Corporate Governance

INTRODUCTION

ETHICAL LEADERSHIP AND GOOD CORPORATE GOVERNANCE

The AECI Board fully subscribes to the statement that “good corporate governance makes good business sense” and consequently, in the year under review, the Board sought to streamline a number of its processes and bring the Company towards full compliance with King III and other best practices.

The Board’s approach to corporate governance is anchored in the Company’s values.

Corporate governance in AECI is managed through three broad, distinct but interconnected pillars:

• compliance management;
• risk management; and
• internal and external assurance.

This overview deals with the three pillars in terms of:

• landscape requirements detailing what is required of a company in order to “conform, comply or adhere” to best practice. These requirements include relevant legislation, Codes and frameworks;
• structures in place to facilitate management of the landscape requirements;
• efforts undertaken by the Group in the year under review;
• governance status as at year-end; and
• governance outlook for the year ahead.

REVIEW OF 2011 KEY FOCUS AREAS

Progress was made in all of the areas identified for attention in 2011, namely:

• to continue to evaluate the implications and implement the principles of King III;
• a continued focus on strategic issues at Board level;
• a continued focus on corporate social responsibility and integrated sustainability matters including the development of Group employees and Transformation;
• the identification and management of business risks;
• the development and formalising of a succession plan for Executive Directors and Senior Management;
• continued training relevant to the Group’s Code of Ethics, whistle blowing and competition matters; and
• continued training and development of Non-Executive Directors.

GOVERNANCE LANDSCAPE REQUIREMENTS

COMPLIANCE MANAGEMENT

In a changing governance landscape, companies operating in South Africa need to review their compliance structures and processes on an ongoing basis.

The new Companies Act for example, places additional compliance requirements on companies. The King III Report and Code require adherence to their principles with regard to integrated reporting.

The Consumer Protection Act, as another example, requires that consumers be protected in all dealings with institutions. AECI’s efforts to respond appropriately to such changes were sustained in 2011.

RISK MANAGEMENT

The Board firmly believes that effective risk management is key to AECI achieving its strategic goals in a sustainable manner. By understanding and properly managing our risks, we provide greater certainty and security for our employees, customers, shareholders and other stakeholders and are better informed and more decisive in moving with greater confidence towards our goals.

The Board recognises risk management as a key business tool to assess the balance between risk and reward in current and new businesses. Risk management aims to protect the Group against hazards and uncertainties which may prevent the achievement of business goals and strategic objectives.

INTERNAL AND EXTERNAL ASSURANCE

AECI’s current landscape is detailed in the About this Report section (“Assurance and Comparability”) and in the Risk Measurement and Management (“Assurance”).

STRUCTURES

In line with the Companies Act, AECI’s corporate governance and processes are led by the Board supported by six sub-Committees:

• Audit Committee
• Risk Committee
• Social and Ethics Committee
• Remuneration Committee
• Nominations Committee
• Executive Committee

THE BOARD OF DIRECTORS

The AECI Board comprises a majority of Independent Non-Executive Directors and it operates with a unitary structure that provides for interaction among all of its members in the decision making process on strategy, planning and performance, allocation of resources, business ethics, risk management and communication with stakeholders. The Board exercises control through a governance framework that includes appropriate reporting to the Board and its Committees. In 2011 the Board approved a delegation matrix that formally sets out the authority limits for itself and Management.

The Board is committed to building a diverse and appropriately skilled Board and accordingly it appointed Ms LL Mda in 2011 as an Independent Non-Executive Director. The AECI Board is now comprised of 11 Directors, nine of whom as at the date of this Report are Independent Non-Executives and two are Executives. We believe this represents a balanced Board that is in line with best practice guidelines and has a representative set of skills and experience that will benefit the Board as a whole in its oversight role.

