Demonstrate integrity in all our actions. 63 Corporate Corporate governance and risk management governance and risk management Contents • Corporate governance statement 65 • Group board 86 • Group remuneration report 94 • Group Executive Committee 108 • Risk management report 118 Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 65 Introduction Good corporate governance is an integral part of Absa’s operations. Accordingly, Absa Group Limited is fully committed to the principles of the Code of Corporate Practices and Conduct set out in the King Report on Corporate Governance (King II). The purpose of King II is to promote the highest level of corporate governance in South Africa. In supporting the code, the directors recognise the need to conduct the enterprise with integrity and in accordance with generally accepted corporate practices. Key governance highlights and developments The following were the key governance highlights and developments during the year under review: • Ongoing compliance with King II. • Successful implementation of section 404 of the Sarbanes-Oxley Act within the context of the materiality limits applicable to Barclays PLC. • The identification and recruitment of a new Group chairperson to replace Dr Danie Cronjé, who will be retiring from the board in 2007. • Further improvement in reporting processes to the main board, board committees and Absa’s Executive Committee. • Implementation of a new employee share scheme and related share scheme matters. (Refer to the Group remuneration report for additional information.) • Ongoing adoption of governance standards and practices applied by Barclays as well as other international best practices, where deemed appropriate, by the Absa board. • In line with international best practice, the introduction of a requirement in terms of which all directors serving on the board for longer than nine years are subject to annual re-election by shareholders at the annual general meeting. • The introduction of an annual director performance assessment for all directors (previously only applied in respect of those directors seeking re-election at the annual general meeting). • An annual board effectiveness evaluation (previously done on a three-yearly cycle). • The formation of a Board Finance Committee, with a mandate from the board to review and approve investments and divestments and related transactions, subject to specific limits. • The formation of a Group Credit Committee, which replaced the Board Lending Committee. • Ongoing progress with regard to meeting the requirements of the Financial Sector Charter. 66 [ Absa Group Limited Absa Group Limited Stakeholder report Stakeholder report 31 December 2006 31 December 2006 ] Corporate governance statement Challenges Some of the key governance challenges include: • The need to improve the board continuously and the availability of suitably skilled and experienced directors in this regard. This is especially pertinent for banks, which need to be at the forefront of risk management. • The challenge of responding and adhering to a continuing flow of new laws and regulations, while at the same time ensuring a profitable and sustainable business. • Ongoing preparation to ensure Basel II compliance by 2008. Awards and recognition For the past four years, Absa’s annual report has been placed among those of the top three in the annual Ernst & Young Excellence in Corporate Reporting survey of the top 100 listed company annual reports. Looking ahead For the year ahead, the Group has the following corporate governance objectives and focus areas: • Ongoing compliance with King II. • Induction and assimilation of a new Group chairperson, who will replace Dr Danie Cronjé. • Ongoing focus on the board’s succession plan, specifically given that certain board members will be reaching retirement age over the next few years. • Greater focus on director training and development, especially in Absa’s African subsidiaries and for new directors. • The enhancement of a governance framework for adoption by the Absa subsidiaries in Tanzania, Mozambique and Angola. • Governance matters relating to the proposed acquisition by Absa of the nine African banks currently owned by Barclays. • Ongoing adoption of governance standards and practices applied by Barclays as well as other international best practices, where deemed appropriate by the Absa board. • An investigation into electronic proxy voting and electronic communication with shareholders in general. • Ongoing work to meet the requirements of Basel II by 2008 and the implementation of a market disclosure policy. Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 67 Compliance with King II The directors are of the opinion that Absa complies with, and has applied, the requirements of King II with regard to the year under review. Application of the code and approach to corporate governance All entities in the Group are required to subscribe to the spirit and principles of the code. In addition, the code is applied to all operating entities of the nature and size identified in King II (such as banks, financial and insurance entities). Whereas the Absa board takes overall responsibility for Group compliance with the code and is the focal point of the Group’s corporate governance system, the directors of specific companies in the Group are responsible for ensuring compliance in respect of the companies of which they are directors. The Group facilitates a comprehensive process to review compliance with the code by all relevant entities annually. This includes: • a full and effective review by the Absa board of all aspects relating to ongoing corporate governance, the inclusion of statements in this regard in the annual report and consideration of the requirements of Regulation 38(5) of the Banks Act (in terms of which the board is required to report annually to the Registrar of Banks on the extent to which the process of corporate governance implemented by the Company successfully achieves the objectives determined by the board); and • a review of current and emerging trends in corporate governance and the Group’s governance systems as well as benchmarking the Group’s governance systems against local and international best practice. In its governance approach, the board believes that, while compliance with the formal standards of governance practice is important, greater emphasis is placed on ensuring the effectiveness of governance practice, with substance prevailing over form. The board also seeks to ensure that good governance is practised at all levels in the Group and is an integral part of Absa’s operations. Absa’s corporate governance standards, which support the Group’s overall strategy, are captured and measured in terms of the Group’s overall balanced scorecard measurement. Absa and Barclays have agreed on a governance framework for how the two entities will work together. The framework takes account of matters such as the regulatory, legislative and industry constraints applicable to Absa and Barclays respectively, the interests of Absa’s minority shareholders, the legal implications of the parent/subsidiary relationship between Barclays and Absa, taking cognisance of the fact that Barclays has made a financial strategic investment in Absa, the fiduciary responsibilities of the Absa and Barclays boards of directors and Absa’s normal corporate governance procedures. The framework is intended to ensure that Barclays and Absa can work together to maximise value for all shareholders while complying with all regulatory and legislative requirements. The framework is reviewed by the board annually, taking account of recommendations made by the Directors’ Affairs Committee. As regards Absa’s black economic empowerment (BEE) transaction (in terms of which approximately 10% of Absa’s total issued share capital is held by Batho Bonke Capital (Proprietary) Limited), governance oversight is provided via an ad hoc board committee, comprising independent directors: D C Cronjé (committee chairman), D C Brink, A S du Plessis and P du P Kruger. The main objective of the committee is to ensure that the BEE transaction is implemented in accordance with the transaction approved by Absa shareholders in June 2004. This committee met four times during 2006 and considered a wide range of matters relating to the overall governance arrangements of the BEE transaction. The committee chairman reported to the board following each committee meeting, and minutes of the committee were provided to the board. In considering share allocations to potential recipients, the committee applied specific principles and criteria. 68 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement Risk management Absa’s overall risk management philosophy, policy, methodologies and governance structure are set out in the risk management report on page 118 of this report. Boards of directors and board committees Board composition Absa has unitary board structures in all South African companies in the Group. The Absa board has an appropriate balance, with a majority of independent directors*. The chairman of the Absa board is an independent director. Details on the categorisation of the directors appear on pages 86 of this report. As at 31 December 2006, there were 21 directors, of whom four were executive, five were non-executive and 12 were considered to be independent directors. In subsidiary companies in the Group, the roles of chairmen and managing directors do not vest in the same persons and the chairmen are non-executive directors of the entities of which they are chairmen. Board procedures and related matters The board meets regularly, retains full and effective control over all the companies in the Group and monitors executive management in implementing board plans and strategies. Additional board meetings, apart from those planned, are convened as circumstances dictate. The number of meetings held during the year under review (including meetings of board-appointed committees) and the attendance of each director are set out on pages 72 to 78 of this report. Where directors are unable to attend a meeting personally, teleconferencing facilities are made available to include them in the proceedings and allow them to participate in the decisions and conclusions reached. The board meets with management annually for a number of days prior to the formulation of the Group’s annual financial budget to debate and agree on the proposed Group strategy and to consider long-term issues facing Absa. The board has identified and monitors key risk areas, key performance areas and non-financial aspects relevant to Absa, where applicable supported by board-appointed committees. The directors are entitled to obtain independent professional advice at the Group’s expense, should they deem this necessary. The board has approved an appropriate policy in this regard. In addition, the board has unrestricted access to all company information, records, documents and property to enable it to discharge its responsibilities. The information needs of the board are reviewed annually. Efficient and timely procedures for informing and briefing board members prior to board meetings have been developed. Directors are afforded the opportunity to propose additional matters for discussion at board meetings. Management ensures that board members are provided with all relevant information and facts to enable the board to reach objective and well informed decisions. Board meetings are scheduled well in advance and include a board plan for the year, setting out matters for consideration at each meeting. Board documentation is provided in a timely manner to directors and the tabling of documents at board meetings is done *A non-executive director who is independent, as deﬁned by King II. Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 69 only on an exception basis. The board agenda and meeting structure has been adapted to focus on strategy and performance monitoring, governance and related matters. This ensures that the board’s time and energy is appropriately applied. The board considers a number of key performance indicators, variance reports and industry trends quarterly. A range of non-financial information is also provided to the board to enable it to consider qualitative performance factors that involve broader stakeholder interests. The board recognises the importance of promoting entrepreneurial flair while continuing to ensure conformance to governance and other compliance restraints. The directors bring a wealth of skills, knowledge and experience from their own fields of business to the board and ensure that debate on matters of strategy, performance, resources, transformation, diversity, employment equity, standards of conduct and policy is robust, informed and constructive. Non-executive directors have access to management and may meet separately with management without the attendance of executive directors. In terms of Absa’s board charter, arrangements for such meetings are facilitated through the office of the Group secretary. Prior to every scheduled board meeting, the non-executive directors meet without the presence of management. Directors are kept appropriately informed of key developments affecting the Group between board meetings. The board has developed a charter, the salient aspects of which are set out below. The Absa board charter Purpose and objectives The purpose of the charter is to regulate how business is to be conducted by the board in accordance with the principles of good corporate governance. The charter sets out specific responsibilities to be discharged by board members collectively and the individual roles expected of them. The objectives of the charter are to ensure that all board members acting on behalf of the Company are aware of their duties and responsibilities as board members and the various legislation and regulations affecting their conduct and to ensure that the principles of good corporate governance are applied in all their dealings in respect of and on behalf of the Company. Key features • The roles of the chairman, deputy chairman, the Group chief executive and individual board members. • Board composition (including qualifications and key competencies for board membership). • Conduct regarding conflicts of interest. • The reward system and process in determining board remuneration. • Director orientation, induction and training. • Succession planning and director selection and appointment. • The role of the board (including the adoption of strategic plans and the monitoring of operational performance and management). • Board procedures. • Access to management by non-executive directors. • Matters specifically reserved for the board, including the approval of: – the Company’s objectives, strategy, strategic financial plans, business plans and annual budgets and the monitoring of performance against these criteria; – annual financial statements, interim reports and related financial matters; – Absa’s code of ethics; – appointments to and removals from the board (including the chairman, the deputy chairman, the Group chief executive, and executive and non-executive directors); 70 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement – delegations of authority to the Group chief executive and executive directors; – board committee mandates, authorities and membership; – Absa’s risk appetite; – significant Company policies; and – Absa’s corporate governance philosophy and ongoing governance compliance. • Compliance with laws and regulations. • Risk management and internal controls. • Stakeholder communication. • Board/individual director performance evaluation. Board appointments and succession planning Non-executive directors on the Absa board are appointed for specific terms and reappointment is not automatic. The initial term of office of directors is three years, whereafter they are obliged to retire but can offer themselves for re-election. A third of the directors retire by rotation annually. If eligible, their names are submitted for re-election at the annual general meeting, accompanied by appropriate biographical details set out in the report to shareholders. Non- executive directors are required to retire at the annual general meeting following their 70th birthday. In line with international best practice, Absa has introduced a requirement in terms of which all directors on the board for longer than nine years are subject to annual re-election by shareholders at the annual general meeting. The board as a whole, within its powers, selects and appoints directors, including the Group chief executive and executive directors, on the recommendation of the Group Remuneration Committee (in respect of executive directors) and the Directors’ Affairs Committee (DAC) (in respect of non-executive directors). The DAC considers non-executive director succession planning and makes appropriate recommendations to the board. This encompasses an evaluation of the skills, knowledge and experience required to implement the Group’s business plans and strategy and address any gaps in this regard, as well as the board transformation process to meet the requirements of the Financial Sector Charter. All appointments are in terms of a formal and transparent procedure and are subject to confirmation by the shareholders at the annual general meeting. Prior to appointment, potential board appointees are subject to a “fit and proper” test, as required by the JSE Limited and as prescribed by the Banks Act. Training and orientation workshops covering topics such as the Group’s business, corporate governance, fiduciary duties and responsibilities, new laws and regulations and risk management are provided to both new and existing directors. Directors (particularly new directors) are encouraged to attend development programmes with regard to their duties, responsibilities, powers and potential liabilities. A formal orientation programme with members of management is provided to all newly appointed directors. The programme typically lasts two days. In addition, new directors are provided with a “governance file” setting out matters such as important legislation (such as provisions and regulations of the Banks Act), the Group’s board/committee governance structure, the board plan for the year, the board charter (which forms part of their letter of appointment), the terms of reference of all board- appointed committees and key company policies. The Group secretary meets with new directors to take them through the governance file, as well as to review recent board documentation. Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 71 Independence The DAC assesses the independence of each Absa director against the criteria set out in King II. Based on this assessment, the DAC is of the view that the following directors meet these criteria: D C Cronjé, D C Brink, D C Arnold, D E Baloyi, B P Connellan, A S du Plessis, G Griffin, M W Hlahla, L N Jonker, P du P Kruger, F A Sonn and P E I Swartz. With regard to Dr Cronjé, the DAC specifically considered the fact that he is chairman of Absa while at the same time being a director of Barclays PLC and Barclays Bank PLC. The DAC noted that Dr Cronjé did not represent Barclays PLC and Barclays Bank PLC on the Absa board nor vice versa. In addition, the committee felt that he was sufficiently independently minded. Taking these factors into account, the committee was of the view that Dr Cronjé is an independent director. Board performance assessment The DAC annually assesses the contribution of each director, using an individual director evaluation process that is conducted by the Group chairman and deputy chairman. The Group chairman’s performance is dealt with by the DAC, whereas that of the deputy chairman is dealt with by the Group chairman and one other member of the DAC. The Absa board as a whole considers the outcomes of the above processes. This culminates in a determination by the board as to whether the board will endorse a retiring director’s re-election. Where a director’s performance is not considered satisfactory, the board will not endorse the re-election. Individual director performance is assessed against the following criteria: time, availability and commitment to performing the function of an Absa director, strategic thought and specific skills, knowledge and experience brought to the board, the director’s views on key issues and challenges facing Absa, the director’s views on his/her own performance as a board member, attendance over the past year and other areas or roles where the director’s specific skills could be used. Information on the directors standing for re-election at the annual general meeting is contained in the explanatory notes to resolutions for the annual general meeting (refer to page 522). Annually, a collective board effectiveness evaluation is conducted. This assessment is aimed at determining how the board’s effectiveness can be improved. The DAC considers the outcomes of the evaluation and makes recommendations where deemed appropriate. The Absa board considers the outcomes of the evaluation and the recommendations of the DAC. Board remuneration and share ownership Details of Absa’s remuneration policies and practices and the remuneration paid to Absa Group directors are set out in the remuneration report on pages 94 to 107. Share- holders are invited to consider and approve the proposed remuneration All appointments are in terms of a formal payable to directors at each annual general meeting. and transparent procedure and are subject Non-executive directors have agreed to hold a minimum of 1 000 Absa to confirmation by the shareholders at the ordinary shares throughout their tenure. Details of the shares held by annual general meeting. directors are set out on pages 355 and 357. 72 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement Attendance at board meetings Board meeting attendance (2006) Director Appointment Resignation Feb Mar Apr Jun Jul Oct Nov* Dec L N Angel A ✔ ✔ ✔ ✔ ✔ ✔ A D C Arnold ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ D E Baloyi ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ S F Booysen ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ D C Brink (deputy chairman) ✔ A ✔ ✔ ✔ ✔ ✔ ✔ D Bruynseels ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ B P Connellan ✔ ✔ ✔ ✔ ✔ ✔ A ✔ D C Cronjé (chairman) ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Y Z Cuba 6 Dec ’06 A S du Plessis ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ G Griffin ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ M W Hlahla ✔ ✔ ✔ ✔ ✔ A ✔ ✔ L N Jonker ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ N Kheraj ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ P du P Kruger ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ L W Maasdorp 30 Sept ’06 ✔ ✔ ✔ ✔ ✔ D L Roberts 23 Oct ’06 ✔ ✔ ✔ ✔ ✔ J H Schindehütte ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ F F Seegers 23 Oct ’06 ✔ ✔ ✔ T M G Sexwale A ✔ ✔ ✔ ✔ ✔ ✔ ✔ F A Sonn ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ P E I Swartz ✔ ✔ ✔ ✔ ✔ ✔ ✔ A L L von Zeuner ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Legend *Special meeting ✔ Attendance A Apologies Board committees A number of board-appointed committees have been established to assist the board in discharging its responsibilities. The membership and principal functions of the standing committees appear in the pages that follow. The board recognises that it is ultimately accountable and responsible for the performance and affairs of the Group and that the use of delegated authorities to board committees and management in no way mitigates or dissipates the discharge by the board and its directors of their duties and responsibilities. Specific responsibilities have been delegated to these committees, which operate under written terms of reference confirmed by the board. There is transparency and full disclosure from board committees to the board. In this regard, the minutes of committees are submitted to the Absa board for noting. In addition, directors have full access to all board committee documentation. Board committees are free to take independent outside professional advice as and when necessary. The office of the Group secretary provides secretarial services for each of the committees. Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 73 Notwithstanding the establishment of the various board committees and delegated authorities, the Absa board reserves to itself a range of key decisions to ensure that it retains proper direction and control of the Group (supported by any recommendation that may be made by the relevant board committee and/or management). A comprehensive framework, setting out authorities and responsibilities with regard to matters affecting the businesses of the boards and committees in the Group, assists in the control of the decision-making process and sees to it that there is a balance of power and authority to ensure that no individual has unfettered powers of decision-making. All board-delegated authorities are reviewed and updated annually by the board. A process is in place to ensure that board committees are subject to annual evaluation by the board to ascertain their performance and effectiveness. Two of Absa’s independent directors have been appointed to the boards of various major subsidiaries. Although the Absa board still retains overall responsibility for the affairs of the Group, subsidiary boards play an important role in the Group’s overall governance approach. Absa directors have full access to subsidiary board documentation. These boards meet five times a year, usually prior to the Absa board meetings. The level of detail dealt with at subsidiary boards is generally greater than that dealt with by the Absa board (as well as being specific to the relevant subsidiary). The Absa board also makes use of ad hoc board committees to deal with specific matters from time to time. Examples of matters dealt with by such committees in the recent past include the Group’s broad-based BEE transaction and the proposed acquisition of the Barclays African operations, where the board has considered and made decisions based on the recommendations of the committees. These ad hoc committees operate under written terms of reference and, in the above instances, their members are all independent directors and have provided independent oversight. The board is of the opinion that the board committees set out on the following pages have effectively discharged their responsibilities as contained in their respective terms of reference for the year under review. Group Remuneration Committee Members: D C Brink (chairman), D E Baloyi, B P Connellan, D C Cronjé and F F Seegers. Composition and meeting procedures: The Group Remuneration Committee is chaired by an independent director of Absa and comprises mainly independent directors of Absa. The Group chief executive, the executive director responsible for human resources and the Group executive director responsible for finance attend the meetings by invitation, but do not participate in discussions and decisions regarding their remuneration and benefits. Meetings are held five times a year. Role, purpose and principal functions: Consideration and recommendation to the board on matters such as succession planning, general employee policies, remuneration and benefits, performance bonuses, executive remuneration, directors’ remuneration and fees, service contracts, the share purchase and option schemes and Group retirement funds. The committee considers executive directors’ emoluments, share and option allocations and other benefits, taking account of responsibility, individual performance and Absa’s retention strategies. To this end, the committee relies on external market surveys and industry reward levels as benchmarks. Remuneration packages are structured in such a way that short- and long-term incentives depend on the achievement of business objectives and the delivery of shareholder value. Non-executive directors receive fees for their contribution to the boards and committees on which they serve. The Group chairman and management recommend proposed fees for consideration by the committee and recommendation to the Absa board, after considering comparable fee structures and market practices. The remuneration of non- executive directors is submitted to shareholders for sanction at the annual general meeting held prior to its implementation and payment. Full details of remuneration matters (including a statement of the Group’s remuneration philosophy) are contained in the remuneration report set out on pages 94 to 107 of this report. The committee undertakes an annual performance assessment of the Group chief executive. The Group chairman’s and Group chief executive’s remuneration are considered taking the assessment of the DAC and the Group Remuneration Committee, respectively, into account. 