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Corporate governance
In the opinion of the Board, good corporate governance is fundamental to the relationship between the Company and its stakeholders. The Group is fully committed to the principles of openness, integrity, accountability and sustainability, which are essential for good corporate governance, in its interactions with shareholders and all other stakeholders. All directors endorse the King III Code. In addition, the Board has adopted the principles of corporate governance contained in the Combined Code on Corporate Governance issued in 2006 by the UK Financial Reporting Council (the "Combined Code") for UK companies.
Throughout the year ended 28 February 2011 and up to the date of approval of this integrated report and annual financial statements, the principles articulated in the King III Code have been applied or, if not applied, explanations are noted in the appropriate section of the Group's integrated report. In addition the Company complied with the provisions set out in Section 1 of the Combined Code during that period.
The Board
The Board of Directors is the Group's governing body. At 28 February 2011, the Board consisted of eight directors, two being executive directors and six non-executive directors who are independent as defined in the JSE Listings Requirements.
The non-executive directors draw on their experience, skills and business acumen to ensure impartial and objective viewpoints in decision-making processes and standards of conduct. The directors consider the mix of technical, entrepreneurial, financial and business skills of the directors to be balanced, thus enhancing the effectiveness of the Board.
Stephen Davidson is the non-executive Chairman and Jens Montanana is the Chief Executive Officer. The separation of these two roles ensures a balance of authority and precludes any one director from exercising unfettered powers of decision making. Nick Temple is the senior independent non-executive director.
The Board formally evaluates the independence of the non-executive directors annually having due regard to the relevant factors which might impair independence. The result of the evaluation during the year under review is that the Board considered all its non-executive directors to be independent. The evaluation had particular regard to the fact that Chris Seabrooke has served on the board for more than nine years but the Board was of the unanimous opinion that this fact did not compromise his independence in any way and noted that his input to Board meetings clearly demonstrates his continuing independence.
The Board retains full and effective control over the Group and monitors the executive management and decisions in the subsidiary companies. The Board's responsibilities include: the adoption of strategic plans; monitoring of operational performance and management; determination of policy and processes to ensure the integrity of the Group's risk management and internal controls; communications policy; and director selection, orientation and evaluation. The responsibilities of the Board are set out in full in its Charter. The Charter was comprehensively reviewed and updated in the light of the King III Code and the new Companies Act of 2008. The directors are of the opinion that they have adhered to the terms of reference set out in the Board Charter for the financial year ended 28 February 2011.
To fulfil their responsibilities adequately, directors have unrestricted access to timely financial and other information, records and documents relating to the Group. During the year, the Board received presentations from the management teams of its major subsidiaries enabling it to explore specific issues and developments in greater depth. Directors are provided with guidelines regarding their duties and responsibilities as directors and a formal orientation programme has been established to familiarise incoming directors with information about the Group's business, competitive posture and strategic plans and objectives.
At the request of the Group, our American director, John McCartney, continues to fill the role of non-executive director of Westcon Group, Inc. in New York and is separately remunerated for those services. The Board has determined that this does not in any way impinge on his independence on the Datatec Board.
The Board reviews its own performance and that of its committees annually by means of questionnaires completed by individual directors and discussed at Board and committee meetings. These appraisals enable the Board to evaluate its performance objectively and to determine that it is operating effectively under the terms of reference set down in its Charter.
Under the Company's articles of association a third of the directors retire by rotation each year and are eligible for re-election by shareholders at the Annual General Meeting. At the 2011 Annual General Meeting, Mr Davidson, Mr Montanana and Mr Temple will retire by rotation and, being eligible, will offer themselves for re-election. On behalf of the Board, the senior independent non-executive director confirms that on the basis of the annual evaluation of the Chairman, the performance and commitment of Mr Davidson throughout his period of office have been highly satisfactory. On behalf of the Board, the Chairman confirms that on the basis of the annual evaluation of the Board and of the performance of individual directors, the performance and commitment of both Mr Montanana and Mr Temple throughout their periods of office have been highly satisfactory.