The guidelines in the JSE Listings Requirements were used to determine whether the Directors were Independent. Mr S Engelbrecht met all the criteria for independence from 5 March 2012, when he sold directly beneficial ordinary shares held by him in the Company and exercised his outstanding options as detailed in note 31 . The current Board members are:

Independent Non-Executive Directors

1. F Titi (Chairman)
2. RMW Dunne
3. S Engelbrecht
4. Z Fuphe
5. MJ Leeming
6. LL Mda
7. AJ Morgan
8. LM Nyhonyha
9. R Ramashia

Executive Directors

1. GN Edwards (Chief Executive)
2. KM Kathan (Financial Director and Chief Financial Officer)

A balance of skills and experience, gender and demographic representation is taken into account in determining an effective composition of the Board. Board appointments are done in accordance with a formal Appointment Policy which includes proper screening of candidates, formal interviews conducted by the Nominations Committee and the completion of a Director’s declaration by successful applicants.

The Board is comprised of persons with experience in diverse industries including banking, chemicals, technical and accounting. The Board is of the opinion that having Directors with relevant business and industry experience is beneficial to the Board as a whole, since Directors with such backgrounds can provide a useful perspective on significant risks and competitive advantages as well as an understanding of the challenges facing the business.

The Board monitors the mix of skills and experience of Directors to assess whether the Board is optimally placed to perform its oversight function effectively. The Board will continue to review the skills, knowledge, gender and diversity at Board level to ensure that the mix is appropriate and effective and takes into account succession plans for Non-Executive and Executive Directors.

The expectation of the Board is that, at a minimum, Directors should possess the requisite knowledge and expertise to fulfill an appropriate role within the mix of capabilities the Board deems appropriate and to exercise diligence. This includes attending Board and Committee meetings and coming prepared to provide thoughtful input at such meetings. Directors need to devote an appropriate amount of time and attention to their duties and to develop the broad-based as well as the specific knowledge required to fulfill their obligations in this regard.

Directors are expected to:

• prepare for and attend all Board meetings and all meetings of Committees of which they are members, unless there are exceptional circumstances preventing them from doing so;
• participate actively in meetings;
• attend shareholders’ meetings;
• develop and maintain a high level of knowledge about the Company’s business;
• keep current in their own fields of expertise; and
• develop a broad understanding of their role and responsibilities as Directors.

Directors are expected to ensure that they have sufficient time available to properly carry out their duties and responsibilities as Directors of the Company. Non-Executive Directors in particular are required to carefully assess and guard against potential conflicts of interest and involvement with an excessive number of Boards.

It is regarded as critical that Directors have sufficient information to enable them to make informed decisions and therefore the Board continually reviews the information requirements of Directors to enable them to fulfill their duties and responsibilities effectively. Directors are informed timeously of matters that will be discussed at Board meetings and are provided with information relating thereto. Board meetings are structured to encourage participation and dialogue and to ensure effective decision making.

Submissions relevant to the agendas of Board and Committee meetings are sent to Directors and Committee members about a week in advance of meetings. All submissions and matters discussed at meetings are strictly confidential.

The annual strategy session is usually held in May of each year and is designed to facilitate the review of the Company’s medium- and long-term strategic plans and priorities. The Board meets at least quarterly and on other occasions when necessary. There were five Board meetings during the 2011 financial year. Attendance by Directors at Board meetings is set out in the Corporate Governance of this Report.

The Company’s Articles of Association require a minimum of six and a maximum of 12 Directors, the majority of whom should be Independent. Between Annual General Meetings the Board may appoint a Director/s to fill casual vacancies or as an additional Director by majority vote to serve until the next Annual General Meeting.

One third of the Directors are subject, by rotation, to retirement and re-election at the Annual General Meeting in terms of the Company’s Articles of Association. The names of Directors submitted for re-election are accompanied by brief biographical details to enable shareholders to make an informed decision in respect of their re-election.

Directors who will present themselves for re-election at the forthcoming Annual General Meeting are:

• LL Mda
• AJ Morgan
• R Ramashia

Executive Directors are employees of the Company and have standard terms and conditions of employment. They do not receive any special remuneration or other benefits for their additional duties as Directors. Neither of the Executive Directors has an employment contract with a notice period longer than one month or special termination benefits and there is no restraint of trade in place. The Board, on the recommendation of the Remuneration Committee, determines the remuneration of Executive Directors and other Senior Managers as underpinned by the remuneration philosophy of the Company. No Non-Executive Director has an employment contract with the Company. Non-Executive Directors’ remuneration is arrived at after an annual benchmarking exercise performed by the Chief Executive and the approval by shareholders of the proposed fees.

