraud-prevention policy and process	A new fraud-prevention policy was adopted in November 2010, supported by a dedicated governance forum, the ethics committee, to ensure effective management of the process.
Conduct independent board assessments	To assess the skills and experience of each board member and the board as a whole, an independent board assessment was conducted by the Institute of Directors.

Ethics

Exxaro is committed to the highest standards of honesty, integrity and fairness, and has zero tolerance for the commissioning or concealment of fraudulent acts by employees, contractors or suppliers. To support this approach, a revised fraud-prevention policy was adopted during the review period.

The group has an ethics committee comprising executives and representatives of internal audit and the chief audit executive. The committee, chaired by the finance director, meets monthly to consider issues of non-compliance to the group code of ethics and/or conflict of interest policy as well as matters reported on the ethics line or to management. Required investigations are conducted by a dedicated forensics team. This approach is reinforced by articles highlighting the importance of ethical behaviour in the quarterly internal newsletter.

A dedicated ethics line is in place to report all ethical matters including possible fraud and corruption. This is independently operated by Tip-Offs at a cost of R100 000 per annum.

In 2010, 31 cases of alleged fraud were reported at corporate level for forensic investigation, 11 of these via the ethics line. Eight of these led to disciplinary action and the dismissal of employees concerned. Four cases were also reported to the South African Police Service (SAPS) for criminal prosecution. The estimated impact or saving to the group of prompt action against suspected fraud was R4,5 million. At business unit level, over 160 cases of alleged fraud were reported, resulting in disciplinary action in 36 cases and 17 cases reported to SAPS.

The types of fraud investigated included:

Fraudulently changing bank accounts
Credit card fraud
Submitting false qualifications
Tender fraud
A fraudulent payment scheme (crime syndicate)
Fraudulent orders (crime syndicate with possible employee collusion).

Employees and all stakeholders can report suspected incidents of fraud or corruption to Tip-offs at 0800 203 579 or exxaro@tip-offs.com. This is an independent service designed to help people report incidents while remaining totally anonymous for their protection.

Key findings of the King III readiness assessment

The release of King III is a milestone in the evolution of corporate governance in South Africa and offers significant opportunities for Exxaro to enhance current corporate governance practices. King III has opted for an “apply or explain” governance framework. This means that where the board believes it to be in the best interests of the company, it can adopt a different practice from that recommended in King III, but must explain this.

The table summarises key observations and areas for consideration from an independent review of the principles of King III and its adoption in Exxaro. The findings are the result of an independent review completed by a leading corporate governance adviser in the second half of last year. Where Exxaro does not comply with King III, the reasons are given. Actions initiated to apply or enhance the principles are shown in the last column.

For a copy of King III contact the Institute of Directors at www.iodsa.co.za.

Key:

		No or minor adjustments required to conform with King III principles.
		Specific gaps identified that would require focused management action to conform with King III principles.
		Non-conformance with King III principles. Significant management effort required.

Chapter	Governance element	Status	Summary of findings	Action steps for continuous improvement
1	Ethical leadership and corporate citizenship		No major findings.	Governance forum known as the ethics committee has been established. Fraud-prevention policy adopted by the board in November 2010.
2	Board of directors		No major findings. Exxaro is currently not able to adopt all the principles on the composition of boards as our board structure is regulated by our articles of association based on the Pangolin shareholders’ agreement entered into between various parties in November 2006. For more information, please contact the company secretary.	Exxaro will continue with its board induction and extensive knowledge-enhancement programmes.
3	Audit committee		The role of the audit committee must be re-assessed in light of its changed role, more specifically the: review of integrated reporting implementation of a combined assurance model approving disclosure of sustainability issues.	The structure, composition and terms of reference for all board committees, including the audit committee, were reviewed in December 2010 and January 2011, for finalisation in 2011.
4	The governance of risk		The current risk management framework should be more integrated and aligned to industry best practice.	At the request of the audit, risk and compliance committee, Exxaro has initiated a project to ensure that a new integrated risk management framework is designed and implemented across the group. The new framework will be supported by best-practice enabling technology that includes the ability to monitor all risks, including risks related to compliance and information technology. The first phase of the project, which identified gaps with ISO 31000, from an organisational structure and process perspective, was concluded in October 2010. The next phase, which examines the implementation of enabling technology, will be finalised in 2011.
5	The governance of information technology (IT)		This is the only new chapter in King III. The findings relate to: The board not being sufficiently involved in IT strategy and governance IT risk being managed in a fragmented manner The board not being sufficiently involved in the acquisition and disposal of IT goods and services.	The new integrated risk management framework will include management of all IT risks.
6	Compliance with laws, rules, codes and standards		Although Exxaro has adopted a compliance policy, the associated processes have not been implemented.	Integrated compliance risk management was addressed from an organisational structure and process point of view. The proposed new process adheres to the standards of the Compliance Institute of South Africa and was finalised in November 2010. We expect the integrated compliance risk management process to be implemented in 2011.
7	Internal audit		Exxaro should integrate risk management and control in its business processes to create value.	See 4.
8	Governing stakeholder relations		Current stakeholder relations policies need to be reviewed by the board. The integrated report should also disclose the nature and outcome of Exxaro’s dealings with stakeholders.	Exxaro has implemented a stakeholder relations strategy that is two pronged: a stakeholder management process at each business unit to ensure all material issues for internal and external stakeholders have been identified and a management response instituted; secondly, forming a stakeholder panel comprising independent experts and NGOs in the social and environment fields to verify that all relevant material issues have been identified.
9	Integrated reporting and disclosure		No major findings.	A sustainability and assurance steering committee has been established that meets at least quarterly to discuss: Material issues and their communication to the board Regulatory changes that may impact the nature of reporting to stakeholders The scope of external reporting and assurance.

