The Board of directors of Pick n Pay Stores Limited (the Board) and senior management are committed to the highest standards of corporate governance and take pride in our high moral and ethical business standards. The Group is committed to sound and transparent business practices. The Board is committed to complying, in all material respects, with the principles contained in the King Code of Corporate Practices and Conduct (King III), as well as to the additional requirements for good corporate governance stipulated in the JSE SRI Index. We have performed a thorough review of the implications of King III and, where appropriate, the corporate governance structure has been amended to comply with the new code, which became effective on 1 March 2010. An overview of the Group’s corporate governance framework is provided below including a section dealing with the aspects of King III that are still under review.

A more comprehensive review with details of all board and committee charters, and roles and responsibilities of the Chairman, CEO and Managing Directors – is available in the Investor Relations section of our website (www.pnp.co.za).

This report applies to Pick n Pay Stores Limited and where applicable to Pick n Pay Holdings Limited. For corporate governance issues relating to Pick n Pay Holdings Limited only, click here.

Group structure

The Group is controlled by Pick n Pay Holdings Limited whose only investment is its 53.6% shareholding in Pick n Pay Stores Ltd. The Group has a flat organisational structure and overall responsibility lies with the Board. This Board appoints the CEO to be responsible for day-to-day operations of the Group and in discharging this responsibility, the CEO has split the operations of the Group into three separate divisions. The three divisions are: the Retail division, the Group Enterprises division and Franklins Australia. Each division has its own management board, to control daily operations. This flat Group structure enables local operations to take ownership of decision-making and to assume individual responsibility for their actions and success. The structure encourages personal growth and achievement, ensuring that initiative is enabled, identified and rewarded.

Enduring principles of Pick n Pay

The Board has a responsibility to ensure that the CEO and management do not depart from the following enduring principles that were applied by Raymond Ackerman while building the Group and which ensure that the spirit of Pick n Pay remains intact:

• Consumer sovereignty
• Striving for a flat organisational structure
• Where appropriate, maximising decentralisation of authority to enable local control
• Promoting from within, recruiting from outside only as an exception when specialist skills are required
• Maintaining a discount image
• Fighting collusion amongst suppliers, and rejecting collusion between retailers
• Maintaining strong cash balances for buying forward corporate governance on a rising market

The Board

The Board comprises seven non-executive directors and four executive directors. It is responsible for selecting a successful management team, approving corporate strategy, monitoring and assessing performance, and acting as a resource for management in matters of planning and policy. The Board is responsible for setting the governance policy and practices for the Group, and for appointing the Chairman and CEO, whose roles are separate. The Board meets four times a year to monitor the performance of the Group, its executive directors and senior management.

The Board performs an annual self-assessment of its performance and the results of this review are made available to the external auditors. The Board has a responsibility to ensure that internal controls over operations and finance have been implemented, are continuously monitored and are functioning effectively. The Board is not aware of and has not been informed of any issue that would suggest that internal controls have had a material breakdown during the financial year.

Appointment of directors

New appointments to the Board are considered by the Board as a whole, on the recommendation of the Nominations committee. When appointing a director, the Board considers the directors’ ability to lead, requisite knowledge, relevant experience and independence. It is important that the appointment ensures the necessary balance of power (majority of directors to be independent non-executives) and also introduces new skills and expertise to supplement and or replace existing skills and experience of board members.

Background and reference checks are performed by the Nominations committee before the nomination of a director. Experience of directors are presented in their CVs listed here. Directors serve three year terms after which they are required to retire at the AGM but may offer themselves for re-election. At the end of each three year term the director is evaluated by the Chairman and will only be put forward for re-election by mutual consent of the Chairman and the respective director.

The appointment of all directors to the Board requires shareholder approval at the AGM. On appointment to the Board a new director is required to retire and offer themselves for re-election to the Board by shareholders at the first AGM following their appointment.

Independence of non-executive directors

With the implementation of King III, all non-executive directors classified as independent will undergo an annual evaluation of their independence based on the guidelines provided by King III. Directors serving terms greater than nine years will undergo a rigorous review of their independence.

The majority of non-executive directors are independent in terms of King III. Gareth Ackerman and David Robins are not considered independent by virtue of their relationship with the Group’s ultimate controllingshareholder. The remaining non-executive directors are considered independent. The Board has considered the independence of Hugh Herman, Constance Nkosi and Ben van der Ross in light of their years of service and are satisfied that their independence remains intact.