The Board unanimously recommends the reappointment of Mr Davidson, Mr Montanana and Mr Temple and recommends shareholders vote in favour of their reappointment at the Annual General Meeting.
Also at the 2011 Annual General Meeting a resolution to ratify the appointment of Ms Ighodaro as a director will be proposed. On behalf of the Board, the Chairman confirms that on the basis of the annual evaluation of the Board and of the performance of individual directors, the performance and commitment of Ms Ighodaro throughout her period of office have been highly satisfactory.
The Board therefore unanimously recommends the ratification of the appointment of Ms Ighodaro and recommends shareholders vote in favour of her ratification as a director at the Annual General Meeting.
The Board has established three committees to assist it with its duties:
· Audit, Risk and Compliance Committee
· Remuneration Committee
· Nomination Committee
Governance and committees
Audit, Risk and Compliance Committee
The Audit, Risk and Compliance Committee comprises three independent non-executive directors:
· Chris Seabrooke (Chairman)
· Funke Ighodaro
· Wiseman Nkuhlu
The committee considers its chairman, Mr Seabrooke, to be designated the financially qualified member. The financial qualifications of the committee members are:
Chris Seabrooke - Bachelor of Commerce and Bachelor of Accountancy degrees from Natal University, an MBA from the University of the Witwatersrand and a Fellow of the UK Institute of Cost and Management Accountants ("FCMA").
Funke Ighodaro - Fellow of the Institute of Chartered Accountants in England and Wales ("FCA")
Wiseman Nkuhlu - Bachelor of Commerce degree from the University of Fort Hare, Chartered Accountant (South Africa), MBA from the University of New York.
The chairman of the Company, Mr Davidson, served as one of the committee members until 31 August 2010 when Ms Ighodaro replaced him on the committee. He continues to attend Audit, Risk and Compliance Committee meetings as an invitee as his contribution and his wide experience and qualifications are valued by the committee which considers that his involvement as an invitee improves the level of governance in the Company overall.
The committee operates within defined terms of reference as set out in its Charter and authority granted to it by the Board and meets at least three times a year, when the external auditors, the internal auditors, the Company Chairman (as noted above), Chief Executive Officer and the Chief Financial Officer are invited to attend. The external and internal auditors have unrestricted access to the Audit, Risk and Compliance Committee and meet with the committee members, without management present, at least once a year.
The committee reviews its performance annually by means of questionnaires completed by individual committee members and attendees which are then discussed at Board and committee meetings. These appraisals enable the committee to evaluate its effectiveness objectively and to conclude that it is operating effectively under the terms of reference set down in its Charter.
The committee is satisfied that it has met its responsibilities for the year under review and to the date of this report with respect to its terms of reference. The committee's Charter is available on the Group's website (www.datatec.co.za) or from the Company Secretary. Furthermore the committee is satisfied that it has complied with its legal and regulatory responsibilities throughout that period.
The principal functions of the committee are: to review the annual financial statements, the half-yearly results announcement and other financial reports; monitor the effectiveness of internal controls and comment on the state of the internal control environment (see later in this report); assess the risks facing the business and review the Group's risk management procedures; discuss the findings and recommendations of the internal and external auditors; review the internal and external audit plans; and to review the effectiveness of the internal and external auditors. The chairman of the committee reports on the committee's activities at each Board meeting.
Datatec's operating subsidiary companies have financial review and compliance committees, chaired by the Datatec CEO. Full reports from these sub-committees are submitted to the Datatec Audit, Risk and Compliance Committee which retains all the functions of an audit committee in respect of these subsidiaries. The chairman of the Audit, Risk and Compliance Committee is invited to attend the subcommittee meetings.
The Audit, Risk and Compliance Committee reviews the operation of the Group's internal audit function (described in more detail later in this report) and annually reviews the internal audit charter and recommends it to the Board.