74 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement Group Remuneration Committee – meeting attendance Director Appointment Resignation Jan Mar May* Jul Sept Oct* Nov D E Baloyi 17 Feb ’06 ✔ ✔ ✔ ✔ ✔ ✔ D C Brink (chairman) ✔ ✔ ✔ ✔ ✔ ✔ ✔ B P Connellan ✔ ✔ ✔ ✔ ✔ ✔ ✔ D C Cronjé ✔ ✔ ✔ ✔ ✔ ✔ ✔ D L Roberts 23 Oct ’06 ✔ ✔ ✔ ✔ ✔ F F Seegers 23 Oct ’06 ✔ ✔ Legend *Special meeting ✔ Attendance Group Audit and Compliance Committee (GACC) Members: A S du Plessis (chairman), D C Arnold, Y Z Cuba, N Kheraj and P du P Kruger. Composition and meeting procedures: Other than Mr Kheraj and Ms Cuba, who are non-executive directors, the chairman and remaining members of the GACC are independent directors on the board of Absa. A third of the members of the GACC retire annually by rotation and are considered for re-election by the Absa board. Meetings are held at least five times a year and are attended by the external and internal auditors and the compliance officer and, on invitation, members of executive management, including those involved in risk management, control and finance, and the Group chairman (who is not a member of the committee). All of the members of the committee are financially literate. At every meeting, time is reserved for separate private discussions with committee members only, the committee together with management (excluding the external auditors) and the committee together with the external auditors (excluding management). Private discussions provide an opportunity for committee members, management and the external auditors to communicate privately and candidly. The internal and external auditors, as well as the compliance officer, have unrestricted access to the GACC, which ensures that their independence is in no way impaired. Role, purpose and principal functions: The GACC assists the board with regard to reporting financial information, selecting and properly applying accounting policies, monitoring the Group’s internal control systems and various compliance-related matters. Specific responsibilities include: • reviewing and/or approving internal audit and compliance policies, plans, reports and findings; • ensuring compliance with the applicable legislation and regulations; • making the necessary enquiries to ensure that all risks to which the Group is exposed are identified and managed in a well-defined control environment; • dealing with matters relating to financial and internal control, accounting policies, reporting and disclosure; • reviewing and recommending to the board interim and annual financial statements and profit and dividend announcements; • recommending to the board the appointment and dismissal of the external auditors and fees payable to the external auditors; • evaluating the performance of the external auditors; • approving the Group’s policy on non-audit services and ensuring compliance therewith; • reviewing and/or approving external audit plans, findings, reports and fees; and • collaborating with the Group Risk Committee and considering issues identified by that committee. Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 75 The Group’s policy on non-audit services, which is annually reviewed by the GACC, sets out in detail which services may or may not be provided by Absa’s external auditors. The policy is largely based on the requirements of the Sarbanes-Oxley Act. The external auditors are prohibited from providing bookkeeping or other services related to the Group’s accounting records or financial statements, financial information systems design and implementation, appraisal or valuation services, fairness opinions or contributions-in-kind reports, actuarial services, internal audit outsourcing, management functions or other secondments, human resource functions (including recruitment/selection), broker or dealer, investment adviser or investment banking services, legal and expert services and services where Absa is represented by the external auditors in legal proceedings involving tax matters. Services that may be provided by the external auditors are statutory audit services, regulatory audit services, other attest and assurance services, regulatory non-audit services and taxation services (except for services where Absa is represented in legal proceedings). They may also provide accountancy advice, risk management and controls advice and carry out transaction support and recoveries. Assignments for allowable services above a certain value must be pre-approved by the GACC. Assignments within management’s mandate must be pre-approved by the Group finance director. All non-audit service fees are reported to the GACC quarterly. Absa has a formal external auditor evaluation process which occurs annually and includes various criteria and standards such as audit planning, technical abilities, audit process/outputs and quality control, business insight, independence and general factors (such as BEE credentials). Absa has an audit partner rotation process in accordance with the relevant legal and regulatory requirements. The committee stays abreast of current and emerging trends in accounting standards and held several workshops during the period under review, specifically with regard to the Sarbanes-Oxley Act and the alignment of Absa’s audit committee practices with those of Barclays. Group Audit and Compliance Committee – meeting attendance Director Appointment Resignation Jan Apr Apr* Jul Sept Nov Nov D C Arnold ✔ ✔ ✔ ✔ ✔ ✔ ✔ Y Z Cuba 6 Dec ’06 A S du Plessis (chairman) ✔ ✔ ✔ ✔ ✔ ✔ ✔ N Kheraj ✔ ✔ ✔ ✔ ✔ ✔ ✔ P du P Kruger ✔ ✔ ✔ ✔ ✔ ✔ ✔ L W Maasdorp 30 Sept ’06 ✔ ✔ ✔ ✔ ✔ Legend *Special meeting ✔ Attendance Group Risk Committee (GRC) Members: P du P Kruger (chairman), D C Arnold, D C Cronjé, A S du Plessis, G Griffin, M W Hlahla, N Kheraj and P E I Swartz. Composition and meeting procedures: The GRC is chaired by an independent director and consists of a further six independent directors and one non-executive director (N Kheraj). Members of executive management attend by invitation. The committee meets at least four times a year. Role, purpose and principal functions: To assist the board with regard to risk management and to ensure compliance with the requirements of the Banks Act regarding risk and capital management. 76 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement The GRC’s principal responsibilities are • to assist the board: – in its evaluation of the adequacy and efficiency of the risk policies, procedures, practices and controls applied in Absa in the day-to-day management of the business; – in the identification of the build-up and concentration of the key risks and in developing a risk mitigation strategy to ensure that Absa manages the risks in an optimal manner; – to set up an independent risk management function, coordinate the monitoring of risk management on a globalised basis, and facilitate and promote communication regarding risk policies, procedures, practices and controls or any other related matter; and – in establishing a process that relates capital to the level of risk undertaken and states capital adequacy goals with respect to risk, taking account of Absa’s strategic focus and business plan; • to liaise with the GACC regarding matters which are common areas of responsibility; • to annually recommend Absa Group’s risk appetite to the board for approval, and to monitor the actual risk taken on against the board-approved appetite on a quarterly basis; • to review the adequacy and efficiency of the risk-type control frameworks and policies determined in accordance with the board’s approved risk approach; • to review the Group’s various risk profiles and ensure they are understood and appropriately managed in the Group; and • in conjunction with the GACC, to ensure Absa makes appropriate disclosure of its risk management status and activities. Group Risk Committee – meeting attendance Director Appointment Mar Jun Sept Nov D C Arnold ✔ ✔ ✔ ✔ D C Cronjé ✔ ✔ ✔ ✔ A S du Plessis ✔ ✔ ✔ ✔ G Griffin ✔ ✔ ✔ ✔ M W Hlahla 28 Jul ’06 A ✔ N Kheraj ✔ A# ✔ A# P du P Kruger (chairman) ✔ ✔ ✔ ✔ P E I Swartz ✔ ✔ A ✔ Legend ✔ Attendance A Apologies #The Barclays risk director attended these meetings. Directors’ Affairs Committee (DAC) Members: D C Cronjé (chairman), D C Brink, L N Jonker, F F Seegers, T M G Sexwale and F A Sonn. Composition and meeting procedures: The DAC is chaired by the Group chairman and the majority of its members are independent directors. Four meetings a year are scheduled. Role, purpose and principal functions: This committee assists the board with regard to corporate governance, board nominations and related matters. More specifically, this encompasses: • reviewing all aspects relating to ongoing corporate governance during the year, the inclusion of statements in this regard in the report to shareholders and consideration of the requirements of Regulation 38(5) of the Banks Act; • considering current and emerging trends in corporate governance and the Group’s governance systems as well as benchmarking the Group’s governance systems against local and international best practice; Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 77 • reviewing the size, diversity, demographics, skills and experience of the board, perceived gaps in the board’s composition, potential board appointees and non-executive director performance evaluations (including that of the Group chairman); • conducting an effectiveness evaluation of the Absa board to review its performance in meeting its key responsibilities; and • annually evaluating the individual performance of directors, as well as the performance of the board as a whole. Directors’ Affairs Committee – meeting attendance Director Appointment Resignation Jan Apr Jul Aug* Oct* Nov D C Brink ✔ ✔ ✔ ✔ ✔ ✔ D C Cronjé (chairman) ✔ ✔ ✔ ✔ ✔ ✔ L N Jonker ✔ ✔ ✔ ✔ ✔ ✔ D L Roberts 23 Oct ’06 ✔ ✔ ✔ ✔ ✔ F F Seegers 23 Oct ’06 ✔ T M G Sexwale A ✔ ✔ A ✔ ✔ F A Sonn 17 Feb ’06 ✔ ✔ A ✔ ✔ Legend *Special meeting ✔ Attendance A Apologies Group Credit Committee Members, composition and meeting procedures: The committee consists of a panel of four independent directors (D C Brink, B P Connellan, D C Cronjé and A S du Plessis), of which at least two are required as a quorum for facility decisions. Certain members of executive management and risk management also attend meetings. The committee meets daily as required. Role, purpose and principal functions: The Group Credit Committee considers and approves credit exposures that exceed the mandated approval limits of management in the credit risk function. The Group Credit Committee replaced the former Board Lending Committee and divisional credit committees. Credit Committee: Large Exposures Members: D C Cronjé (chairman), S F Booysen, D C Brink, B P Connellan, A S du Plessis and J H Schindehütte. Composition and meeting procedures: Four independent directors and the Group chief executive and Group finance director. Specific members of management, such as the Group executive: Credit and the Group executive: Enterprise-wide Risk Management, attend meetings ex officio. Quarterly meetings are scheduled for this committee. Role, purpose and principal functions: This committee has been established pursuant to requirements set by the South African Reserve Bank (Bank Supervision Department) with regard to large exposures (amounts exceeding 10% of Absa Bank Limited’s capital and reserves). The committee approves or ratifies credit exposures that exceed the mandated approval limits of the Group Credit Committee. The Absa board sets these limits annually. Credit Committee: Large Exposures – meeting attendance Director Apr Jul Sept Nov S F Booysen ✔ ✔ ✔ ✔ D C Brink ✔ ✔ ✔ ✔ B P Connellan ✔ ✔ ✔ A D C Cronjé (chairman) ✔ ✔ ✔ ✔ A S du Plessis ✔ ✔ ✔ ✔ J H Schindehütte ✔ ✔ ✔ ✔ Legend ✔ Attendance A Apologies 78 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement Implementation Committee Members: G Griffin (chairman), B P Connellan, D C Cronjé and F F Seegers. Composition and meeting procedures: The Implementation Committee is chaired by an independent director and the majority of its members are independent directors. Six meetings were held during 2006. Role, purpose and principal functions: This committee provides governance oversight and assists the board with regard to integration and implementation risks and opportunities flowing from the acquisition by Barclays of a controlling stake in Absa (the transaction). More specifically this encompasses: • considering integration/implementation opportunities and risks flowing from and/or as a consequence of the transaction and making recommendations to the board and/or the relevant committees of the board, where appropriate, relating to actions deemed necessary to realise the planned benefits flowing from the transaction; • providing a forum for Absa management for more detailed reporting to the board on progress with regard to implementation/integration matters, and more specifically where management is required to seek provisional support for a planned action, subject to final board approval where necessary; • providing oversight of any implementation investments (including write-offs but excluding acquisitions and disposals) as approved by Absa management within their mandate and making recommendations to the board with regard to any implementation investments above management’s mandate; and • within its mandate, reviewing and approving any economic transfer arrangements (ETAs) between Absa and Barclays and recommending to the Absa board any ETAs exceeding its mandate. Implementation Committee – meeting attendance Director Appointment Resignation Feb Apr Jul Sept Oct Dec B P Connellan 17 Feb ’06 ✔ ✔ ✔ ✔ ✔ D C Cronjé ✔ ✔ ✔ ✔ ✔ ✔ G Griffin (chairman) ✔ ✔ ✔ A ✔ ✔ L W Maasdorp 30 Sept ’06 ✔ ✔ ✔ ✔ D L Roberts 23 Oct ’06 ✔ ✔ ✔ ✔ ✔ F F Seegers 23 Oct ’06 ✔ Legend ✔ Attendance A Apologies Board Finance Committee Members: D C Cronjé (chairman), D C Brink, A S du Plessis, P du P Kruger and F F Seegers. Composition and meeting procedures: The Board Finance Committee is chaired by an independent director and the majority of its members are independent directors. This committee was formed in early 2006 and has a mandate from the board to review and approve investments and divestments and certain defined large transactions, subject to specific limits. Meetings are held on an ad hoc basis as required. Six meetings were held during 2006. Role, purpose and principal functions: The committee is mandated by the board to enter into and settle the terms of all transactions with regard to the acquisition and disposal of investments as well as to approve capital raising and securitisation transactions, subject to limits set by the board. Previously, these transactions were dealt with by the board. The advantage of this is that the committee can more rapidly deal with matters within its mandate (such as investment or divestment opportunities), whereas previously these would typically have been dealt with at the next scheduled board meeting. Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 79 Executive directors and the Group Executive Committee (Group Exco) There are four executive directors on the board of Absa and a number of executive directors on the boards of the Group’s main subsidiaries. There are no service contracts exceeding six months relating to the position of any executive director. Executive directors are required to retire from the board (as executive directors) on reaching the age of 60. There is full disclosure in the remuneration report of various remuneration matters in respect of the executive directors of Absa. The board appoints executive management, taking into account the recommendations of the Group chief executive and the Group Remuneration Committee. In addition, the Group Remuneration Committee determines the remuneration and benefits of executive directors. Group Exco, established and chaired by the Group chief executive, comprises the executive directors and other members of the executive management of Absa and of the Group’s major subsidiary, Absa Bank Limited. It meets, as a general rule, once a week and deals with all material matters relating to the implementation of the agreed strategy, the monitoring of performance and the consideration of company policies. The board has delegated specific authorities to the Group chief executive. These delegated authorities, which are encompassed in a board-approved signing authority resolution, are reviewed annually or as circumstances dictate. As a general rule, members of Group Exco are not permitted to hold external directorships. In exceptional cases, the Group Remuneration Committee allows such directorships only to the extent that these do not interfere with the members’ immediate management responsibilities. Share dealings In terms of the Group’s closed period policy, directors, officers, participants in the share incentive scheme and employees who may have access to price-sensitive information are precluded from dealing in Absa shares for approximately two and a half months prior to the release of the Group’s interim and final results. In terms of the policy, “shares” include options, financial instruments and securities, as defined in the Financial Markets Control Act and the Stock Exchanges Control Act. Where appropriate, additional closed periods, as well as the persons to whom such periods apply, may be invoked by the board. Details of directors’ dealings in Absa shares are disclosed to the board and the JSE Limited through the Securities Exchange News Service (Sens). In addition, details of trades in Absa shares by Group Exco members are disclosed to the Group Remuneration Committee. Group secretary All directors have access to the advice and services of the Group secretary, who provides guidance to the board as a whole and to individual directors with regard to how their responsibilities should properly be discharged in the best interests of the Company. The secretary also oversees the induction of new directors and assists the Group chairman and the Group chief executive in determining the annual board plan and board agendas, as well as formulating governance and board-related issues. 80 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement Internal control The directors are responsible for ensuring that the Group maintains adequate records, which disclose, with reasonable accuracy, the financial performance and position of the Group. In the case of a banking group in particular, great reliance is placed on information contained in its financial statements, not least by the investing community, depositors, other banks and the regulatory authorities. To enable the directors to meet these responsibilities, the board sets standards and management implements systems of internal control, comprising policies, standards, procedures, systems and information, to assist in: • safeguarding assets and reducing the risk of loss, error, fraud and other irregularities; • ensuring the accuracy and completeness of accounting records; and • the timely preparation of reliable financial statements and information in compliance with relevant legislation and generally accepted accounting policies and practices. The Group’s internal audit function and the external auditors independently appraise the adequacy and effectiveness of the internal controls. The Group Audit and Compliance Committee, with extensive input by the internal and external auditors, plays a major role in assisting the directors in satisfying themselves regarding the adequacy and effectiveness of the accounting systems, records and internal controls. The directors’ report on this aspect is contained in the statement on the responsibility of directors for annual financial statements on page 353 of this report. The board of directors reports annually on the Group’s controls in terms of Regulation 39 (4) of the Banks Act. The view of the directors in this regard is contained in the statement on the responsibility of directors for the annual financial statements on page 351 of this report. The Group’s joint external auditors are Ernst & Young Registered Auditors Inc. and PricewaterhouseCoopers Inc. The report of the independent auditors for the year under review is contained on page 352 of this report. Regulatory compliance The board of directors is appointed by the shareholders of the Group to lead, control and monitor the business of the Group and to provide effective corporate governance. The board, through the Group chief executive, delegates the authority to the Group compliance officer to ensure that the compliance process operates effectively and that laws, regulations and supervisory requirements are adhered to. As part of the compliance process, Group Compliance independently monitors the adequacy and effectiveness of the internal controls implemented to ensure compliance with applicable laws, regulations and supervisory requirements. The reporting structures in the Group ensure that the Group compliance officer has unrestricted access to the Group Audit and Compliance Committee (GACC), the Group chief executive and the chairman of the board of directors (the board), while functionally reporting to the executive director responsible for risk. This ensures that Group Compliance remains independent and has the necessary support to perform its duties. Going concern The board has considered and recorded the facts and assumptions on which it relies to conclude that the business will continue as a going concern in the financial year ahead. The board considers this aspect at both the interim reporting stage and financial year-end. The directors are of the opinion that the business will be a going concern in the year ahead and their statement in this regard is also contained in the statement on the responsibility of directors for the consolidated financial statements on page 351 of this report. Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 81 Integrated sustainability reporting Overall reporting approach Absa has adopted the Global Reporting Initiative (GRI) guidelines on economic, environmental and social performance (collectively referred to as the triple bottom line) as a benchmark for the Company’s sustainability reporting. The GRI guidelines represent the most advanced international standards for sustainability reporting and Absa seeks to align its reporting to these standards. However, it is recognised that enhanced sustainability reporting is an ongoing journey requiring an incremental approach. An analysis of Absa’s reporting, measured against the GRI guidelines, is contained on page 330 of this report. JSE Socially Responsible Investment (SRI) Index Absa is included in the JSE SRI Index. This index applies to the top 150 companies listed on the JSE and measures companies’ systems and processes with regard to corporate governance, environmental, economic and social issues. Stakeholder communication and relationships The Group has various policies governing communication, relationships and conduct with stakeholders. Absa’s stakeholders include shareholders, employees, customers, the community, governments and regulators and various resource/service providers. The board recognises the importance of ensuring an appropriate balance in meeting the diverse needs and expectations of the Group’s stakeholders, building lasting relationships with them and reporting to them in a transparently balanced and comprehensible manner that favours substance over form. Absa reports annually on the nature and extent of its social, transformation, ethical, safety, health (including HIV/Aids) and environmental policies and practices. The Group recognises the need for full, equal and timely disclosure to all shareholders, as prescribed by the Listings Requirements and guidelines of the JSE. Apart from annual and interim reports, it uses a broad range of communication channels, including Sens, the print, radio and television media and the Absa website, www.absa.co.za, to achieve this. In addition, Absa has an investor relations department responsible for ensuring appropriate communication with shareholders and the investment community. Regular contact is maintained with domestic and international institutional shareholders, fund and asset managers and analysts by means of a comprehensive investor relations programme. This includes meetings with executive management, investor road shows, presentations to the investment community as well as liaison with private shareholders. Copies of Sens announcements, investor briefings/presentations, interim and annual reports and other relevant information are posted on the Group’s website at www.absa.co.za. Merrill Lynch South Africa (Proprietary) Limited acts as Absa’s sponsor in compliance with the JSE Listings Requirements. The Group recognises the importance of its shareholders’ attendance at its annual general meetings. Such attendance offers an opportunity for shareholders to raise issues and participate in discussions relating to items included in the notice of meeting. Explanatory notes setting out the effects of all proposed resolutions accompany the notice of meeting. The chairmen of board-appointed committees attend annual and other general meetings to respond to questions from shareholders. Shareholders’ meetings are conducted on the basis of a poll. The results of shareholders’ meetings are posted on Sens. Shareholders have access to the minutes of such meetings in accordance with the requirements of the Companies Act. An employee report detailing employment equity issues, training and development initiatives, occupational health and safety matters and Absa’s strategy, plan and policy with regard to the potential impact of HIV/Aids on the Company’s activities, appears in the sustainability section, starting on page 260 of this report. 