In terms of the Board charter, Directors must be assessed individually as well as collectively as a Board. The collective assessment of the Board must evaluate the Board’s contribution as a whole and, specifically, it must review areas in which the functions of the Board could be improved.

In 2010 a Board assessment was undertaken by an external party. Such an assessment is performed every three years. In the intervening years, a self-assessment is conducted by the Board. Accordingly, after confirming the corporate strategy with the Chairman and the Chief Executive, arrangements were made for a self-evaluation process to be undertaken assessing 45 key performance indicators. This was aimed at giving Board members the opportunity to express their individual opinions on and assessment of the performance of the Board and its Committees. The Board received feedback at its meeting in February 2012. Based on the areas identified as being of concern to Directors, action plans are being developed to address these appropriately.

The emphasis is always on development, growth and the meeting of future challenges, both for individual Board members and for the Board as a whole.

Key performance indicators used in the assessment process were, inter alia:

• the quality and overall effectiveness of Board meetings;
• the information available to Board members to support decision making;
• the Board’s role in the formulation and approval of business strategy;
• the Board’s evaluation of the Chief Executive and the planning for succession;
• an evaluation of the Board’s structure in terms of its Executive and Non-Executive components; and
• the suitability of the Board’s composition and that of the Committees. Composition is re-evaluated on an ongoing basis to ensure a balance between the competencies of Directors and the areas of responsibility covered by the Committees.

The Remuneration Committee, in consultation with the Chairman of the Board, evaluates the Chief Executive on a regular basis. The evaluation is based on objective criteria including business performance, achievement of long-term strategic objectives, the development of Managers and other such issues. The Remuneration Committee provides feedback to the full Board.

Through the Board assessment process, the Board also evaluates the performance of the Chairman of the Board and the Chairmen of the Board Committees on an annual basis.

The Board operates under an approved Board charter which regulates the way business is conducted. The Board charter provides a clear division of responsibilities and sets out the accountability of Board members collectively and individually to ensure an appropriate balance of power and authority.

In terms of the Board charter the primary responsibilities of the Board are:

• to provide strategic direction to the Company;
• to determine the Company’s purpose, values and stakeholders relevant to its business and to develop strategies combining all three elements;
• to ensure that procedures are in place to monitor and evaluate the implementation of strategies, policies, performance criteria for Senior Managers and business plans;
• to review and approve financial objectives, plans and actions, including significant capital allocations and expenditure;
• to define its mission as representing the interests of the Company and its stakeholders in perpetuating a successful business that adheres to the vision and values of the Company and creates long-term value for stakeholders;
• to be accountable and responsible to stakeholders for the performance and affairs of the Company;
• to appoint the Chief Executive, other Executive Directors and the Company Secretary and ensure that succession is planned;
• to ensure that the Company complies with all relevant laws and regulations and that it communicates with its stakeholders openly with substance prevailing over form;
• to assess the key risk areas of the business on a regular basis and to determine the policies and processes necessary to ensure the integrity of internal control and risk management in the Company;
• to develop the framework, policies and guidelines for safety, health and environmental management and other matters relating to sustainability and to monitor key indicators of performance in this field;
• to define levels of materiality, reserving specific powers for itself and delegating other matters with written authority to Management; and
• to establish and set the terms of reference for Committees of the Board.

The following matters, inter alia, are reserved for decision by the Board on the basis of any recommendation as may be made from time to time by the Executive Committee or other Committees:

• approval of the Company’s strategy and monitoring the implementation thereof;
• adoption of any significant change to or departure from Accounting Policies;
• changes to the Board and its Committees;
• exercise of borrowing powers;
• approval of the declaration of distributions to shareholders;
• approval of budgets on an annual basis;
• capital funding: terms and conditions of rights issues, capital issues or issues of convertible stock including shares or stock issued for acquisitions;
• community investment: approval of annual budgets and special/extraordinary single contributions in excess of R5 million;
• approval of employee share incentive/ option schemes, rules and amendments to rules as recommended by the Remuneration Committee;
• formulation or approval of recommended policies relating to Employment Equity;
• investments, fixed assets and capital projects: commitments, acquisitions or disposals in excess of limits specified by the Board from time to time;
• litigation: prosecution, defense or settlement of, where material and except in the ordinary course of business;
• Pension and/or Provident Funds: approval of rules and amendments thereto having a material effect on the actuarial liabilities of the Funds where applicable;
• prioritisation of resources: prioritising the allocation of capital and technical and human resources; and
• any other matters the Board deems necessary it should decide on.

