Corporate Governance

We will always ensure that we act in good faith, with care, diligence and skill in the way that we manage our business.

Codes and regulations

Our Group is committed to complying with all legislation, regulations and best practices relevant to the business.

For the period under review, the Board confirms that the Group complied with almost every aspect of the Code of Corporate Practices and Conduct as set out in the King II Report on Corporate Governance. An index illustrating the Group’s compliance to this code can be found here.

The Board

The Board of Massmart is responsible for directing the Group towards the achievement of the Massmart vision. The Board is ultimately accountable for the development and execution of the Group’s strategy, operating performance and financial results, practised within the Group’s formal governance authorities. The Board is responsible for its own composition, the appointment of the Chairman and Chief Executive Officer, and the constitution and composition of its committees.

The role of all directors is to bring independent judgement and experience to Board deliberations and decisions. At the financial year-end, the Massmart Board comprised four executive directors and nine non-executive directors, all of whom are independent of Massmart and its shareholders.

Chris Seabrooke is Chairman of the Board and Mark Lamberti is Deputy Chairman and Chief Executive Officer. Brief biographical details of each Board member are reported on here.

All directors retire by rotation every three years. Unless requested to serve a further term by the Board, retiring directors are not proposed for re-election by the shareholders. In addition, shareholders must ratify the initial appointment of each director at the first annual general meeting of shareholders following that director’s appointment.

Board process and evaluation

The Board meets five times a year and also on an ad hoc basis should a particular issue demand its attention. The Board’s authority is devolved sequentially through the Massmart Executive Committee, the Divisional Boards and the Divisional Executive Committees as prescribed by the Massmart Governance Authorities. In addition, the Board has delegated certain specific responsibilities to Board Committees, as described more fully below.

Directors’ attendance at Board meetings:

 Aug
2005
Nov
2005
Feb
2006
May
2006
CS Seabrooke
MJ Lamberti
MD Brand
ZL Combi
GRC Hayward
J Hodkinson x
P Langeni
IN Matthews
P Maw
DNM Mokhobox x
S Nothnagel
GM Pattison
MJ Rubin x

The Board works to a formal agenda that covers strategy, structure, operating performance, growth initiatives and other key activities of the Group. To do so effectively, formal documents and minutes of all Board Committees are included in the Board papers.

Directors are encouraged to take independent advice, at Company cost, in the proper execution of their duties and responsibilities. They have direct, unfettered access to the external auditors, professional advisers and to the advice and services of the Company Secretary.

The Nomination and Remuneration Committee facilitates a comprehensive annual formal performance evaluation of the Chief Executive Officer (CEO), comprising a self-evaluation; an evaluation of the CEO by every non-executive director by way of a questionnaire which includes open-ended comments; and an appraisal of the CEO by each of his direct reports using a different questionnaire. The Chairman provides the summary and feedback of the above to the CEO, and he is encouraged to probe and debate any aspect of the evaluation with the full Board.

In addition, all Board members complete a detailed Board self-assessment each year, probing the composition, duties, responsibilities, process and effectiveness of the Board. All Board Committee members complete a detailed selfassessment probing the composition, duties, responsibilities, process and effectiveness of their committees.

Finally, all Board members formally assess the Chairman’s performance and the Chief Executive Officer provides the feedback.

These assessments are approached in a constructive manner and provide valuable input that is used to enhance the effectiveness of the Board and its committees.

Board committees

Audit Committee

The Audit Committee comprises Messrs Nigel Matthews (Chairman), Chris Seabrooke and Peter Maw. When necessary, the Chief Executive Officer, the Chief Financial Officer, senior financial executives of the Group and representatives from the external and internal auditors attend Committee meetings by invitation.

The Audit Committee is responsible for reviewing and reporting that:

  • The Audit Committee is responsible for reviewing and reporting that:
  • Appropriate accounting policies have been adopted and consistently applied;
  • Robust internal control systems, designed in response to identified key business and control risks, are in place and have been effective throughout the period;
  • Robust internal control systems, designed in response to identified key business and control risks, are in place and have been effective throughout the period;
  • The going-concern assertion remains appropriate; and
  • The financial statements give a true and fair view, consistent with information known to the Committee, which makes a recommendation that the Board considers adopting the interim and final financial statements.