The Audit, Risk and Compliance Committee is responsible for selecting the external auditor and recommending its appointment to the shareholders. The committee monitors the external auditor as described in more detail later in this report.
As required by the JSE Listings Requirements, the Audit, Risk and Compliance Committee annually considers and satisfies itself of the appropriateness of the expertise and experience of the Chief Financial Officer. Furthermore, the committee considers annually the appropriateness of the expertise and adequacy of resources of the Group's finance function and the experience of senior management responsible for the finance function. For the year under review the committee has satisfied itself on this point.
The committee assists the Board in reviewing the risk management process and significant risks facing the Group. The committee sets the Group's risk strategy in liaison with the executive directors and senior management, making use of generally recognised risk management and internal control models and frameworks in order to maintain a sound system of risk management and internal control as described later in this report.
The committee identifies and monitors, at least annually, key performance indicators and key risks, including operational, physical, human resources, technology, continuity, credit, market and compliance risks.
The chairman of the Audit, Risk and Compliance Committee will be available at the Annual General Meeting to answer queries about the work of the committee.
Remuneration Committee
The Remuneration Committee operates under terms defined in its Charter, which has been approved by the Board and can be obtained from the Company's website: www.datatec-group.com. The role of the committee is to assist the Board to ensure that the Company remunerates directors and executives fairly and responsibly in alignment with the creation of long-term shareholder value and to ensure that the disclosure of director and senior management remuneration is accurate, complete and transparent.
The committee must perform all the functions necessary to fulfil its role including the following:
• oversee the setting and administering of remuneration at all levels in the company;
• determine, agree and develop the Company's general policy on executive and senior management remuneration so that it will promote the achievement of strategic objectives and encourage individual performance;
• ensure that the remuneration policy is put to a non-binding advisory vote at the general meeting of shareholders once every year;
• determine specific remuneration packages for executive directors of the Company, including basic salary, benefits in kind, annual performance-based bonuses, share incentives and pensions ensuring that the mix of these remuneration elements meets the Company's needs and strategic objectives;
• determine any criteria necessary to measure the performance of executive directors in discharging their functions and responsibilities and review the outcomes of the implementation of the remuneration policy for whether the set objectives are being achieved;
• give the executive directors every encouragement to enhance the Company's performance and to ensure that they are fairly, but responsibly, rewarded for their individual contributions and performance;
• review the terms and conditions of executive directors' service agreements, taking into account information from comparable companies when relevant;
• determine any grants to executive directors and other senior employees made pursuant to the Company's share schemes and satisfy itself as to the accuracy of recorded performance measures that govern the vesting of incentives;
• select an appropriate comparative group when comparing remuneration levels;
• regularly review incentive schemes to ensure continued contribution to shareholder value and that these are administered in terms of the rules;
· advise on the remuneration of non-executive directors; and
• oversee the preparation of, and recommend to the Board, the remuneration report, to be included in the integrated report.
The Remuneration Committee employs the services of specialist consultants in the field of executive remuneration to assist it when necessary. The consultants who have been retained in this role to date are Towers Watson and PricewaterhouseCoopers.
The composition of the Remuneration Committee during the 2011 financial year was:
· Stephen Davidson (Chairman)
· Chris Seabrooke
· Nick Temple
· John McCartney
The Board has elected not to apply the King III recommendation that the Chairman of the Board should not also chair the Remuneration Committee.
The Board is of the view that the Company's corporate governance and the effectiveness of the Remuneration Committee are best served by the Board Chairman also chairing the Remuneration Committee in view of the high level of ongoing interaction between the Chairman and the CEO and the resultant comprehensive knowledge of the Group's executives and their performance by the Chairman.
During the year ended 28 February 2011, the Remuneration Committee worked on the following specific matters in addition to its normal annual programme:
• Changes to the variable pay/basic pay balance for executive directors
• Proposed changes to the structure of the Group's share-based remuneration plan, including removing the retesting and increasing the performance conditions
· Proposed changes to the structure of the DBP.
