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Remuneration committee report

The Remuneration Committee (the committee) presents the following report for the 2018 financial year.

This report sets out the committee’s governance and the company’s remuneration policy, which is divided into four sections.

Section 1 – Committee governance

Section 2 – Background statement

Section 3 – 2018 Remuneration policy

Section 4 – Implementation report

Section 1 – Committee governance

Composition

The members of the committee for the 2018 financial year were independent non-executive directors Harish Mehta (Chairman), Mike Hankinson and Phumla Mnganga, all of whom are independent non-executive directors. Their qualifications and experience are available here.

Meetings

The CEO attends meetings by standing invitation to make proposals and provide such information as the committee may require.

The committee met three times during the 2018 financial year. Members’ attendance at meetings was as follows:

		Attendance
Member	Status	14 Nov 2017	6 Feb 2018	7 Aug 2018
Harish Mehta (Chairman)	Independent non-executive	✓	✓	✓
Mike Hankinson	Independent non-executive	✓	✓	✓
Phumla Mnganga	Independent non-executive	✓	✓	✓

Members’ attendance was 100%.

Terms of reference

The committee executes its responsibilities in accordance with a formal terms of reference and work plan, which is reviewed annually and aligned with the King IV™ recommendations. No changes were made to the terms of reference since its last review in 2017.

The committee is satisfied that it has fulfilled its responsibilities in accordance with its terms of reference.

A copy of the committee’s terms of reference can be found here.

Section 2 – Background statement

Dear shareholders,

As members of the committee, our focus is to ensure that the company remunerates fairly, responsibly and transparently and in doing so annually reviews the company remuneration policy to ensure that it promotes the achievement of strategic objectives and encourages individual performance.

This report outlines the background, philosophy, policy and implementation details of the remuneration of non-executive directors, executive directors and all employees of the company.

The committee makes annual use of PricewaterhouseCoopers’ (PwC) executive and non-executive remuneration reports to provide insight into current remuneration practices and trends. This year the committee consulted with PwC to assist them with a benchmarking exercise of salaries, including looking at short-term and long-term incentives in order to ensure that the remuneration of executive management is fair and responsible in the context of overall employee remuneration.

Following the engagement with PwC:

the committee remained satisfied that the current short-term and long-term incentive schemes were appropriate; and
the benchmarking exercise revealed that executive guaranteed salary packages were approximately 20% below the market average.

The committee was satisfied that PwC was independent and objective with their advice.

During the 2018 financial year, the committee:

reviewed the company’s remuneration policy and implementation report for approval by the board, which will be put to a non-binding vote by shareholders at the 2019 annual general meeting (AGM). In the event that the remuneration policy and/or the implementation report is voted against by 25% or more of the voting rights exercised, management will engage with those shareholders to get an understanding of the reasons why and amend the remuneration policy and/or the implementation report to address any shortcomings, if necessary;
reviewed and approved the executive directors’ and executive committee members’ remuneration, performance and incentives bonuses;
approved the annual award of shares in terms of the group’s long-term conditional share plan, details of which are below;
approved the salary mandate to be implemented for the group’s employees;
considered the fees payable to non-executive directors for approval by shareholders, details of which are below; and
reviewed the King IV™ recommendations.

Executive management formally engaged with a number of the company’s top shareholders regarding the company’s remuneration policy before its 2018 AGM and were pleased with the 95.66% (2017: 94.49%) vote in favour of the remuneration policy and the 89.97% vote in favour of the implementation report.

No changes were made to the remuneration policy during the year under review. The committee is satisfied that remuneration in all forms accruing to employees at all levels is market-related and equitably awarded. In addition, the committee believes that the remuneration policy encompasses the objectives set out in the company’s remuneration philosophy.

Thank you to the members of the committee for their dedication and constructive contributions to the functioning of the committee.

Harish Mehta
Chairman of the Remuneration Committee
13 November 2018

Section 3 – 2018 Remuneration policy

Remuneration philosophy

SPAR’s employees are pivotal in meeting its strategic objectives in that SPAR is committed to paying fair, competitive and market-related remuneration to ensure that the company is able to attract and retain top-quality and talented employees. Our remuneration policy therefore seeks to:

position the remuneration levels appropriately and competitively in comparison with the labour market; and
acknowledge the contribution of individual employees by rewarding them for the successful achievement of company goals and objectives.

Apart from fixed remuneration, an element of variable remuneration that is aligned to value creation in the form of short and longer-term incentive schemes is also catered for and linked to the achievement and performance of specified targets and objectives, with payment being made from increased returns. This also assists in attracting and retaining key employees.

Process to determine remuneration

SPAR strives to ensure that remuneration is free of unfair discrimination. Fair differentiation based on performance and skills shortage is applied. The company takes cognisance of its external environment through an understanding of national remuneration trends and by regular benchmarking against comparable companies.

SPAR uses remuneration surveys conducted by reputable salary survey companies that have sufficient sample sizes and spread of positions, and an adequate representation in relevant industries comparable to SPAR. Salary scales provide remuneration guidelines based on the Paterson grading system and are informed by market comparisons. The company strives to remunerate key positions and those positions where there is a shortage of skills (as defined annually) on at least the 75th percentile of the market, and the rest of the positions on at least the 50th percentile of the market.

The use of a performance management system also ensures that there is a positive correlation between individual and team performance and remuneration earned. Management is responsible for managing remuneration and thus supporting the long-term sustainability of the company.

The committee is responsible for approving salary increases for executive directors and the executive committee. The CEO, together with the executive committee, is responsible for all employees below EU grade. The overall percentage increase for employees below EU grade is authorised by the committee. Salary increases are implemented:

on 1 January each year for all employees graded DU band and below who are not members of the bargaining unit;
on 1 October each year for employees graded EL band and above; and
as per collective agreements with the union(s) for employees in the bargaining unit.