The Committee reviews the scope, as well as the independence and objectivity, of the external auditors. The nature and extent of non-audit services provided by the external auditors is reviewed annually to ensure that fees for such services do not become so significant as to call into question their independence of Massmart. The Committee has adopted a guideline that fees paid to the Group auditors for non-audit services (excluding due diligence investigations) should not exceed the level of audit fees charged to the Group. If it appears that this guideline will be breached on a consistent basis, non-audit services will be outsourced to third party auditors.

The Audit Committee recommends the appointment of the external auditors for Board and shareholder approval. During the financial year, Deloitte & Touche were the external auditors for all Group companies, with the exception of Trident, De La Rey and Servistar.

During the year, Deloitte & Touche provided certain non-audit services, including tax reviews and advice, and reviews of information technology systems and applications.

The Committee reviews the scope and coverage of the Internal Audit department, and has approved that department’s coverage and work plan for the forthcoming year.

The internal and external auditors have unfettered access to the Audit Committee and both present formal reports to the meetings.

The Audit Committee met three times during the year and members of the Committee also met with the head of Internal Audit and the external auditors.

Attendance at Audit Committee meetings:

 Aug
2005
Feb
2006
May
2006
IN Matthews
CS Seabrooke
P Maw

Nomination and Remuneration Committee

The Nomination and Remuneration Committee, comprising Messrs Chris Seabrooke (Chairman), Nigel Matthews and Ms Dawn Mokhobo, and Mark Lamberti who attends by invitation, is responsible for the Group’s remuneration policy and the short-term and long-term incentive policies for directors, executives, management and staff. It considers and approves the remuneration and incentives for directors and executive management, and requests the trustees of the Massmart employee share incentive scheme to award shares granted in terms of the policy and rules of the scheme.

The Committee is responsible for the recruitment and nomination of new non-executive directors and for ensuring that succession plans are in place for the Chief Executive, the executive directors and divisional heads.

The Nomination and Remuneration Committee met four times during the year.

Attendance at Nomination and Remuneration Committee meetings:

 May
2005
Nov
2005
Feb
2006
May
2006
CS Seabrooke
IN Matthews
DNM Mokhobo x

Risk Committee

The Risk Committee comprises Messrs Nigel Matthews (Chairman), Dods Brand, Peter Maw, Guy Hayward, Fanus Nothnagel, Grant Pattison and Norman Gray (Head of Massmart Internal Audit). Nigel Matthews chairs both the Risk and Audit Committees to ensure the appropriate exchange of key issues between the two committees. In order to facilitate the effective operation of the Committee to assess risk at all levels in the Group, the Committee is not exclusively comprised of nonexecutive directors.

The Board considers risk management to be a key business discipline designed to balance risk and reward and to protect the Group against risks and uncertainties that could threaten the achievement of our business objectives. The Risk Committee is responsible to the Board to oversee the Group’s risk management programme. The day-to-day responsibility for risk management, including maintaining an appropriate loss prevention and internal control framework, remains with the executives of the Group and of each Chain.

The Risk Committee met once during the year and all members were in attendance. In addition, in February each year an interim report is prepared by the executives on the Committee and is circulated to the Committee. This report comments on the status of the risks identified in the current Group Risk Register, notes any risk incidents that may have occurred since the previous Committee meeting and comments on the general risk environment.

The Committee’s primary role is one of oversight and therefore it reviews and assesses the dynamic interventions, within the Group’s available resources and skills, required in response to business-specific, industry-wide and general risks. The Committee tables a Group risk register, aggregated from those prepared by the Chains and the Group Executive Committee, to the Board annually in August. This register summarises the major risks facing the Group, taking into account the likelihood of occurrence and the potential impact.

The ten major risks facing the Group, not ranked in priority, are shown in the table below.