82 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement A community report detailing Absa’s role in the community can be found on pages 276 to 293 of this report. Regarding black economic empowerment (BEE), Absa has developed a BEE policy that covers Absa’s overall BEE strategy as well as procurement practices and investment strategies. Details of Absa’s BEE transformation initiatives and its approach to the Financial Sector Charter are contained on pages 306 to 319 of this report. An environmental report is set out on pages 320 to 329 of this report. Absa is considered a low-impact company from an environmental perspective, so there is limited board involvement with regard to environmental matters. However, Absa is environmentally aware and the Group has an environmental officer with designated responsibilities for environmental matters. Furthermore, Absa’s credit policies contain specific provisions with regard to environmental matters and acceptable lending practices. Democracy support One of Absa’s aspirations is to contribute towards the preservation of a politically stable and economically prosperous society and the development of democracy. With this in mind, the Absa board has approved a democracy support policy. In terms of the policy, the criteria for recipients of these donations is that they must be registered with the Independent Electoral Commission (IEC) and, to be considered, they must have a minimum of three seats in the National Assembly. The amount of the donations takes into account the performance and results of each of the political parties in the most recent general election as determined by the IEC. During 2006, the board approved that an amount of R2,4 million be set aside for the above. Financial Sector Charter Absa is a signatory to the Financial Sector Charter. This charter is a voluntary private sector initiative to address BEE in the financial services industry and provides a basis for the sector’s engagement with other stakeholders, including the government. The charter represents a partnership programme as outlined in the government’s strategy for broad- based BEE and establishes targets and responsibilities in respect of human resource development, procurement policies, enterprise development, access to financial services, empowerment financing and ownership. The charter also outlines processes for implementation and mechanisms to monitor and report on progress. More detail on Absa’s progress against the charter is contained on pages 306 to 319 of this report. Code of Banking Practice Absa endorses the Code of Banking Practice and applies the underlying values embodied in the code. Absa is committed to providing its customers with professional and friendly service, in a manner that is fast, easy, accessible, transparent, approachable and in line with what is fair and just. For this reason, Absa regards the code as a living document. To ensure adherence to the code, training is constantly provided to employees, customers are made Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 83 aware of the Company’s commitment to the code and the code is made available through the branch network and on the internet. In collaboration with the Banking Sector Education and Training Authority (known as Bankseta) and other banks, training material for the industry has been designed and delivered to ensure consistency in training and knowledge sharing in the industry and therefore ensure awareness and consumer protection. Furthermore, Absa’s Group Compliance function monitors procedures and practices against the code. The ultimate customer experience forms the basis of the code, which also links with the relevant Absa values: to demonstrate integrity, to treat customers consistently fairly and, as a customer-driven organisation, to be transparent in all dealings with customers. Absa is a subscribing member of the Office of the Ombudsman for Banking Services. The mission of the ombudsman is to provide banks and their customers with a quick and efficient dispute resolution service in a fair, impartial and confidential way and to strive to improve general banking practice. Of all the customer complaints lodged through Absa’s Actionline central help desk during the year under review, very few required the further intervention of the Office of the Ombudsman for Banking Services. Absa Customer Care has an internal mediation panel (ombudsman functionality) available to internal and external customers, providing additional dispute resolution options. Absa has implemented a customer charter, which sets out Absa’s commitment to providing the highest standard of customer service. Areas covered by the charter are service, affordability, choice, convenience and security. National Credit Act (NCA) A governance structure has been established which defines how and when the National Credit Regulator is engaged. At industry level a number of bodies have been established to address NCA queries and issues. The Absa representation at these bodies is carefully determined and approved through the project structure. To meet the requirements of the NCA, the organisation established a Group-wide project which has addressed areas such as technology and systems, pricing, processes, employee behaviour and training, communications, forms and customer correspondence, and credit assessment and rehabilitation. Within each of these areas, the existing protocols and standard operating procedures have been matched against the provisions of the NCA, and, where necessary, the protocols and standard operating procedures already in place, revised and enhanced to meet these new provisions. To ensure continued awareness among employees, a communications and training awareness drive has been undertaken. The FAIS Ombud (Established in terms of the Financial Advisory and Intermediary Services (FAIS) Act, No 37 of 2002) The Office of the FAIS Ombud is a statutory ombudsman established in terms of the FAIS Act. The objective of the FAIS Ombud is to deal with complaints in a procedurally fair, informal, economical and expeditious manner and by reference to what is equitable in all circumstances. The Office of the Ombud investigates and makes determinations with regard to complaints received from qualifying complainants. The FAIS Ombud attends to, inter alia, complaints relating to financial services (advice or intermediary service) rendered by authorised financial services providers (AFSPs) or representatives of providers where the provider or representative has allegedly contravened or failed to comply with the provisions of the FAIS Act and as a result the complainant has suffered financial prejudice or damage. It also deals with allegations that the provider or representative wilfully or negligently rendered a financial service to the complainant that caused prejudice or damage to the complainant. Lastly, the FAIS Ombud attends to complaints that the provider or representative has treated a complainant unfairly. The FAIS Ombud does not deal with matters relating to the investment performance of financial 84 [ Absa Group Limited Stakeholder report 31 December 2006 ] Corporate governance statement products that fall within the ambit of the FAIS Act unless such performance has been guaranteed by a financial adviser or intermediary or there appears to be other evidence of impropriety. The FAIS Ombud has limited monetary jurisdiction and can only attend to complaints with a monetary value of up to R800 000. Alternatively, the complainant can abandon the excess amount. The FAIS Ombud, also referred to as the Ombudsman for Financial Services Providers, is the only statutory ombudsman. The FAIS Ombud has jurisdiction over complaints received in respect of agreements, services or products or financial institutions as defined. Ombudsmen such as the Ombudsman for Banking Services, the Credit Information Ombudsman as well as the ombudsmen for the long- and short-term insurance industries have been voluntarily created by their respective industries but have recently been acknowledged as recognised schemes in terms of the Financial Services Ombud Schemes Act, No 37 of 2004. In terms of this Act, the ombudsman of a recognised scheme has the jurisdiction to attend to complaints as provided for in the procedures under which the scheme operates. All AFSPs in the Absa Group have a comprehensive internal complaints resolution process that they follow when they receive a complaint from a customer. It is only in the event that the customer is not satisfied with the resolution of the complaint that the customer may approach the FAIS Ombud. All AFSPs must disclose to the customer the details of the FAIS Ombud, as required by the Act and its subordinate legislation, thereby promoting transparent and fair dealings with customers. Ombudsmen for the long- and short-term insurance industries Members of the long- and short-term insurance industries contribute subscriptions to the offices of the ombudsmen for long- and short-term insurance. The ombudsman for the long-term insurance industry mediates in disputes between the subscribing members of the industry and policyholders. In so doing, the ombudsman endeavours to ensure that principles of fairness, equity and independence prevail. The ombudsman for short-term insurance seeks to resolve disputes between industry members and consumers in an independent, impartial, cost-effective, efficient, informal and fair way. As a subscribing member, Absa co-operates fully with the offices of the ombudsmen with regard to the resolution of disputes and constantly seeks to maintain positive relationships with their offices. Organisational integrity and the code of ethics Unethical behaviour in the broader South African community is reported regularly in the media. A company such as Absa, which represents a Management demonstrates its commitment sample of the broader community, does not escape these trends. It is to the code of ethics by entrenching therefore crucial for management to various principles. ensure that there is an appropriate focus on preventing losses owing to unethical behaviour. In Absa, through various risk control procedures, the effects of unethical behaviour are limited. Absa has appointed the Corporate governance statement [ Absa Group Limited Stakeholder report 31 December 2006 ] 85 managing executive: Human Resources as the ethics officer, ex officio. Compliance with Absa’s code of ethics is monitored by a specific official in Absa’s Group Compliance function. Absa’s code of ethics is periodically refined, applying input from various interested parties and stakeholders in the organisation. Management demonstrates its commitment to the code of ethics by entrenching various principles. These include rewards and incentives for ethical behaviour and disciplinary procedures as well as criminal and civil charges for unethical or dishonest behaviour. In addition, employees found guilty of dishonesty during internal procedures are reported to the Banking Council for listing in the industry’s register. Absa has an independently operated helpline to facilitate the reporting of possible fraudulent, corrupt and unethical behaviour in the Group. The line is available 24 hours per day, seven days a week. Furthermore, newly appointed employees and employees employed in sensitive positions are assessed for ethical risks. Appropriate training in procedures and laws relating to the prevention of crime is provided and awareness of ethical behaviour is stimulated by regular communication with employees in the Group. All incidents involving potentially fraudulent activities are formally investigated and corrective actions taken. Procedures are adapted when deemed prudent to prevent further incidence of unethical behaviour. Absa’s code of ethics has been provided to all directors under cover of a letter from the Group chairman, in terms of which directors undertake to adhere to the code. The board is satisfied that there are processes in place to ensure that Absa’s code of ethics is being adhered to. Absa has a Brand and Reputation Committee to protect and enhance the brand and reputation of Absa in line with the Group’s belief that its reputation as a good corporate citizen is an important driver of economic value. The committee plays an important role in fulfilling the board’s objective for Absa to be a leading company in the field of corporate responsibility and with regard to ensuring that all stakeholders are treated fairly and appropriately. The committee considers and provides advice to the Group chief executive and the board on matters that impact the Group’s reputation and will advise on the appropriate actions that should be taken to maintain robust ethical business practice, for example with regard to stakeholder relationship management. In addition, Absa has a Recruitment and Promotions Committee. The purpose of the committee is to govern the recruitment (external and internal) and promotion of individuals to the top leadership team at Absa and other high priority roles as designated by the Group chief executive and managing executive: Human Resources. The committee is chaired by the Group chief executive and comprises a further six members of Group Exco, including the director responsible for human resources. 86 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group board Introduction The Absa board has an appropriate balance with a majority of independent directors. The chairman of the Absa board is an independent director. As at 31 December 2006, there were 21 directors, of whom four were executive, five were non-executive and 12 were considered to be independent directors. Key developments A number of developments impacted the membership of the Absa board during the twelve months under review. These included: • the resignation of Mr Maasdorp on 30 September 2006; • the resignation of Mr Roberts on 23 October 2006 and the appointment of Mr Seegers at the same date; and • the appointment of Ms Cuba on 6 December 2006. Board membership The Absa Group board comprised the following directors as at 31 December 2006: Independent non-executive directors D C Arnold, D E Baloyi, D C Brink (deputy chairman), D C Cronjé (chairman), B P Connellan, A S du Plessis, G Griffin, M W Hlahla, L N Jonker, P du P Kruger, F A Sonn and P E I Swartz Non-executive directors L N Angel, Y Z Cuba, N Kheraj*, F F Seegers# and T M G Sexwale Executive directors S F Booysen (Group chief executive), D Bruynseels*, J H Schindehütte and L L von Zeuner *British Dutch # Board committee membership Absa seeks to ensure that a majority of independent non-executive directors serve on the Group’s board committees. The board committees are set out below. Committee Members Group Audit and Compliance Committee A S du Plessis (chairman), D C Arnold, Y Z Cuba, N Kheraj and P du P Kruger Group Risk Committee P du P Kruger (chairman), D C Arnold, D C Cronjé, A S du Plessis, G Griffin, M W Hlahla, N Kheraj and P E I Swartz Group Remuneration Committee D C Brink (chairman), D E Baloyi, B P Connellan, D C Cronjé and F F Seegers Directors’ Affairs Committee D C Cronjé (chairman), D C Brink, L N Jonker, F F Seegers, T M G Sexwale and F A Sonn Group Credit Committee D C Brink , B P Connellan, D C Cronjé and A S du Plessis Credit Committee: Large Exposures D C Cronjé (chairman), S F Booysen, D C Brink, B P Connellan, A S du Plessis and J H Schindehütte Implementation Committee G Griffin (chairman), B P Connellan, D C Cronjé and F F Seegers Board Finance Committee D C Cronjé (chairman), D C Brink, A S du Plessis, P du P Kruger and F F Seegers Group board [ Absa Group Limited Stakeholder report 31 December 2006 ] 87 Biographical details and appointment dates of board members The biographical details and appointment dates of the Group’s board members as at 31 December 2006 were as follows: Age 60 Qualifications DCom Title Chairman Year appointed 1987 Independence Independent director Absa board committee • Directors’ Affairs Committee (chairman) memberships • Group Remuneration Committee • Group Risk Committee • Group Credit Committee • Credit Committee: Large Exposures (chairman) • Implementation Committee • Board Finance Committee Other directorships/ Dr Cronjé is a director of Barclays PLC and Barclays Bank PLC. He is the chairman trusteeships of the Absa Foundation and a trustee of the Absa Group Retirement Fund. He is a member of certain subsidiary boards in Absa. Skills, expertise and Dr Cronjé joined Volkskas in 1975 and held various positions in Volkskas Merchant experience Bank and Volkskas Group. He was formerly deputy chief executive and subsequently Group chief executive of Absa until 1997. D C (Danie) Cronjé Age 67 Qualifications MSc Eng (Mining), Diploma in Business Administration, Graduate Diploma in Company Direction Title Deputy chairman Year appointed 1992 Independence Independent director Absa board committee • Directors’ Affairs Committee memberships • Group Remuneration Committee (chairman) • Group Credit Committee • Credit Committee: Large Exposures • Board Finance Committee Other directorships/ Chairman of Unitrans Limited, and a director of Sappi Limited, BHP Billiton Limited trusteeships and BHP Billiton PLC. He is a trustee of the Absa Foundation and chairman of the Absa Group Retirement Fund. He is co-chairman of the Business Trust, a director of the National Business Initiative and vice-president of the South African Institute of Directors. Skills, expertise and Joined Murray & Roberts Limited in 1970 after eight years in the gold industry with experience Anglo American Corporation of South Africa Limited. Appointed chief executive officer of Murray & Roberts Holdings Limited in 1986 and chairman in 1994. Mr Brink was chief executive officer of Sankorp Limited from 1994 to 1997. D C (Dave) Brink Age 44 Qualifications DCom (Acc), CA(SA) Title Group chief executive Year appointed 2004 Independence Executive director Absa board committee • Credit Committee: Large Exposures memberships • Attends various other board committee meetings ex officio. Other directorships/ Dr Booysen is a director of various companies in the Absa Group. trusteeships Skills, expertise and After completing his articles with Ernst & Young (1980–1983), Dr Booysen became a experience lecturer in accounting at the University of South Africa (1983–1988). His first appointment with the Group was as senior manager: Finance at TrustBank (1989– 1991). He then became an assistant general manager at TrustBank (1991–1992). From 1992 to 1994, he was assistant general manager: Group Finance at Absa. He then joined Absa Corporate Bank (now Absa Capital). He held the positions of assistant general manager, general manager and deputy operating executive until he was appointed as a Group executive director in 2001. He was appointed as Group chief executive of Absa Group Limited in August 2004. S F (Steve) Booysen 88 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group board Age 52 Qualifications BA (Hons), MSc (Sociology) Year appointed 2004 Independence Non-executive director Absa board committee • None, but she is a trustee of the Absa Foundation. memberships Other directorships/ Ms Angel is chairperson of a women’s investment group, TsaRona Investments, and trusteeships a director of Batho Bonke Capital. She is active in nature conservation and is a director of the Open Africa Initiative and the Peace Parks Foundation. She is also a trustee of the Kagiso Trust and a board member of Deloitte Chartered Accountants (SA). Skills, expertise and From 1994 to 1995, Ms Angel was the public affairs manager at Rhone-Poulenc experience Rorer SA (Proprietary) Limited. Thereafter she was appointed as general manager: Corporate Affairs at Engen Petroleum Limited, a position she held until early 2000, when she was appointed as executive director: Strategic Affairs at Engen. From 2001 to 2003, Ms Angel was seconded to the Presidency as chief operations officer: Strategic Planning and Communications. From 2004 to 2005 she was the chief executive officer of Mvelaphanda Resources Limited. She was then appointed as the managing director: External Relations at Eskom. She resigned from this position in June 2006, so as to focus on her role as chairperson of TsaRona Investments. L N (Nthobi) Angel Age 66 Qualifications CA(SA), FCMA, AMP Year appointed 2003 Independence Independent director Absa board committee • Group Audit and Compliance Committee memberships • Group Risk Committee Other directorships/ Mr Arnold is a director of the Wits Health Consortium (Proprietary) Limited and trusteeships chairman of its audit committee. He is also chairman of the Barlows Pension Fund and is a trustee of the Absa Group Retirement Fund. Skills, expertise and Mr Arnold was formerly the executive director: Finance and Administration of experience Barloworld Limited. He joined the Barlows Group in 1967 and held a number of senior financial positions in the Barlows Group, which culminated in his appointment to the board in 1993. He retired from Barloworld at the end of March 2003. Mr Arnold is a past president of the Eastern, Central and Southern African Federation of Accountants (ECSAFA) and represented ECSAFA on the Council of the International Federation of Accountants (IFAC). He is also a past president of the South African Institute of Chartered Accountants (SAICA) and is an honorary life member of SAICA. He has represented SAICA on the Financial and Management Accounting Committee of IFAC. D C (Des) Arnold Age 50 Qualifications Ed.D (International Education and Development) Year appointed 2004 Independence Independent director Absa board committee • Group Remuneration Committee memberships Other directorships/ Dr Baloyi is an executive director of the National Black Business Caucus with trusteeships expertise in the fields of business development and strategy. She is the chairperson of the Advertising Standards Authority, the Diabo Share Trust for Telkom employees, Medikredit and the National Skills Authority. Dr Baloyi serves on a number of other boards, including the Business Unity South Africa Council, SA Tourism (where she is deputy chairperson), the Southern African Enterprise Development Fund, Metrofile Holdings Limited (formerly MGX Holdings Limited) and Enterprise Risk Management Limited. Dr Baloyi is also the chairperson of South African Women Investment Holdings, an organisation she founded, and serves on the board of governors of the SA Council on HIV/Aids. Skills, expertise and Dr Baloyi spent 12 years in the US studying and working for, among others, the experience African-American Institute and the United Nations Development Fund for Women. She also taught at well-known academic institutions, including City University of New York, Essex County College and Rutgers University. She has been involved in many of the empowerment charter processes. D E (Danisa) Baloyi Group board [ Absa Group Limited Stakeholder report 31 December 2006 ] 89 Age 47 Qualifications BA (Hons), MBA, Diploma in Financial Studies, Associate of the Chartered Institute of Bankers Year appointed 2005 Independence Executive director Absa board committee • Attends various board committee meetings ex officio. memberships Other directorships/ He is a director of Barclays Bank of Botswana Limited, Barclays Bank of Ghana trusteeships Limited, Barclays Bank of Kenya Limited, Barclays Bank of Zambia Limited, Barclays Bank Egypt (SAE), Barclays Overseas Pension Fund Trustees Limited and the Overseas Development Institute. Skills, expertise and Joined Barclays in 1980. He has fulfilled a variety of UK-based branch, regional and experience head office roles, including a position as deputy head of the Barclays business sector marketing department. He was the head of Network and Operations (1995–1996). He was then appointed as finance director for the Barclays Africa, Caribbean, Middle East and Latin American business (1997). He was appointed as managing director for Barclays Africa in 1999. He now holds the role of chief executive officer for Barclays Africa. He led the transformation of the Barclays business in Africa. Following the acquisition of Barclays majority holding in Absa, Mr Bruynseels was appointed Group executive director and member of the Absa Executive Committee and board (2005). D (Dominic) Bruynseels Age 66 Qualifications CA(SA) Year appointed 1994 Independence Independent director Absa board committee • Group Remuneration Committee memberships • Group Credit Committee • Credit Committee: Large Exposures • Implementation Committee Other directorships/ Director of Illovo Sugar Limited, Tiger Brands Limited, Reunert Limited and Sasol trusteeships Limited. Skills, expertise and After qualifying as a chartered accountant, he joined the Barlows Group in 1964. He experience managed a number of subsidiaries and was appointed as a director of Barlow Rand Limited in 1985. Mr Connellan was executive chairman of the building materials, steel and paint division until 1990. Thereafter he was appointed as executive chairman of Nampak Limited, a position he held until retirement in 2000. B P (Brian) Connellan Age 29 Qualifications BCom (Hons), CA(SA) Year appointed 2006 Independence Non-executive director Absa board committee • Group Audit and Compliance Committee memberships Other directorships/ Director of Mvelaphanda Group Limited, Mvelaphanda Holdings (Proprietary) trusteeships Limited, Total Facilities Management Company (Proprietary) Limited and Life Healthcare (Proprietary) Limited. She is a member of the Nelson Mandela Foundation Investment and Endowment Committee. Skills, expertise and In 1999, Ms Cuba commenced her career in marketing with Robertsons Foods. experience Thereafter, she moved to Fisher Hoffman, an auditing firm, where she completed her articles in 2002. She then joined Mvelaphanda in January 2003 in its corporate finance division. She currently holds the position of deputy chief executive officer of Mvelaphanda Group and Mvelaphanda Holdings (Proprietary) Limited. Y Z (Yolanda) Cuba 90 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group board Age 62 