Board

Role and composition
A highlight of 2010 was the appointment of Dr Len Konar as chairman of the board on 23 February 2010. Dr Konar has extensive experience as chairman and provides overall leadership to the board without limiting the principle of collective responsibility of board decisions. Dr Konar is also chairman for purposes of in-committee discussions at the transformation, remuneration, human resources and nomination committee and is not a member of any other committee of the board. He brings a wealth of financial, governance, industry and international knowledge. In line with the recommendations of King III, Exxaro has a unitary board structure, comprising:

Four independent non-executive directors
Six non-executive directors
Two executive directors.

In assessing the status of directors, the principles contained in King III and the Listings Requirements of the JSE Limited were used.

At Exxaro we understand that by promoting transformation actively in all our structures, a sustainable future will be ensured in the communities in which we operate. This is also visible in the composition of our board: we are proud that the majority of our board members are historically disadvantaged South Africans. The diverse backgrounds of directors ensure a wide range of experience in commerce, industry and engineering. The directors have access to management as required, and Dr Konar regularly meets individually with senior management to share knowledge.

The board defines the levels of authority in Exxaro and reserves specific powers to itself while delegating others to management. The collective responsibility of management vests in the chief executive officer, Mr Sipho Nkosi. Mr Nkosi provides regular reports to the board on progress towards the group’s objectives and strategy.

The board is ultimately accountable and responsible to its shareholders for the performance and affairs of Exxaro. The board therefore retains full and effective control over Exxaro and gives strategic direction to its management. The board is also responsible for ensuring compliance with all relevant laws, regulations and codes.

In addition, the board has a responsibility to the broader stakeholder base – which includes present and potential beneficiaries of Exxaro products and services, clients, lenders and employees – to achieve continuing prosperity and ensure its sustainability.

The board has a written charter that governs its powers, functions and responsibilities; and ensures that no one board member has unfettered powers of decision making. The charter is reviewed annually. The board charter also formalises policies on board membership, composition, procedures, compliance and risk management, board evaluation, induction and remuneration. A broadened policy on board appointments has been approved by the board.

The board selects and appoints the company secretary and recognises the pivotal role to be played by this person in entrenching good corporate governance. All directors have access to the advice and services of the company secretary. The board has an established procedure for directors to obtain independent professional advice at the group’s cost.

New directors are informed of their duties and responsibilities by way of extensive induction material, and also have access to key management members where information on Exxaro’s operations may be obtained. Visits to operational businesses are included in the annual board programme.

A formal ongoing directors’ development programme was instituted in 2008, giving members the opportunity to attend briefing sessions to ensure they are kept up to date with local and industry developments, risk management, financial reporting and corporate governance best practice.

An independent appraisal of the board was undertaken at the end of 2009 by the Institute of Directors. Feedback sessions were held with individual directors by the chairman.

The chief executive officer’s performance is also evaluated against his performance contract. This is approved annually by the transformation, remuneration, human resources and nomination committee, in conjunction with the chairman of the board.

Committees of the board
The board committees assist the board in executing its duties, powers and authorities. The board delegates to each of the committees the authority required to enable the committees to fulfil their respective functions through formal board-approved terms of reference.

Delegating authority to board committees or management does not mitigate or discharge the board and its directors of their duties and responsibilities. This is reflected in the Exxaro delegation-of-authority framework which is managed by the office of the company secretary. This framework has been adopted by all wholly owned subsidiaries and is reviewed annually.