RISK

RESPONSE

Talent retention and succession
This covers four broad issues: the national scarcity of retail-specific skills; the challenge to develop sufficient internal business and leadership skills to ensure our longer-term competitiveness; a possible overdependence on key leaders in the Group; and the need for an actively managed succession pipeline.The Group considers this a major area of focus and deals with it on several levels. The Executive Committee actively monitors and manages the mentoring, progress, development and likely succession plans for the “Top 200” employees, as well as monitoring a further 200 employees. In addition, there are in-house education programmes prepared and presented in conjunction with GIBS and Babson Retail that focus on developing our senior, middle and junior executives. Annual career reviews are held with each executive in the Group, which are attended by that person’s superior and a third person – either the Group Organisation Executive or HR person in that Chain.
Another major store fire
In the last 12 years Makro has had three stores totally destroyed by fire. The most recent fire, in May 2004, caused by a subcontractor working on the roof, occurred despite significant and costly fire detection and prevention measures implemented following the previous Makro fire in 2001. Depending upon the cause of any future potential fire, it is unlikely that Makro, and possibly the Group, would be able to secure adequate catastrophe insurance cover or, alternatively, may secure adequate insurance cover but at a significant premium.Makro and the rest of the Group work closely with external risk assessors, insurance brokers and our major insurers in order to ensure that our stores have the highest possible level of fire detection and prevention.
Information technology
With millions of transactions daily, the Group is dependent upon reliable, secure, effective and efficient IT systems, including data and information. Major IT implementations or initiatives can distract management, be costly, destabilise the current IT platform and/or perform sub-optimally post implementation. Finally, at a strategic level, there exists the potential for misalignment between business strategy and the IT capability, which can result in reduced operational effectiveness.All the Group’s IT development, for both hardware and software, must be specifically approved and then monitored by the Group’s Technology, Information and Processes (TIP) forum, representing all the Chains’ IT executives, Massmart Internal Audit and, where appropriate, external service providers. Chain Boards must sign off all IT developments. Massmart Internal Audit has significant IT expertise and independently assesses all IT developments and is part of the “go-live” decision on any project. External auditors review the IT general control environment in the major Chains on an agreed rotation basis.
Integration of acquisitions
In the 2005 financial year, Massmart acquired three significant businesses. In the absence of compensating controls and interventions, acquisitions raise the level of organisational risk. In addition, there is the need to ensure that the new businesses are readily integrated into the Group. This must occur without harming the acquired businesses’ strategies, management and organisational culture. In addition, this integration will necessarily occupy significant time and focus from the relevant Group and Chain executives in order to ensure the appropriate levels of growth and profitability over the longer term.All acquisitions must meet Massmart’s strategic criteria. This ensures that, once acquired, sustainable value-enhancing activities should more readily flow between Massmart and the acquired businesses. Group executives, assisted by Massmart Internal Audit, perform detailed due diligence investigations, including thorough discussions with local executives. Integration does not necessarily mean that IT platforms or common business functions must be combined – this is only done if it provides a longer-term benefit to the acquired business.
HIV/Aids
This refers to the impact of the virus on Massmart and its broader community. Outside of the terrible human tragedy, potential business impacts include higher levels of employee deaths, reduced available skills, lower productivity and higher absenteeism, and higher direct and indirect costs of employment. Over the last three years, HIV prevalence has been measured in all the Chains by an external agency. The recent acquisitions have not yet been tested. The Group’s estimated infection rate, using statistical methods, is 6.9% amongst permanent employees and 12% amongst temporary employees. All the Chains are at various stages of rolling out Aids support initiatives and offering voluntary counselling and testing programmes. Massmart has also implemented a comprehensive HIV/Aids Awareness and Treatment Programme which incudes the provision of free Anti-retrovirals to all permanent staff and their spouses.
Slowing or low growth markets
There is the possibility of unnecessarily increasing the Group’s market shares in potentially low or no-growth South African markets and/or the rate of market growth slowing dramatically in the Group’s major categories. Both of these potential scenarios would have adverse financial consequences over the longer term.Massmart is careful to monitor and measure our own sales growth, per Chain, and our growth relative to the market, i.e. market share movements. The Group reviews new product categories and businesses within strict strategic criteria, and only considers expansion in those markets that offer good growth opportunities. All store opening decisions are approved at Group level after being financially assessed against a 10-year view of the socio-demographics of that particular market (this view is provided by external researchers).
Volatility in exchange rates, local interest or inflation rates
This concern focuses on two potential impacts, the first being the financial impact on the business’s trading and the second being the possible adverse effect on consumer expenditure.