Qualifications BCom, CA(SA), HDip Tax, AMP Year appointed 1992 Independence Independent director Absa board committee • Group Audit and Compliance Committee (chairman) memberships • Group Risk Committee • Group Credit Committee • Credit Committee: Large Exposures • Board Finance Committee Other directorships/ He is a director of Sanlam Limited, KWV Group Limited and various companies in the trusteeships Sanlam Group. Skills, expertise and From 1986 to 2002, he was an executive director of Sankorp Limited and Sanlam experience Limited. A S (Attie) du Plessis Age 57 Qualifications BSc, FIA, FASSA Year appointed 2001 Independence Independent director Absa board committee • Group Risk Committee memberships • Implementation Committee (chairman) • Also serves on the board of Absa Financial Services and Absa Life Actuarial Committee Other directorships/ He is chairman of two privately held companies based in Cape Town and is a trustee trusteeships of the University of Cape Town Foundation. Skills, expertise and An actuary, Mr Griffin has wide experience in the financial services industry, both experience locally and internationally. He worked for Old Mutual from 1970 to 1999, at which time he was managing director responsible for Old Mutual’s worldwide asset management and unit trust businesses, as well as all activities outside South Africa. Since 1999, he has consulted to a number of South African and international businesses, including Orbis, Investec Asset Management and Old Mutual PLC and served as a non-executive director on a number of boards, including Sage, Swiss Re of South Africa and Citadel Holdings. Mr Griffin was Group chief executive officer of the Sage Group from April 2003 to May 2005. He is currently a member of the Council of the Actuarial Society of South Africa. G (Garth) Griffin Age 43 Qualifications BA (Hons) (Economics), MA (Urban and Regional Planning) Year appointed 2005 Independence Independent director Absa board committee • Group Risk Committee memberships Other directorships/ Non-executive director of Air Traffic and Navigation Services and the Industrial trusteeships Development Corporation. She is the second vice-chairperson and special adviser to the chairperson of the Airports Council International World Governing Body. Skills, expertise and Ms Hlahla completed her studies in the United States of America. During her studies, experience she also worked at the Coalition for Women’s Economic Development in Los Angeles. In 1994, she reinvested her expertise in South Africa and joined the Development Bank of Southern Africa, where she successfully managed several large infrastructure projects. In 2000, Ms Hlahla joined Old Mutual Employee Benefits as regional manager: Northern Region, a position she held until her appointment as chief executive officer of the Airports Company South Africa (ACSA) in 2001. M W (Monhla) Hlahla Group board [ Absa Group Limited Stakeholder report 31 December 2006 ] 91 Age 66 Qualifications BSc (Agric) Year appointed 1996 Independence Independent director Absa board committee • Directors’ Affairs Committee memberships Other directorships/ He is chairman of Weltevrede Wine Estates (Proprietary) Limited and a director of trusteeships Naspers Limited, Toeloms Investments No 1 (Proprietary) Limited and Weltevrede Cellar (Proprietary) Limited. Mr Jonker was re-appointed to the Naspers Investments Limited board in September 2005. Skills, expertise and Mr Jonker is the owner of Weltevrede Wine Estate. Joined the board of KWV Co- experience operative in 1981 and became chairman of KWV Group Limited and KWV Investments Limited in 1994. Mr Jonker led the successful transformation of KWV from a co-operative to a fully commercialised company. He resigned from the KWV board in December 2003. He was also adjudged farmer of the year in 1996 and served on various committees in the wine industry. L N (Lourens) Jonker Age 42 Qualifications BA, MA (Economics) Year appointed 2005 Independence Non-executive director Absa board committee • Group Audit and Compliance Committee memberships • Group Risk Committee Other directorships/ He serves on the boards of Barclays PLC and Barclays Bank PLC. trusteeships Skills, expertise and Mr Kheraj was appointed as Group finance director of Barclays and joined the board experience of that company on 1 January 2004. He has previously held the positions of chief executive of Barclays Private Clients, deputy chairman of Barclays Global Investors, global head of Investment Banking and global chief operating officer of Barclays Capital. Prior to joining Barclays, he was a managing director and held the position of chief financial officer for Europe at Salomon Brothers. N (Naguib) Kheraj Age 69 Qualifications BSc Eng (Mining), MBL Year appointed 1996 Independence Independent director Absa board committee • Group Audit and Compliance Committee memberships • Group Risk Committee (chairman) • Board Finance Committee Other directorships/ Mr Kruger is a director of Abagold (Proprietary) Limited, Hardekoolkamp Properties trusteeships (Proprietary) Limited, Wilderness 927 Trust, KGMF Trust, and the Rand Afrikaans University Trust. Skills, expertise and Joined Sasol in 1964 at the Sigma Colliery in Sasolburg. Appointed chief executive experience officer and managing director of the Sasol Group in 1987. He was appointed as chairman of Sasol in 1996 and was a director of numerous Sasol subsidiaries. He retired from the Sasol boards on 31 December 2005. P du P (Paul) Kruger 92 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group board Age 47 Qualifications BCom (Hons), CA(SA), HDip Tax Year appointed 2005 Independence Executive director Absa board committee • Credit Committee: Large Exposures memberships • Attends various other board committee meetings ex officio. Other directorships/ A director of various companies in the Absa Group. trusteeships Skills, expertise and Served articles with Ernst & Young from 1981 to 1983. Served in various senior experience managerial positions at Transnet until 1999. Joined Absa as Group executive: Group Finance during 1999. Appointed as a Group executive director in January 2005. J H (Jacques) Schindehütte Age 47 Qualifications Master’s degrees in engineering and finance Year appointed 2006 Independence Non-executive director Absa board committee • Group Remuneration Committee memberships • Directors’ Affairs Committee • Implementation Committee • Board Finance Committee Other directorships/ Mr Seegers is an executive director on the boards of Barclays PLC and Barclays trusteeships Bank PLC. Skills, expertise and Mr Seegers is responsible for all Barclays retail and commercial banking operations experience globally. This includes UK Banking (Retail and Business), International Retail and Commercial Banking, and Barclaycard. Mr Seegers joined Barclays in July 2006, having previously held senior positions in Citigroup over the past 17 years. Most recently, he was the chief executive officer of the Global Consumer Group with a remit covering all retail operations in Europe, Middle East and Africa. He was also a member of the Citigroup Operating Committee and the Citigroup Management Committee. Between 2001 and 2004, Mr Seegers was the chief executive officer of Consumer Banking for Asia Pacific, covering 11 consumer markets. Under his leadership, this region was the fastest growing part of Citigroup. Prior to this, he developed internet banking for Citibank and held various posts including division executive for Japan, president of Citibank California, marketing director for Citibank Direct and marketing director of Citibank Belgium. Mr Seegers joined Citigroup in Germany as an associate in 1989. F F (Frits) Seegers Age 53 Qualifications Certificate in Business Studies Year appointed 2001 Independence Non-executive director Absa board committee • Directors’ Affairs Committee memberships Other directorships/ Executive chairman of Mvelaphanda Holdings (Proprietary) Limited and Mvelaphanda trusteeships Group Limited. Chairman of Northam Platinum Limited, Trans Hex Group Limited, Mvelaphanda Resources Limited and a director of Gold Fields Limited. Mr Sexwale is a trustee of the Nelson Mandela Foundation and chancellor of the Vaal University of Technology, as well as a trustee of the Desmond Tutu Peace Trust. Skills, expertise and A former member of the national executive committee of the African National experience Congress and former premier of Gauteng. T M G (Tokyo) Sexwale Group board [ Absa Group Limited Stakeholder report 31 December 2006 ] 93 Age 67 Qualifications BA (Hons), PTD, FIAC Year appointed 1999 Independence Independent director Absa board committee • Directors’ Affairs Committee memberships Other directorships/ Chairman of African Star Ventures (Proprietary) Limited, Airports Company South trusteeships Africa Limited (ACSA), Kwezi V3 Engineers (Proprietary) Limited and Ekapa Mining (Proprietary) Limited. Director of Sappi Limited, Safmarine (Proprietary) Limited, Steinhoff International Holdings Limited, Macsteel Holdings Limited, Metropolitan Holdings Limited, RGA Reinsurance Company of South Africa Limited and RGA SA Holdings (Proprietary) Limited. Trustee of the Nelson Mandela Foundation and the Legal Resources Trust. Chancellor of the University of the Free State. Skills, expertise and Rector of the Peninsula Technikon from 1978 to 1994. Served as South African experience ambassador to the United States of America from 1995 to 1998. Former president of the Afrikaanse Handelsinstituut. President of the Union of Teachers Associations of South Africa for 16 years. F A (Franklin) Sonn Age 65 Qualifications Advanced Primary Teacher’s Diploma Year appointed 1994 Independence Independent director Absa board committee • Group Risk Committee memberships Other directorships/ He serves on the boards of Distell Limited and Sun International Limited. He is a trusteeships trustee of the Cape Peninsula University of Technology Foundation, Western Cape Cerebral Palsy Association and the Eoan Group Trust. Skills, expertise and Was a school music teacher for 10 years. He became the first chancellor of the Cape experience Technikon (Cape Peninsula University of Technology). He has, over the past 35 years, held personal interests in various industries, including cinemas, hotels, supermarkets, fast foods outlets, centrifugal pump manufacturing and property development. A former chairman of the South African Tourism board. He also served over many years as a director of Sanlam Limited, Ellerines Holdings Limited and New Clicks Holdings Limited. P E I (Peter) Swartz Age 45 Qualifications BEcon Year appointed 2004 Independence Executive director Absa board committee • None, but attends various board committee meetings ex officio. memberships Other directorships/ Mr von Zeuner serves on the boards of the Banking Association South Africa, Section trusteeships 21 Housing Company, MasterCard and the SA Payments Strategy Association. Skills, expertise and His first position was that of a clerk in the Goodwood branch of Volkskas. He worked experience in the branch system until 1995, by which time he had been branch manager of four branches, namely Wynberg (1989–1990), Cape Town (1990–1991), Old Paarl Road (1991–1992) and Stellenbosch (1992–1995). His appointment as regional manager for the Northern Cape in Kimberley (1995–1996) elevated him to Absa’s general management. He then became provincial general manager of the Northern Province (1996–1998) and the Free State (1998–1999). In 2000, he moved to Absa head office, where he became the operating executive of Absa Commercial Bank. He was appointed as an executive director on the Absa Group board in September 2004. L L (Louis) von Zeuner 94 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group remuneration report Introduction The Group remuneration report deals with the governance of remuneration matters in Absa, the Group’s remuneration policy as well as executive and non-executive directors’ emoluments and service contracts. Key remuneration highlights and developments • The Group’s shareholders approved, at a special general meeting in May 2006, the adoption of four new incentive plans: the Absa Group Performance Share Plan (PSP), the Absa Group Phantom Performance Share Plan (Phantom PSP), the Absa Group Executive Share Award Scheme (ESAS) and the Absa Group Phantom Executive Share Award Scheme (Phantom ESAS). These plans were designed to align the interests of executive directors and senior executives with those of Absa’s shareholders. The incentive plans implemented for 2006 were the Phantom PSP and the Phantom ESAS. The Phantom ESAS has been used to enable executive directors and senior executives to convert their existing banked bonuses into this phantom deferred share arrangement on a one-off basis. No additional benefits were provided under this scheme for 2006. • Existing benefits were reviewed for all employees, and a new flat rate medical aid subsidy was introduced for all employees. • Mr D L Roberts resigned from the Group Remuneration Committee on 23 October 2006. • Mr F F Seegers was appointed to the Group Remuneration Committee on 23 October 2006. Challenges • The introduction of the Phantom PSP (following shareholders’ approval of the new incentive plans) involved a number of challenges, including determining the most appropriate way to adapt the best practice used by Barclays to the Absa Group and its employees, the communication of the new scheme to employees, the required valuation calculations with reference to the IFRS 2 requirements, and the appropriate Group hedging strategy to ensure that future requirements in relation to this scheme are identified and provided for. Looking ahead • Continued use of the Phantom PSP in 2007 to ensure an alignment of interest between participants and shareholders with regard to the financial performance of the Group. • Use of the Phantom ESAS in 2007 for all those employees, including Group executive directors, whose bonus awards exceed a predetermined threshold. • Refining the bonus pool funding methodology. Group remuneration report [ Absa Group Limited Stakeholder report 31 December 2006 ] 95 Governance Governance of Group directors’ remuneration in Absa is performed by the Group Remuneration Committee, a committee of the Absa board of directors. Its members (D C Brink (chairman), D E Baloyi, B P Connellan, D C Cronjé and F F Seegers) are all non-executive directors and the majority are independent directors. The Group chief executive, the executive responsible for human resources and the Group finance director attend the meetings by invitation. Meetings are held five times a year. In addition, special meetings are called to deal with urgent matters. No executive director is present when his or her own remuneration or performance evaluation is discussed. The Group Remuneration Committee’s responsibilities include: • approving the Group’s remuneration philosophy, principles and policy; • approving the remuneration of the Group chief executive and executive committee members. In addition, it provides oversight regarding the remuneration of the senior leadership group. Remuneration includes all elements of remuneration: guaranteed fixed remuneration, performance bonuses, incentive plans, and any other form of benefits or perquisites; • reviewing all payments made in terms of the Group’s various incentive schemes; • reviewing management’s recommendations of the fee structure for directors and the fees for members of board committees, for onward recommendation to shareholders; • determining the Group chairman’s remuneration for approval by shareholders, at a meeting from which he recuses himself; • succession planning for executive directors and top management, including the Group chief executive, executive directors and other strategic positions/roles, together with the Group Directors’ Affairs Committee (DAC); and • evaluating the performance of the Group chief executive and reviewing the evaluation of the performance of executive directors. The DAC assesses the contribution of all non-executive directors annually via an individual director evaluation process as well as the effectiveness of the board as a whole. The chairman and deputy chairman conduct this process. The DAC and thereafter the Absa board consider the outcomes of this process. The DAC appraises the chairman’s performance at a meeting from which he recuses himself. The Group Remuneration Committee takes this evaluation into account in determining the remuneration of the chairman. The Group Remuneration Committee’s effectiveness is evaluated annually by the Absa Group board. Advisers In determining the appropriate remuneration for Group executive directors, Absa makes use of the services of an independent remuneration consulting company, Global Remuneration Solutions (Proprietary) Limited. This company advises the Group Remuneration Committee on the remuneration of executive directors and top management, after using surveys of the banking industry as well as the broader industry to make remuneration comparisons. The Group bears all the expenses relating to the appointment of external consultants. Furthermore, in setting the performance measures for the Phantom PSP, Absa makes use of independent advisers, Kepler & Associates, based in London. These advisers provide advice on appropriate financial performance targets and the probabilities of achieving these targets to ensure that there is sufficient “stretch” in the targets set. Kepler & Associates assists in setting the targets for the Phantom PSP annually. Human Resources also provides advice to the Group Remuneration Committee. The Human Resources division is a Group specialist function and assists the committee by providing supporting information and documentation relating to matters that are presented to the Group Remuneration Committee. This includes comparative data and motivations for salaries, bonuses and incentive plans. In addition, the Group executive: Human Resources is responsible for providing professional support to line management relating to human resources policies and administration and for monitoring compliance with prescribed policies and programmes across the Group. 96 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group remuneration report Remuneration philosophy and policy Absa aims to employ individuals of the highest calibre, who embrace the Group’s values. In addition to ensuring that all employees, including Group executive directors, create value for all Absa’s stakeholders, the Group provides a positive, supportive, healthy and diversity-friendly working environment, thereby enabling employees to achieve their full potential with the assurance of being recognised and rewarded for excellent performance. The purpose of remuneration is to attract, retain and motivate employees. Absa has an overarching remuneration philosophy to support this purpose, which, in turn, supports the Group’s strategy. Absa’s senior managerial and professional employees, including Group executive directors, are rewarded as individuals for the value they add through the payment of fixed remuneration, performance bonuses, and performance share (or phantom performance share) allocations. The key principles of Absa’s overall remuneration policy are as follows: • Reward programmes are designed and administered to align the interests of senior managerial and professional employees, including executive directors, with those of the Group’s stakeholders. • Reward programmes are clear and transparent to reward the achievement of the Group’s desired strategic positioning. • Rewards are linked to the performance of the business and the individual business units. Reward levels are targeted to be commercially competitive. Reward levels are based on the scope of responsibility and individual contribution made. • Appropriate industry and comparable organisations’ remuneration practices are reviewed at least annually. Absa’s remuneration structure has three components: • Fixed remuneration = annual salary and benefits. • Variable remuneration = short- to medium-term performance-related incentives. • Incentive plans = long-term performance-related incentive schemes. Fixed remuneration is reviewed annually to ensure that those who contribute to the success of the Group and who have the potential to sustain performance are remunerated competitively. The Group uses variable remuneration schemes to focus behaviour on important business objectives and to sustain performance. To achieve this goal, the existing variable remuneration incentives are reviewed annually and adjustments are made to improve their efficiency. Incentive plans are used to retain and incentivise key and talented employees. Remuneration of employees Guaranteed ﬁxed remuneration The approach adopted for all employees, including Group executive directors, is a total cost-to-company approach. The sustainable contribution of each employee is used as the basis for remuneration reviews. Across the Group, remuneration reviews are undertaken at least annually. The cost-to-company approach also encapsulates benefits provided such as retirement schemes; death and disability cover; medical cover and other benefits, as dictated by competitive local market practices. In addition to the above, employees, including Group executive directors, receive two payments at the time of the release of the Group’s interim and annual results, based on the Group’s financial performance. This is known as “conditional fixed remuneration”. This element of pay was disclosed as part of the performance bonus in the past. This formed a relatively small component of each employee’s total cost-to-company pay annually (approximately 5%). The Group has removed the conditional fixed remuneration element of pay (the final such payment was made in February 2007, relating to the Absa Group’s annual results for 2006). Going forward, the conditional fixed remuneration will be included into the total cost-to-company remuneration for all employees (including Group executive directors). This change is effective 1 January 2007 and has resulted in a permanent uplift of total cost-to-company remuneration for all employees, including executive directors, on the basis that the bi-annual payments will cease. The net effect on the Group and employees, including Group executive directors, will largely be neutral, as the uplift in the total cost-to- company remuneration will compensate for the removal of the bi-annual conditional fixed remuneration awards. Group remuneration report [ Absa Group Limited Stakeholder report 31 December 2006 ] 97 Performance bonuses (variable remuneration) Performance bonuses are linked to business performance in terms of targeted performance goals and are based on an economic value-added approach. Over the past few years, significant value has been created for shareholders, with the Group’s return on average equity (RoE) increasing from 21,4% in the 2003 financial year to 27,4% for the twelve months ended 31 December 2006. ������������������������������� ���������������������������� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���������� �������� �������� �������� �������� �������� ������������������������ ������� ������� *The statistics for 2003 and 2004 have not been restated for International Financial Reporting Standards (IFRS). Methodology used to calculate performance bonuses The Group Remuneration Committee approves a challenging performance target. This target is converted to a headline earnings target to facilitate communication and understanding. For most areas of Absa**, performance bonuses are paid only when the Group’s financial performance exceeds a hurdle, which is related to the cost of equity. The headline earnings target, on which a bonus pool is made available, is set on a sliding scale and is dependent on the Group’s performance in the period under review. For most areas of Absa**, the final bonus pool is calculated by multiplying the bonus multiple (which is a function of the level of achievement of the headline earnings target) by the sum of annual total cost-to-company remuneration, appropriately differentiated for each job grade. Although, in prior years, the calculation was based on direct remuneration, in the year under review, the Group moved to a calculation based on cost-to-company remuneration. Furthermore, the bonus multiple pool for executive directors had been capped at a two multiple, with a possible individual award of a performance bonus up to 2,5 times his/her remuneration. For the year under review, the Group Remuneration Committee approved bonus awards utilising a pool of 2,3 times the cost-to-company remuneration of the participating Group executive directors (in excess of the two multiple) given the superior financial performance of the Group. The overall individual limit of 2,5 times cost-to-company remuneration was observed. Performance bonuses are not guaranteed; they are discretionary and vary according to an individual’s performance rating. Although prior practice was that two-thirds of any performance bonus paid in excess of one bonus multiple was banked (retained) and was paid during the next two financial years, subject to sustained performance by the Group, this is no longer the practice, and it has been replaced by the Phantom ESAS described in the section titled long-term incentive plans. **Other than in specialised areas such as Absa Capital. 