The board has three committees through which it operates:

Audit, risk and compliance committee
Safety and sustainable development committee
Transformation, remuneration, human resources and nomination committee.

In the spirit of transparency and full disclosure, each committee’s independent chairman reports formally to the board after each meeting on all matters within its duties and responsibilities, including recommendations on envisaged action steps.

Board committees and members are authorised to obtain independent outside professional advice when considered necessary. The company secretary assists board committees and members in obtaining any such professional advice.

Audit, risk and compliance (audit) committee

Apart from the statutory duties of the audit committee as set out in the Corporate Laws Amendment Act, and the provisions of the JSE Listings Requirements and King III, the role of this committee has been expanded to include issues of risk management and compliance.

The committee met its responsibilities under the current terms of reference for the review period.

The terms of reference will be expanded to include new areas of responsibility, eg integrated reporting and information technology.

The committee assists the board in:

Examining and reviewing the group’s financial statements and reporting of interim and final results, the accompanying message to stakeholders and any other announcements on the company’s results or other financial information to be made public
Overseeing cooperation between the internal and external auditors, and serving as a link between the board and these functions
Overseeing the external audit function
Approval of the internal audit plan, fees and qualifications of the internal auditors
Evaluating the qualification and independence of the external auditor
Approval of the external audit fees
Ensuring effective internal financial controls are in place
Reviewing the integrity of risk control systems and risk policies
Evaluating the scope and effectiveness of the internal audit function
Evaluating the competency level of the financial director
Appointing the chief audit executive
Complying with legal and regulatory requirements.

The committee meets at least four times a year.

The three members of the committee are non-executive members, and two of these are independent. The finance director, Wim de Klerk, and chief audit executive, Rian Strydom, attend meetings by invitation. During the review period, the committee considered, and was satisfied with the adequacy and resources of the group’s finance function, including the appropriateness, expertise and experience of the finance director.

Although Exxaro is only required to rotate the senior partner responsible for the group’s audit, we recognise that a periodic change in external auditors supports good governance and have appointed PricewaterhouseCoopers as external auditors from 1 January 2011.

To ensure consistency in sustainability reporting, the services of the current assurance provider on sustainability issues in the integrated report were retained. The audit committee has considered the disclosure of sustainability issues in the integrated report and is satisfied with the contents.

The committee has satisfied itself on the independence of the external auditor in accordance with section 270A of the Companies Act. Principal matters considered in determining independence included those arising from the ownership of shares, the quantum of the audit fee and the types and quantum of the non-audit services provided by the firm. Requisite assurance was sought and provided by the external auditor that internal governance processes in the firm support and demonstrate its claim to independence.

The committee also determines and carefully monitors the use of the external auditor for non-audit-related services and is guided by a formal policy that precludes the external auditor from providing services that would impair audit independence. The non-audit services rendered by the external auditors during the period comprised tax advisory services, tax compliance services, accounting opinions and other advisory services. The fees applicable to these services totalled
R747 288.

The committee nominated the appointment of PricewaterhouseCoopers (PwC) as registered auditors for the 2011 financial year and Mr D Shango, the audit partner, as the independent registered auditor of the company. The committee also considered and satisfied itself that PwC, including its advisors, is accredited in terms of the JSE list of accredited auditors as contemplated in paragraph 3.86 of the JSE Listings Requirements.

The following compliance-related documents were submitted to the committees and board for noting:

Directors’ liability in terms of safety and environmental statutes
Directors’ liability in terms of the Competition Act 1 of 2009 (which seeks to amend the Competition Act 89 of 1998)
Gap analysis on the King III report and actions required by the board and management
The impact of the proposed Companies Act 71 of 2008
Quarterly information manuals updating the board on industry, regulatory, legal and statutory matters.

Transformation, remuneration, human resources and nomination committee

The purpose of this committee (known as Tremco) is to:

Guide, monitor, review and evaluate Exxaro’s progress with transformation, with specific reference to the three primary pillars: employment equity, community involvement and preferential procurement
Make recommendations on remuneration policies and practices for the company’s executive directors, senior management and personnel
Review compliance with all statutory and best-practice requirements on labour and industrial relations management.

Although this is a combined committee, a process has been put in place to ensure the following responsibilities for the nomination element are carried out:

Providing recommendations on the composition of the board and board committees and ensuring that the board comprises individuals equipped to fulfil the role as directors of the company
Annual revision of corporate governance guidelines and related documents, and providing recommendations to the board as deemed advisable
Providing comments and suggestions on committee structures of the board, committee operations, member qualifications and member appointment
Establishing and maintaining procedures for interested parties to communicate with board members
Reviewing and recommending to the board its annual training programme
Maintaining procedures to review board members’ interests.

