Integrated Annual Report 2014

The style. The passion
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Underpinning the Group's mission to be a sustainable, ascendant organisation are our key disciplines which centre on best practice benchmarks and controls across the business and our belief in fairness, integrity and transparency in all business dealings.

Corporate governance

Share Appreciation Rights Scheme

In accordance with the Share Appreciation Rights Scheme (SARS), selected directors and employees of the Group are entitled to a conditional cash award linked to the value of notional Italtile Limited shares (shares). 25% of the awards vest after three years from grant date, and the balance (75%) after five years. The value of an award is equal to the increase in the value of the shares between grant date and vesting date (the value at the latter date is defined as the volume weighted average price of Italtile Limited shares as traded on the JSE over the 10 trading days preceding and including the vesting date).

Executive Retention Plan

The Executive Retention Plan is an additional mechanism, over and above the existing Italtile LTIP and SARS, to retain and reward selected employees and directors in line with the Group's values and remuneration philosophy of partnership. Italtile selectively enters into Retention Plan agreements with employees and directors in terms of which retention payments are made to them in conjunction with awards in terms of the Share Scheme. The payment of a Retention Award to an employee or director is subject to such employee or director remaining with the Group for a period of three years. The employee or director shall be the registered and beneficial holder of the shares acquired pursuant to the retention award from the date of transfer of such shares.

Awards from these three schemes are to be applied towards the obligatory subscription and/or purchase of Italtile Limited ordinary shares.

Non-executive directors' fees

Non-executive director remuneration is fee based and not linked to the share price of Italtile Limited.

The Remuneration Committee takes cognisance of market norms and practices when setting non-executive director fees.

Italtile Limited non-executive directors do not receive bonuses or share options to ensure actual and perceived independence. However, it should be noted that Mr S I Gama participates in the Group's BEE transaction.

Nominations Committee

The Nominations Committee is a sub-committee of the Board and meets on an ad hoc basis as required, but at least once a year. The Committee is chaired by the independent, non-executive Chairman and comprises a majority of independent non-executive directors. The current members of the Committee are:

Mr S G Pretorius (Chairman), Ms S M du Toit and Mr G A M Ravazzotti.

The Nominations Committee's key roles include the identification and evaluation of suitable candidates for appointment to the Board, as well as succession planning. The Committee met twice in the period under review at which all members were present.

The Board considers the composition of the Nominations Committee to be appropriate for the needs of the Group at this time, and believes that the members are suitably equipped with the necessary knowledge, skills and experience.

Social and Ethics Committee
Composition and terms of engagement

The Social and Ethics Committee (the Committee) is a sub-committee of the Board of directors as required by the Companies Act, No 71 of 2008 (as amended). The Committee adopted a formal charter that was approved by the Board of directors. The Committee conducts its affairs in compliance with its charter. The Committee meets at least twice per annum and is chaired by an independent non-executive director. The Committee is comprised of four directors. The current members of the Committee are:

Ms S M du Toit (Chairman), Mr G A M Ravazzotti, Mr P D Swatton and Mr B G Wood.

The Board considers the Committee's composition appropriate in terms of the necessary knowledge, skills and experience of the members.

The Italtile Group Company Secretary, Ms E J Willis, attends all meetings of the Committee as secretary.
A representative from Human Resources attends all meetings by invitation in order to provide input and guidance to the Committee on employment and ethics related matters.

The Committee met three times during the year and all members were present, besides one meeting not attended by Mr G A M Ravazzotti.

Role and responsibilities

The Committee's role and responsibilities include its statutory duties as per the Companies Act, No 71 of 2008 (as amended), and the principles of the King Code, which includes:

  • monitoring the Group's activities with regard to matters relating to
    • social and economic development;
    • good corporate citizenship, including the Group's promotion of equality, prevention of unfair discrimination, reduction of corruption, contribution to development of the communities in which its activities are predominantly conducted or within which its products or services are predominantly marketed, and record of sponsorship, donations and charitable giving;
    • the environment and health and public safety;
    • consumer relationships, including the Group's advertising, public relations and compliance with consumer protection laws; and
    • labour and employment.
  • monitoring the Group's performance and interaction with its stakeholders and ensuring that this interaction is guided by the Constitution and Bill of Rights;
  • determining clearly articulated ethical standards and ensuring that the Group takes measures to achieve adherence to these in all aspects of the business, thus achieving a sustainable ethical corporate culture within the Group; and
  • providing effective leadership based on an ethical foundation and ensure that the Company is and is seen to be a responsible corporate citizen.
Social and ethics policy

