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Review from the chairperson of the audit and remuneration committees

The group strengthened its
forecasting model to monitor
its financial strength and
capacity to assume risk.
In the current difficult economic
environment, ensuring the
effective, but responsible,
incentivisation of key skills
was a core focus.
Stuart Morris
  Stuart Morris
 

A key consideration during the year was the introduction of King III which became effective on 1 March 2010, as well as the promulgation of the new Companies Act 2008, which came into effect from 1 May 2011.

  • Audit committee

    The audit committee considered the requirements of both the Code and the Act in line with its responsibilities. It has amended its board charter and work plan to address these requirements.

    Outside of these developments, during the year the audit committee worked closely with the board and risk committee on the key financial aspects of a number of pertinent matters within our business. Although some of these matters are discussed in other reviews in this integrated report, my review aims to address these from a financial and internal control perspective.

    Impairment of Construction Materials asset base

    The construction industry suffered a substantial slowdown, resulting in excess available capacity, including in the aggregates, sand and readymix concrete markets. This placed extreme downward pressure on volumes and prices within the group’s Construction Materials cluster.

    Practice requires that the carrying value of non-current assets, including property, plant and equipment and the undeveloped mining resources related to the ore body in the group’s fixed quarries are reviewed on an annual basis or when there is an indication of impairment. Estimating the recoverability of undeveloped mining resources in a market which presents little visibility and for an ore body which holds a life in excess of 40 years is therefore very complex.

    During the year, the audit committee worked closely with the group’s executive management during their process of determining the carrying value of the quarry-related assets and the subsequent verification of the impairment of this carrying value. The audit committee and board are satisfied that due caution was applied to the assessment of this impairment balance.

    Middle East – resolution of legacy items and approval of future strategy

    The group has an established presence in the Middle East with a track record of profitability and the establishment of an order book in the region of R4 billion as at June 2008. However, in late 2008 the Dubai market practically collapsed due to global market pressure, resulting in the cancellation of two of the group’s major contracts in January 2009.

    The impact was not only the loss of future work to be executed, but also the required commercial process to ensure an effective and timeous resolution of amounts due to the group on these contracts. Over the last two financial years, the group has spent a considerable amount of time negotiating with its two main clients on these contracts to ensure that the group is presented with a resolution which is acceptable to the board of directors in the preservation of shareholder value.

    Ensuring resolution of the debt payment terms, as well as evaluating the most responsible strategy for the group in the United Arab Emirates (UAE) required a substantial amount of time and resources from both the group’s executive and the Middle East business. To effectively understand the numerous challenges in the region and its potential financial impact, the board decided that certain audit and risk committee members should travel to the region to obtain first-hand understanding of the issues.

    I therefore travelled with members of the executive team and my fellow board member, John Job, to Dubai, Jordan and Qatar in June to address the following:

    The recoverability of the debts due on the cancelled and legacy contracts in Dubai
    A review of the Jordanian pipeline contract which incurred additional costs to implement corrective action
    The evaluation of business development opportunities in line with the group’s strategy to retain a presence in the Middle East

    Based on this visit and following continued interaction with the group’s executives during the year, the audit committee was comfortable to report back to the board that management’s actions to resolve these issues have been sound. It is also supportive of the group’s expansion into certain Middle East markets targeted by the group.

    Unwinding of a portion of the group’s broad-based black economic empowerment (BBBEE) transaction

    A key focus area for the group remained the effective management of the legal process relating to the unwind of a portion of its BBBEE ownership transaction held by the iLima Consortium. The challenge during the year was to ensure the group would maintain its BBBEE rating in terms of the Construction Sector scorecard post the unwind. The board allocated the overview of this process to the audit committee which established a sub-committee to consider, advise on and, where necessary, approve:

    The legal actions to be undertaken around the unwind process in the best interest of the group and its stakeholders while remaining sensitive to the imperative to have strong black shareholding
    The investigation into the options for a revised ownership BBBEE structure which will in time be presented to shareholders for final approval

    The audit committee considers this responsibility to be one of its key priorities. It is pleased with the progress made so far.