To the extent that they may require such access to make informed decisions, Board members have unrestricted access to the Company’s records, information, documents and property. In addition, Board members have unrestricted access to consult Senior Management on any aspect of the Company’s operations. Finally, Board members may collectively or individually, at the expense of the Company, consult external professional advisors on any matter of concern to the Company after having advised the
Chief Executive or Chairman.

For the Board to function effectively, the resources necessary for developing and refreshing the knowledge and skills of Non-Executive Directors must be provided.
To this end, all Non-Executive Directors have an open invitation to visit the operations of the Company and to meet with Management. The objective is to ensure that Non-Executive Directors are able to obtain as full an understanding of the Company’s operations as possible in order to make informed decisions and hence enhance the effectiveness of the Board.

The Company has procedures for the induction and training of Directors to ensure that they are aware of their statutory duties, obligations and potential liabilities. The Company Secretary has compiled Directors’ manuals which are updated on a regular basis and there are site visits arranged to operating companies across the Group.

The Company Secretary further provides Directors with updates on regulations and statutory matters at each Board meeting.

The Board has approved the delegation of authority to the Executive Committee and to other Committees, where appropriate.

The appointment and removal of the Company Secretary is a matter for the Board as a whole. The Company Secretary advises the Board on the appropriate procedures for the management of meetings and the implementation of governance procedures and is further responsible for providing the Board collectively, and each Director individually, with guidance on the discharge of their responsibilities in terms of legislation and regulatory requirements applicable to the Company. The Company Secretary monitors Directors’ dealings in securities and ensures adherence to “closed periods” for share trading.

On 1 June 2011 the Board appointed Ms EN Rapoo as the Company Secretary to oversee the portfolio of secretariat, legal services, risk and compliance management. Ms Rapoo replaced Mr EA Rea who was acting in this capacity. The Board has access to the Company Secretary who provides guidance on how Directors’ duties and responsibilities should be discharged in the best interests of the Company. In the year under review, the Company Secretary has overseen the induction and ongoing informal training of Board members and assisted the Board and its Committees in the formulation of annual plans, agendas, minutes and terms of reference.

BOARD COMMITTEES

In line with the provisions of the Companies Act the Board reconstituted the Corporate Citizenship Committee as the Social and Ethics Committee in 2011. The Board has established six Committees through which it discharges its mandate. The Committees submit reports to each Board meeting detailing progress on activities undertaken. All members of Board Committees are elected by the Board. Members of the Audit Committee are confirmed by shareholders at the Annual General Meeting.

Each Committee has written terms of reference under which authority is delegated by the Board. The composition and responsibilities of each Committee are summarised here. Attendance at Board and Committee meetings by Directors, during their tenure as Directors in 2011, is disclosed in the Corporate Governance.

The Audit Committee is comprised of four Independent Non-Executive Directors. The Audit Committee’s statutory duties, as set out in the Companies Act, include inter alia, considering the Company’s Annual and Interim Financial Statements, its Accounting Policies as well as its mechanisms for safeguarding Company assets.

The Audit Committee met four times in the year under review. Both the internal and external auditors have unrestricted access to the Chairman of the Audit Committee and may meet privately with the Committee if required. The report of the Audit Committee, including more details on its responsibilities.

Current members of Audit Committee are:

• MJ Leeming (Chairman)
• RMW Dunne
• AJ Morgan
• LM Nyhonyha

Composition

The Risk Committee comprises three Independent Non-Executive Directors, two Executive Directors and five Executive Committee members. In view of the number of portfolios that Mr Dunne held in Board structures, the Board elected Mr Morgan to succeed Mr Dunne as Chairman of the Risk Committee in 2011. Messrs Dunne and Engelbrecht resigned from the Risk Committee at the end of the year. The Company Secretary attends all meetings as secretary.