With approximately 30% of all merchandise sales being imported, directly and indirectly, any sudden changes in the exchange rate will affect inventory valuation, although there may be a lag where the Group has entered into forward exchange contracts on its own direct imports to combat this eventuality. Furthermore, foreign currency fluctuations in those African countries where Game operates stores can also affect the level of sales and earnings reported by those stores in South African currency, as well as causing a potentially adverse balance sheet translation difference.

Increases in interest rates will make South African corporate funding more expensive, with an adverse impact on profitability.

Higher inflation rates may affect Group profitability where these cost increases cannot be controlled or additional productivity associated with those is not forthcoming.

Lower inflation rates may make long-term property leases, with higher fixed escalation rates, appear expensive and potentially affect profitability.

South African consumer behaviour appears to be more affected by sudden changes in economic variables, including exchange rates and local interest and inflation rates, than by gradual changes in these variables. It follows that a sudden deterioration in one or several of these economic variables may dampen levels of consumer expenditure, thereby reducing sales growth and potentially Chain or Group profitability too.
All direct foreign exchange trading liabilities are covered forward, resulting in certainty about the expected landed cost of merchandise and also providing a four to six-month buffer against changing the cost of imported inventory should there be any sudden deterioration in the exchange rate. The value of inventory in the supply chain between manufacturer and retailer has also been actively managed lower by all industry participants. This reduces the extent of any imported inventory that is over- or undervalued following a sudden change in the exchange rate.

Interest rates on the Group’s medium-term debt is fixed to provide certainty as to the future cost of this funding, and this will keep the Group immune to any adverse increases in corporate borrowing rates.

Where possible, property lease escalation rates are negotiated as low as possible, taking market conditions into account, and certain older property leases have been renegotiated to be inflation-linked, within a cap (maximum rate) and collar (minimum rate).

Salary and wage increases are negotiated in the context of the current South African socio-economic environment, and where a negotiated increase may be higher than is suitable, productivity measures may be introduced to reduce the net cost of the higher wages.
Insufficient progress with transformation
There is the possibility of adverse or undue reputational exposure due to the Chains or the Group not fulfilling, or underdelivering on, BEE requirements. In the broader national context, inadequate transformation at all levels by us or other South African businesses will curb the country’s longer-term growth potential and maintain the current unacceptable and unsustainable levels of social and economic inequality.

This issue specifically includes insufficient black representation at Group and Chain executive level.
The Board-approved BEE strategy, dated February 2004 and covering all the elements of the Code of Good Practice, has been effectively implemented group-wide and we believe that much progress has been achieved in little time.

A BEE share issue amounting to 10% of the pre-dilution shares of Massmart was announced in May 2006 and is effective 1 October 2006. All permanent Massmart employees, not already participants in the current share trust, are beneficiaries. The rights awarded to general staff have voting and dividend rights.
Fraud, security and crime
There is the risk of human, financial and reputational exposure through high levels of inventory shrinkage, armed robberies for cash or merchandise, and losses from fraud, both internal and external. The rate of armed and violent incidents of crime has increased to unacceptable levels. Unchecked, this can adversely affect employees, customers, the business and the overall business environment.The Group is continually improving its procedures and controls to ensure that the risk of potential losses or injury through criminal incidents is minimised. Massmart is also an active participant in the Business Against Crime/ECR forum that shares information on all incidents of crime across the major retail chains. There is a whistle-blowing facility, Tipoffs Anonymous, through which employees, customers or suppliers can report unethical or dishonest acts. Staff fraud is dealt with severely.
Game stores in Africa
Game has nine stores in sub-Saharan Africa, and another three to be opened in the next year. The level of complexity unavoidably increases with the greater distances involved, the associated communication and logistical challenges and the multiple regulatory environments. There is also the increased exposure to foreign currencies and the related potential volatility of Randreported sales and earnings. There is the small and unpredictable risk that a store’s earnings, assets and/or inventory may be seized or prevented from being accessed by Massmart.A thorough country pre-evaluation, which must include transparent foreign exchange repatriation, before agreeing to enter each country. There is a dedicated team, led by a senior executive, responsible for all Game’s African stores. The risk diversifies slightly with multiple African stores.

Sustainability Committee

The Sustainability Committee comprises Messrs KK Combi (Chairman), Dods Brand, Michael Rubin, Grant Pattison and Brian Leroni (Group Corporate Affairs Executive), and Mmes Phumzile Langeni, Dawn Mokhobo.