Remuneration structure

SPAR’s remuneration structure consists of both guaranteed and variable remuneration. SPAR uses the Paterson grading methodology, which works as follows:

F	Chief Executive Officer
EL and EU	Executives
DU	High-level specialists/middle to high management
D	Management
CU	Lower-middle management
C	High-level skilled/clerical/supervisory
B	Clerical
A	Low-level skilled

Guaranteed remuneration and benefits

Non-management (A to C band) and management employees (D to EL band) remuneration

Salary and subsidised benefits (retirement and medical) form the guaranteed component of employees’ remuneration. The components are as follows:

Bands A to C receive a monthly salary and a guaranteed 13th cheque.
Bands D and above receive a monthly salary.
Other pensionable remuneration applicable to bands D and above includes a car allowance, vehicle insurance and fuel, which are paid by the company.
From date of engagement, permanent employees at all levels become members of one of the available retirement funds, namely:
- The Old Mutual SuperFund Pension Fund: The SPAR Group Ltd Defined Contribution Pension Fund,
- The Old Mutual SuperFund Provident Fund: The SPAR Group Ltd Staff Provident Fund, and
- The Old Mutual SuperFund Provident Fund: The SPAR Group Management Provident Fund.
Membership of a medical aid scheme is not compulsory, but those who wish to become members can choose from several medical aid schemes available. The Tiger Brands Medical Scheme is a group scheme, while a number of other low-cost medical aids have been negotiated at distribution centre level.
Other variable remuneration, such as allowances, is paid, where applicable, and in accordance with the legislation and collective agreements entered into with the union(s) or workers’ committees.
Non-financial benefits include subsidised canteen meals, access to a clinic, uniforms and training and development.

Executive remuneration (EU to F band)

The executive directors are full-time employees of the company and, as such, each has an employment agreement, in accordance with the company’s standard conditions of service, but with a notice period of two months (versus one month for other employees) and more comprehensive confidentiality undertakings. The CEO has a notice period of three months.

Executive directors receive a monthly salary and benefits based on the role of each executive and his or her performance and contribution to the group’s overall results, including other pensionable remuneration applicable to band EU and above, such as car allowance, vehicle insurance and fuel, which is paid by the company.

Details of the executive directors’ remuneration are available on below.

Non-executive directors’ remuneration

Non-executive directors are not full-time employees of the company and, as such, each has a contract for services and not a contract of employment.

Non-executive directors’ remuneration consists of a guaranteed basic fee and is not linked to the financial performance of the group, nor do they receive share options or bonuses.

Management recommends non-executive directors’ fees, based on industry benchmarks, to the committee for onward recommendation to and approval by the board who in turn recommends the fees to shareholders for approval in accordance with the Companies Act. Non-executive remuneration increases are implemented on 1 March each year and their proposed fees for the period 1 March 2019 to 29 February 2020 are available here.

VARIABLE PAY

Short-term incentives

The short-term incentive scheme is solely at the discretion of the company and can be changed or withdrawn at any time. Short-term incentives are only paid to individuals who are in the employ of the company at the end of the financial year.

The main purpose of this incentive scheme is to support a performance culture and to reward employees for achieving good annual financial results when compared with predetermined targets. Performance bonuses are based on the achievement of financial, individual and transformation objectives approved by the committee.

Non-management employees (A to C band)

Non-management employees are entitled to a performance bonus of up to 50% of a month’s salary or part thereof, based on the achievement of set targets. The targets are based on key issues in the business plan and are mainly financial targets.

Management employees (D band and above)

The maximum incentive bonus that may be earned is as follows:

Paterson grade	% of basic annual salary	Bonus split financial:functional
F	100	75:25
EU	100	75:25
EL	60	60:40
DU	30	30:70
DL	15	30:70

The financial component of the short-term incentive for divisional managers is based on a targeted divisional profit before tax growth on the previous year. For central office managers, short-term incentives are based on the group’s profit after tax growth on the previous year.

The functional component comprises objectives that include corporate objectives (for example, transformation) and individual objectives, which are specific to a manager’s sphere of influence. The attainment of these targets contributes to the achievement of the company’s strategic objectives, which are aligned to the delivery of sustained shareholder value. The principle of paying for performance is a key factor underpinning the short-term incentive, and any variable payments are directly aligned to performance outcomes. Achieving these objectives will result in a bonus payout subject to the achievement of a minimum profit level of no less than the profit level achieved in the previous year.

The short-term incentive bonus is capped at 100% of annual salary for executive directors and senior general management.

For the executive directors, the breakdown of the targets, relative bonus caps as a percentage of annual salary and the average payout for the 2018 financial year, were as follows:

	Bonus cap (% of annual salary)	Executive directors’ average performance achievement %
Group financial results	75	75.0
Transformation targets	10	55.2
Key performance objectives	15	82.1
Total	100	68.5

Long-term incentives

Share Option Plan (SOP) (2004)

The last options were allocated on 7 February 2014 and remaining participants have 10 years from date of issue to exercise their option rights. No further share option allocations can be made in this scheme. There are no performance criteria in this scheme and as the scheme is now closed, none can be introduced.

Options previously granted to executive directors, options exercised during the year under review and unexercised options as at 30 September 2018 are provided in the implementation report below.

Conditional Share Plan (CSP)

The CSP provides a mechanism that enables the company to provide key employees with the opportunity to receive shares in the company based on personal or group performance. The primary intent is to make performance-related awards under the CSP through an award of shares that are subject to appropriate performance conditions. An award of restricted shares may be made in exceptional circumstances to address serious retention risks or to compensate prospective employees for the loss of long-term incentive awards with their existing employer.