These matters are all explained in detail in the remuneration section of the report.
The Chief Executive Officer and the Chief Financial Officer may be invited to attend meetings of the Remuneration Committee but neither may take part in any discussions regarding their own remuneration. External advisers are used to provide information and advice as required.
Nomination Committee
The Nomination Committee currently consists of the following independent non-executive directors:
· Stephen Davidson (Chairman)
· John McCartney
· Chris Seabrooke
· Nick Temple
The committee operates within defined terms of reference as set out in its Charter, and authority granted to it by the Board and meets at least once a year. The Chief Executive Officer and Chief Financial Officer may be invited to attend these meetings, but neither may take any part in decisions regarding their own succession. The committee is satisfied that it has met its responsibilities for the year with respect to its terms of reference. The committee's Charter is available on the Group's website (www.datatec-group.com) or from the Company Secretary. The committee is responsible for making recommendations to the Board regarding the appointment of new executive and non-executive directors and makes recommendations on the composition of the Board generally. The committee ensures that director appointments are formal and transparent and oversees succession planning for the Board and senior management.
The chairman of the committee reports on the committee's activities at each Board meeting. The chairman of the committee will be available at the Annual General Meeting to answer questions about the committee's work.
Social and ethics committee
The Board has noted the requirements for the establishment of a social and ethics committee under the new Companies Act. The Board intends to establish such a committee and draft its Charter during the financial year ending 29 February 2012. It is intended that the committee will be chaired by Prof Nkuhlu and comprise in addition the CEO, Mr Montanana and CFO, Mr Dittrich.
Company Secretary
All directors have access to the advice and services of the Company Secretary and are entitled and authorised to seek independent and professional advice about affairs of the Group at the Group's expense. The Company Secretary is responsible for the duties set out in section 88 of the Companies Act. Datatec Management Services (Pty) Limited, a South African company, is the legal entity which is the Company Secretary. This company is managed by Simon Morris. The certificate required to be signed in terms of subsection 88(2)(e) of the Act appears in this report.
Risk management
The Board is responsible for the total process of risk management and has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. The risk management process involves the identification of the key risks facing the business and the implementation of controls to mitigate the risks where possible. The Board obtains assurance that the controls over the identified risks are operating effectively by means of external and internal assurance providers including the external auditors, internal auditors and other professional advisers as well as from management itself. During the 2011 financial year the Board implemented a formal combined assurance framework in order to co-ordinate and monitor the provision of assurance. The Board sets the level of risk tolerance and limits of risk appetite for Datatec as part of its strategic direction of the Group. In evaluating the risk of acquiring new businesses and entering new geographies as well as directing the development of existing businesses, the Board takes a prudent approach to risk informed by many years of experience in the Group's main business streams. The Board also draws on the experience of its non-executive directors in other fields of business in setting the Group's approach to risk in a wider context. The Board is responsible for the total process of risk management and has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. The Board and the Audit, Risk and Compliance Committee monitor risk management activities as a standard item on their agendas and actively participate in discussions around risk topics raised.
Each of the significant subsidiaries of Datatec regularly reviews their strategic risks and has followed a consistent approach by identifying and prioritising high-risk areas according to standard risk rating guidelines based on impact and likelihood. Impact ratings are broadly defined in terms of the following assessment criteria: financial thresholds; operational impacts; regulatory compliance; customer and community impacts; employee impacts and reputational impacts. Similarly, likelihood ratings are defined in terms of the overall likelihood of a risk materialising. These criteria form the basis for allocating ratings that prioritise risks on a "risk map" grid with low impact, low probability risks at the bottom left hand corner and high impact, high probability risks at the top right hand corner. Each subsidiary group maintains a record of its risk assessment in the form of a "risk register" and Datatec also maintains a Group-level register. The risk registers and risk maps are reviewed twice a year by the financial reporting and compliance committees of the subsidiary divisions and by the Audit Risk and Compliance Committee.