The role of the Committee is to assist the Group to discharge its business sustainability responsibility with respect to the implementation of practices that are consistent with good corporate citizenship.

Executive Committee

The Massmart Executive Committee is the most senior executive decision-making body in the Group. The Committee is chaired by the Chief Executive Officer (Mark Lamberti) and comprises the Chief Financial Officer (Guy Hayward), the Chief Executive Officer Designate (Grant Pattison), the Chief Operating Officer (Fanus Nothnagel), the Deputy Chief Financial Officer (Aubrey Cimring), the Group Organisational Executive (Steve Glendinning) and the four Divisional Chief Executives (Robin Wright, Richard Potash, Joe Owens and Kevin Vyvyan-Day).

The Committee deliberates, takes decisions or makes recommendations on all matters of strategy and operations. Within the parameters described by the Board-approved Governance Authorities, the decisions or recommendations are sometimes referred to the Board or its relevant committee for final approval, while in other cases the power to take decisions is delegated to individual subsidiary boards, or subsidiary executive committees.

The Executive Committee has specific responsibility, inter alia, for:

  • Monitoring and measuring the structures, trends and performance of markets and competition;
  • Strategic planning;
  • Defining, configuring, financing and structuring the Group’s portfolio of assets;
  • Shaping and approving the competitive strategies, operating plans and budgets of the divisions and functional departments;
  • Measuring, monitoring and taking proactive corrective action on divisional performance;
  • Ensuring adequate risk management, controls and governance throughout the Group; and
  • Shaping and approving succession plans and senior executive management appointments.

In many respects, the relationship between the Massmart Board and the Executive Committee is analogous to the Supervisory Board and Management Board relationship found in the European governance model.

Remuneration of directors and executives

Massmart strives for remuneration policies that enable it to recruit, retain and motivate the executive talent needed to achieve superior performance. The Nomination and Remuneration Committee, with periodic advice from external executive remuneration consultants, ensures the provision of executive remuneration packages that are competitive with reference to other major South African retail companies, as well as other companies similar to Massmart in their size, spread and complexity.

The Massmart remuneration policy strives for fixed remuneration at the median of comparable positions, but places particular emphasis on generous annual incentives for high performance for both executive directors and executive management. This policy, communicated to and understood by the Group’s executives, codifies a range of performance incentives linked to annual earnings-per-share growth targets for the Group in excess of average CPIX plus 10%, or profit before tax targets for each division, as appropriate. During the year, for the first time, an incentive bonus was instituted for non-financial performance. Starting in 2006 Group and Divisional Executives will be incentivised on the achievement of employment equity targets approved by the Nomination and Remuneration Committee. This incentive will amount to between one and three months’ salary in addition to the earnings per share/ profit before tax growth bonuses, less than nine months salary. The Nomination and Remuneration Committee also has the discretion to reward superior individual performance.

In addition, longer-term equity incentive plans ensure the alignment of executive reward with shareholders’ interests, in particular the sustained creation of shareholder value. New issues of annual allocations of shares or options are only allowed when Massmart’s growth in earnings per share in the prior year exceeds average CPIX plus 10%. The amount allocated is based upon a factor of the executive’s total prior year remuneration plus incentive bonus.

With effect from July 2002, only members of the Massmart Executive Committee can elect to receive scheme shares, whilst all other participants receive options.

Non-executive directors receive fees in the top quartile for their role as directors and members and for their roles on Board Committees.

Details of individual directors’ remuneration are provided here.

Shareholder communication

We strive to provide generous and frequent disclosure to our shareholders, regardless of how hard this may be in periods of difficulty or underperformance.

Massmart reports formally to shareholders twice a year (in February and August) when its half-year and full-year results, together with an Executive Review, are announced and issued to shareholders and the media. On both occasions the Chief Executive Officer, Chief Financial Officer and selected senior management give presentations to institutional investors, analysts and the media.

Early in January and July, shortly after the conclusion of the half-year and full-year trading periods, on release of the annual report and at the Group’s annual general meeting in November, Massmart releases trading statements reporting on the Group’s year-to-date sales performance.