The CSP is differentiated from the SOP in that it has performance conditions governing the vesting of awards. In addition, whereas the SOP is generally settled by the issue of shares, the CSP is intended to be settled by a market purchase of shares and will, therefore, not cause dilution to shareholders.

Salient features of the CSP are as follows:

DETAILS	CONDITIONAL SHARE PLAN
Description	Under the CSP, participants receive a conditional right to receive a share in the company on the vesting date if certain conditions are met. Participants will only become shareholders to the extent that vesting occurs on the vesting date and will have no shareholder rights prior to this date.
Company limit	The cumulative aggregate number of shares that may be allocated under the CSP shall not exceed 5 200 000 shares (approximately 3% of issued share capital). This limit excludes share purchases in the market and shares forfeited. The aggregate number of restricted shares that may be allocated under the CSP may not exceed 1 300 000 shares.
Individual limit	The cumulative aggregate number of shares that may be allocated to any one individual may not exceed 570 000 shares (approximately 0.33% of issued share capital).
Settlement method	The intention of the company is to settle all CSP awards from a market purchase of shares; however, the rules of the CSP allow for settlement in any of the following ways: • Market purchase of shares • Issue of shares • Use of treasury shares
Termination of employment	Bad leavers will forfeit all awards on the date of termination of employment. In the case of good leavers, a pro rata portion of all unvested awards will vest. The pro rata portion will reflect the number of months served since the award date and the extent to which the performance conditions (if any) have been met. The balance of the awards will lapse.
Allocation methodology	The CSP will be used for annual allocations. The company will define annual allocation levels expressed as a percentage of gross annual basic salary. In defining these levels, the company will endeavour to maintain the fair value that participants would have maintained under the SOP. To this end, new allocation levels that may be made on an annual basis (expressed as a percentage of gross annual basic salary) are approximately: • CEO: 60% • Executive committee members: 50% • Senior managers: 35%
Grant price	Not applicable
Vesting/employment period	Three years for annual award of performance shares and in equal parts after years three, four and five for restricted shares.

The performance conditions applicable to an award of shares are set annually by the committee, in broad consultation with shareholders. The performance conditions will be measured over a performance period of three years, which is aligned with the financial years of the company.

The table below shows the three performance conditions along with their definitions and the proportion of the total number of shares awarded to which the performance conditions relate. In addition, the table shows the Threshold, On-target and Stretch target conditions which represent the levels of achievement required for certain portions of the performance shares related to that particular performance condition to vest.

PERFORMANCE CONDITION	DEFINED AS	DETAIL	Weighting	Threshold	On-target	Stretch
Return on net assets (RONA)	Operating profit expressed as a percentage of the net closing asset value at the relevant year-end.	The average RONA over the performance period will be compared to the targets set out herewith.	30%	80% of the on-target	Average RONA as per the operating budgets approved by the board.	120% of the on-target
Growth in headline earnings per share (HEPS)	Headline earnings divided by the weighted average number of ordinary shares (net of treasury shares) in issue during the relevant financial year. Headline earnings consist of the earnings attributable to ordinary shareholders, excluding non-trading and capital items.	Growth in HEPS will be calculated as the growth between the base year and the last year in the performance period.	50%	CPI growth over the performance period	Growth between HEPS as per the operating budget approved by the board for the last year in the performance period and the base year HEPS.	Target plus 9% over the performance period
Total shareholder return (TSR) relative to a peer group	The TSR will be measured as the compound annual growth rate (CAGR) in the TSR index for the company and the peer companies over the performance period after holding the shares and reinvesting the dividends over the performance period.	To remove vagaries in the market, the CAGR in TSR calculation is to be smoothed by using the average TSR index for the 20 business days up to and including the start of the performance period and 20 business days up to and including the end of the performance period. The peer group will constitute suitably constructed and appropriate peer companies.	20%	80% of on-target	Weighted average TSR of peer group	120% of on-target

Threshold performance will act as a ‘gatekeeper’ and will represent the minimum performance that is required before performance shares vest. On-target performance relates to good, but sufficiently stretching performance, and stretch performance relates to exceptional performance in the context of the prevailing business environment. The portion of the performance shares that will vest at each target will be as follows:

	VESTING PERCENTAGE
Threshold	30% of the award of performance shares will vest for performance at threshold. None of the performance shares will vest for performance below threshold.
On-target	65% of the award of performance shares will vest for performance on-target.
Stretch	100% of the award of performance shares will vest for performance at stretch.

Linear vesting will apply for performance between threshold and on-target or between on-target and stretch performance. The conditions of the CSP will continue to be reviewed in line with best practice.

The remuneration committee supports shareholding by its top executives and believes this re-enforces shareholder alignment post the vesting of long-term incentives. To this end, senior executives can elect to subject CSP shares that are coming up for vesting for a further agreed holding period during which time such shares cannot be disposed of. The remuneration committee is in the process of approving a formal minimum shareholding requirement policy that will contain targeted shareholding to be achieved by senior executives.

Performance conditions, targets, information and allocations

The interim measures against the targets for the unvested awards issued in 2015, 2016 and 2017 are summarised in the table below. The HEPS growth and average annual RONA projections over the appropriate performance periods for each applicable grant has been calculated using historical and forecast HEPS values.