98 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group remuneration report Group executive directors’ remuneration and performance bonus statistics The following table indicates the total guaranteed fixed remuneration paid to Group executive directors as well as their performance bonuses. It must be noted that the results for the twelve months ended 31 December 2006 are not comparable with those of the previous period, which have nine months as a base, owing to the change in the Group’s year-end. The remuneration tabled below relates only to the period an individual is/was a Group executive director. Group executive directors’ guaranteed ﬁxed remuneration and performance bonuses Directors’ fees Absa Retire- Total Con- Bank and ment guaran- ditional other Travel fund teed ﬁxed Perfor- Absa divisional allow- contribu- remune- remune- mance Group executive Group boards Salaries* ances tions ration ration** bonuses*** Total director Note R R R R R R R R R Twelve months ended 31 December 2006 S F Booysen 1 119 467 — 4 608 081 25 233 368 519 5 121 300 378 911 12 000 000 17 500 211 D Bruynseels 2&6 119 467 129 838 — — — 249 305 — — 249 305 J H Schindehütte 3 119 467 — 2 288 637 24 862 182 963 2 615 929 184 042 5 500 000 8 299 971 L L von Zeuner 4 119 467 — 2 885 628 66 906 230 722 3 302 723 249 625 7 900 000 11 452 348 Total 477 868 129 838 9 782 346 117 001 782 204 11 289 257 812 578 25 400 000 37 501 835 Nine months ended 31 December 2005 S F Booysen 1 80 000 — 3 184 195 24 641 251 501 3 540 337 231 683 7 486 000 11 258 020 D Bruynseels 2&6 45 333 4 834 — — — 50 167 — — 50 167 F J du Toit 5 — — — — — — — 144 208 144 208 J H Schindehütte 3 80 000 — 1 671 472 53 375 132 222 1 937 069 129 897 2 975 000 5 041 966 L L von Zeuner 4 92 250 — 1 975 845 33 285 155 778 2 257 158 169 858 5 208 000 7 635 016 Total 297 583 4 834 6 831 512 111 301 539 501 7 784 731 531 438 15 813 208 24 129 377 Notes (1) Appointed to the Absa Group board on 1 August 2004. (2) Appointed to the Absa Group board on 27 July 2005. (3) Appointed to the Absa Group board on 1 January 2005. (4) Appointed to the Absa Group board on 1 September 2004. (5) Retired from the Absa Group board on 1 January 2005. (6) Currently remunerated by Barclays PLC, and any directors’ fees earned are paid to Barclays PLC. Additional note Group executive directors’ guaranteed remuneration, conditional ﬁxed remuneration, and performance bonuses are paid by Absa Bank Limited, other than in the case of D Bruynseels. *The Group has, in the year under review, introduced a medical insurance subsidy for all employees. This subsidy falls outside of total cost-to-company remuneration for reasons relating to the need to track the subsidy separately from other cost-to-company remuneration items. The subsidy is R400 per month across the board for all permanent employees, including executive directors, irrespective of grade or pay level. **As mentioned previously in this report, the payment of conditional ﬁxed remuneration took place in respect of 2006 for the last time, as the conditional ﬁxed remuneration scheme has been discontinued with effect from 1 January 2007. The performance bonus for the nine months ended 31 December 2005 excluded conditional ﬁxed remuneration. For 2006, the conditional ﬁxed remuneration has been separated from the performance bonuses owing to the total cost-to-company remuneration adjustments (effective 1 April 2007) that will be effected to the revised cost-to-company remuneration ﬁgures (with regard to the inclusion of conditional ﬁxed remuneration in total cost-to-company remuneration with effect from 1 April 2007). ***Performance bonuses for 2006. Deferred as Cash part of the consideration ESAS Total Group executive director R R R S F Booysen 9 000 000 3 000 000 12 000 000 J H Schindehütte 4 125 000 1 375 000 5 500 000 L L von Zeuner 5 925 000 1 975 000 7 900 000 Total 19 050 000 6 350 000 25 400 000 The performance bonuses comprise a cash portion (as to 75% of the notional performance bonus), which will have accrued to the Group executive director concerned, and a non-cash portion (as to 25% of the notional performance bonus), which will be deferred into the mandatory ESAS. Group remuneration report [ Absa Group Limited Stakeholder report 31 December 2006 ] 99 Long-term incentive plans The Group has, until May 2006, operated a share incentive scheme designed to link the interests of executive directors and eligible employees with those of shareholders and the long-term desired strategic positioning of the Group. All full-time senior managerial and professional employees above an agreed job grade were eligible to participate in the share incentive scheme, principally based on the ability of the individual to influence the Group’s performance and the retention of key talent. One-third of the options vested on the third anniversary of the date of grant, a further third vested on the fourth anniversary of the date of grant and the final third on the fifth anniversary of the date of grant. All options in terms of the scheme have a ten-year expiry period. There are specific provisions governing retirement, death, retrenchment, ill health and contractual termination. In addition to the requirement that recipients be in the employ of the Group on vesting dates, there were earnings- based performance measures linked to the allocation of share options in 2005. Recipients are generally key employees whose current and potential contributions to achieving or implementing Absa’s strategy were taken into account. The share incentive scheme has been supplemented with revised incentive plans to bring the Absa incentive plans in line with best practice. The new incentive plans were approved by shareholders at a special general meeting held on 10 May 2006. Although the Group may still use the incentive scheme referred to above, the Group has, in the year under review, introduced new incentive plans, namely the PSP, the Phantom PSP, the ESAS and the Phantom ESAS. The PSP is aimed at rewarding future performance by incentivising senior Absa employees, including executive directors, to achieve performance targets. The Absa Group Remuneration Committee annually makes an award of PSP shares or Phantom PSP shares to senior managers, professionals and executives and sets performance conditions applicable for a three-year period. The Group Remuneration Committee ensures that the performance conditions are sufficiently demanding and support profitable growth, capital efficiency, risk management and the creation of shareholder value. The Group Remuneration Committee engages with external advisers (Kepler & Associates) to obtain advice on performance conditions. In addition, the vesting of awards is subject to: • a basic financial hurdle, such that the cumulative profit after tax for the Group in the three-year performance period attached to each award must be greater than the Group’s cumulative profit after tax of the previous three-year period; and • a second, three-year performance condition, typically an internal, non-market-based and/or an external market- based performance condition that applies to 100% of the PSP shares or Phantom PSP shares under each award. It being recorded that the minimum threshold for any vesting of 2006 awards will be based on growth in the Group’s earnings per share of CPIX plus 5%, measured at a cumulative compound annual growth rate. At the end of the three-year period, the final award of shares may be between 0% and 300% of the award, depending on the extent to which the performance conditions have been met. Rand value awards took place, effective 22 May 2006, in terms of the rules of the Phantom PSP. Subsequent to the awards taking place, the participants were informed of the actual number of phantom shares that they were awarded. The awards were calculated at the volume-weighted price over the 20 days immediately preceding the award date. The details of the awards for Group executive directors are listed on page 103 of this report. The use of a rand-value award mechanism enables easy communication of the underlying value of the award. It also enables the Group Remuneration Committee to obtain an overall view of an individual’s total compensation (total cost-to-company remuneration, discretionary bonus and share or phantom share award). 100 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group remuneration report The purpose of the ESAS is, inter alia, to increase employee and shareholder alignment through employee share ownership, as well as to retain key personnel. Employees, including executive directors, whose annual bonuses are in excess of a certain level, participate in the ESAS. In terms of the ESAS, 25% of an employee’s annual performance bonus is mandatorily converted into a number of nil-cost* options, shares or phantom shares. A further 75% of a participating employee’s bonus can be converted voluntarily by the employee. If the employee is still in the employ of the Group after a period of three years, he or she will receive certain bonus (matched) shares (or phantom shares) and certain dividend shares. A further portion of bonus (matched) shares and dividend shares will be awarded if the participant is still in the employ of the Group after a period of five years from the original date. The ESAS is therefore a deferred bonus plan that rewards participating employees with matched shares and encourages them to share in growth in Absa’s share price. Generally, no performance conditions will apply to the ESAS. The Group’s senior executives, including Group executive directors, who elected to convert their banked bonuses during the period under review will participate in the Phantom ESAS in substitution for the Banked Bonus scheme. The options granted in terms of the previous incentive scheme remain in place and may be exercised in terms of the rules under which the shares were granted. Group executive directors’ share options – composition of opening balances at 1 January 2006 Share options granted Expiry date Number Price Group executive director Note Date of grant of options granted R S F Booysen 1 19 Jun ’01 19 Jun ’11 23 334 37,43 7 Jun ’02 7 Jun ’12 80 000 33,67 5 Jun ’03 5 Jun ’13 135 000 35,01 7 Jun ’04 7 Jun ’14 300 000 48,73 18 Aug ’05 18 Aug ’15 180 000 91,70 718 334 D Bruynseels 2 — — — — — J H Schindehütte 3 19 Jun ’01 19 Jun ’11 23 334 37,43 7 Jun ’02 7 Jun ’12 46 667 33,67 5 Jun ’03 5 Jun ’13 30 000 35,01 31 May ’04 31 May ’14 186 856 46,56 18 Aug ’05 18 Aug ’15 30 000 91,70 316 857 L L von Zeuner 4 1 Apr ’01 1 Apr ’11 16 668 32,61 19 Jun ’01 19 Jun ’11 21 668 37,43 7 Jun ’02 7 Jun ’12 40 000 33,67 5 Jun ’03 5 Jun ’13 95 000 35,01 7 Jun ’04 7 Jun ’14 26 000 48,73 19 Aug ’04 19 Aug ’14 102 000 51,61 18 Aug ’05 18 Aug ’15 60 000 91,70 361 336 Notes (1) Appointed to the Absa Group board on 1 August 2004. (2) Appointed to the Absa Group board on 27 July 2005. (3) Appointed to the Absa Group board on 1 January 2005. (4) Appointed to the Absa Group board on 1 September 2004. *An option that can be exercised at a zero strike price at any point between the end of the vesting period (after three years) and the end of the further vesting period (after ﬁve years). Group remuneration report [ Absa Group Limited Stakeholder report 31 December 2006 ] 101 Group executive directors’ share option movements – Share incentive scheme Share options granted* Share options exercised Shares pur- chased/ Gains on Purchase share date**/ Option options Balance of Group executive Opening Date of Price Expiry exercise price exercised*** share director Note balance Number grant R date Number date R R options Twelve months ended 31 December 2006 Shares purchased at 25 Aug share option price of S F Booysen 1 718 334 — — — — 23 334 ’06 R37,43 Shares purchased at 25 Aug share option price of 40 000 ’06 R33,67 Shares purchased at 25 Aug share option price of 45 000 ’06 R35,01 610 000 D Bruynseels 2 — — — — — — — — — Shares purchased at 24 Aug share option price of J H Schindehütte 3 316 857 — — — — 23 334 ’06 R37,43 Shares purchased at 24 Aug share option price of 23 333 ’06 R33,67 Shares purchased at 24 Aug share option price of 10 000 ’06 R35,01 260 190 Shares purchased at share option price of L L von Zeuner 4 361 336 — — — — 16 668 6 Apr ’06 R32,61 344 668 *The share incentive scheme has not been used for new allocations to Group executive directors in respect of the year under review, given the introduction of the PSP. **Options are exercisable at any date from the vesting date. Where the activity reported upon is a purchase of shares, the purchase date has been reﬂected, in which event a preceding exercise of the options would already have taken place. ***Note that a “gain” arises where the options have been exercised at a price higher than the grant date price during the year under review. Where no cash gain has been realised, in circumstances where a purchase of the shares has taken place, then the details of this purchase have been disclosed instead. 102 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group remuneration report Share options granted* Share options exercised Shares purchased/ Gains on Purchase share date**/ Option options Balance of Group executive Opening Date of Price Expiry exercise price exercised*** share director Note balance Number grant R date Number date R R options Nine months ended 31 December 2005 S F Booysen 1 735 750 180 000 18 Aug ’05 91,70 18 Aug ’15 104 450 27 Jul ’05 82,50 3 803 653 69 633 2 Aug ’05 93,77 6 491 563 Shares purchased at share option price of 23 333 14 Dec ’05 R37,43 718 334 D Bruynseels 2 — — — — — — — — — — J H Schindehütte 3 471 856 30 000 18 Aug ’05 91,70 18 Aug ’15 97 000 27 Jul ’05 82,50 3 877 928 Shares purchased at share option price of 40 000 27 Jul ’05 R23,73 Shares purchased at share option price of 6 000 27 Jul ’05 R26,53 Shares purchased at share option price of 9 333 27 Jul ’05 R37,43 Shares purchased at share option price of 9 333 27 Jul ’05 R33,67 Shares purchased at share option price of 23 333 13 Sept ’05 R37,43 316 857 L L von Zeuner 4 478 400 60 000 18 Aug ’05 91,70 18 Aug ’15 106 239 27 Jul ’05 82,50 3 502 587 Shares purchased at share option price of 8 000 27 Jul ’05 R27,49 Shares purchased at share option price of 4 160 27 Jul ’05 R30,47 Shares purchased at share option price of 4 000 27 Jul ’05 R17,85 Shares purchased at share option price of 8 000 27 Jul ’05 R27,68 Shares purchased at share option price of 8 000 27 Jul ’05 R26,53 Shares purchased at share option price of 13 333 27 Jul ’05 R32,61 Shares purchased at share option price of 17 332 27 Jul ’05 R37,43 Shares purchased at share option price of 8 000 27 Jul ’05 R33,67 361 336 Notes (1) Appointed to the Absa Group board on 1 August 2004. (2) Appointed to the Absa Group board on 27 July 2005. (3) Appointed to the Absa Group board on 1 January 2005. (4) Appointed to the Absa Group board on 1 September 2004. *The share incentive scheme has not been used for new allocations to Group executive directors in respect of the year under review, given the introduction of the PSP. **Options are exercisable at any date from the vesting date. Where the activity reported upon is a purchase of shares, the purchase date has been reﬂected, in which event a preceding exercise of the options would already have taken place. ***Note that a “gain” arises where the options have been exercised at a price higher than the grant date price during the period under review. Where no cash gain has been realised, in circumstances where a purchase of the shares has taken place, then the details of this purchase have been disclosed instead. Group remuneration report [ Absa Group Limited Stakeholder report 31 December 2006 ] 103 Group executive directors’ share award movements – Phantom PSP* Phantom PSP shares granted Initial Closing Opening allocation balance balance at granted as at Group executive 1 January during Date of Price*** 31 December director Note 2006 2006** grant R Expiry date 2006 S F Booysen 1 — 51 194 22 May ’06 117,20 22 May ’09 51 194 D Bruynseels 2 — — — — — — J H Schindehütte 3 — 23 464 22 May ’06 117,20 22 May ’09 23 464 L L von Zeuner 4 — 33 617 22 May ’06 117,20 22 May ’09 33 617 Notes (1) Appointed to the Absa Group board on 1 August 2004. (2) Appointed to the Absa Group board on 27 July 2005. (3) Appointed to the Absa Group board on 1 January 2005. (4) Appointed to the Absa Group board on 1 September 2004. *The ﬁrst allocations of the Phantom PSP took place in 2006. Therefore there is no comparable data for the previous reporting period. One Phantom PSP share has a value equivalent to one Absa ordinary share. **As mentioned on page 99 of this report, the scheme is subject to proﬁt after tax and stretched earnings per share performance measures, which, if achieved, will have the effect of an increase on the initial allocation of Phantom PSP shares to a maximum of three times. ***The price is the volume-weighted average price for the 20 trading days immediately preceding the grant date (22 May 2006). Conversion of banked bonuses to ESAS by executive directors Closing balance – Number of number of phantom phantom shares shares under Date Price Expiry under ESAS* of grant R** date*** ESAS S F Booysen 32 934 14 Jun ’06 107,63 14 Jun ’09 32 934 D Bruynseels — — — — — J H Schindehütte 15 665 14 Jun ’06 107,63 14 Jun ’09 15 665 L L von Zeuner 23 653 14 Jun ’06 107,63 14 Jun ’09 23 653 *The banked bonus is not a new award, as this has been disclosed as part of the performance bonus awards for 2004 and 2005. **The price is the volume-weighted price over the 20 trading days up to and including 14 June 2006. ***Although the vesting date is the third anniversary of the award date, there is an opportunity for a participant to remain in the scheme for a further two-year period. Additional note Please note that the portion of the 2006 notional performance bonuses that will be deferred to ESAS (which takes place in 2007) are contained on page 98 of this report. Absa executive compensation plans Two new executive compensation plans were introduced during the previous reporting period. These plans are intended to: • retain key members of the management team; and • deliver, as a minimum, the Barclays business case**** for the acquisition of a controlling stake of the Absa Group. The ﬁrst plan – Barclays special incentive plan The first plan, known as the Barclays special incentive plan, is delivered in Barclays PLC shares, but is dependent on Absa’s performance relative to the achievement of the business case**** in terms of the acquisition of a controlling stake in the Absa Group. The plan is aimed at selected key individuals, namely S F Booysen, D Bruynseels, J H Schindehütte, L L von Zeuner, R R Emslie and N P Mageza. The costs associated with the plan are borne directly by Barclays and therefore do not affect Absa’s financial performance. The Barclays and Absa remuneration committees approve any awards under this plan and scrutinise the performance outcomes. **** Delivery of the business case means realisation of the synergy beneﬁts as well as the delivery of Absa’s business-as-usual performance. Barclays Africa is excluded. 104 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group remuneration report Group executive directors – Barclays PSP awards* Barclays Opening PLC shares Closing balance at granted balance as at 1 January during Vesting 31 December 2006 2006 Performance period date 2006 S F Booysen — 100 224 1 Apr ’05 – 30 Jun ’08 30 Sept ’08 100 224 D Bruynseels — 27 839 1 Apr ’05 – 30 Jun ’08 30 Sept ’08 27 839 J H Schindehütte — 29 209 1 Apr ’05 – 30 Jun ’08 30 Sept ’08 29 209 L L von Zeuner — 49 090 1 Apr ’05 – 30 Jun ’08 30 Sept ’08 49 090 *This is an award of Barclays shares. Absa does not bear the cost of these awards. The speciﬁc performance conditions are linked to the underlying Absa Group performance from the period 1 April 2005 to 30 June 2008. There is a multiplier dependent on Absa’s performance, the range of the multiplier being from zero to six times the initial allocation, with the maximum award being made in the event of performance being equal to 130% of the predetermined business case**. These conditions have been approved by the Barclays Group Remuneration Committee. The attainment of these measures will be determined in respect of the published results for June 2008. The second plan – Special discretionary bonus plan The second plan consists of a special discretionary performance bonus for selected key roles (approximately 30 in number). Key criteria include the delivery of the business case** in terms of the acquisition of a controlling stake in Absa and an individual’s performance. The participants include a number of individuals assigned to Absa from Barclays. Participants in the Barclays special incentive plan detailed previously will not participate in this plan. The bonus, which may be up to 200% of guaranteed fixed remuneration, will be delivered in cash by Absa after two years, subject to individual performance assessments, taking into account delivery of the business case**, including growth in profit before tax, the realisation of synergies, the management of restructuring costs and personal contribution. The Group Remuneration Committee will approve any awards under this plan, and will scrutinise the performance outcomes. Group executive directors’ service contracts The service contracts of executive directors do not have a fixed term, but provide for a notice period of six months. Group executive directors retire from their positions and from the board (as executive directors) at the age of 60. Severance arrangements Absa’s policy when terminating the services of an individual for operational reasons is to make use of the following formula to calculate the severance package: a minimum of two months of the total annual fixed remuneration package is payable for up to two completed years of service, plus two weeks of the annual remuneration package for each additional completed year of service. The maximum severance compensation payable is limited to an amount equal to six months of the annual remuneration package of the retrenchee. In cases where the benefits calculated under the rules of the Basic Conditions of Employment Act are more beneficial than the above formula, the provisions of the Act apply (one week’s pay for each completed year of service). An executive director would need to have been in Absa’s service for longer than 24 years for the rules of the Basic Conditions of Employment Act to be more beneficial. Absa aims to apply the above policy to all employees, including Group executive directors. However, depending on circumstances, it is sometimes necessary to negotiate with the Group executive director, or employee, whose contract is being terminated. Group non-executive directors’ remuneration Non-executive directors are remunerated for their membership of the boards of Absa Group Limited and Absa Bank Limited and board-appointed committees. The remuneration rates reflect the size and complexity of the Group. **Delivery of the business case means realisation of the synergy beneﬁts as well as the delivery of Absa’s business-as-usual performance. Barclays Africa is excluded. Group remuneration report [ Absa Group Limited Stakeholder report 31 December 2006 ] 105 Market practices and external remuneration surveys are taken into account in determining non-executive directors’ remuneration. The elements of non-executive directors’ remuneration are: • a base fee and a fee for special board meetings; • a fee as a member of a board committee (including special board committees and special board committee meetings); and • fees for ad hoc investigative and consultancy work. Absa’s fee structure, as approved by shareholders, is indicated in the table below. Remuneration from Remuneration from 1 May 2006 1 October 2005 to 30 April 2007 to 30 April 2006 Category Note R R Chairman 1 & 11 3 154 200 2 500 000 Board member 2, 3 & 11 123 200 112 000 Group Audit and Compliance Committee (GACC) member 4 & 11 104 400 87 000 Group Risk Committee (GRC) member 5 & 11 68 000 63 000 Group Remuneration Committee (Rem Com) member 6 & 11 54 600 52 000 Directors’ Affairs Committee (DAC) member 7 & 11 41 000 39 000 Credit Committee: Large Exposures member 8 & 11 41 000 39 000 Implementation Committee 9, 10 & member 11 41 000 39 000 Pool of R350 000 per annum Pool of R300 000 per annum payable to committee payable to committee members pro rata to the members pro rata to the Group Credit Committee member 12 number of facilities reviewed. number of facilities reviewed. Special board meeting (per meeting) 16 500 15 000 Special board committee meeting 10 600 9 700 Ad hoc board fees: • per ad hoc board committee 10 600 9 700 meeting attended • consultancy work R2 750 per hour R2 500 per hour Notes (1) From 1 May 2006, the chairman’s remuneration was changed to an all-in basis. Previously, he received fees as Absa Group Limited and Absa Bank Limited board chairman equal to twice the fee payable to a board member, over and above this annual remuneration as chairman. (2) The deputy chairman receives fees equal to 1,5 times the fee payable to a board member. (3) Executive directors of Absa Group Limited receive fees, as members of the Absa Group Limited board, equal to the fees payable to a board member. (4) The GACC chairman receives fees equal to twice the fee payable to a GACC member. (5) The GRC chairman receives fees equal to twice the fee payable to a GRC member. (6) The Rem Com chairman receives fees equal to twice the fee payable to a Rem Com member. (7) As the Group chairman is chairman of the DAC, this is covered by his Group chairman’s fee. (8) As the Group chairman is also the chairman of the Credit Committee: Large Exposures, this fee is covered by his Group chairman’s fee. (9) The Implementation Committee chairman receives fees equal to twice the fee payable to an Implementation Committee member. (10) The Implementation Committee is a committee that was established in 2005 to provide governance oversight on various implementation issues arising from the Barclays transaction. (11) The fees payable to non-executive directors of Absa Group Limited in respect of subsidiary companies are not included as these fees are approved by the shareholders of the respective subsidiaries. (12) This fee has been revised in the period under review. Although the pool has remained the same, the basis of splitting the pool has changed to a fee per facility rather than a pro rata split of the pool. The remuneration of Group non-executive directors is submitted to shareholders for sanction at the annual general meeting prior to implementation and payment. 