During the year, apart from closed periods, the Chief Executive Officer, Chief Executive Officer Designate and Chief Financial Officer meet regularly, but never alone, with institutional shareholders and, in addition, are available for meetings with analysts and any existing or prospective Massmart shareholder.

Massmart’s website, www.massmart.co.za, provides financial and business information about the Group and includes electronic copies of all recent formal announcements, public statements and presentations made by Massmart.

Share buy-back programme

In the previous financial years, the shareholders in general meeting gave the Group the authority – valid until this year’s annual general meeting and subject to the Listings Requirements of the JSE Limited (“the JSE”) – to purchase its own shares up to a maximum of 15% of the issued shares, at a price not greater than 10% above the preceding five-day weighted average. Shareholders have been asked to renew this authority at the forthcoming November 2006 annual general meeting.

No shares were repurchased in the year to June 2006. The amount and timing of any future purchases will be determined by the Board and are dependent on prevailing market conditions and other factors. The share trust will acquire shares from time to time to partially mitigate the dilution caused by the Company issuing new shares when options are exercised.

Share dealings

No director, executive or employee may deal, directly or indirectly, in Massmart shares where that person may be aware of unpublished price-sensitive information. There are strict closed periods during which all directors, executives and employees are not allowed to deal in Massmart shares. The periods begin one month prior to the end of each reporting date (these reporting dates being 31 December and 30 June) and end on release of the Group results. A closed period also applies whenever Massmart issues a cautionary announcement.

In addition, all directors, executives and employees are not allowed to deal in Massmart shares in the final hour of trading on the JSE. All share dealings by a director, executive or employee must be authorised by either the Chief Executive Officer or Chief Financial Officer. Any dealings by the Chief Executive Officer are authorised by the Chairman.

Accountability, risk and control

The Board recognises its responsibility to report a balanced and accurate assessment of the Group’s financial results and position, its business, operations and prospects. Aspects of how this is achieved are covered in the section below.

Internal control framework

Massmart maintains clear principles and procedures designed to achieve accountability and control across the Group. These are codified in the Governance and Approvals Framework that describes the specific levels of authority and the required approvals necessary for all major decisions at both Group and divisional level. Through this framework, operational and financial responsibility is formally and clearly delegated to the divisional and Chain boards. This is designed to maintain an appropriate control environment within the constraints of Board-approved strategies and budgets, while providing the necessary local autonomy for day-to-day operations.

Audit Committee

The Audit Committee receives regular reports on Group companies’ financial performance, internal controls, adherence to accounting policies and areas of significant risk, amongst others. After considering these reports, the Committee formally reports to the Board, twice each year, regarding the overall framework and effectiveness of controls.

Internal Audit

Massmart Internal Audit comprises a dedicated team of 30 staff that, although managed from Massmart Corporate, is deployed group-wide. The responsibilities of Internal Audit are defined and governed by a Charter approved by the Audit Committee and Board. The Head of the Massmart Internal Audit department reports functionally to the Audit Committee, to ensure the department’s independence, and reports only administratively to the Chief Financial Officer. Internal Audit has unfettered access to the Board and all information within the Massmart Group. All functions across all operating divisions are subject to review by Internal Audit and all employees are required to cooperate positively. The Internal Audit team comprises appropriately qualified and experienced personnel, including internal audit professionals and managers with retail experience, to ensure the delivery of a relevant and high quality service.

Massmart Internal Audit applies a risk-based audit approach that aligns its audit methodology to the internal and, where applicable, external risks facing Massmart. The annual audit plan, which is pre-approved by the Audit Committee, is determined through a continuous assessment and understanding of risks facing the Group. Where necessary some audit tasks are outsourced to consultants with appropriate skills, for example certain forensic work or highly specialised IT reviews. Internal Audit utilises audit programmes and technologies which are designed and selected after assessing the significant business, strategic and control risks. The results of these programmes provide audit assurance regarding the adequacy and effectiveness of controls. In addition to providing this assurance, Massmart Internal Audit applies its knowledge and understanding to advise local and executive management on best practice processes and controls that could be implemented to improve overall effectiveness and efficiency.