Description	2015 Grant	2016 Grant	2017 Grant
Vesting date	09.02.2019	07.02.2020	07.02.2021
Performance period	01.10.2015 to 30.09.2018	01.10.2016 to 30.09.2019	01.10.2017 to 30.09.2020

Total number of units remaining	304 600	228 100	307 100
Projected HEPS growth over performance period	22.3%	23.9%	40.3%
HEPS target	30.0%	30.0%	27.5%
Vesting percentage	44.6%	50.3%	100.0%

Projected average annual RONA over performance period	41.7%	40.4%	41.7%
RONA target	45.0%	40.0%	40.0%
Vesting percentage	52.1%	66.9%	72.3%

The measure of TSR will be the TSR of SPAR relative to the weighted average TSR of the six selected peer group companies.

On 7 February 2018, the committee awarded 307 100 performance shares (2017 grant) and 101 100 restricted (retention shares) (2017 grant) to executives and senior managers. This was the first award of restricted shares to key, selected employees. The vesting date of the performance shares award is 7 February 2021 and the vesting dates of the retention shares are 7 February 2021, 7 February 2022 and 7 February 2023. Details of CSP awards to executive directors are provided in the implementation report below.

On 17 February 2018 the first tranche of CSP awards issued in November 2014 vested. The final performance conditions for the grant were measured and externally verified by Deloitte. The results of the calculation of the actual vesting percentage were as follows:

HEPS growth	51.1%
RONA growth	53.2%
ITSR	100.0%
Final vesting	61.5%

Of the total number of awards remaining at the measurement date, 297 791 vested. These awards were settled by a market purchase of shares.

Section 4 – Implementation report

The implementation report contains the detailed information and figures pertaining to the application of the remuneration policy in relation to executive and non-executive directors.

Directors’ remuneration and interest report

R’000	Salary	Per- formance related bonus⁽²⁾	Retirement funding contri- butions	Travel allowance and other benefits⁽¹⁾	Share option gains	Total
Emoluments
2018
Executive directors
GO O’Connor	5 850	4 374	687	468		11 379
WA Hook	3 407	1 747	425	474	14 037	20 090
MW Godfrey	4 042	3 022	481	476	1 589	9 610
R Venter	3 063	2 236	384	1 360	2 694	9 737
Total emoluments	16 362	11 379	1 977	2 778	18 320	50 816

2017
Executive directors
GO O’Connor	5 053	1 582	599	429		7 663
WA Hook	3 407	1 296	423	463	22 620	28 209
MW Godfrey	3 302	1 001	397	437	3 735	8 871
R Venter	2 889	847	362	466		4 564
Total emoluments	14 651	4 725	1 781	1 795	26 355	49 307

⁽¹⁾	Other benefits include medical aid contributions and a long service award.
⁽²⁾	The performance related bonuses relate to amounts earned in current year.

In addition to an annual inflation adjustment, the committee recommended and the board approved additional salary increases for GO O’Connor and MW Godfrey following the market benchmarking exercise to ensure their guaranteed earnings remained appropriately aligned with industry norms.

	Group
R’000	2018	2017
Fees for services as non-executive directors
MJ Hankinson (Chairman)^bc	1 319	1 210
MP Madi^c	498	456
M Mashologu^a	515	475
HK Mehta^abc	805	715
P Mnganga^bd	704	563
CF Wellsacd	952	775
AG Waller^c	358
Total fees	5 151	4 194

^a	Member of Audit Committee.
^b	Member of Remuneration and Nominations Committee.
^c	Member of Risk Committee.
^d	Member of Social and Ethics Committee.

Number of shares	2018	2017
Directors’ interests in the share capital of the company
Executive directors
GO O’Connor – direct beneficial holding	22 986	300
WA Hook – direct beneficial holding	74 110	25 500
MW Godfrey – direct beneficial holding	13 530
R Venter – director beneficial holding	13 530
Non-executive directors
MJ Hankinson – held by associates	2 800	2 800
HK Mehta – direct beneficial holding	2 000	2 000
HK Mehta – indirect beneficial holding	10 000	10 000
CF Wells – direct beneficial	1 100	1 100
AG Waller – direct beneficial	3 200

As at the date of this report the directors’ interests in the share capital of the company remained unchanged.

Declaration of disclosure

Other than that, disclosed above and below, no consideration was paid to, or by any third party, or by the company itself, in respect of the services of the company’s directors, as directors of the company, during the year ended 30 September 2018.

Directors’ share scheme interests

The group’s option scheme (SOP) provides the right to the option holder to purchase shares in the company at the option price. On election by option holders, one third of the options granted vests after three years, with a further third vesting on the expiry of years four and five respectively. Option holders have 10 years from the date of issue to exercise their option rights.

Options held over shares in The SPAR Group Ltd

			Number of options held
Executive directors	Date of option issue	Option price Rand	2018	2017
GO O’Connor	07/02/2014	124.22	50 000	50 000
Total			50 000	50 000
WA Hook	11/11/2008	50.23		100 000
	10/11/2009	66.42	50 000	50 000
	08/12/2010	99.91	50 000	50 000
	08/11/2011	96.46	55 000	55 000
	13/11/2012	122.81	60 000	60 000
Total			215 000	315 000
R Venter	08/12/2010	99.91		23 200
	08/11/2011	96.46	11 800	11 800
	13/11/2012	122.81	30 000	30 000
	12/11/2013	126.43	30 000	30 000
Total			71 800	95 000
MW Godfrey	11/11/2008	50.23		12 000
	10/11/2009	66.42	12 000	12 000
	08/12/2010	99.91	25 000	25 000
	08/11/2011	96.46	35 000	35 000
	13/11/2012	122.81	30 000	30 000
	12/11/2013	126.43	30 000	30 000
Total			132 000	144 000
Total directors share scheme interests			468 800	604 000

Options exercised	Date of options exercised	Number of options exercised	Rand	Market price on exercise	Gain R’000
WA Hook	20/09/2018	60 000	50.23	190.60	8 422
WA Hook	25/09/2018	40 000	50.23	190.60	5 615
R Venter	16/02/2018	23 200	99.91	216.01	2 694
MW Godfrey	28/09/2018	12 000	50.23	182.60	1 589

Shares held by participants in terms of the CSP

In terms of the CSP, the group has granted shares to executives, senior management and key talent specifically identified in the form of performance share awards. These shares vest over a period of three years subject to performance conditions at year-end. No exercise price is allocated to these awards.