As Gareth Ackerman (non-executive Chairman) is not independent, Hugh Herman has been appointed as Lead Independent Director (LID). All members of the Board have unfettered access to the LID when required.

Leadership development

The Chairman evaluates the performance of the CEO annually, which is then discussed with the non-executive directors. The evaluation is based on objective criteria including performance of the business, accomplishment of long-term strategic objectives and management development. The CEO reports to the Board on succession planning, with a defined succession plan in place should the CEO, MDs or any of the senior management personnel need to be replaced. The CEO’s recommendation for his successor is known by the Board at all times. Succession planning is also performed across the Group to ensure continuity of the business. The CEO reports annually to the Board on the Group’s programme and performance in respect of management development and employment equity.

Board committees

The Board is assisted by the following specialist committees: Audit, Risk and Compliance; Remuneration; Nominations; and Corporate Governance. Each committee has a formal charter which is reviewed annually by the Board. Detailed information on each of the committees is available from our website. A brief outline of the role and responsibility of each committee is provided below:

Audit, Risk and Compliance committee

For details on this committee, please refer to the Audit, Risk and Compliance committee report.

Remuneration committee

For details on the composition and the role of the Remuneration committee please refer to the Remuneration report.

Nominations committee

The Nominations committee is chaired by the Chairman and members are only non-executive directors. The committee identifies and evaluates potential candidates for appointment to the Board and has strict guidelines on the qualities required of directors. These qualities include being tough-minded, independent and objective, as well as being loyal to the principles and values upon which the Group is built.

Corporate Governance committee

The Corporate Governance committee is chaired by the Chairman and other members are non-executive directors and the Company Secretary. The committee ensures that corporate governance structures are in line with national and international standards, and are both appropriate and effective.

Accountability

The CEO is responsible and accountable to the Board for all Group operations, including Franklins from July 2010. He has a formal role description (with limits of authority) from the Board, which is reviewed and reaffirmed annually. The CEO, who manages the Retail management board, appoints a managing director (MD) of Franklins and a director of Group Enterprises to assist in discharging this responsibility. The duties and responsibilities of the MD and director are also detailed in a formal role description, together with limits of authority, which are approved and reviewed annually by the CEO.

The Chairman’s Executive committee (Exco), which comprises top management, helps the Board assess strategic opportunities and guides the management board’s on principles of strategy and policy.

The Group’s policy of decentralisation and flat organisational structure means that each region is managed autonomously. Each region has its own management team that manages operational, marketing and social responsibility budgets. Each store is responsible for its own results, responds individually to customer needs and is autonomous in its choice of social responsibility programmes.

Risk management

The Board has recognised the importance of an effective risk management process and has adopted an enterprise-wide approach to risk management. This has resulted in the Company investing in an Enterprise Risk Management (ERM) software package. Risks identified are captured and rated in the ERM package, which houses the Company’s risk register.

The Board is responsible and accountable for ensuring that adequate procedures and processes are in place to identify, assess, manage and monitor key business risks. The Board is assisted in its responsibilities by the Audit, Risk and Compliance committee, whose objective is to monitor, develop and communicate the process for managing risk across all divisions in the Group. The day-to-day responsibility for identifying, evaluating and managing risk resides with management. The risk management process, which is regularly assessed by the Audit, Risk and Compliance committee, involves a formalised system to identify and assess risk, both at a strategic and operational level. The process includes the evaluation of mitigating controls and other assurances in identifying and assessing the risks.

Risks are continually being identified and mitigated in terms of a process that involves allocating responsibility, developing action plans, and monitoring compliance with these action plans. Every employee has a role to play in this endeavour and in achieving the Group’s goals and objectives. Risks are monitored and reported upon at quarterly management meetings, and in the Audit, Risk and Compliance committee meetings. The Group’s annual internal audit plan incorporates the outcomes of the risk management process. Group Risk and Assurance Services (internal audit) provides a risk identification facilitation role. Management is responsible for managing risks on a daily and operational basis. The Group has developed a culture of identifying and managing risk. The internal audit plan is based on a risk-based audit approach.

The Group’s assets are insured against loss, with cover being taken out above predetermined self-insurance levels. In a disaster recovery circumstance, business continuity plans will ensure the business continues with the least amount of disruption, both from an information technology and operational viewpoint. These plans are reviewed and updated regularly.