High-risk areas are further analysed to identify potential root causes. This allows Datatec to better understand the contexts within which risks occur and identify probable areas for risk mitigation and organisational control. Risks across all aspects of the Group's sphere of operations are considered including financial, market, political, and operational risks as well as social, ethical and environmental risks.
Mitigating controls and associated monitoring/assurance activities have been identified for each high-risk area. In addition, responsible executive level staff members are assigned to monitor and manage specific risk areas on behalf of the Group on an ongoing basis. During the year ended 28 February 2011, the Group implemented a combined assurance framework to ensure these assurance activities are properly co-ordinated and therefore that adequate assurance is obtained that the controls in place over the identified risks are operating effectively. The combined assurance approach is explained further below.
Simon Morris, Group Corporate Director and Company Secretary, is also the Chief Risk Officer.
The Group reports annually on key risk areas identified by the risk assessment processes described above.
Financial and internal control
The Board has applied Principle C.2 of the Combined Code in its approach to risk management and internal control throughout the financial year under review and up to the date of approval of the annual report and accounts in accordance with the revised guidance. The Group's internal control and accounting systems are designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial information and to safeguard, verify and maintain accountability of its revenues and assets. These controls are implemented and maintained by skilled Company personnel.
In accordance with Provision C.2.1 of the Combined Code, the Board is able to report that procedures are in place for monitoring and evaluating the effectiveness of the internal controls. These procedures, incorporating internal and external assurance providers, are co-ordinated and assessed by the combined assurance framework introduced during the financial year under review which is described in more detail below.
Local management is required to complete and submit control self-assessment programmes annually and management is monitored against internal control norms in all Group companies. Action is taken where ratings are considered to be inadequate. Ratings are also reviewed by the Audit, Risk and Compliance Committee.
In addition, there are documented and tested procedures in the major subsidiaries which will allow these subsidiaries to continue their critical business processes in the event of a disastrous incident impacting their activities. Such documented procedures are reviewed annually and, where weaknesses are identified, the relevant subsidiaries are required to rectify them.
The governance of information technology
The Board has ensured that the governance of IT is firmly embedded in its risk management culture by identifying IT risk as one of the risks to be managed across all operations (in addition to those identified by divisional management) with controls and assurance provision to be maintained and reviewed in the same way as for other risks. The Board has added a review of IT governance procedures operated by the Group's major divisions to its annual timetable so that it may carry out its IT-governance role.
The Board's review of IT governance procedures includes summary analysis of:
• All annual risk assessment and associated risk mitigation processes and techniques, performed at the division level
• All industry standard IT audits performed at the division level on a regular basis throughout the year
• Specific progress on any large-scale IT projects, as required.
Management reporting
The Group has established management reporting disciplines which include the preparation of annual budgets by operating entities. Monthly results and the financial status of operating entities are reported against approved budgets. Profit projections and cash flow forecasts are reviewed regularly, while working capital, borrowing facilities and bank covenant compliance are monitored on an ongoing basis. All financial reporting by the Group including external financial reporting and internal management reporting is generated from the same financial systems which are subject to the internal controls and risk management procedures described above.
Compliance framework and processes
Each division manages compliance with relevant laws and regulations which the Audit Risk and Compliance Committee has divided into the following broad categories for the purposes of monitoring compliance. These are considered to be the main themes/classes of legislation which contain the biggest risk to Datatec in the event of breach.
· Corporate law - Companies Acts, financial reporting
· Financial law - anti-money laundering, fraud
• Export regulations - trade sanctions, foreign corrupt practices
· Import regulations - including duty and VAT
· Taxation
· Securities law - insider dealing, stock exchange compliance
• Employment law - unfair dismissal, employment practices, health and safety
· Intellectual property, trademarks, patents
· Competition legislation
· Customer protection legislation.