Awards to participants in terms of the CSP are as follows:

			Number of shares
	Award date	Share price on date of grant Rand	2018	2017
Executive Directors
GO O’Connor	17/02/2015	R133.61		36 665
GO O’Connor	09/02/2016	R195.38	20 000	20 000
GO O’Connor	07/02/2017	R175.10	14 600	14 600
GO O’Connor	07/02/2018	R170.70	30 700
WA Hook	17/02/2015	R133.61		14 000
WA Hook	09/02/2016	R195.38	7 500	7 500
WA Hook	07/02/2017	R175.10	7 500	7 500
WA Hook	07/02/2018	R170.70	13 000
R Venter	17/02/2015	R133.61		22 000
R Venter	09/02/2016	R195.38	9 600	9 600
R Venter	07/02/2017	R175.10	7 500	7 500
R Venter	07/02/2018	R170.70	15 000
MW Godfrey	17/02/2015	R133.61		22 000
MW Godfrey	09/02/2016	R195.38	11 000	11 000
MW Godfrey	07/02/2017	R175.10	9 000	9 000
MW Godfrey	07/02/2018	R170.70	17 500
			162 900	181 365

In line with the remuneration committee’s view that senior executives should be exposed to the share price post the vesting of their long-term incentives, the following executives have elected to subject their CSP shares to a further agreed upon holding of 3 years.

CSP Awards vested

	Award date	Total number granted	% vested	Total vested
Executive Directors
GO O’Connor	17/02/2015	36 665	61.5	22 548
WA Hook	17/02/2015	14 000	61.5	8 610
R Venter	17/02/2015	22 000	61.5	13 530
MW Godfrey	17/02/2015	22 000	61.5	13 530
		94 665		58 218