106 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group remuneration report The following table indicates Absa’s non-executive directors’ emoluments. Actual fees for the nine months ended 31 December Fees for the twelve months ended 31 December 2006* 2005* Absa Bank Absa and its Group subsidi- Ad hoc Commit- Limited aries fees tees Total Total Name Note R R R R R R Present directors D C Cronjé (chairman) 1 74 667 3 029 533 10 600 — 3 114 800 3 634 160 D C Brink (deputy chairman) 179 200 144 000 96 350 485 167 904 717 661 186 L N Angel 2 119 467 96 000 15 750 39 504 270 721 209 500 D C Arnold 119 467 96 000 9 700 209 883 435 050 269 700 D E Baloyi 3 119 467 96 000 — 70 600 286 067 144 000 B P Connellan 119 467 96 000 35 750 336 163 587 380 316 692 Y Z Cuba 6 — — — — — — A S du Plessis 119 467 96 000 89 100 497 591 802 158 511 767 G Griffin 119 467 96 000 25 008 199 467 439 942 263 235 M W Hlahla 7 119 467 96 000 — 28 333 243 800 — L N Jonker 119 467 96 000 15 750 72 033 303 250 216 500 N Kheraj 5 119 467 96 000 19 400 190 233 425 100 161 033 P du P Kruger 119 467 96 000 70 600 267 167 553 234 414 150 D L Roberts 5 & 12 98 933 79 500 21 200 164 633 364 266 140 366 F F Seegers 9 20 533 16 500 — 38 367 75 400 — T M G Sexwale 119 467 96 000 — 50 933 266 400 171 750 F A Sonn 119 467 96 000 25 750 58 183 299 400 188 750 P E I Swartz 119 467 96 000 35 750 76 833 328 050 233 500 Past directors L Boyd 4 — — — — — 237 938 L W Maasdorp 2 & 13 88 667 71 250 25 450 165 183 350 550 282 650 P T Motsepe 8 — — — — — 62 333 T van Wyk 10 — — — — — 162 000 J van Zyl 11 — — — — — 62 332 Total 2 015 071 4 588 783 496 158 2 950 273 10 050 285 8 343 542 Notes (1) As a result of the additional time spent by the Group chairman, Dr D C Cronjé, on Absa matters during the period from August 2004 to May 2005, over and above his current contractual arrangement with Absa, shareholders ratiﬁed the payment of R1,5 million at the annual general meeting held on 19 August 2005. This fee is included in the total fees for the nine months ended 31 December 2005. (2) Appointed to the Absa Group board on 16 August 2004. (3) Appointed to the Absa Group board on 31 December 2004. (4) Resigned from the Absa Group board on 30 December 2005. (5) Appointed to the Absa Group board on 27 July 2005. (6) Appointed to the Absa Group board on 6 December 2006. (7) Appointed to the Absa Group board on 23 December 2005. (8) Appointed on the Absa Group board on 9 July 2004. He subsequently resigned from the Absa Group board on 27 July 2005. (9) Appointed to the Absa Group board on 23 October 2006. (10) Resigned from the Absa Group board on 27 July 2005. (11) Appointed to the Absa Group board on 19 April 2004. He subsequently resigned from the Absa Group board on 27 July 2005. (12) Resigned from the Absa Group board on 23 October 2006. (13) Resigned from the Absa Group board on 30 September 2006. *All emoluments to Group non-executive directors are paid by Absa Bank Limited, as disclosed in note 48.5 to the ﬁnancial statements. Group remuneration report [ Absa Group Limited Stakeholder report 31 December 2006 ] 107 Absa shares held by Absa Group directors Ordinary shares Certain executive and non-executive directors have an interest in the Group through beneficial and non-beneficial interests in Absa shares. This is disclosed in the directors’ report on page 355 of this report. Absa Bank preference shares Certain executive and non-executive directors have an interest in the Group through Absa Bank Limited preference shares. This is disclosed in the directors’ report on page 357 of this report. Preference shareholding in Absa Shareholders approved the allocation of cumulative redeemable option-holding preference shares (preference shares) to a number of previously disadvantaged individuals, qualifying employees, and black non-executive directors in terms of the Group’s broad-based black economic empowerment transaction on 25 June 2004. These allocations were made to Batho Bonke Capital (Proprietary) Limited (73 152 300 shares) and the Absa Group Limited Employee Share Ownership Administrative (ESOP) Trust (6 085 200 shares). Absa’s broad-based black economic empowerment and employee transactions entailed an 11% interest in Absa being allocated in the form of redeemable cumulative option-holding preference shares. These redeemable preference shares have the same rights as ordinary shares, including voting rights, save for the rights relating to dividends, redemption, the options and liquidation. The option exercise period is from 2 July 2007 to 1 July 2009. A variable option strike price is a core element of the transaction and is as follows: • If the Absa share price ≤ R70,00, the strike price is R48,00; or • If the Absa share price > R70,00, but ≤ R100,00, the strike price is R48,00 + 70 cents for each completed R1,00 increment in the share price over R70,00; or • If the Absa share price > R100,00, the strike price is R69,00. The Group’s broad-based black economic empowerment and employee transactions create value for all Absa stakeholders by providing a platform for meaningful wealth creation for as many previously disadvantaged individuals as possible, enhancing employee loyalty and commitment, expanding the Group’s customer base and improving customer loyalty. The following Absa non-executive directors hold preference shares in Absa indirectly through their direct and indirect holdings of ordinary shares in Batho Bonke: Absa preference shares Group non-executive director 31 December 2006 31 December 2005 Present directors L N Angel 1 280 165 1 280 165 D E Baloyi 150 000 100 000 Y Z Cuba 91 600 — M W Hlahla 50 000 — T M G Sexwale 4 183 090 4 183 090 P E I Swartz 500 000 500 000 F A Sonn 500 000 500 000 Past directors L W Maasdorp 2 560 328* 2 560 328 Total 9 315 183 9 123 583 Non-executive directors’ terms of employment Non-executive directors do not have service contracts. Letters of appointment confirm the terms and conditions of their service. *Resigned from the Absa Group board on 30 September 2006. 108 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group Executive Committee Introduction The Group executive committee (Exco), comprises the executive directors and other members of the executive management of Absa and of the Group’s major subsidiary, Absa Bank. The committee meets, as a general rule, once a week and deals with all material matters relating to the implementation of the agreed strategy, the monitoring of performance and the consideration of company policies. Key developments A number of developments impacted the membership of Exco during the twelve months under review. These included: • The resignation of Israel Skosana on 20 February 2006; • The retirement of Charles Erasmus and Pieter van der Merwe on 30 December 2006; and • The resignation of Allan Fielder on 31 December 2006. Biographical details and appointment dates of the Absa Group Executive Committee members The biographical details and appointment dates of the executive committee members as at 31 December 2006 were as follows: Age 44 Qualifications DCom (Acc), CA(SA) Title Group chief executive Tenure at Absa 17 years (appointed 1989) Year appointed as an Executive Committee member 2001 Areas of responsibility Steve is the Absa Group chief executive. Skills, expertise and After completing his articles with Ernst & Young (1980–1983), he became a lecturer experience in accounting at the University of South Africa (1983–1988). His first appointment with Absa was as senior manager: Finance at TrustBank (1989–1991). He then became an assistant general manager at TrustBank (1991–1992). From 1992 to 1994, he was assistant general manager: Group Finance at Absa. He then joined Absa Corporate Bank (later Absa Corporate and Merchant Bank and now Absa Capital). He held the positions of assistant general manager, general manager and deputy operating executive until he was appointed as a Group executive director in 2001. He was appointed as Group chief executive of Absa Group Limited in August 2004. S F (Steve) Booysen Group Executive Committee [ Absa Group Limited Stakeholder report 31 December 2006 ] 109 Age 42 Qualifications BAcc (Hons), CA(SA) Tenure at Absa Five years (appointed 2002) Year appointed as an Executive Committee member 2005 Areas of responsibility Responsible for Absa Private Bank*. Skills, expertise and Zarina commenced her career at Ernst & Young (then Ernst & Whinney) in 1986. In experience 1989, Zarina was seconded to Ernst & Young London for three years. There, she worked with a number of Ernst & Young’s key multinational customers. She returned to South Africa in 1992 and was appointed as a senior manager in Ernst & Young’s accounting and auditing technical department. In 1996 she was appointed as a partner in Ernst & Young and in 1998 as the chief operating officer of Ernst & Young Africa Group. In 2002, Zarina joined Absa as managing executive: Retail Banking Services. In February 2005, Zarina became managing executive: Absa Private Bank. She was appointed to Absa’s executive committee in July 2005. Participation in external Over the years, Zarina has served on the boards of the South African Institute of entities Chartered Accountants (SAICA) and the Unisa Foundation. She has also served as vice-president and chair of the Association for the Advancement of Black Accountants (ABASA) and as chair of the Public Accountants’ and Auditors’ board. Z B M (Zarina) Bassa Age 47 Qualifications BA (Hons), MBA, Diploma in Financial Studies, Associate of the Chartered Institute of Bankers Tenure at Barclays 26 years Year appointed as an Executive Committee member 2005 Areas of responsibility Responsible for Absa’s African operations. Skills, expertise and Dominic joined Barclays Bank in 1980. In his early career with the bank, he fulfilled a experience variety of UK-based branch, regional and head office roles. In early 1997, he became the finance director: Barclays Africa, Caribbean, Middle East and Latin America. In January 1999, he became managing director: Barclays Africa and has led the transformation of the Barclays business on the continent. D (Dominic) Bruynseels Age 46 Qualifications Diploma in Financial Studies, Associate of the Chartered Institute of Bankers Tenure at Barclays 30 years Year appointed as an Executive Committee member 2005 Areas of responsibility Responsible for the implementation of integration initiatives between Barclays and Absa, and Absa’s credit, risk management and compliance operations. Skills, expertise and Robert joined Barclays in 1976. After 10 years in the branch network in a range of experience roles, he joined the Barclays strategic planning team. In 1987, he returned to branch banking as a corporate relationship manager. He then moved to Large Corporate Banking, where he led the debt restructuring of several large property companies that were experiencing difficulties following the UK property crisis of the early 1990s. In 1994, Robert moved to Northampton to take up the role of finance and risk director: Corporate Barclaycard. Returning to London in 1997, he joined Business Banking, where he led the specialist sales teams before becoming marketing director in 2001. While at Business Banking, Robert developed and led the implementation of value aligned performance measurement (VAPM), a new approach to measuring and rewarding performance. In 2001, Robert was appointed to manage the Barclays £1 billion cost reduction challenge. Having completed this successfully, he moved to Madrid in 2003, where he led the programme to integrate the newly acquired Banco Zaragozano into Barclays. In late 2004, he became risk director: International Retail and Commercial Banking. In 2005, Robert was appointed as an executive director of Absa following the Barclays acquisition of a majority stake in the Absa Group. R (Robert) East *Subsequent to year-end, Zarina became responsible for Absa Islamic Banking. 110 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group Executive Committee Age 48 Qualifications BCom (Hons), CA(SA) Tenure at Absa 19 years (appointed 1987) Year appointed as an Executive Committee member 2004 Areas of responsibility Responsible for Absa Corporate and Business Bank, Real Estate Asset Management and Absa Development Company Holdings (Proprietary) Limited. Skills, expertise and Robert commenced his career as a lecturer at the then Rand Afrikaans University experience (now the University of Johannesburg), focusing on accountancy and taxation. He joined the Group in 1987 as the head of taxation for the Bankorp Group. Robert has held numerous positions in the Group’s finance department. From 1998 until 2000, Robert was a member of the Absa Corporate and Merchant Bank (now Absa Capital) Executive Committee and was responsible for volume transactional products and the back office environment. In 2000, he was appointed as managing executive: Business Banking Services and in 2003 he became managing executive: Absa Corporate and Merchant Bank. In 2005, he took responsibility for the Group’s corporate and business banking operations. R R (Robert) Emslie Age 44 Qualifications BSc (Hons), MBA Tenure at Barclays Seven years Year appointed as an Executive Committee member 2005 Areas of responsibility Responsible for Group Human Resources, Communication and Public Relations, and Group Black Economic Empowerment, Government Relations and Corporate Social Investment. Allan resigned from the Absa Group at the end of 2006. Skills, expertise and Allan has more than 15 years’ experience in the field of human resources and held a experience number of senior management roles at London Transport and Ernst & Young before joining the Barclays Group in January 2000. In the position of director: Human Resources Central Support Development, he was responsible for all aspects of human resource delivery to the central support teams. In addition, he had Group-wide accountability for the management of senior talent, employee relations, policy, equality and diversity. Alongside this role, Allan was seconded in November 2003 to cover the position of human resource director accountable for the Private Clients and International businesses. In this position, he was accountable for the provision of the full range of human resources services to approximately 19 000 employees, including those in Barclays Africa and the Middle East. Allan was appointed executive director: Group Human Resources at Absa following the Barclays acquisition of a majority stake in the Absa Group. A D (Allan) Fielder Group Executive Committee [ Absa Group Limited Stakeholder report 31 December 2006 ] 111 Age 48 Qualifications Senior executive programme Tenure at Absa Three years (appointed 2003) Year appointed as an Executive Committee member 2005 Areas of responsibility Responsible for Retail Delivery, Group Customer Experience and AllPay Consolidated Investment Holdings (Proprietary) Limited. Skills, expertise and Prior to joining the Absa Group, Venete worked for various financial services experience institutions. Venete joined Absa in June 2003 as head: Agriculture. Her portfolio grew to include franchising, consumables, black business, banking to women-owned business and medium business. In January 2005, she was appointed as deputy managing executive: Business Banking Services. Her portfolio was expanded to include the public sector. Venete was appointed as an executive director in July 2005. Participation in external Venete is a director of the Office of the Ombudsman for Banking Services, the deputy entities chair of the Agricultural Business Chamber, deputy vice-president of the Afrikaanse Handelsinstituut (AHI), economic adviser to the premier of the North West, a trustee of the Absa Foundation and the Community Impact Trust and a member of the International Policy Commission. She serves on a number of bodies appointed by the Minister of Finance: • The standing committee for the Short-term Insurance Act; • The standing committee for the revision of the Banks Act 1990; • The policy board for financial services and regulation; and • The task team – South Africa, regional financial centre of Africa. V J (Venete) Klein Age 38 Qualifications BCom (Hons), FFA Tenure at Absa 11 years (appointed 1995) Year appointed as an Executive Committee member Willie was appointed as an Executive Committee member in January 2007. Areas of responsibility* Responsible for Absa’s bancassurance operations (Absa Life Limited, Absa Investment Management Services (Proprietary) Limited, Absa Health Care Consultants (Proprietary) Limited, Absa Insurance Company Limited, Absa Manx Insurance Company Limited, Absa Syndicated Investments Holdings Limited, Global Insurance Company Limited, Absa Insurance Risk Management Services Limited, Absa Trust Limited, Absa Fund Managers Limited, Absa Mortgage Fund Managers (Proprietary) Limited, Absa Stockbrokers (Proprietary) Limited, Absa Portfolio Managers (Proprietary) Limited, Absa Consultants and Actuaries (Proprietary) Limited, Absa Brokers (Proprietary) Limited and Absa Asset Management (Proprietary) Limited). Skills, expertise and In May 1995, Willie was appointed as consulting actuary at Absa Consultants and experience Actuaries. He was then appointed as general manager: Operations at Absa Life in 1997 and as managing director: Absa Life in 2001. In December 2005, he was appointed managing executive: Absa Financial Services, Corporate. In 2007, he became an Absa executive director, responsible for the Group’s bancassurance operations. Participation in external Willie is a director of the Life Offices’ Association (LOA), a convener of the Credit Life entities Committee of the LOA and the chairman of the Joint Credit Life Forum between the South African Insurance Association (SAIA) and the LOA. He is also a member of the Actuarial Training Programme steering committee at the Unit for Business Mathematics and Informatics (University of North West). W T (Willie) Lategan *As at January 2007. 112 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group Executive Committee Age 52 Qualifications ACCA Tenure at Absa Six years (appointed 2000) Year appointed as an Executive Committee member 2003 Areas of responsibility Peter is the Group’s chief operating officer. He is responsible for overseeing the Group’s support functions: Group Change and Support Services; Group Information Technology; Group Communication and Public Relations*; Group Black Economic Empowerment, Government Relations and Corporate Social Investment*; Group Human Resources; Group Sourcing and Support Services*; Group Operations, Information Management and Group Payment Systems. Subsequent to the end of 2006, he became responsible for Group Strategy and Planning. Skills, expertise and Peter joined Absa in January 2000 to take over a number of executive functions at experience the Group’s instalment finance arm and was appointed as a Group executive director in 2003. He started his career in the audit environment, working for Coopers & Lybrand Chartered Accountants (SA) as audit senior, supervisor and manager. He also worked in Transnet Limited’s Group Internal Audit Services. He moved into general management at Autonet, the road passenger and freight logistics division of Transnet Limited. He held the positions of executive manager: Tours Express, general manager: Passenger Businesses as well as chief executive officer: Autonet. In 1988, he moved to the financial services sector to join Nedcor Limited’s technology and operations process management division. Participation in external He is a fellow of the Association of Chartered Certified Accountants (ACCA) and is a entities member of the Johannesburg Rotary Club. N P (Peter) Mageza Age 38 Qualifications BSc Tenure at Absa Five years (appointed 2001) Year appointed as an Year appointed as an 2005 Executive Committee member Areas of responsibility Responsible for Retail Banking Services, Flexi Banking Services and Small Business. Skills, expertise and Alfie has a background in technology, business management and sales in the experience manufacturing, consulting and high-tech industries. He joined Absa in 2001 with responsibility for the electronic delivery channels. He subsequently assumed responsibility for Absa Card in 2004, and in March 2005 was appointed to the Group Executive Committee. Participation in external He represents Absa’s interests on various industry bodies and in several joint entities ventures. V (Alfie) Naidoo Age 47 Qualifications BCom (Hons), CA(SA), HDip Tax Tenure at Absa Six years (appointed 1999) Year appointed as an Executive Committee member 2005 Areas of responsibility Responsible for Group Finance, Absa Legal, Group Economic Research, Group Investor Relations, Group Secretariat, Corporate Development, Capital Management, Group Treasury, Sarbanes-Oxley, the productivity and efficiency programme and Group Strategy and Planning**. Skills, expertise and Served articles with Arthur Young & Co (now Ernst & Young) from 1981 to 1983. experience Served in various senior managerial positions in the South African Transport Services, Portnet and Transnet until 1999. Joined Absa as Group executive: Group Finance during 1999. Appointed as Group executive director: Finance in January 2005. J H (Jacques) Schindehütte *As at January 2007. **Subsequent to year-end, Group Strategy and Planning became the responsibility of the chief operating officer. Group Executive Committee [ Absa Group Limited Stakeholder report 31 December 2006 ] 113 Age 43 Qualifications BCompt (Hons), CA(SA) Tenure at Absa Two years (appointed 2005) Year appointed as an Executive Committee member 2005 Areas of responsibility Responsible for Group Strategy and Planning. Skills, expertise and James is a qualified chartered accountant, with extensive experience in the financial experience services industry. He worked at Nedcor as a senior financial manager for five years, before joining Merrill Lynch SA in 1995 as a top-rated banking and financial services analyst. James also served as managing director of research at Merrill Lynch SA and deputy head of emerging markets research. In 2002, James co-founded J&J Financial Services, a subsidiary of the J&J Group (an empowered investment company supported by Old Mutual), and became the chief executive officer of First South Financial Services, a 100% subsidiary of J&J Financial Services. J L (James) Slabbert Age 42 Qualifications BSBA Tenure at Barclays Four years Year appointed as an Executive Committee member 2005 Areas of responsibility Responsible for Absa Capital. John joined Barclays Capital in 2002 as chief operating officer of Global Emerging Markets before moving into the position of chief operating officer of Rates (which includes Fixed Income, FX, Equities, Commodities, Collateralised Finance, Emerging Markets and Money Markets). Prior to this, he was with Credit Suisse First Boston as director of e-commerce for Emerging Markets. He previously held a number of other positions at Credit Suisse First Boston, including proprietary trader for the emerging markets group and global head of the emerging markets repo desk. John is a graduate of Georgetown University, where he received a Bachelor of Science degree in Business Administration in 1990. He is also a veteran of the US Marine Corps (1982–1986), having served in Beirut, where he was awarded the Combat Action Ribbon. John joined the Absa Group Executive Committee as executive director: Absa Corporate and Merchant Bank (now Absa Capital) upon the completion of the Barclays acquisition of a majority stake in the bank on 27 July 2005. J F (John) Vitalo Age 45 Qualifications BEcon Tenure at Absa 25 years (appointed 1981) Year appointed as an Executive Committee member 2001 Areas of responsibility Responsible for retail banking, including Absa Home Loans, Absa Card, and Absa Vehicle and Asset Finance. He is also responsible for Group Marketing. Skills, expertise and His first position was that of a clerk in the Goodwood branch of Volkskas. He worked experience in the branch system until 1995, by which time he had been branch manager of four branches, namely Wynberg (1989–1990), Cape Town (1990–1991), Old Paarl Road (1991–1992) and Stellenbosch (1992–1995). His appointment as regional manager: Northern Cape in Kimberley (1995–1996) elevated him to Absa’s general management. He then became provincial general manager: Northern Province (1996–1998) and provincial general manager: Free State (1998–1999). In 2000, he moved to Absa head office, where he became operating executive: Absa Commercial Bank. He was appointed as an executive director on the Absa Group board in September 2004. Participation in external Other than serving as a director on many Absa divisional boards, Louis also entities represents Absa on the boards of the Banking Association South Africa, and the Section 21 Housing Company. L L (Louis) von Zeuner 114 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group Executive Committee Reporting structure as at January 2007 GROUP CHIEF EXECUTIVE Steve (S F) Booysen DCom (Acc), CA(SA) Appointed 1989 CHIEF EXECUTIVE: GROUP EXECUTIVE GROUP CHIEF GROUP EXECUTIVE ABSA CAPITAL DIRECTOR OPERATING OFFICER DIRECTOR John (J F) Vitalo Louis (L L) von Zeuner Peter (N P) Mageza Jacques (J H) Schindehütte BSBA BEcon ACCA BCom (Hons), CA(SA), HDip Tax Appointed 2005 Appointed 1981 Appointed 2000 Appointed 1999 CHIEF OPERATING OFFICER EXECUTIVE DIRECTOR GROUP ADMINISTRATION SARBANES-OXLEY Ian (I J) Axe Zarina (Z B M) Bassa General manager Group executive BEng (Hons), MSc, MBA BAcc (Hons), CA(SA) Hendrik (H R B) Opperman Friedel (F) Meisenholl Appointed 2006 Appointed 2002 BCom (Hons), CA(SA) BAcc (Hons), CA(SA) TRADING (SECONDARY MARKETS) Appointed 1996 Appointed 1993 Head: Trading ABSA PRIVATE BANK GROUP INFORMATION TECHNOLOGY GROUP FINANCE Michael (R A) Bagguley Senior executive: Strategic Wealth Management Chief information ofﬁcer Group executive FIA, BSc (Hons) Ian (I W) Henstock Frik (F P) van der Merwe Eric (E) Wasserman Appointed 2006 BCompt (Hons), CA(SA), MBA, HDip Tax Law Dip Business Management, Project BCom (Hons), CA(SA) EQUITY INVESTMENTS Appointed 2004 Management Appointed 2000 Head: Equity Investments and Special Projects Appointed 1994 ABSA LEGAL André (A B) la Grange EXECUTIVE DIRECTOR GROUP CHANGE AND SUPPORT Group general counsel MCom Venete (V J) Klein SERVICES Chris (C J) van der Walt (acting) Appointed 2000 Senior executive programme Group executive BCom (Hons), MBL, FIFM INVESTMENT BANKING Appointed 2003 Leon (L) du Rand Appointed 1985 Acting head: Investment Banking BA (Hons), MCom GROUP SECRETARIAT André (A B) la Grange RETAIL DELIVERY Appointed 1987 Group secretary MCom Managing executive INFORMATION MANAGEMENT William (W R) Somerville Appointed 2000 Arrie (A) Rautenbach Group executive ACIS, ACMA, Dip Corp Law BBA, MBA, AMP (Insead) Premlin (P) Pillay (acting) Appointed 1990 CHIEF FINANCIAL OFFICER Appointed 1997 Charles (C J) Russon BSc (Hons), MBA CORPORATE DEVELOPMENT BCom, CA(SA) GROUP CUSTOMER EXPERIENCE Appointed 2004 General manager Appointed 2006 General manager GROUP CHIEF OPERATING OFFICER: Shaun (S) Strydom Ina (I) Steyn (acting) SUPPORT CA(SA), HDip Strategic Management EMPOWERMENT CAIB (SA), BCom Head: Empowerment Chief of staff Appointed 2006 Appointed 1984 Emile (E) Burger George (J G) Sebulela CAPITAL MANAGEMENT BA (Comm), AMP, LDP, PGrd Dip Marketing ALLPAY CONSOLIDATED INVESTMENT BCom (Hons), ACMA, MBA General manager Appointed 2004 HOLDINGS (PROPRIETARY) LIMITED Appointed 1997 Carel (C F) Grönum Managing director GROUP COMMUNICATION AND PUBLIC BCom (Hons) SALES (SECONDARY MARKETS) Dirk (D J) Kotzé (acting) Head: Sales RELATIONS Appointed 1993 BCom Group executive Andrew (A C) Selby Appointed 1994 GROUP TREASURY BCom, PGDA, CA(SA) Vacant Group treasurer Appointed 2006 GROUP HUMAN RESOURCES Petrus (P J) Balt EXECUTIVE DIRECTOR Group HR director MCom, CA(SA), HDip Tax PRIMARY MARKETS Alﬁe (V) Naidoo Head: Primary Markets Lawrence (L B) Mlotshwa Appointed 2000 BSc BA, HEd, MBA Stephen (S J) van Coller Appointed 2001 PRODUCTIVITY AND EFFICIENCY CA(SA), ACMA, BCom (Hons) Appointed 2003 PROGRAMME Appointed 2006 RETAIL BANKING SERVICES GROUP BLACK ECONOMIC General manager Managing executive EMPOWERMENT, GOVERNMENT Dirk (D J) Reyneke Pierre (J P) Loubser (acting) RELATIONS AND CORPORATE BCom (Hons), CA(SA), Advanced Dip BCom, MBA SOCIAL INVESTMENT Banking Appointed 1989 Group executive Appointed 2005 Riah (M V) Phiyega FLEXI BANKING SERVICES MA, PGrd Dip Business Administration EXECUTIVE DIRECTOR Managing executive Appointed 2005 James (J L) Slabbert Daphne (D R) Motsepe BCompt (Hons), CA(SA) BCompt, MBA GROUP SOURCING Chief procurement ofﬁcer Appointed 2005 Appointed 2005 