Each category is considered in the risk assessment process and, if appropriate, the risk is recorded on the risk register and managed in accordance with the risk management procedures outlined above. The operating divisions' financial reporting and compliance committees report on each category of legislation above, noting whether any breaches of compliance have been identified.
Organisational integrity and ethics
The Group operates on a basis of decentralised management across numerous countries and a Code of Ethics has been approved by the directors and has been implemented through the Group. All employees are required to maintain the highest level of ethical standards in ensuring that the Group's business practices are conducted in a manner that, in all circumstances, is above reproach. The directors believe that the required ethical standards have been met during the year under review.
Datatec maintains a performance-driven culture of full disclosure and transparency in which individual employees assume responsibility for the actions of the business. The integrity of new appointees is assessed in the selection and promotion process and the basis of ethical conduct as set out in the Code of Ethics is entrenched in the Company culture.
All employees of the Group have been notified of a "whistle-blowing hotline" telephone number which is available to call to report anonymously any matter of concern. Any matter reported in this way is referred to the Audit, Risk and Compliance Committee which has in place a documented procedure for handling complaints made via the whistle-blowing hotline or in any other way.
No significant matters were reported on the whistle-blowing hotline during the year under review.
Management assurance
Management assurance forms part of the Group's combined assurance framework. The Board obtains a formal letter of assurance annually from each of its subsidiary divisions (supported by similar representations from the divisions' own subsidiaries) which provides the Board with assurance over the operation of the risk management processes described above, including the operation of internal controls over financial and IT risks, compliance with legislation, and their ethical and sustainable management of the business.
Share dealings
The Company has a share dealing code to regulate dealings by its directors and applicable employees in the Company's shares.
No Group director or employee may deal, directly or indirectly, in Datatec shares or derivative financial instruments on the basis of previously unpublished, price-sensitive information.
Restrictions are imposed upon directors and senior management in the trading of Datatec shares and upon all employees regarding the exercising of Datatec share-based incentives during certain "closed periods". In light of the JSE Listings Requirements, the insider trading laws and good corporate governance, the Datatec Remuneration Committee has advised that employees are not permitted to exercise their share options during closed periods or when in possession of unpublished price-sensitive or inside information relating to Datatec. The closed periods include the periods between Datatec's interim and financial year-end reporting times and the dates on which the relevant results are published, and any time when Datatec is trading under a cautionary announcement.
Employees may nonetheless on application, and at the sole discretion of the directors, be allowed to exercise their share options while Datatec is trading under a cautionary announcement provided that the JSE Listings Requirements and the relevant insider trading laws permit the exercise of options at the relevant time. Employees exercising their options in these circumstances will be required to sign a declaration confirming that they are not in possession of unpublished price-sensitive or inside information relating to Datatec.
Investor relations and shareholder communication
Datatec is committed to providing timely, transparent and full disclosure to all its stakeholders on both financial and non-financial matters.
The Group maintains a dialogue with its institutional shareholders via a planned programme of communications headed by the Chief Executive Officer and the Chief Financial Officer together with nominated investor relations management. These activities include regular meetings and presentations to analysts, institutional investors and the media in South Africa and the UK, as well as meeting twice a year with institutional investors after the release of the Group's interim and final results.
The Group's website (www.datatec-group.com) provides current and historical financial and other information on the Group including formal announcements, presentations, webcasts as well as annual reports. Datatec also disseminates information to stakeholders who subscribe to the Group's investor relations programme on the website. Press releases, announcements and notifications are distributed via email to subscribers as soon as they become publicly available.
Shareholders and their appointed representatives are encouraged to attend Datatec's Annual General Meeting, to vote on the resolutions placed before the meeting and to conduct relevant discussions with the Group's directors. As noted above, the chairmen of the Audit, Risk and Compliance Committee, Remuneration Committee and Nomination Committee attend the Annual General Meeting and are available to answer questions on the activities of the committees.
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