Principle	Arrangements, achievements, measurements and future focus areas	Examples and references in the integrated report
1 The governing body should lead ethically and effectively	The board endeavours to meet the highest ethical standards of business practice and acknowledges that ethics are the foundation of, and reason for, corporate governance. The board is responsible for ensuring that management actively cultivates a culture of ethical conduct and establishes the values we must uphold. We value independent judgement and require that each board member prepare, participate and contribute at each meeting, in addition to informal discussions and interaction with the Chairman related to the SPAR business. The board meets formally four times year. To further improve non-executive directors’ understanding of the company’s operating divisions, a board meeting is held at least once a year at a distribution centre.	Our governance structures, composition and functioning Our reflection on the King IV™ outcomes (how we create an ethical culture) Nomination committee report
2 The governing body should govern the ethics of SPAR in a way that supports the establishment of an ethical culture	SPAR’s culture is informed by its values of passion, family values and entrepreneurship, in combination with the SPAR Code of Ethics. The board sets a leadership example through its adherence to the relevant guidelines, regulations and benchmarks for good corporate governance and ethics. This includes adherence to the Universal Declaration of Human Rights and the International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work. The Social and Ethics Committee, which functions independently of the board, oversees SPAR’s actions and promotes a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public. The committee is responsible for monitoring and making recommendations in relation to the following: Social and economic development, including compliance with the United Nations Global Compact, the Organisation for Economic Co-operation and Development (OECD) recommendations on corruption, the Employment Equity Act and Broad-based Black Economic Empowerment Act. Good corporate citizenship, including the promotion of equality, prevention of unfair discrimination, reduction of corruption, contribution to community development, sponsorship, donations and charitable giving, environmental risks, health and public safety as well as reputational risks and other related risks. Consumer relationships, including advertising, public relations and compliance with Consumer Protection laws. Labour and employment, including employment relationships and contributions towards the educational development of employees. This also includes compliance with standards such as the International Labour Organisation Protocol on decent work and working conditions. Ethics management, including recognising the importance of all stakeholders while minimising the negative impacts and maximising the positive impacts of SPAR on the communities within which it operates. The committee exercises oversight by reviewing the programme to monitor compliance with the SPAR Code of Ethics annually. Employee recruitment, on-boarding and training interventions contain elements that relate to expected behaviours aligned to SPAR’s values and culture. An ethics survey was conducted by the Ethics Institute of South Africa (EthicsSA) during the 2015 financial year. Consequently, an action plan to address the shortcomings identified was discussed, and a relaunch of the Code of Ethics and Whistleblowing hotline took place in 2017. The independent whistleblowing hotline provides a mechanism for stakeholders to report any ethics breaches. These are reported to the Social and Ethics Committee and appropriate action is taken. SPAR has a customer care and complaints line with all complaints being reported to the Company Secretary, who directs these to the relevant distribution centres from where these are relayed to retailers. The distribution centres take ownership of complaints and are responsible for communication with the relevant manager of store in question to address any issues. The regional and national guild committees have the power to rescind retail membership if any ethics breaches take place. The board reviewed and approved the Group Fraud and Corruption Prevention Policy during 2016. This policy acts as a guide to ensure all instances of fraud or corruption are managed in a fair and uniform manner. The policy further assists us in creating a climate for the prevention and detection of fraud, theft, corruption or associated internal irregularity.	Our strategy and business model (outcomes) Our strategy and business model (the link between strategy, governance and risk) Our focus on South Africa (our profile in South Africa) Our reflection on the King IV™ outcomes (how we create an ethical culture) Social and ethics committee report
3 The governing body should ensure that SPAR is and is seen to be a responsible corporate citizen	SPAR’s vision positions the group as a responsible corporate citizen: to be the first-choice brand in the communities we serve. A strong community focus is supported by the SPAR values of demonstrating passion, living our family values and encouraging entrepreneurship in our leadership as well as through our relationships. Where we are able to create authentic shared value, as per our sustainability pledge, we build our reputation as a good corporate citizen and strengthen the material relationships that enable value creation. Our new supermarket strategy’s outcomes all consider our internal and external interactions with stakeholders and the environment to support our commitment to being a responsible corporate citizen. Our sustainability pledge aims to create authentic shared value through the following outcomes: Contribution to societal change Contribution to responsible living Opportunity creation Resources stewardship The report contains extensive context and commentary on SPAR’s material relationships, including interfaces with SPAR International and the guilds. SPAR’s voluntary trading model is furthermore based on relationships of trust and co-operation between SPAR and our retailers, to mutual benefit. For the voluntary trading model to operate effectively, all parties have to display responsible corporate citizenship. Corporate citizenship is one of the elements monitored by the Social and Ethics Committee (see above) and is based on SPAR’s stakeholder-inclusive approach. The committee approves and monitors corporate social development spend and impact, for example in the case of the emerging farmer programme. It also tracks progress with SPAR’s BBBEE rating. We linked our values to the sustainable development goals (SDGs), thereby articulating how we can support the aims to end poverty, protect the planet and ensure prosperity in the next 15 years.	Our strategy and business model (our supermarket strategy at a glance) Our material relationships Focus on South Africa Focus on Ireland Focus on Switzerland Social and ethics committee report
4 The governing body should appreciate that SPAR’s core purpose, risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process	The board recognises that SPAR creates value on a global scale through the voluntary trading model. It creates significant value for our independent retailers, who benefit from the economies of scale gained by our buying efficiencies, and the cost savings through operational efficiency and a wide scope of products offered and distributed through our distribution centres. Our material relationships provide input into our business activities and help us mitigate the risks, including waste and resource depletion, associated with a distribution and wholesale business. The board provides overall guidance and direction for the development and annual review of the strategy, which articulates the key imperatives and enablers required to deliver on the group’s outcomes. Progress with the implementation of the strategy is measured according to financial and non-financial indicators, combined with an enterprise risk management programme which considers SPAR’s entire value chain. The board formally considered the going concern assertion of SPAR and is of the opinion that it is appropriate for the forthcoming financial year.	Who we are (our profile as a wholesale distributor and brand owner) Who we are (SPAR International, the guilds and the voluntary trading model) Why invest in SPAR Reports from our leaders Our strategy and business model Our material relationships Focus on South Africa Focus on Ireland Focus on Switzerland
5 The governing body should ensure that reports issued by SPAR enable stakeholders to make informed assessments of SPAR’s performance, and its short, medium and long-term prospects.	The board takes responsibility for SPAR’s financial and integrated reporting, supported by internal and external assurance mechanisms. SPAR’s integrated annual reports aim to provide our readers with a broad understanding of the group’s past performance in the context of the external environment, demonstrated through a wide range of activities, interactions and relationships. This should enable readers to gauge the prospects and future trajectory of SPAR’s value creation abilities. Our commitment to reporting according to the <IR> Framework means that we only report on what is material for SPAR to be able to create value over the short, medium and long term this is structured according to our material relationships. Our full reporting suite and archives are available on the SPAR website.	Our reflection on the King IV™ outcomes Our reporting approach