The Risk Committee’s mandate includes reviewing and assessing risk and compliance management processes, including safety, health and environmental management. For the period under review, the Committee focused on monitoring the entrenchment of the risk management process in the Group and also initiated an integrated process of compliance management across Group companies.

The latter project will continue in 2012. The Risk Committee met four times in 2011. Its members are:

• AJ Morgan (Chairman)
• JAA Diepenbroek *
• RMW Dunne ^#
• MA Dytor *
• GN Edwards*†
• S Engelbrecht ^#
• KM Kathan *†
• TJ Louw *
• EE Ludick *
• LL Mda
• R Ramashia
• SM Venter *

* Member of the Executive Committee.
† Executive Director.
^# Resigned on 21 November 2011.

Responsibilities

The Committee’s responsibilities are, inter alia:

• establishing and maintaining a common understanding of the risk universe that needs to be addressed in order to achieve corporate objectives;
• reviewing and confirming, at least annually, the levels of tolerable risk and the risk profile of the Company;
• coordinating the Company’s risk management and assurance efforts;
• considering the results of the assurance efforts and ensuring that appropriate action is taken as required;
• assisting the Board in overseeing its duties relating to the identification of risk and the assessment of the effectiveness of risk management in the AECI Group. Risk in the widest sense includes issues such as market risk, credit risk, liquidity risk, operational risk and commercial risk, which together may cover detailed combined risk;
• reviewing risk identification and measurement methodologies;
• reviewing and assessing the integrity of the risk control systems and ensuring that risk policies and strategies are managed effectively;
• monitoring external developments relating to corporate accountability, including but not limited to emerging and prospective impacts;
• setting out the nature, role and responsibility and function of risk management in the AECI Group;
• reviewing the impact that significant litigation could have on the AECI Group;
• reviewing the adequacy of the Company’s insurance coverage;
• liaising closely with the Audit Committee to exchange information relevant to risk;
• expressing the Committee’s formal opinion to the Board on the effectiveness of the system and process of risk management;
• reviewing information pertaining to risk management that is to be included in stakeholder reports in order to ensure that such information is timely, comprehensive and relevant;
• monitoring procedures to deal with and review the disclosure of information to stakeholders; and
• assessing the performance and effectiveness of the Committee and its members on a regular basis.

Composition

The Social and Ethics Committee is comprised of five members, four of whom, including the Chairman, are Independent Non-Executive Directors. The Company Secretary attends all meetings as secretary and the Chief Financial Officer attends by invitation. The Group Technical and Safety, Health and Environment Manager and the Group Human Resources Manager are also in attendance at meetings. Three meetings were held in 2011.

Current members of the Committee are:

• LM Nyhonyha (Chairman)
• GN Edwards
• Z Fuphe
• MJ Leeming
• R Ramashia

In addition to ensuring compliance with relevant legislation, the Committee’s responsibilities are:

• to consider, formulate and recommend to the Board policies and implementation plans in the areas of:
  – Broad-based Black Economic Empowerment;
  – Employment Equity, including education and training;
  – corporate social investment;
  – ethical business conduct; and
  – safety, occupational health and environmental practice and performance;
  
• to monitor and advance the implementation of policies and plans approved by the Board regarding these matters; and
• to assess the performance and effectiveness of the Committee and its members on a regular basis.

Composition

The Remuneration Committee comprises three Independent Non-Executive Directors. The Committee meets at least twice per year and additional meetings are scheduled as the Committee deems appropriate. Three meetings were held in 2011. The Chief Executive and Chief Financial Officer attend by invitation when necessary to discuss the remuneration of Executive Directors and Senior Management. The Company Secretary attends all meetings as secretary. The Company’s Remuneration Report, including details on the Remuneration Committee’s responsibilities is published in the Remuneration Report.

Current members of the Committee are:

• RMW Dunne (Chairman)
• S Engelbrecht
• F Titi

Composition

The Nominations Committee comprises three Independent Non-Executive Directors.

The Committee meets at least twice per year and additional meeting are scheduled as the Committee deems appropriate. Three meetings were held in 2011. The Company Secretary attends all meetings as secretary. In accordance with the recommendations of King III, the Chief Executive attends by invitation when necessary to discuss Senior Management appointments and succession plans.