Ian (I M) Russell SMALL BUSINESS BSc (Econ), MBA, FCIPS GROUP STRATEGY AND PLANNING Managing executive Appointed 2005 Sizwe (S A) Tati BCom (Acc), Dip Bus Admin, Dip Project GROUP LOGISTICAL SERVICES GROUP ECONOMIC RESEARCH Management Leon (L P) Kruger Group economist Appointed 2004 Dip IOM, Dip Security Admin Christo (C W) Luüs Appointed 1980 BCom (Hons), MBL, FIFM ABSA HOME LOANS Appointed 1985 GROUP PAYMENT SYSTEMS Managing executive General manager Gavin (G R) Opperman Walter (W V) Volker GROUP INVESTOR RELATIONS CAIB (SA), LLB (SA), Dip Marketing BSc, MBL General manager Appointed 1994 Appointed 1990 Jacques (J C) Badenhorst ABSA CARD CA(SA) Managing executive Appointed 2006 Chris (C) Sweeney BSc (Hons) Appointed 2005 GROUP MARKETING Group executive Happy (H) Ntshingila BA (Comm), Dip Labour Law Appointed 2006 ABSA VEHICLE AND ASSET FINANCE Managing executive Marcel (M N) de Klerk BSc (Hons), BCom, MBL Appointed 1995 PERSONAL BANK Chief operating ofﬁcer Johan (F J) Geldenhuys BCom (Hons) Appointed 1985 Group Executive Committee [ Absa Group Limited Stakeholder report 31 December 2006 ] 115 INTERNAL AUDIT General manager John (J P) MacElvogue (acting) Post-graduate Diploma in Internal Audit and Management, PIIA Appointed 2006 EXECUTIVE DIRECTOR: GROUP EXECUTIVE EXECUTIVE EXECUTIVE ABSA FINANCIAL SERVICES DIRECTOR DIRECTOR DIRECTOR Willie (W T) Lategan Dominic (D) Bruynseels Robert (R) East Robert (R R) Emslie BCom (Hons), FFA BA (Hons), MBA, DipFS, ACIB ACIB, DipFS BCom (Hons), CA(SA) Appointed 1995 Appointed 2005 Appointed 2005 Appointed 1987 ABSA INVESTMENTS ABSA AFRICA IMPLEMENTATION ABSA CORPORATE AND Managing executive Managing director (INTEGRATION) BUSINESS BANK Alan (A J) Miller Dana (D) Botha BEconSc, BSc (Hons), FIA, CFA BCom, BCompt (Hons), MBL GROUP CREDIT ABSA REAL ESTATE ASSET Appointed 2005 Appointed 1989 Group executive MANAGEMENT AND ABSA ABSA INSURANCE SERVICES Keiran (K P) Foad DEVELOPMENT COMPANY Managing executive ACIB HOLDINGS (PROPRIETARY) LIMITED Coenraad (C F) de Jager Appointed 2006 Managing executive BSc, FIA, CFP CHIEF OPERATING OFFICER: RISK Sipho (S) Mashinini Appointed 1985 Chief operating ofﬁcer MBA, Dip Project, Financial and Eddie (E) Swanepoel Marketing Management, Cert Property ABSA FIDUCIARY SERVICES Development and Management Managing executive BCom (Acc) Appointed 1989 Appointed 2004 Johann (M J) Grobler BSc, MBL, CFP OPERATIONAL RISK Appointed 1985 General manager ABSA BROKERS Anne-Marie (A) Pothas (PROPRIETARY) LIMITED PhD (Operational research) Executive director Appointed 2001 Deon (D) Olckers GROUP COMPLIANCE CA(SA), LLB Group compliance ofﬁcer Appointed 2000 Maadian (M) Botha BLC, LLB, LLM, MBA, Attorney of the High Court (SA) Appointed 2000 116 [ Absa Group Limited Stakeholder report 31 December 2006 ] Group Executive Committee Reporting structure as at May 2007 GROUP CHIEF EXECUTIVE Steve (S F) Booysen DCom (Acc), CA(SA) Appointed 1989 CHIEF EXECUTIVE: CHIEF EXECUTIVE: GROUP CHIEF GROUP FINANCIAL ABSA CAPITAL RETAIL BANK OPERATING OFFICER DIRECTOR John (J F) Vitalo Louis (L L) von Zeuner Peter (N P) Mageza Jacques (J H) Schindehütte BSBA BEcon ACCA BCom (Hons), CA(SA), HDip Tax Appointed 2005 Appointed 1981 Appointed 2000 Appointed 1999 CHIEF OPERATING OFFICER EXECUTIVE DIRECTOR GROUP STRATEGY AND PLANNING GROUP ECONOMIC RESEARCH Ian (I J) Axe Zarina (Z B M) Bassa Head: Group Strategy and Planning Group economist BEng (Hons), MSc, MBA BAcc (Hons), CA(SA) Vacant Christo (C W) Luüs Appointed 2006 Appointed 2002 GROUP OPERATIONS BCom (Hons), MBL, FIFM TRADING (SECONDARY MARKETS) Group executive Appointed 1985 Head: Trading WEALTH SOLUTIONS Hendrik (H R B) Opperman GROUP INVESTOR RELATIONS Michael (R A) Bagguley Senior executive BCom (Hons), CA(SA) General manager FIA, BSc (Hons) Ian (I W) Henstock Appointed 1996 Jacques (J C) Badenhorst Appointed 2006 BCompt (Hons), CA(SA), MBA, HDip Tax Law GROUP INFORMATION TECHNOLOGY CA(SA) EQUITY INVESTMENTS Appointed 2004 Chief information ofﬁcer Appointed 2006 Head: Equity Investments and Special Projects ABSA PRIVATE BANK Frik (F P) van der Merwe GROUP FINANCE André (A B) la Grange Senior executive Dip Business Management, Project Group executive MCom Hlengani (H) Mathebula Management Eric (E) Wasserman Appointed 2000 BA, BTh (Hons), MDP, SEP, Dip Marketing Appointed 1994 BCom (Hons), CA(SA) INVESTMENT BANKING Appointed 2005 GROUP CHANGE AND SUPPORT Appointed 2000 Acting head: Investment Banking ABSA PRIVATE BANK SERVICES ABSA LEGAL André (A B) la Grange Chief operating ofﬁcer Group executive Group general counsel MCom Johannes (J) Binnekade Leon (L) du Rand Johannes (J P) Gouws Appointed 2000 BCompt (Hons), CA(SA) BA (Hons), MCom BLC, LLB CHIEF FINANCIAL OFFICER Appointed 1989 Appointed 1987 Appointed 2007 Charles (C J) Russon ABSA ISLAMIC BANKING INFORMATION MANAGEMENT GROUP SECRETARIAT BCom, CA(SA) Managing director Group executive Group secretary Appointed 2006 Ahmed (A O) Moola Premlin (P) Pillay (acting) William (W R) Somerville EMPOWERMENT CA(SA) BSc (Hons), MBA ACIS, ACMA, Dip Corp Law Head: Empowerment Appointed 2006 Appointed 2004 Appointed 1990 George (J G) Sebulela GROUP CHIEF OPERATING OFFICER: CORPORATE DEVELOPMENT BA (Comm), AMP, LDP, PGrd Dip Marketing EXECUTIVE DIRECTOR SUPPORT General manager Appointed 2004 Venete (V J) Klein* Chief of staff Shaun (S) Strydom SALES (SECONDARY MARKETS) Executive programme Emile (E) Burger CA(SA), HDip Strategic Management Head: Sales Appointed 2003 BCom (Hons), ACMA, MBA Appointed 2006 Andrew (A C) Selby Appointed 1997 GROUP TREASURY BCom, PGDA, CA(SA) CUSTOMER MARKETING AND GROUP COMMUNICATION AND PUBLIC Group treasurer Appointed 2006 SOLUTIONING RELATIONS Carel (C F) Grönum Managing executive Group executive BCom (Hons) PRIMARY MARKETS Arrie (A) Rautenbach Head: Primary Markets Makhosini (H) Nkosi Appointed 1993 BBA, MBA, AMP (Insead) NED Stephen (S J) van Coller Appointed 1997 PRODUCTIVITY AND EFFICIENCY CA(SA), ACMA, BCom (Hons) Appointed 2007 PROGRAMME Appointed 2006 SALES AND SERVICE GROUP HUMAN RESOURCES General manager Managing executive Group HR director Dirk (D J) Reyneke Pierre (J P) Loubser Lawrence (L B) Mlotshwa BCom (Hons), CA(SA), Advanced Dip BCom, MBA BA, HEd, MBA Banking Appointed 1989 Appointed 2003 Appointed 2005 ALLPAY CONSOLIDATED INVESTMENT GROUP BLACK ECONOMIC HOLDINGS (PROPRIETARY) LIMITED EMPOWERMENT, GOVERNMENT Managing executive RELATIONS AND CORPORATE Thandeka (T M) Mbabama SOCIAL INVESTMENT DPhil Group executive Appointed 2007 Riah (M V) Phiyega MA, PGrd Dip Business Administration EXECUTIVE DIRECTOR Appointed 2005 Alﬁe (V) Naidoo* BSc GROUP SOURCING AND SUPPORT Appointed 2001 SERVICES Chief procurement ofﬁcer Ian (I M) Russell SMALL BUSINESS BSc (Econ), MBA, FCIPS Managing executive Appointed 2005 Daphne (D R) Motsepe ABSA HOME LOANS BCompt, MBA GROUP PAYMENT SYSTEMS Managing executive Appointed 2005 General manager Gavin (G R) Opperman Walter (W V) Volker CAIB (SA), LLB (SA), Dip Marketing MICRO-LENDING BSc, MBL Appointed 1994 Head: Micro-Lending Appointed 1990 Lawrence (L K) Twigg ABSA CARD BA Managing executive Appointed 2006 Chris (C) Sweeney BSc (Hons) VENTURES AND ALLIANCES Appointed 2005 Managing executive Simon (S W) Just GROUP MARKETING BBA Group executive Appointed 2003 Happy (H) Ntshingila BA (Comm), Dip Labour Law DIGITAL CHANNELS Appointed 2006 Managing executive Christo (C J) Vrey ABSA VEHICLE AND ASSET FINANCE HEd Managing executive Appointed 1994 Marcel (M N) de Klerk BSc (Hons), BCom, MBL ABSA CONTACT CENTRE Appointed 1995 Senior specialist Andy (A J) Rigg PERSONAL BANK Dip Management Studies, MBA, Harvard Chief operating ofﬁcer Executive Programme Johan (F J) Geldenhuys Appointed 2007 BCom (Hons) Appointed 1985 *Structure operationalised in the second half of 2007. Group Executive Committee [ Absa Group Limited Stakeholder report 31 December 2006 ] 117 INTERNAL AUDIT Chief internal auditor Friedel (F) Meisenholl BAcc (Hons), CA(SA) Appointed 1993 CHIEF EXECUTIVE: CHIEF EXECUTIVE: GROUP RISK CHIEF EXECUTIVE: ABSA FINANCIAL SERVICES ABSA AFRICA GROUP DIRECTOR ABSA CORPORATE AND BUSINESS BANK Willie (W T) Lategan Dominic (D) Bruynseels Robert (R) East Robert (R R) Emslie BCom (Hons), FFA BA (Hons), MBA, DipFS, ACIB ACIB, DipFS BCom (Hons), CA(SA) Appointed 1995 Appointed 2005 Appointed 2005 Appointed 1987 ABSA INVESTMENTS ABSA AFRICA IMPLEMENTATION ABSA CORPORATE AND Managing executive Managing director (INTEGRATION) BUSINESS BANK Alan (A J) Miller Dana (D) Botha BEconSc, BSc (Hons), FIA, CFA BCom, BCompt (Hons), MBL GROUP CREDIT SEGMENTS AND MARKETING Appointed 2005 Appointed 1989 Group executive James (J L) Slabbert ABSA INSURANCE SERVICES Keiran (K P) Foad BCompt (Hons), CA(SA) Managing executive ACIB Appointed 2005 Coenraad (C F) de Jager Appointed 2006 CHIEF OPERATING OFFICER BSc, FIA, CFP CHIEF OPERATING OFFICER: RISK Trix (G M B) Coetzer Appointed 1985 Chief operating ofﬁcer CA(SA) ABSA FIDUCIARY SERVICES Eddie (E) Swanepoel Appointed 2004 Managing executive BCom (Acc) PRODUCTS AND SECTORS Johann (M J) Grobler Appointed 1989 General manager BSc, MBL, CFP OPERATIONAL RISK Gavin (G) Clark Appointed 1985 General manager IOB, AEP ABSA BROKERS Anne-Marie (A) Pothas Appointed 1988 (PROPRIETARY) LIMITED PhD (Operational research) COMMERCIAL PROPERTY Executive director Appointed 2001 FINANCE Deon (D) Olckers GROUP COMPLIANCE General manager CA(SA), LLB Group compliance ofﬁcer Rob (R D) Jeffery Appointed 2000 Maadian (M) Botha MBA BLC, LLB, LLM, MBA, Attorney of the High Appointed 2000 Court (SA) Appointed 2000 ABSA REAL ESTATE ASSET MANAGEMENT AND ABSA DEVELOPMENT COMPANY HOLDINGS (PROPRIETARY) LIMITED Managing executive Sipho (S) Mashinini MBA, Dip Project, Financial and Marketing Management, Cert Property Development and Management Appointed 2004 118 [ Absa Group Limited Absa Group Limited Stakeholder report Stakeholder report 31 December 2006 31 December 2006 ] Risk management report Introduction Risk management is a core capability of the Absa Group and is integral to the execution of its business activities. It is also integral to evaluating strategic alternatives and setting objectives that are aligned with the Group’s strategy. Risk management is fundamental to Absa’s business and plays a crucial role in enabling management to operate more effectively in an uncertain environment. Absa adopts the following approach to risk management: • All significant risks must be identified and managed. These risks are identified in the Principal Risks Policy, which is approved by the board. This policy is the successor to the Board Governance Standards, which were adopted in 2005. • A five-step risk management process (direct, assess, control, report, manage/challenge) is adopted throughout the Group. isk R management highlights and developments • Development and implementation of appropriate Basel ll-compliant risk management processes in preparation for implementation in 2008. • Training and creating awareness in the Group of various risk topics, such as Basel II, the National Credit Act and money laundering control. • Enhancement of the decentralised risk management structures (divisional risk governance and control committees). • Alignment with and integration of the Barclays risk management practices. • Development and roll-out of the Absa employee compliance conduct guide. • Entrenchment of requirements in respect of the Financial Intelligence Centre Act (FICA) and anti-money laundering and terrorist financing legislation. Looking ahead • Finalisation of the Basel ll implementation (including Banks Act amendments and new regulations), compliance and training for parallel implementation in late 2007. • Ensuring that risk-reward applications based on Basel ll requirements are further entrenched throughout the Group. • Ongoing alignment with the Barclays risk management frameworks and methodologies. • Continued expansion of capabilities relating to FICA and financial sanctions regulatory obligations. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 119 Risk management fundamentals Risk management in Absa is guided by several concepts, the most important of which are: • assigning appropriate responsibility and accountability for all risks and resulting returns; • adopting a framework for integrated risk management that applies across all businesses and all risk types, which includes comprehensive risk identification, assessment, response, control and reporting; • formal risk governance processes; • an independent risk management function; and • protecting the Group’s reputation. A description of each element is set out on the pages that follow. Responsibility and accountability The responsibility for risk management resides at various levels, from members of the board to individuals throughout the Group, and is governed by a board-approved principal risks type policy. Associated risk management control frameworks and policies are established on a comprehensive, organisation-wide basis by senior management and reviewed with and, where appropriate, approved by, the board of directors. The control frameworks, policies, appetites and tolerances are clearly communicated throughout the Group and apply to all business units in the various divisions, wholly owned subsidiaries, as well as non-wholly owned subsidiaries and majority equity stakes over which the Group has management control. Board and executive management responsibility The Absa Group board is responsible for annually approving the Group’s risk appetite. This risk appetite is translated into risk limits per business unit and per risk type. Adherence to these limits is monitored and reported monthly and culminates in a risk-reward profile for the Group. Details on the risk appetite methodology are provided further on in this report. Risk appetite does not specifically address all types of operational risk, inadequate corporate governance processes, reputation risk and long-term strategic risk. These risks are addressed in the Group’s risk management framework. Business unit/subsidiary accountability Business units/subsidiaries are accountable for managing the risks associated with their activities within established and approved tolerance limits, as well as for the results, both positive and negative, of taking those risks. In discharging this responsibility, business units are assisted by Absa’s independent risk management division (Absa Risk). Oversight is provided by the divisional risk, governance and control committees (DRG&CCs). Framework for integrated risk management Absa’s risk management framework is effective, comprehensive, consistent and formally approved. All risks are qualitatively evaluated on a recurrent basis and, wherever practical, the evaluation includes quantitative analysis. Risk assessments consider the effects of both likely and unlikely events. Integrated, structured risk assessments take place across all risk types and businesses in accordance with the established risk management framework. A five-step process of directing, assessing, controlling, reporting and managing/challenging is followed. Monitoring is done through ongoing processes built into the normal, recurring operating activities of the Group, as well as internal and external audit recommendations. All risks are comprehensively and regularly reported across the Group. 120 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report Risk governance Risk governance refers to the approach that balances the demands for entrepreneurship, control and transparency, while supporting the Group’s objectives with an efficient decision-making process. Formal risk governance processes are established in Absa. The management of risk in the Group is guided and monitored by a number of committees. Risk governance structure The main elements of the Group’s risk governance structure are shown below: Board Absa Group board Board-appointed committees Group Risk Group chief executive and Group Audit and Compliance Committee Group Executive Committee (GACC) (GRC) Committee (Group Exco) Group Exco risk-type Credit Risk Market Risk committees Committee Committee Operational Risk (CRC) (GRC) Committee (ORC) Group Exco subcommittee Group Governance and Control Committee (GGCC) Absa Financial Divisional risk, governance Services Risk and control committees Absa Corporate Personal and Central Support Governance and Absa Capital Absa Africa and Business Private Banking Functions (DRG&CCs) Control Committee RG&CC RG&CC Bank RG&CC RG&CC RG&CC (RG&CC) Other Group oversight Brand and Group Group Tax Group Investment Reputation Valuation Group Change committees Committee Committee Committee Committee Committee isk R governance refers to the approach that balances the demands for entrepreneurship, control and transparency, while supporting the Group’s objectives with an efficient decision-making process. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 121 The most influential role-players in the risk management framework (as indicated in the governance structure) and their responsibilities are: Absa Group board and board committees Information on Absa’s board and its various committees can be found in the corporate governance statement on page 65 of this report. Group chief executive The Group chief executive is appointed by the Absa Group board to manage, with the assistance of Group Exco, the Group’s business within an acceptable risk profile and to achieve sustainable profits. The main responsibilities of the Group chief executive and Group Exco with regard to risk include: • overseeing all risk processes at an executive level; • monitoring the management of all risks within acceptable qualitative and quantitative risk profiles; • ensuring that appropriate internal controls are in place by developing and providing a strong control environment; • ensuring that risk management policies are approved and implemented from a Group and business unit perspective; • ensuring that information and reporting systems pertaining to risk management and control are adequate, accurate and effective; • ensuring that risk is taken into account in long-term plans and investments; and • regularly reporting on risk to the board. Group Governance and Control Committee (GGCC) The GGCC is a Group Exco committee established during the year to assist Group Exco and the GACC through oversight of the design and operation of the internal control framework in Absa. The committee meets quarterly and is responsible for the design and operation of the Group control framework, communication of the framework and its contents, independent assurance and escalation of issues. The GGCC reviews control issues escalated from the divisional risk governance and control committees (DRG&CCs) incorporated in the control issues of Group significance (CIGLS) report. Divisional/subsidiary risk, governance and control committees (DRG&CCs) DRG&CCs were established by the Group chief executive to assist Group Exco, the Group Audit and Compliance Committee (GACC) and the Group Risk Committee (GRC) to discharge their responsibilities from a business unit perspective. It is the responsibility of Absa Risk to assist business unit heads with the effective functioning of the divisional/subsidiary risk governance structures in accordance with Absa’s risk management framework. Management risk-type committees The Credit Risk Committee (CRC), Market Risk Committee (MRC) and Operational Risk Committee (ORC) are committees established by Group Exco to manage the credit, market and operational risk-reward profiles of the Absa Group. The committees convene monthly with the overall objective of aligning developments in the three risk areas with the requirements of Basel II and ensuring that the risk-reward profile supports the overall risk appetite of the Group (including all business units and subsidiaries that are controlled by Absa) in an integrated way. Other oversight committees The Group has established a number of committees with oversight of specialised areas such as investments, taxation, and valuations in the life insurance business. The committees convene either monthly or quarterly. Specialist functions and shared services Absa’s operating model is designed to obtain maximum operational efficiency from a number of shared services in the Group. Specialist functions, aided by specialist committees, assist with risk management, including strategic investment activities, in the Group. These are conducted according to clear governance guidelines. 122 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report The main functions with specialised knowledge are listed below: Function Risk management areas supported Absa Capital: Market Risk Traded market risk in Absa Capital Absa Internal Audit Internal audit assurance and advisory Group Strategy and Planning Strategic risk Absa Risk Credit risk, market risk, operational risk, strategic investment risk, economic capital and forensic services Group Operations Maintenance of an effective control environment; operational risk pertaining to processes Group Communication and Public Relations Reputation risk Group Compliance Regulatory compliance and anti-money laundering monitoring Group Economic Research Financial risk Group Finance Accounting, tax and compliance risk Group Information Technology and Information Technology and information risk; operational risk Management pertaining to systems Group Investor Relations Reputation and compliance risk Absa Legal Legal risk and compliance risk Group Marketing Reputation risk Group Secretariat Compliance and governance risk Group Sourcing and Support Services Operational risk pertaining to sourcing and logistical processes Group Treasury Asset and liability market risk, liquidity risk and capital management Group Human Resources Operational risk pertaining to people Real Estate Asset Management (REAM) Valuation and recovery of physical security, operational risk pertaining to external events Retail Delivery Operational risk pertaining to processes Absa Life, Absa Insurance Company and Absa Underwriting and investment risk Manx Holdings Independent risk function Absa Risk is an independent specialist function accountable to the Group Risk Committee (GRC), and in certain areas to the Group Audit and Compliance Committee (GACC). The activities of this division are evaluated and governed by the Group chief executive through the effective functioning of the Credit Risk Committee (CRC), Market Risk Committee (MRC), Operational Risk Committee (ORC) and the divisional/subsidiary risk, governance and control committees (DRG&CCs). Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 123 The risk division is responsible for ensuring that an integrated and effective risk management framework is maintained throughout the Group. To discharge this role as efficiently and effectively as possible, Absa Risk relies on other role- players in the risk governance structures such as those reflected in the preceding table. Absa Risk comprises a number of specialist risk management areas, chiefly credit, market, operational, insurance and investment risk, as well as compliance and forensic services functions. External validations of Absa Risk and the Group’s risk management frameworks are performed by independent external parties. Protecting the Group’s reputation A strong corporate reputation is an invaluable asset to a financial services institution. Absa recognises the benefit of maintaining and improving its corporate reputation at all times. By managing and controlling the risks incurred in the course of business, the Group protects its reputation. This entails avoiding large concentrations of exposures of all kinds, as well as transactions that are sensitive for tax, legal, regulatory, social, environmental or accounting reasons. A cautious approach is adopted towards other risks that cannot be sensibly evaluated or priced. Absa aspires to the highest standards in protecting the confidentiality and integrity of customer information, and aims to maintain the highest ethical standards in all business dealings. Protecting the Group’s reputation must be an overriding concern of each employee, particularly those involved in risk decisions. Risk management and control Internal control framework Absa’s internal control framework is aligned with the internationally accepted standard “Internal Control – Integrated Framework” published by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). The Group’s principal risk categories (set out below) are the subject of board-approved risk control requirements. • Brand management • Capital • Corporate responsibility • Financial crime • Financial reporting • Insurance underwriting and investment • Legal • Liquidity • Major change • Market • Operations • People • Regulatory compliance • Retail credit • Strategic • Taxation • Technology • Wholesale credit 124 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report Risk management responsibilities Absa applies a five-step approach to risk management, as follows: Direct • Understand the principal risks to achieving the Group’s strategy. • Establish the risk appetite. • Establish and communicate the risk management framework including responsibilities, authorities and key controls. Assess • Establish the process for identifying and analysing business-level risks. • Agree and implement measurement and reporting standards and methodologies. Control • Establish key control processes and practices, including limit structures, provisioning criteria and reporting requirements. • Monitor the operation of the controls and adherence to risk direction and limits. • Provide early warning of control or appetite breaches. • Ensure that risk management practices and conditions are appropriate for the business environment. Report • Interpret and report on risk exposures, concentrations and risk-taking outcomes. • Interpret and report on sensitivities and key risk indicators. • Communicate with external parties. Manage and challenge • Review and challenge all aspects of the Group’s risk profile. • Assess new risk-return opportunities. • Advise on optimising the Group’s risk profile. • Review and challenge risk management practices. Risk appetite Risk appetite is the Group’s chosen method of balancing return and risks, recognising a range of possible outcomes, as business plans are implemented. Absa’s framework, approved by the Group Risk Committee (GRC), uses a formal, quantitative method based on advanced risk analysis. The risk appetite is set annually by the Absa Group board. Risk appetite methodology In 2006, Absa aligned its measurement methodologies with those of Barclays and reported on risk appetite to the GRC, using both methodologies during the year. Absa previously used a one-year horizon for setting risk appetite that incorporated all business units and all risk types at a selected confidence limit. As part of the alignment with Barclays methodology, this approach was enhanced by the introduction of additional confidence limits and economic capital measurement. The measurement methodologies of all the risk types were individually assessed and aligned where necessary. The aligned measurement was then Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 125 incorporated into the risk appetite setting and monitoring process to ensure a coherent and comprehensive assessment of the Group’s use of risk appetite. The objectives of the risk appetite framework are to: • help protect the Group’s performance; • enable unused risk capacity to be identified and thus profitable opportunities to be highlighted; • improve management confidence and debate regarding the Group’s risk profile; and • help executive management improve control and coordination of risk-taking across businesses. The risk appetite framework considers credit, market, operational and insurance underwriting risk and is applied using two perspectives: “earnings volatility” and “mandate and scale”. Earnings volatility This takes account of the potential volatility around Absa’s forecast financial performance each year, with appetite being set in the context of strategic objectives, including dividend sustainability and preservation of Absa’s rating in stress environments. The portfolio is analysed in this way at four representative levels: • Expected performance (including the average credit losses, based on measurements over many years). • A moderate stress level of loss that is likely to occur only infrequently and is meant to correspond to a macroeconomic cycle. • A severe stress which is much less likely. • An extreme but highly improbable level of stressed loss, which is used to determine the Group’s economic capital. These ascending but increasingly less likely levels of loss are illustrated in the following chart: Risk appetite concepts (diagram not to scale) Expected (Mean) Probability of loss Moderate stress Severe stress Extreme stress Risk Economic capital tendency Potential size of loss in one year Mandate and scale This second perspective enables the setting of limits to control unacceptable levels of loss that may arise as a result of portfolio concentration. Absa’s objective is to keep unexpected losses within the scope of its communicated strategy and to a scale that is appropriate for the Group. This perspective uses simple, descriptive measures and limits for relevant exposure types. 