6 The governing body should serve as the focal point and custodian of corporate governance at SPAR	The board works according to an annual board plan which ensures a structured and formal approach to governance. There are at least four formal board meetings per annum and board members are provided with ample context, reports and indicators to be able to ensure that the group acts ethically, performs according to expectations, maintains the necessary controls and is being perceived as a responsible corporate citizen. Board meeting attendance is high and additional conversations between board members are encouraged for updates or when pertinent decisions require more deliberation. The board is satisfied that it has fulfilled its responsibilities according to its charter for the year. The board intends to improve the detail understanding of corporate governance structures per country where SPAR is invested and will ensure that more detail from these operations are available in the board packs.	Our governance structures, composition and functioning
7 The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively	SPAR’s core governance structure includes the board and its committees; however, the wider governance ecosystem also encompasses the guild structures and external assurance providers, who all assist the board in discharging its governance role and responsibilities. The board member profiles in the integrated report summarise the demographics, qualifications, capacity, status and memberships of each board member and indicate their respective tenures. The nomination committee amended the company’s gender diversity policy to include a policy on race diversity and renamed it the board diversity policy. The voluntary targets in terms of this policy are a minimum of three black people and two females. An internally facilitated independence assessment is conducted annually by the Nomination committee for each non-executive director who has served on the board beyond nine years. An externally facilitated, independent assessment is conducted every three years. The SPAR policy for board appointments is implemented by the Nominations Committee, who ensures that there is an appropriate balance of diversity, skills and experience within the board’s ranks to fulfil its mandate and covers both financial and sustainability roles and responsibilities.	Our governance structures, composition and functioning Nomination committee report
8 The governing body should ensure that its arrangements for delegation with its own structures promote independent judgment, and assist with balance of power and the effective discharge of its duties	The board delegates specific roles and responsibilities to the Chief Executive Officer (CEO) and the board committees. Each committee has terms of reference that is reviewed annually. In addition to the four committees, there are three Executive Committees according to the three main geographies, each with very specific functions and responsibilities. Diverse backgrounds and cross-membership between committees, including guild memberships, ensure that there is appropriate balance in judgement and influence. The committee reports contain details of membership, responsibilities, advisors, attendance and key areas of focus.	Our governance structures, composition and functioning Nomination committee report Remuneration committee report Risk committee report Social and ethics committee report
9 The governing body should ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, support continued improvement in its performance and effectiveness	The board and its committees conduct an annual self-evaluation process to measure its respective performances and the chair of the board and committees present to the board the results of those self-assessments. Evaluation criteria include the effectiveness of the board’s composition, governance processes and procedures; the effectiveness of the board’s committees in discharging their respective mandates; the effectiveness of the executive directors; and the effectiveness and contributions of each of the directors.	Nomination committee report
10 The governing body should ensure that the appointment of, and delegation to, management contribute to role clarity and the effective exercise of authority and responsibilities	The SPAR governance bodies are all governed by a delegation of authority framework, which is reviewed annually and sets out the matters reserved for determination by shareholders, the board, and those matters delegated to management and the Executive Committees. The board is satisfied that the delegation of authority framework contributes to role clarity and the effective exercise of authority and responsibilities. The CEO is accountable to the board for the daily management of the company and co-ordinates the implementation of board policy and strategy through the Executive Committees. The CEO’s responsibilities include, among other things, ensuring that the company conducts its affairs within the rule of law and abides by the company’s Code of Ethics, and keeping the board informed of all its major business proposals and developments by way of specific reports, within limits set by the board. The CEO’s notice period is three months and his performance is measured as per the remuneration policy. The board approved the appointment of SPAR’s CEO as the chairman of SPAR International. Succession planning is an ongoing focus area and will become important in medium-term as a number of senior management members will be reaching retirement age. SPAR’s Company Secretary is a suitably qualified and experienced employee who is able to provide the board with the requisite support for its efficient functioning and discharge of its duties. She contracts with the necessary service providers to provide specialist input or guidance on board matters, including, for example, PwC, EOH Legal Services, the Chartered Secretaries South Africa, Garlicke & Bousfield, The Ethics Institute the Institute of Directors Southern Africa, the Ethics Institute and the company’s JSE sponsors. We believe these arrangements are effective and appropriate for the efficient functioning of the board.	Our governance structures, composition and functioning
11 The governing body should govern risk in a way that supports SPAR in setting and achieving its strategic objectives	SPAR operates according to a voluntary trading model, which creates unique challenges for effective control as retailers have the freedom to operate independently under the SPAR brand. Our primary area of control extends to operations at the distribution centres, including delivery, with more limited control in the retail environment. SPAR’s retail operations team, in co-operation with the guilds, provides the necessary structures to facilitate the most appropriate risk mitigation, and financial and reputational controls for retail. In terms of distribution centres, subsidiaries and central office functions, the board relies on a range of internal and external assurance mechanisms in combination with formal policies and frameworks. External mechanisms include, for example, the auditors, sponsors and verification agencies, while internal audit and management reviews provide internal control. SPAR’s risk management ability is integral to the achievement of strategic objectives. The integrated report includes detail reporting on these risks – showing the risk ranking, mitigation actions and a link to the relevant strategic imperative. We also identify the most strategic risks per material relationship. Risk is governed and managed through the Risk Committee. The committee oversees the company’s risk management, IT and compliance processes to ensure that management identifies potential risks in these areas which may affect the company or its operations. It implements effective policies and plans to mitigate any risks,enhance the company’s ability to achieve its strategic objectives, and support the company in being ethical and a good corporate citizen.	Our reflection on the King IV™ outcomes Our material relationships Risk committee report