This policy sets out Italtile's commitment to undertake its business activities in a socially and environmentally responsible and ethical manner, and sets out the standards by which all employees, representatives and franchisees will be guided in their actions and dealings with colleagues, customers, suppliers and business partners. The policy was approved by the Board of directors and is communicated to all directors and employees.

Italtile is committed to a policy of fairness and integrity in its business dealings. Italtile recognises that maintaining high ethical standards is essential to the long-term economic success of the Group. The Group believes in integrity and transparency, hands-on involvement, partnerships to promote entrepreneurial spirit and passion for customer service.

1. Italtile's relationship with employees

Italtile strives to treat all employees equally and believes in providing a workplace that is free form unfair discrimination. In this pursuit, Italtile subscribes to the following principles and supports the following programmes and initiatives:

  • All employees have the right to work in an environment which is free from any form of discrimination on the basis of race, age, place of origin, religion, creed, gender, sexual orientation, political persuasion, marital or family status, disability, nationality or HIV/Aids.
  • Italtile promotes the health, safety and welfare of all employees.
  • Italtile provides appropriate training and the opportunity for development to all employees, management and leadership.
  • Italtile gives fair remuneration to employees that reflect an inidual's worth to the Group and abides by both the terms of contracts of employment and its human resources policies. An important element of the Group's remuneration philosophy is the profit share, shared by all employees. Depending on inidual contribution and Group performance, the profit share can have a significant impact on an inidual's earnings.
  • Italtile does not exploit labour and upholds the principle of fair labour practices.
  • Italtile respects an inidual's right to freedom of association.
  • Italtile is committed to employment equity. The Employment Equity Committee meets on a monthly basis to monitor and implement the requirements of the Employment Equity Act, 1998.
2. Employees, leaders, franchisees and business partners' relationship with Italtile

All employees and leaders will demonstrate high levels of integrity, professionalism and performance in their work.

  • Integrity – We are open, honest and fair in all our relationships. We make and keep commitments and accept accountability for our actions.
  • Professionalism – We try to achieve our full potential as leaders and employees. We commit to winning by learning as much as we can, improving and working as an effective team every day.
  • Performance – We strive for continuous improvement, set clear goals and reward excellence.
3. Italtile's relationship with its franchisees and business partners

Italtile's association with its business partners and franchisees is conducted in a spirit of partnership. We will:

  • honour all commitments;
  • strive to achieve Italtile's business objectives; and
  • preserve the entrepreneurial nature of the business.
4. Dealings with colleagues

In dealing with Italtile colleagues we are open, honest, fair and respectful.

5. Dealings with customers

Italtile exists because of its customers. Customer service is thus our top priority. We will provide:

  • friendly, courteous, knowledgeable and professional service and advice at all times; and
  • quality, fashionable products that provide good value for money.
6. Dealings with suppliers

Relationships with suppliers are conducted in a professional manner in order to support Italtile's reputation and business objectives. In doing business we:

  • will honour Italtile's commitments;
  • will not knowingly associate with suppliers who exploit labour or discriminate on any basis;
  • will not deal with suppliers who conduct unethical or improper business practices; and
  • will encourage dealings with suppliers committed to the process of transformation.
7. Dealings with competitors

Italtile recognises that competition is essential to continuous improvement. Every action that Italtile takes will comply with both the spirit and the letter
of the law.

We will compete fairly in the market place.

8. Compliance with laws and regulations

Employees and leaders must comply with all applicable laws and regulations, which relate to their activities for and on behalf of Italtile.