Although the board chairman is not a member of this committee, a separate agenda is set for nominations committee matters and the board chairman takes the chair.

Safety and sustainable development (S&SD) committee

The name of this committee was changed from safety, health and environment committee in 2010 to encompass its obligations to the environment, employees and communities impacted by operations in support of sustainable development.

The committee’s purpose is to provide advice to the board and, as necessary, to the audit, risk and compliance committee on S&SD risk matters.

In executing the governance function, the committee will:

Assess the effectiveness of management’s approach to and activities in managing sustainability risks
Review significant S&SD incidents, performance indicators and compliance
Report to the board on developments, trends or significant legislation on S&SD matters relevant to Exxaro’s operations, assets and employees
Identify issues and elements arising from national and international protocols applicable to Exxaro’s S&SD
Ensure the company reports annually through an integrated report on S&SD issues affecting it.

The committee meets at least three times a year.

Management committees

Executive committee
The executive committee (Exco) is constituted in terms of the articles of association to assist the chief executive officer (CEO) in managing the group.

Exco assists the CEO to guide and control the overall direction of the company and acts as a medium of communication and coordination between the business units, corporate service departments and the subsidiary companies and the board.

The duties of Exco include:

Overseeing the financial, operational and safety performance of Exxaro
Guiding Exxaro in its relations with shareholders and key stakeholders, including personnel, regulators, environmental interests and the media
Developing group strategy for board approval
Receiving and considering regular reports from businesses in Exxaro to monitor and manage financial performance
Ensuring coordination between business units and corporate service departments
Regularly reviewing the adequacy of reporting arrangements and effectiveness of internal control and risk management
Approving or recommending to the board expenditure and other financial commitments as specified in the framework for the delegation of authority
Acting as a responsible corporate citizen with an ethical culture.

Portfolio review committee
The portfolio review committee is constituted as a strategy management committee to assist the CEO with portfolio management.

The committee ensures that new opportunities fit Exxaro’s portfolio and determines strategic priorities. It oversees strategic initiatives and investigations into the viability of potential investment projects throughout the group. The committee discusses and challenges Exxaro’s portfolio performance as well as intended strategic initiatives and projects. Initiatives aligned with the current strategy are included in proceedings of the investment review committee. Recommendations to terminate initiatives already in the current strategy or to proceed with initiatives or projects not included in the current strategy are subject to agreed governance procedures.

Investment review committee
The investment review committee is constituted as a management committee to assist the CEO with the management process of the group.

The committee oversees approval processes for investments. These are designed to ensure they are aligned to the group’s agreed strategies and values, risks are identified and evaluated, investments are fully optimised to produce the maximum shareholder value within an acceptable risk framework and appropriate risk management strategies are pursued.

The main purpose of the committee is to review investments in a structured, formal and transparent manner to ensure:

Each project meets the strategic, technical and investment requirements of the company, which includes identifying and managing all project-related risks
Critical decisions, project parameters, safety, health and environmental impacts and governance processes are followed and addressed prior to committing funds
Each project enhances the portfolio value of the company.

Offshore review committee
This committee assists the CEO and finance director with the management process of Exxaro’s portfolio of offshore investments and interests. The primary responsibilities of the committee include:

Financial control and governance of Exxaro’s offshore investments and multi-disciplinary interests
Efficient financial structuring
Providing for funding offshore investments and expenditure
Ensuring financial reporting, auditing and tax-related issues are properly managed
Ensuring the company’s offshore offices are effectively staffed, managed and utilised.

The committee meets quarterly, or more frequently if required.

External communications
Briefing analysts, investors and fund managers is integral to maintaining investor relations. However, we only provide price-sensitive information after disclosing that information to the market.

Broader stakeholder communication plans are in place. The group believes in clear, transparent, concise and timely dissemination of relevant information to all stakeholders. This is achieved through a multitude of channels and media, including written, electronic and verbal presentations. Specifically, there are a number of mechanisms for stakeholders to interact with the board and its sub-committees. These include annual general meetings, representative forums and internal communications across a range of platforms.

Marketing communication
In line with its corporate values, Exxaro communicates regularly and openly with all stakeholders. At all times, our communications adhere to the laws, standards and voluntary codes of accepted marketing communication in the areas where we operate. During the year, no incidents of non-compliance were recorded.

Implementation of the mining charter

In 2009, the Department of Mineral Resources promulgated codes of good practice for the mining industry. In 2010, the review of the mining charter was finalised and the accompanying scorecard adjusted. Exxaro already complies with several aspects of the revised scorecard and steady progress is being made in those areas where the group does not fully comply. Refer to the Mining charter scorecard page for more details.

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