12 The governing body should govern technology and information in a way that supports SPAR in setting and achieving its strategic objectives	Technology and information at SPAR is governed through the Risk Committee mandate, which ensures that information technology (IT) is managed as an integral and strategic part of the business. The IT strategy supports and enables the business strategy and delivers value through cost and resource management, risk management and regulatory compliance. IT serves all aspects, components and processes of SPAR in South Africa, with limited integration with the international entities. The South African IT team creates synergies between the group operations where possible and provides the teams in Ireland and Switzerland with guidance and support to ensure acceptable governance measures are in place. IT is therefore leveraged to create opportunities and to gain a competitive advantage. The board is cognisant that, as much as IT is a strategic asset within the group, it also presents the organisation with significant risks. IT is represented on the SPAR Executive Committee. This generates continuous information management dialogue, aligned to the short, medium and long-term business requirements. Demands placed on IT resources are expected to exceed the capacity of these resources for the foreseeable future. It is therefore crucial that the limited resources available are put to optimal use. To this end proposed projects will be selected and ranked by the Executive Committee according to their value to SPAR. Application maintenance is limited to necessary fixes and selected change requests for which a convincing business case exists. All projects have an owner outside the IT department, responsible for the overall project management, acceptance by the business and implementation. IT work is divided in major projects, minor projects and maintenance. Each type is dealt with differently. Major projects take more than six months to deliver, and include, for example, the SAP implementation. Major projects follow the following steps: Initiation by a user, supported by the functional executive responsible for the relevant area of business. Investigation by initiator, functional executive, business analyst and systems manager. Development of a business case by functional executive, business analyst and systems manager. Presentation to Executive Committee for approval, ranking and budget. Delivery. Implementation pre- and post-reviews with all parties concerned. Minor projects typically take less than six months to deliver. These projects follow the same steps as major projects with the exception that approval and ranking take place by the IT management team together with the functional executive. IT risks were reviewed during the year with software quality emerging as the most significant risk. Cybercrime was rated fairly low due to the systems in place to mitigate this risk. South Africa is quickly following in the footsteps of first world countries by introducing legislation governing corporate behaviour. Some of the acts that have a direct effect on IT are: The Electronic Communications and Transactions Act The Promotion of Access to Information Act The Regulation of Interception of Communications and provision of communications related information Act Payment card industry data security standard Protection of personal information act Consumer Protection Act Non-compliance with this legislation exposes SPAR to unnecessary risk. It is the specific responsibility of the Group Systems Audit & Security manager to keep abreast of legislative developments by subscribing to a suitable legal service. Any significant IT investments form part of the budget process and are submitted to the board for final approval. The board subsequently oversees the return on investment from these projects. Annual internal and external IT audits are based on the COBIT IT governance framework. Based on these audits and feedback from the Audit and Risk Committees, the board is satisfied that the SPAR Group has adequate resilience arrangements in place for disaster recovery. IT effectiveness is monitored mainly through independent audits, user surveys, uptime and support statistics and user meetings with retailers. The SAP transition to the Enterprise Management generation software based on the HANA database architecture was completed with SPAR being the 6th installation worldwide to achieve this. The second phase of the SAP programme is well underway. This phase completes the finance area with the introduction of accounts payable and accounts receivable. Roll-out of this phase will start in 2019. Preparation for the third and last phase has started. This phase will cover merchandising, replenishment and logistics. Significant investment is also being made in advanced firewall technology to keep abreast with developments in the cybercrime area.	Our reflection on the King IV™ outcomes Risk committee report
13 The governing body should govern compliance with applicable laws and adopted, non-binding rules, codes and standards in a way that supports SPAR being ethical and a good corporate citizen	One Capital is SPAR’s Sponsor and advises the board, through the Company Secretary on compliance with the JSE Listings Requirements. We subscribe to LexisNexis’s online legal library and engaged with LexisNexis to provide their Lexis Assure programme, which is a notification service that informs SPAR of any regulation changes and allows SPAR to view all the relevant Acts pertaining to its business, as well as the level of associated compliance risk for each Act. SPAR has had no regulatory penalties, sanctions or fines and had not had any inspections by environmental regulators. SPAR adheres to the Code of Commercial conduct of the Industry Association for Responsible Alcohol Use and is a co-signatory to industry and government bodies on issues relating to fishery improvements. We are aligning our seafood procurement to be within the parameters of the World Wide Fund for Nature (WWF) South African Sustainable Seafood Initiative (SASSI) guidelines on how seafood should be caught and sold. SPAR’s commitment to food safety and nutrition provides consumers with quality assurance and aims to promote healthy living. We deliver on our promise to provide consumers with high-quality, traceable product through strict adherence to product and packaging specifications. This includes providing information on sourcing and ingredients. To ensure our products meet the highest health and safety standards, we contract with an external laboratory that conducts random monthly testing across our entire product range. South African retailers rely on SPAR’s supplier management and audits to ensure food safety compliance for the products provided by the distribution centres. Where retailers elect to source their own products from smaller suppliers, they take responsibility for food safety. Since this poses a risk to SPAR and retailers alike, we work with retailers and hold them accountable to ensure that the appropriate controls are in place and documented. We also assist small suppliers to improve and align with programmes such as GFSI. An additional food safety control takes the form of quarterly inspections of all stores by a SPAR service provider. The operations in Ireland and Switzerland rely, to a larger extent, on government inspectors who enforce food safety regulations, enhanced by an internal SPAR audit programme. In terms of future reporting, SPAR is considering establishing a mechanism to alert the board of all fines. This would enable the board to monitor and track trends and potential impact.	Our reflection on the King IV™ outcomes (how we create an ethical culture) Our material relationships Focus on South Africa Focus on Ireland Focus on Switzerland Risk committee report
14 The governing body should ensure that SPAR remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term	SPAR’s employees are pivotal in meeting our strategic objectives. The board is committed to paying fair, competitive and market-related remuneration to ensure that SPAR is able to attract, retain and motivate top-quality and talented employees. Shareholders voted in favour of the remuneration policy and implementation report at the AGM in February 2018. The remuneration report contains detail on SPAR’s approach to remuneration, policy and implementation.	Remuneration report
15 The governing body should ensure that assurance services and functions enable an effective control environment, and that these support the integrity of information for internal decision-making and of SPAR’s external reports	The board relies on internal and external assurance providers for effective control. Financial information contained in the 2018 integrated report was independently audited by PwC and external assurance was sought on non-financial data. This includes the group’s 2018 BBBEE verification, which was evaluated independently by AQRate. The SPAR Group board applied its collective mind to the contents of the integrated report and is satisfied that it provides a fair account of the business’s performance, risks, opportunities and prospects. An integrated assurance framework is still in development.	Our reporting approach Audit Committee report
16 In the execution of its governance role and responsibilities, the governing body should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time	The board takes SPAR’s responsibility as a corporate citizen seriously, which means that we continuously evaluate the group’s impact on stakeholders and the environment. The Social and Ethics Committee is mandated to provide guidance on and oversight of SPAR’s activities regarding the environment, consumers, employees, communities and other stakeholders, and to monitor the company’s sustainability and governance performance in this regard. The committee also ensures that these activities take place in a compliant and ethical manner that contributes to the welfare of the business and our stakeholders. To further expand on the group’s legitimacy, the SPAR guilds also have Social and Ethics Committees. Our sustainability pledge is to create authentic shared value through the following outcomes: contribution to societal change; contribution to responsible living; opportunity creation; and resources stewardship. Our commitment to creating authentic shared value is inherently linked to our values and our support of the 17 SDGs.	Who we are (our relationship with SPAR International, the guilds and voluntary trading) Our leadership reports Our material relationships Our strategy and business model Focus on South Africa Focus on Ireland Focus on Switzerland