9. Conflict of interest

Employees and leaders must be independent from any organisation providing goods or services to Italtile. In maintaining independence:

  • employees and leaders must not take a direct or indirect financial interest in such organisations, nor accept gifts or favours that create an actual or perceived obligation to such organisations; and
  • employees and leaders must not use their position at Italtile for their own personal benefit.
Company Secretary

The Company Secretary is Ms E J Willis and she is neither a director nor a shareholder of Italtile or any of its subsidiaries. On that basis, the Board believes that E J Willis maintains an arm's length relationship with the executives, the Board and the individual directors in accordance with paragraph 3.84(j) of the Listings Requirements of the JSE.

The Company Secretary is responsible for administering the proceedings and affairs of the directorate, the Company and, where appropriate, owners of securities in the Company, in accordance with the relevant laws. The Company Secretary is available to assist all directors with advice on their responsibilities, their professional development and any other relevant assistance they may require.

The Nominations Committee has considered the skills and experience of the Company Secretary and the level of competence she has demonstrated as Italtile's Group Company Secretary since 2009, and in her role as a company secretarial consultant since 2001. The Board, on the recommendation of the Nominations Committee, is satisfied with the level of competence of the Company Secretary as required in terms of paragraph 3.84(i) of the Listings Requirements of the JSE. It requires a decision of the Board as a whole to remove the Company Secretary, should this become necessary.

Code of business and ethics

The Group has adopted a formal Code of Business Ethics and Conduct (the Code) which requires all directors and employees to act with honesty and integrity and to maintain the highest ethical standards. The Code deals with compliance with laws and regulations through a system of values and standards.

The Board oversees and ensures that management throughout the Group assumes responsibility for training and mentoring staff on the Group's values and standards and ensuring compliance.

The Code will be evaluated on a regular basis to ensure it aligns with the Corporate Compliance policy, King III and relevant new legislation.

Stakeholder communication

Italtile is committed to open, honest and regular communication with key stakeholders on financial and non-financial matters. A working partnership between the Group, its suppliers, franchisees, employees and members of the community forms the basis of a mutually beneficial association.

The annual general meeting provides an opportunity to communicate directly with shareholders. The Chairman has the opportunity to present to the shareholders a report on current operations and developments. The meeting also provides a forum for shareholders to question and express their views about the Company's business. The Chairmen of the Audit and Risk and Remuneration Committees are available at the meetings to answer questions from shareholders.

Notice of the annual general meeting and related documents are mailed to shareholders at least 15 business days before the meeting. Separate resolutions are proposed on each substantially different issue. The notice is contained in the Integrated Annual Report.

The Group's executive management team meets with investors after the publication of interim and annual results to present an update on the industry, current operations of the business and its prospects.

Share dealings

All directors of the Company are required to comply with the requirements of the JSE regarding inside information, transactions and disclosure of transactions.

In line with the Financial Markets Act, 19 of 2012, the Board enforces a restricted period for dealing in Italtile shares, in terms of which any dealings in shares by all directors and senior personnel is disallowed from the time that the reporting period has elapsed to the time that results are released and at any time that such iniduals are aware of unpublished price sensitive information, whether the Company is trading under cautionary announcement as a result of such information or not.

Risk management and internal controls

Italtile recognises that managing risk and compliance is an integral part of generating sustainable shareholder value and enhancing stakeholder interests.

The Group has in place an Enterprise Risk Management framework which is based on a combined assurance model comprising: management (isional and executive directors); external auditors (EY); and support centre oversight (including the internal audit function). The structure of this model and its activities are designed to ensure that the Group's risks are adequately addressed.

The Board, assisted by the Audit and Risk Committee, is responsible for risk, risk tolerance determination, risk management within the Group, performance of risk assessments, the use of acceptable risk methodologies and the monitoring of risk on a continual basis.

The Board ensures there is regular assessment of financial and non-financial risks in the context of the Group's business environment, with a view to mitigating and/or eliminating risk through the Group's strategies and processes.

Internal controls are designed to manage rather than eliminate risks of failure to achieve business objectives, and provide reasonable rather than absolute assurance against material misstatement or loss. The internal audit function is a structured review of internal controls based on risk assessment.