Current members of the Committee are:

• F Titi (Chairman)
• RMW Dunne
• S Engelbrecht

Responsibilities

Responsibilities of the Committee are, inter alia:

• reviewing the Board structure, size, composition and balance between Executive and Non-Executive Directors and making recommendations to the Board regarding adjustments that are deemed appropriate;
• making recommendations to the Board on the reappointment of Non-Executive Directors and the balance between Executive and Non-Executive Directors;
• identifying and recommending for Board approval Executive and Non-Executive candidates for appointment to the Board;
• ensuring that plans for succession are in place, particularly for the Chairman and the Chief Executive; and
• assessing the performance and effectiveness of the Committee and its members on a regular basis.

Composition

The Executive Committee is constituted to assist the Chief Executive in managing the Group. Subject to matters reserved for decision by the Board, the Chief Executive’s authority in managing the Group is unrestricted. The Board has delegated the day-to-day running of the Company to the Chief Executive who works with other Executive Committee members to assist him in this task. The Executive Committee is the highest executive decision making structure in AECI. Its role is focused on formulating and implementing the Group’s strategy and policies and ensuring that business activities are aligned in this respect.

The operational framework of businesses in the Group is a decentralised one, known in AECI as “Freedom supported by a Framework”. Most operating businesses have their own Boards and management structures and decision making is in line with the provisions of the Group’s delegation matrix.

The AECI Executive Committee comprises all the Executive Directors who hold office from time to time, together with such Senior Managers as the Board may appoint from time to time. The Committee meets once a month and the Company Secretary attends as secretary. Details of the members of the Executive Committee.

Responsibilities

The responsibilities of the Chief Executive are, inter alia:

• implementing the strategies and policies of the Group;
• managing the Group’s business and affairs;
• prioritising the allocation of capital and technical and human resources;
• establishing best management practices and standards;
• appointing Senior Managers and assessing their performance;
• making recommendations to the Board on matters which are reserved for decision by the Board, including the fees payable to Non-Executive Directors; and
• assessing the performance and effectiveness of the Committee and its members on a regular basis.

2011 ATTENDANCE: BOARD AND COMMITTEE MEETINGS

1 Chairman.
2 Attendance by invitation.
3 Appointed to the Board on 1 April 2011.
4 Appointed to the Risk Committee on 4 October 2011.

CORPORATE GOVERNANCE PROGRESS IN 2011

COMPLIANCE MANAGEMENT

In the year under review the Company established a compliance function apart from its Legal Department with the specific aim of formalising and integrating the Group’s compliance processes. The objective is to establish a system to facilitate the effectiveness and efficiency of Group operations and assist with general compliance with the regulatory universe in an integrated manner. Work is ongoing in this regard and is aimed at ensuring that AECI is not adversely exposed to legal and compliance risks.

Further progress towards achieving compliance with many of the principles of King III was made and a compliance framework was designed and distributed to the Board for guidance and monitoring.

The Company has conducted a gap analysis on its adherence to King III. The table below provides a detailed analysis of adherence. In future years, only progress in adherence to those principles not fully met in 2011 will be reported.

KING III INDEX

With regard to the new Companies Act, the Board endorsed a plan to achieve full compliance with this Act.

With regard to the JSE Listings Requirements, Management reviewed the changes to the rules and regulations and the implications of these were presented to the Board to confirm common understanding.

An impact analysis of the Consumer Protection Act was conducted and business contracts were realigned with this Act where necessary. Training on the provisions of the Act was conducted for relevant staff.

In the area of stakeholder engagement, which is highly valued by the Board, the formalising of stakeholder identification processes will be pursued in 2012. The objective is to enhance the Company’s understanding of the information needs of key stakeholders in order to address these needs in its reporting processes. To ensure transparency, risk information affecting stakeholders will continue to be shared with stakeholders without compromising commercially privileged information.

RISK MANAGEMENT

Risk management is pivotal to good governance. The Group’s efforts in measuring and managing risks were extensive in the year under review. The output of these efforts was used, inter alia, to determine material issues for inclusion and discussion in this Integrated Report. Accordingly, detailed risk-related commentary is included separately.