    Risk-bearing capacity model

    As is mentioned on page 101, during the year the group focused extensively on enhancing its risk management procedures by formalising the application of its risk-bearing capacity model. One of the four pillars of the model relates to the group’s financial strength to withstand changes in risk profiles in the group.

    The group’s finance function has an entrenched forecasting system which caters for the effects of the current order book as well as for opportunities available to the group on cash flow and liquidity. All these are evaluated along with their investment and financing requirements to present a consolidated group financial position.

    During the year, under the guidance of both the risk and audit committees, this financial forecasting model was strengthened and closely linked to the group’s risk-bearing capacity. This provides a powerful barometer to monitor the group’s financial strength and capacity to assume risk.

    The audit committee believes this rigorous interrogation of financial robustness and capacity is imperative to cater for the tough trading conditions which will continue to exist in our markets.

    Compliance

    The group currently operates in 22 countries and is required to adhere to a wide range of laws and regulations. A key focus area of the audit committee is the assessment of compliance with regard to finance and taxation disciplines. Compliance adherence continues to become more onerous on the group as both local and international authorities introduce additional requirements. To adhere to these in the context of a reducing headcount in line with the focus on cost control in difficult trading conditions, placed considerable pressure on the group. During the year, the audit committee monitored and was comfortable with the group’s progress in this regard.

  • Remuneration committee

    Effective incentivisation

    In the current difficult economic environment, ensuring the effective, but responsible, incentivisation of key skills was a core focus for the committee. To ensure the implementation of robust strategies to address this, the committee met quarterly as opposed to three times a year in previous years. Going forward, meetings will continue to be held quarterly.

    The committee developed a clear strategy to continue attracting, motivating and retaining key skills in the group against severe pressure on profitability.

    In line with this, the committee:

    Reviewed the remuneration incentive programme for the senior management of the group
    Approved payouts on both short and long term incentive programmes
    Approved salaried employees’ annual increases

    During the year, the committee made progress on all fronts by keeping overhead costs to a minimum through the approval of an annual increase of 6% for the group, which is reflective of weak markets and aligned to the lower end of industry expectations. It also approved reduced incentive payouts and reduced share appreciation rights scheme (SARs) allocations for senior management and a smaller black management share allocation. Employee feedback was generally positive, with employees understanding the constraints of current market conditions.

    The committee is in the process of reviewing alternative long term incentive programmes which will allow for more flexibility.

    Share appreciation rights scheme

    Another challenge for the committee was the inability of the share appreciation rights scheme to achieve its intended objective of motivating participants towards achieving long term shareholder value creation through sustained company performance due to the current underperformance of the share price. In line with this, a number of alternative incentive structures were proposed to the board post year end.

    Black management share scheme

    The black management scheme was introduced in 2005 as part of the group’s initial broad-based black economic empowerment (BBBEE) ownership structure. This scheme was created to benefit Group Five black managers in senior roles. The shares are held in trust and awarded to black managers on an annual basis. As mentioned, the committee had to approve a reduced allocation of black management shares per beneficiary as the total number of shares available is limited due to the number of recipients on this scheme increasing. The scheme terminates in calendar 2012 by which time all shares in the trust need to be allocated to black managers. The board is currently reviewing its BBBEE ownership strategy which will include considering options for black management acquisition and retention in the future.

    Appreciation

    I thank my fellow board members for their valued input and close working relationships. I have enjoyed working with you. To our chief financial officer, Cristina Teixeira, a special word of acknowledgment for the significant work and outstanding effort during the year from both her and her team. I would also like to acknowledge the excellent work achieved by the remuneration committee and the contribution by Junaid Allie, the group human resources director.

    The coming year will no doubt continue to present challenges to the group, but I am confident of facing these with the board and management team we have in place.

    SG (Stuart) Morris
    Non-executive chairperson of the audit and remuneration committees

    5 August 2011

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