The Internal Audit team, which has the unequivocal support of the Board and the Audit Committee, on a quarterly basis formally reports any material findings and matters of significance to the Divisional Boards and the Audit Committee. The reports highlight whether actual or potential risks to business are being appropriately managed and controlled. Progress in addressing previous unsatisfactory audit findings is monitored until Internal Audit can report the proper resolution of the problem area. In addition, the Head of Internal Audit formally attends all Divisional Board meetings twice per annum and provides an advisory role to both the Risk Committee and the Ethics Committee.

There is significant Internal Audit involvement in Information Technology throughout the Group in order to ensure satisfactory IT governance and assurance. All new major IT systems in the Group require specific Massmart Internal Audit sign off prior to implementation. The Internal Audit role is twofold – to assess the process and controls around large IT projects at significant phases of these projects; and to assess the control environment within existing IT systems and the Group’s general computer control environment.

Massmart Internal Audit and External Audit scope and efforts are properly coordinated in order to provide efficient and effective assurance to the Audit Committee.

Risk

The Board assesses the risks in the Group’s business environment, with a view to eliminating or reducing them in the context of the Group’s strategies and operations.

Litigation and legal

In the normal course of business, Massmart is subject to various legal proceedings, actions and claims. These matters are subject to risks and uncertainties that cannot be reliably predicted. The Board does not believe that there is any material pending or threatened legal action.

Information technology

Protecting Massmart’s electronic assets is increasingly complex as networks, systems and electronic data expand and, in some cases, are shared with third parties and business partnerships. Depending on the internet for communication brings additional risk. Ensuring proper system security, data integrity and business continuity is the responsibility of the Board, but is given effect by the Audit Committee, the Risk Committee, the Massmart Technology, Information and Process Forum and Massmart’s formally contracted information technology business partners and providers.

Financial risk and appraisal

Financial targets agreed in Group budgets and strategy processes are predicated on assumptions about the future that are uncertain and may prove incorrect or inaccurate. The monitoring and management of this risk is the responsibility of the Executive Committee. Monthly performance is measured and compared to the budget and prior year, and corrective or remedial action taken as appropriate.

Despite extensive financial, accounting and management controls and procedures, including reviews by internal and external auditors, there are risks arising from the Group’s cash management and treasury operations, direct and indirect taxation, and employee or third-party fraud or economic crime.

Corporate ethics and compliance

Massmart is committed to achieving the highest standards of ethical behaviour and continued its strong emphasis on promoting awareness of, and compliance with, Massmart’s Code of Ethical Practice.

Massmart maintained its close relationship with the Ethics Institute of South Africa and a further three employees attended the Ethics Officers Certification course and two more employees were accredited as ethics officers. Furthermore, the Institute requested that Massmart provide material for an ethics case study that is to be included in a booklet that will be distributed by the United Nations to multinational companies and governments around the world.

The appointment of ethics officers in all chains, including the recently acquired Massbuild division, and the formulation and regular meeting of the Group Ethics Forum have ensured the continued focus on the consistent application of ethics practice and training in the organisation.

The Massmart Ethics Line provides an important indication of the status of the ethics climate in Massmart. The fully independent line, the operation of which is outsourced to Deloitte & Touche, provides employees and suppliers with the opportunity to report perceived cases of unethical practice. All reports received are thoroughly investigated and acted upon under the guidance of the Group Ethics Officer who is accountable, from an ethics perspective, to the Massmart Audit Committee.

For the year under review it was pleasing that the awareness of the Ethics Line improved considerably with total calls for the year 93% higher than the previous year and the increase in calls related to alleged criminal activity increasing 85% on the previous year. All criminal calls were investigated and ten of these led to the termination of the employment of the individuals concerned. In certain cases, an independent forensic auditing company is retained to oversee investigations of crime related calls in order to improve the likelihood of successful criminal conviction in a court of law.

Summary of calls to the Massmart Ethics Line from July 2005 to June 2006

Period Total
calls
Crime
related
calls
HR
related
calls
Other
calls
Anony-
mous
calls
July26 1 520 40%
August39 1 335 50%
September29 6 320 67%
October50 12 1226 38%
November47 0 2225 64%
December23 4 514 55%
January18 2 79 89%
February24 3 714 60%
February33 3 1317 50%
April48 7 1328 55%
May45 6 1326 58%
June46 3 835 82%
Total428 48 111269