ACCOUNTABILITY AND INTERNAL CONTROL

The Directors are required in terms of the Companies Act and the JSE Listings Requirements to prepare Annual Financial Statements which fairly present the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss for that period in conformity with IFRS. The Company’s external auditors are responsible for examining the Annual Financial Statements of the Company and its subsidiaries and for reporting their opinion on these Statements to shareholders. Furthermore, the external auditors must determine whether the Annual Financial Statements are in accordance with the Act, IFRS and the JSE Listings Requirements.

Following discussions with the external auditors the Directors consider that, in preparing the Financial Statements, the Company has consistently used appropriate Accounting Policies supported by reasonable and prudent judgemeSnt and estimates. All applicable international accounting standards have been followed. The Directors have formally reviewed the budgets and forecasts of the businesses and have concluded that the Group will continue in business for the foreseeable future. Accordingly, the going concern basis of accounting remains appropriate.

The Directors are also responsible for maintaining adequate accounting records and they have general responsibility for ensuring that an effective risk management process is in place to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

To enable the Directors to meet these responsibilities, management sets standards and implements systems of risk management and internal control aimed at reducing the risk of error or loss in a cost-effective manner. The Company’s Internal Audit function independently appraises the Group companies’ internal control and reports directly to the Audit Committee.

In addition, the Management of each operating business submits an annual Letter of Assurance to the Audit Committee of the Company affirming that the internal control in entities for which they have responsibility is adequate for their operations.

The Directors are of the opinion, based on the information and explanations given by Management, the internal auditors and the external auditors, that during the year there were no material breakdowns of internal controls and that these controls are adequate so that the financial records may be relied on for preparing the Financial Statements and maintaining accountability for assets and liabilities. The Directors believe that assets are insured appropriately and are used as intended with appropriate authorisation.

ETHICS

The AECI Code of Ethics and Business Conduct (“the Code”) is designed to provide clear guidelines for engaging with all stakeholders associated with AECI and its businesses. The Code sets out five values that drive the ethical and responsible business conduct that is expected of all AECI and related businesses’ employees and other stakeholders. These values are supported by underlying principles and they in turn give rise to specific “do’s” and “don’ts”.

Through the Code, AECI has adopted and upholds the highest ethical standards to be reflected in the way it conducts its business. The Code is supported by, and should be interpreted against the backdrop of all relevant legislation in the countries in which the Group operates, the regulatory environment applicable to the various industries served by Group businesses and AECI’s internal controls and systems, policies, standards and procedures.

A formal review of the Code was completed in 2011 and the redrafted Code was approved by the Board. The Code is available on AECI’s website via the link http://www.aeci.co.za/ pdf/policy_documents/code_of_ethics_3.pdf The Code can only be amended by the Board. It is reviewed every three years, or more often if necessary.

A service known as Tip-offs Anonymous is in place and it was reinvigorated to good effect in 2011. The number of legitimate issues and concerns reported doubled, albeit off a low base, and were dealt with as appropriate by the Financial Director and the Head of Internal Audit.

The service is aimed at enabling employees, customers, suppliers and/or other stakeholders, on a confidential basis, to raise concern in cases where conduct is deemed to be contrary to ethical behaviour and AECI’s Code. The service is administered by Deloitte & Touche. Therefore, it is totally independent of AECI and the anonymity of individuals reporting fraud or dishonest and inappropriate behaviour is protected. Tip-offs Anonymous is a useful component of the Group’s efforts to deal with theft, fraud and other misconduct in a professional manner.

The Group has adopted a formal Conflicts of Interest Policy which it updated in 2011 and all employees with the ability to bind the Company (contractually or otherwise) are required to complete and submit a Conflicts of Interest Declaration.

The Group does not engage in or accept or condone engaging in any illegal acts in the conduct of its business. The Group’s policy is to actively pursue and encourage prosecution of perpetrators of fraudulent or other illegal activities should it become aware of any such acts. A zero tolerance approach has been adopted.
Formal training for all employees on the Group’s Code of Ethics, the whistle blowing service and other applicable policies is conducted on an ongoing basis.

In accordance with the JSE Listings Requirements, AECI has adopted a Trading in Securities Policy. In terms of the Policy there is a “closed period” that endures from the end of the financial reporting period until the publication of financial results for this period. Additional closed periods may be declared from time to time if circumstances so warrant.