The Material Issues report discusses the Group's key risks and issues and the management thereof in detail. In brief they are identified as follows:

Suppliers and supply chain management

The Group has strong relationships with its supply partners, being the largest customer to all of its suppliers. Opportunities to increase capacity by suppliers if required is constantly reviewed, as are alternative sources of supply should any potential disruption be identified. The Group's acquisition of a strategic stake in Ceramic Industries Limited is evidence of its policy to strengthen key supplier relationships.

Remaining competitive/fashionable

Ensuring that the Group remains fashionable and internationally competitive is critical to its continued existence. Staying abreast of fashion trends and evolving consumer behaviour, employing experienced brand managers and capitalising on leading-edge technology are key priorities in this regard.

Brand reputation

Reputational risk is managed by ensuring intensive focus on customer service, product quality and competitive pricing. Staff training, motivation and incentivisation are key activities in promoting positive brand awareness. Italtile's corporate governance, sustainability and environmental policies all contribute to upholding the Group's brand reputation.

Preservation of the organisational philosophy and structure

Central to the Group's success is its business model which promotes partnerships and autonomy (an effective motivator), and has been flexible and adaptable in the past. The Group would be negatively impacted if this philosophy and structure are not adequately preserved. A range of factors mitigate this risk, including: close involvement in the operations of the Group by divisional management and executive directors which serves to reinforce the values of the Group; flat reporting structures which facilitate transparent communication and oversight; and optimal recruitment and training programmes to ensure the business model is entrenched.

Treasury risk

The Group has in place a Treasury policy, which serves to mitigate against risks including: under-performing investment returns; inadequate liquidity of investments to meet commitments; and institutional/commercial risk relating to funds into which investments are made.

Currency risk

Foreign currency exposure in imported product is actively managed. All foreign liabilities are matched with forward exchange contracts upon confirmation of import orders.

Credit risk

Trade credit is provided by reputable third party credit providers, and is available through the retail stores. The Board is confident that an adequate system of internal control is in place, which mitigates areas of significant risk to an acceptable level.

Recruitment, retention and succession planning

Attracting, developing and retaining human capital is a major focus for the Group. Keen attention is paid to optimal recruitment processes, comprehensive training, and motivation and incentivisation of employees.

Ongoing development of leadership and management potential is a critical initiative advanced through high-level training programmes.

Computer-based business process

All major business processes are computerised and the Group has a formally documented and tested disaster recovery plan in place.

Regulatory compliance

In order to mitigate against the risk of non-compliance with relevant legislation and regulations, the Group regularly engages various professionals and legal advisers. In addition, management attends workshops and training related to legislative and other updates. To an extent, the external audit also provides some assurance related to compliance.

Sustainability

Italtile is committed to good corporate citizenship practices and organisational integrity in the direction, control and stewardship of the Group's affairs.

The Group recognises the imperative to balance returns for shareholders with the long-term needs of the business, its employees, the broader society and the environment.

The Company is aware of its responsibility to safeguard the interests of all stakeholders and believes that good governance is essential to the Group's long-term sustainability and functioning. The Group's objective is to conform stringently to transparency, while operating profitably and remaining accountable to the broader community which it serves.

Shareholders, customers, employees, suppliers, regulators and the communities in which the Group operates are regarded as key stakeholders.

King III places emphasis on the principles of strategy, sustainability and governance and provides for greater integration of those elements. Accordingly, Italtile continues to strive to align the Group's practices with the recommendations of King III.

Transformation

Italtile is committed to empowerment in its business and is supportive of transformation in the country. The Group endorses the principles in the Employment Equity Act and aligns its Human Resources policies accordingly.

Employment equity
Employee composition statistics

As at 30 June 2014

  Male   Female   Foreign nationals    
African   Coloured   Indian   White   African   Coloured   Indian   White   Male   Female   Total  
Skilled to top management   87   18   5   49   14   8   2   18   2   2   205  
Semi-skilled and unskilled   338   42   3   70   124   28   3   40   7   1   656  
Total   425   60   8   119   138   36   5   58   9   3   861  

The above statistics apply to South African operations only and do not include the franchised stores.

The Group submits its employment equity reports to the Department of Labour on an annual basis and has consistently met relevant targets over recent years.