During closed periods Directors and designated employees are prohibited from dealing in the Company’s securities, either directly or indirectly. Identified employees are advised to that effect. The Company Secretary advises the Directors of all the closed periods.

Dealings in securities by Directors and Officers of the Company require prior approval by the Chairman or the Chief Executive, depending on the person dealing in the securities. Any share dealings by Directors and Officers of the Company are notified to the JSE for publication via the Securities Exchange News Service (“SENS”).

The Group also has in place an Information Disclosure and Communications Policy designed to:

• record AECI’s procedures with regard to communicating with the media, the investment community, securities professionals and other stakeholders to avoid selective disclosure of material information; and
• govern the disclosure of price sensitive information to the public in a broad, comprehensive and lawful manner

This Policy has been brought to the attention of all AECI employees and must be adhered to by them.

The Company has in place Directors’ and Officers’ liability insurance which provides some cover against legal action by third parties.

The Company’s Chief Executive, Financial Director and members of the Executive Committee conduct timely presentations on the Group’s performance and strategy to analysts, institutional investors and the media in South Africa.

Presentations, corporate actions and reports on performance, as well as any other information deemed relevant, are published on the Company’s website. Shareholders and other stakeholders are advised of such newly published items via SENS. Other information on the Company, such as inter alia its Management and history is also available on the website. The website address is www.aeci.co.za

The Company currently publishes and reports on details of its corporate actions and performance, including its half- and full-year Financial Results, in at least one daily national English newspaper and in one daily national Afrikaans newspaper.

AECI’s Communications function maintains regular contact with the media by disseminating relevant information.

The Chairman of the Board and the Chairmen of Board Committees met formally with investors in 2010 without Executive Directors or any Senior Management representatives being present. This practice will continue and a meeting for 2012 has been scheduled.

All Non-Executive Directors are invited to attend the Company’s financial and business-specific presentations.

2011 CONCLUSION

The Board is satisfied that in the 2011 financial year, its decision-making capability and the accuracy of the Company’s reporting and financial results were maintained at a high level at all times with reliance being placed on the internal and external auditors and on the Audit and Risk Committees to raise any issues of finance- and risk-related concerns.

The Company strives constantly to develop and improve existing corporate governance structures and practices to achieve full compliance with the recommendations of King III, other good governance practices and changes in legislation.

CORPORATE GOVERNANCE KEY FOCUS AREAS FOR 2012

In matters of compliance AECI will:

• continue to evaluate the implications and implement the principles of King III;
• maintain a focus on strategic issues at Board level;
• further develop its understanding of the legislative universe and prioritise relevant instruments in this regard;
• improve and maintain relationships, based on trust and transparency, with all regulators;
• continue to evaluate and manage business risks;
• develop and formalise a succession plan for Executive Directors and Senior Management;
• continue the training relevant to the Group’s Code of Ethics, whistle blowing and competition matters;
• continue the training and development of Non-Executive Directors;
• work with individuals designated as risk and compliance champions in AECI’s businesses to enhance risk controls and ensure full compliance; and
• continue training and awareness relevant to the Consumer Protection Act.

In matters of risk management the Board and the Executive Committee will:

• focus on further refining the Company’s risk appetite and risk-bearing capacity to fully entrench the management of the business in the context of the Group’s tolerance levels;
• implement a fully automated risk management system throughout the Group, which will further streamline and embed the risk management process;
• further integrate audit findings and suitable responses thereto into the risk management process;
• continue to enable a Group structure that ensures optimal performance in terms of good corporate governance in support of the entrepreneurial spirit of the business;
• continue to monitor the cost base to enable competitiveness;
• pursue finalisation of a new Water Use Licence for the Modderfontein site, to the mutual satisfaction of the relevant authorities and the Company;
• continue monitoring safety, health and environmental issues, as well as the integrity of key production facilities;
• continue to provide excellent products and customer service in an increasingly competitive environment characterised by skills shortages; and
• maintain the focus on attracting and retaining talented and competent people.

IN MATTERS OF INTERNAL ASSURANCE THE COMPANY WILL:

• review its IT policies and the governance thereof; and
• focus on implementing its compliance plan.