126 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report Overall, the risk appetite framework provides a basis for the allocation of risk capacity to each business. Since the level of loss at each level of probability is dependent on the portfolio of exposures in each business, the statistical measurement for each key risk category gives the Group clearer sight and better control of risk-taking throughout the enterprise. The risk appetite framework is designed to be: • simple and practical, to apply through the measurement and monitoring of exposures; • geared to risk-return, where capacity is directly related to opportunity; • based on a top-down capacity for earnings volatility; • based on the bottom-up identification of risk factors in each business; • relevant, recognising the impact and likelihood of losses; and • aggregated across businesses where appropriate. Stress testing The risk appetite numbers are validated by estimating the Group sensitivity to macroeconomic events using stress testing and scenario analysis. Changes in certain macroeconomic variables represent environmental stresses that may reveal systemic credit and market risk sensitivities in Absa’s retail and wholesale portfolios. More complex scenarios, such as recessions, can be represented by combinations of variables. These scenarios allow senior management to gain a better understanding of how the Group is likely to react to changing economic and geopolitical conditions. The stress test simulates the balance sheet and profit and loss effects of stresses across the Group, investigating the impact on profits and the ability to maintain appropriate capital ratios. Insights gained are fully integrated into the management process and the risk appetite framework. These analyses and insights, supported by the close involvement of management, also provide the basis for fulfilling the stress testing requirements of the Basel II Accord (Basel ll). Absa estimates the capital needed to survive an extreme but highly improbable level of stressed loss. The calculation is based on the historical volatility of losses. Capitalisation occurs to a level sufficient to provide a high level of confidence in the Group, with the level of confidence consistent with the Group’s A rating (international) and AA rating (domestic). Capital and performance measurement A common approach to assessing the creation of shareholder value is applied across the Group. This is measured by value added (the profit attributable to shareholders, less a notional charge, calculated at a risk-adjusted rate, for the equity invested in the business). The focus on value added allows the Group to compare the returns being made on capital employed in each business. The use of risk capital and regulatory capital with greater risk sensitivity is Absa manages both its economic capital closely monitored at business and supply and demand for economic capital to Group levels. The Group’s risk capital model covers optimise capital efficiency. credit, market, operational, insurance and business risks. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 127 The application of economic capital Absa manages both its economic capital supply and demand for economic capital to optimise capital efficiency. The Group assesses the internal demand for capital using the proprietary economic capital methodology developed and refined by Barclays over more than a decade. Economic capital is estimated primarily for credit, market and operational risk as well as insurance risk, risk associated with fixed assets, and risk in private equity investments. The Group computes and assigns economic capital by risk type to all operating units. This enables the Group to apply a common, consistent and additive metric to ensure that returns throughout the Group are commensurate with the associated risks. An asset attracts the same cost of capital wherever it is acquired across the Group, although management may target differential hurdle rates, which are appropriate for the use of capital. The embedding of economic capital in the management culture of the Group via risk-adjusted performance management (for instance, economic profit), effective targeting of resources to value-creating areas, pricing tools, compensation and remuneration schemes is integral to the risk appetite framework and will be a focus area in Absa during 2007. The economic capital framework will be an important part of the Group’s implementation of Basel II. Principal risk types The main risk type categories are: capital management, credit risk, market risk, liquidity risk, operational risk and insurance underwriting risk. The financial risks and the processes to manage them are described in detail in the financial risk report, which appears on pages 478 to 498 of this report. A summary of the main aspects follows. Absa managed its risks effectively throughout the financial year, resulting in all the risk profiles being within the approved risk appetite and tolerance limits. All risk profiles were also regarded as acceptable to support the financial objectives of the Group. Capital management Overview Effective capital management ensures that Absa has sufficient capital resources to: • meet regulatory capital requirements in South Africa and in other markets where regulated business activities are undertaken; • support its organic growth and strategic actions; and • support its external credit rating. Absa has adopted a centralised capital management model to mitigate capital risk, which considers both regulatory and economic capital. The ongoing capital management activities maximise shareholder value by optimising both the level and mix of capital resources to: • meet the individual capital ratios required by regulators as well as to provide a prudent buffer; • maintain a strong credit rating; • generate sufficient capital to support organic asset growth; and • make decisions on the allocation of capital resources as part of the strategic and financial planning review, taking into consideration the return on economic and regulatory capital. 128 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report Governance and risk framework Capital is managed as a board level priority in Absa. The board is responsible for assessing and approving capital management policy, capital target levels, capital strategy and risk-based capital allocation in the Group. Capital activities include managing the capital required for organic growth and strategic actions, as well as optimising the Group capital structure within approved target levels. The target levels are set to provide the Group with adequate buffers for unforeseen changes to balance sheet growth, economic market conditions as well as pending regulatory changes pertaining to the proposed new regulations under Basel II. A dedicated capital management team has been deployed to support the board in executing these responsibilities. This team operates synergistically with the Group economic capital team in Absa Risk, which is an essential element of the internal capital adequacy assessment process (ICAAP) and presents regular capital reports to the Market Risk Committee, Group Exco and the board. Risk oversight of the capital management function is provided by the Market Risk Committee. The Basel II ICAAP programme is being driven by the capital management team as a component of the wider Basel II implementation programme in Absa. The key building blocks of Absa’s ICAAP can be illustrated as follows: Governance p Risk identification and Strategy and risk measurement appetite setting (including economic) p p p Monitoring, management Financial and capital and communication adequacy planning Data, IT and model infrastructure There is a capital management framework to provide effective capital planning, capital market executions, Basel II alignment as well as effective capital allocation in the Group based on Basel II requirements, economic capital utilisation and risk-adjusted performance measurement criteria. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 129 The following diagram illustrates the process Absa follows to ensure end-to-end integration of the Group’s strategy, risk management and financial processes into the capital management process. The purpose is to ensure that capital consumption in the business divisions has an impact on performance measurement, which in turn translates into management performance assessment and product pricing requirements and achievement of the overall strategy within the risk appetite. Capital management process Forecast p p Capital transactions Regulatory capital Capital management • Retained profit. • Calculation of Basel II Pillar 1 p • Assess capital supply options capital requirements. • Review and challenge of Pillar 1 Capital supply given market demand. • Equity and other capital issuance, requirements. including refinancing of existing Economic capital Risk • Review and challenge business capital transactions. appetite • Share buy-backs/special Group unit demands for economic capital. dividends. strategy • Calculation of Group economic • Dividends from subsidiaries. capital. • Optimise capital mix from a cost – Assess adequacy of Pillar 1 perspective. risks. – Capital buffer calculation. p Stress and scenario testing Capital management • Assess impact of financial planning on capital supply. • Management of capital in/out of subsidiaries. • Establish limits for capital demand (such as risk-weighted assets). • Manage structure of capital base in line with capital ratio targets. • Set target ratios to meet internal buffer and external expectations (regulator/agencies). • Propose capital transaction plans, including insurance, securitisations and share buy-backs. Capital deployment (allocation and utilisation) Economic capital is allocated across all Absa’s businesses and risk activities. Economic capital allocations reflect varying levels of risk. The economic capital framework covers not only Basel II Pillar 1 risks but also risks not adequately covered under Pillar 1 and risks not covered under Pillar 1. Economic capital forms the basis of the Group’s internal capital adequacy process, and has been covered in more detail in a previous section of this report. Capital adequacy and value creation Enhancement for effective gearing over the period The Group’s capital management activities maximise shareholder value by optimising the level and mix of its capital resources. These activities mitigate the risk of insufficient capital by: • ensuring access to a broad range of investor markets; • maintaining a strong credit rating by ensuring robust capital resources, together with a diverse portfolio of activities, consistent profit performance, prudent risk management and a focus on value creation; and • managing the Group’s demand for capital. 130 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report The effective leveraging of capital enhances returns and creates shareholder value, and results from the growing and efficient leveraging of the customer base at optimum gearing, given the cost of equity. The Group’s ratios, composition and cost of capital are managed to ensure that entities are adequately capitalised, that dividend payout ratios are appropriate to sustain required levels of risk-weighted asset growth in terms of the Group’s strategy, and that the Group’s capital structure is optimal in view of approved target capital ratios. The management of the capital base includes the management of the following components of capital across the Group: • Ordinary shareholders’ equity. • Preference shares. • Accounting reserves impacting capital. • Subordinated debt instruments. • The development of hybrids (Basel II). During the period under review, Absa issued a tier II bond (AB06) to enhance its capital structure. The principal amount of the bond was R2 billion, with a final legal maturity date of 27 March 2020 and an optional call in 27 March 2015. The issue spread for the bond was 68,5 basis points above the R157 government bond. Absa Bank also issued R3 billion in non-cumulative, non-redeemable preference shares during the period under review. These preference shares were issued with a coupon rate of 63% of the prime overdraft lending rate and were listed on the JSE Limited on 25 April 2006. In February 2006, the Absa Group board authorised a R20 billion securitisation programme for Absa Bank. In September 2006, Absa Bank entered the first series of the programme by securitising R2 billion of its vehicle finance receivables portfolio. RWA growth relative to total assets During the twelve months ended 31 December 2006, Absa Bank Limited’s risk-weighted assets grew by less than total assets at 23,6% (compared with a 24,5% growth in total assets). This trend is expected to continue as the Group continues to focus on balance sheet optimisation and capital efficiency on the balance sheet. Target capital ratios and improvement in capital adequacy levels over the period In addition to the internal economic capital requirements, the Group manages its capital resources to meet regulatory capital requirements. The Group’s authority to operate a bank is dependent on maintaining adequate capital resources measured in terms of the Banks Act (1990) and holding sufficient capital resources to meet minimum regulatory capital requirements. The minimum requirements are expressed as the ratio of capital resources to risk-weighted assets (capital adequacy ratio). During 2007, the Group will start to manage its capital resources in anticipation of the introduction of the revised Basel II rules, which come into effect on 1 January 2008. 31 December 2006 31 December 2005 Risk-weighted Risk-weighted assets Capital ratio assets Capital ratio Regulator Rm % Rm % Absa Bank Limited SARB* 297 168 12,3 246 135 10,7 Absa Life Limited FSB** n/a 5,54 x CAR*** n/a 4,60 x CAR*** Absa Insurance Company Limited FSB** n/a 110,0 solvency n/a 150,0 solvency Absa Group SARB* 314 479 13,1 279 935 11,3 The operations of Absa Group Limited and its subsidiaries are well capitalised and capital adequacy levels are being managed to ensure that the capital structure is optimised. *South African Reserve Bank **Financial Services Board ***Capital adequacy ratio Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 131 The Group continued to manage its capital resources efficiently in 2006. At December 2006, the Group’s capital adequacy ratio was 13,1%, in excess of the minimum requirements of its regulators. The Group’s Tier l ratio was 10,1%, reflecting strong cash flow generation and the efficient use of capital markets. For further information on the capital adequacy of Absa Group Limited and its banking subsidiaries, please refer to page 47 of this report. ���������������������� ����� ����� 11,3% 10,7% ����� ���� 8,6% 7,7% ���������� Absa Bank Limited ����������������� Absa Group Limited ������������������ 2005 ���� 2005 ���� Tier I Total Basel II capital impact During 2005 and 2006, Absa presented the preliminary estimated capital impact of Basel II to the South African Reserve Bank (SARB) as part of the quantitative impact studies (QIS4 and QIS5) performed. The expected impact based on the latest assessment indicated that there will not be a significant capital impact for Absa. However, a number of national discretionary items influencing the new regulations under Basel II are still pending and could have an impact on these preliminary capital level assessments. In addition, as part of Pillar 2 of Basel II, the Absa Group is required to demonstrate the sufficiency of the Group’s ICAAP to assess the overall capital adequacy of the Group in relation to the underlying risk profile and the strategy to maintain adequate capital levels. The existing economic capital methodology forms the basis of the Group’s ICAAP. Absa’s internally calculated capital requirement will be reviewed by the SARB under its supervisory review process as part of Pillar 2, and is expected to include a comparison with Absa’s peer group. The objective of this supervisory review process will be to establish a common view between Absa and the SARB on the final regulatory capital required, as will be the case for all banks in the industry. Credit risk The granting of credit is a key source of income to the Group and one of its most significant risks. The Group dedicates considerable resources to controlling credit risk effectively and optimising losses. The importance of credit risk is illustrated by noting that more than three-quarters of risk-based economic capital is allocated to businesses for credit risks. Credit risk arises in many of Absa’s business activities through lending and trading transactions. These include loans, advances and conditional contracts to lend money in future under specific terms, settlement receivables and unconditional contracts to support customers’ obligations to third parties. The Group has processes to identify, measure, monitor, control and report in respect of credit risk. 132 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report Objectives of credit risk management Growth, consistent returns and capital are jeopardised if credit risk is not controlled. Absa’s credit risk management framework seeks to reduce volatility in its operating performance and lower the cost of equity by managing risks both within and across businesses. Absa optimises its credit and overall risk profile by diversifying risk and revenue sources, growing fee-based and recurring revenues and minimising its breakeven point by carefully managing fixed costs. Other credit risk management objectives include closely monitoring risk-taking and long-term exposure to illiquid assets. Absa continually looks for opportunities to strengthen its credit risk controls, with particular attention to avoiding undue concentrations. At all levels of the Group, sound corporate governance and oversight policies and employee integrity are recognised as critical to effectively managing risk and protecting the interests of shareholders. Credit risk responsibility and governance The Absa credit risk control framework sets out the minimum acceptable standards to be adhered to by those responsible for credit-related businesses in Absa. The framework is aligned to the principal risk policy (previously the board governance standard) on credit risk and supplemented by ancillary credit policies/subpolicies and procedures that are applicable to the specific business areas. The effectiveness of the credit risk control framework and its supporting processes is a board responsibility. The GRC is the board-appointed risk committee and is informed through the Absa Credit Risk Committee (CRC), a Group Exco- appointed risk subcommittee. The purpose of the CRC is to govern, direct and co-ordinate the Group’s credit risk profile and appetite in accordance with the board and GRC/GACC-approved framework to achieve an acceptable Group credit risk profile to facilitate compliance with Basel ll and other best practice credit risk frameworks. The GRC and subcommittees are responsible for the approval of the relevant credit policies and the ongoing review of the credit exposure of the Group. These include, but are not limited to, the monitoring and approval of the following: • Methodologies for credit risk measurement and credit risk economic capital attribution. • Model implementation criteria. • Credit risk appetite and the related mandate and scale limits. • Concentration risk. • Credit risk exposures’ sensitivity to extreme market conditions. • Credit strategies impacting on approved risk profiles. • The impact of economic scenarios on the credit risk profile. • Credit risk forecasting and planning and the related stress testing. • Credit risk transfer strategies. • Risk-reward. • The adequacy of loss provisions and impairments. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 133 Credit risk measurement Absa uses statistical modelling techniques throughout its business in its credit rating systems. These systems assist the Group in frontline credit decisions on new commitments and in managing the portfolio of existing exposures. They also enable the application of consistent risk measurement across all credit exposures, retail and wholesale. The key building blocks in the measurement system, which are described in the financial risk report, are the probability of customer default (expressed through an internal risk rating), exposure in the event of default, and severity of loss given default. Using these, Absa builds the analyses that lead to the decision support systems as previously described in the risk appetite context. Group model risk policy Absa has a large number of models in place across the Group, covering all risk types, including credit risk, market risk, operational risk and finance. To minimise the risk of loss through model failure, Absa has adopted the Barclays Group policy for the control of model risk. The policy minimises the potential for model failure by setting minimum standards for the end-to-end model development and implementation process. The policy also sets the Group governance processes for all models, which makes it possible to monitor model risk across the Group and ensures any potential problems are identified and escalated at an early stage. The key areas where minimum requirements are defined are: Model materiality Absa uses a large number of models across the Group. To help ensure sufficient management time is spent on the more material models, there is a method of providing each model with a materiality rating. The materiality rating for an individual model depends on the assets for which the model is used and the expected loss and economic capital associated with the assets. Models that are more material are subject to higher levels of independent scrutiny and challenge prior to implementation. Model documentation Documentation should be sufficiently detailed to allow an expert to recreate the model from the original data sources. It must include a description of the data used for model development, the methodology used (and the rationale for choosing such a methodology), a description of any assumptions used in the model, details of where the model works well and areas that are known as model weaknesses. Initial model validation All models are subject to a validation and independent review process before they can be signed off for implementation. The model validation exercise must demonstrate that the model is fit for a specific purpose and provides accurate estimates. The independent review process will also ensure that all aspects of the model development process have been performed in a suitable manner. Model sign-off There are clearly laid out rules for the sign-off process for models. The most material models in the Group receive their final sign-off for implementation from the GRC, whereas the less material models can be signed off at the Credit Risk Model Validation and Performance Monitoring Technical Committee (CMMC). Model sign-off processes include ensuring that the model is technically fit for purpose, as well as satisfying business and regulatory requirements. 134 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report Basel models Absa has spent a considerable amount of time on upgrading a number of models across the Group to ensure that it can meet the requirements of Basel ll from the commencement of the parallel run exercise during the last quarter of 2007. All aspects of such models are reviewed against regulatory requirements as part of the sign-off process to ensure that, once signed off, such models are also fit for regulatory purposes. Ongoing model validation and monitoring All models used in the Group are subject to an annual review to ensure that they are working well and that the assumptions used in model development are still appropriate. All credit risk models are also subject to more frequent performance monitoring, which ensures that deficiencies in models are identified early and remedial action can be taken before the deficiency becomes serious and affects the decision-making process. Credit concentration There is a concentration of credit risk when a number of counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The concentrations of credit exposure are not proportionally related to credit loss. Some segments of the Group’s portfolio have and are expected to have proportionally higher credit charges in relation to the exposure than others. Moreover, the volatility of credit loss is different in different parts of the portfolio. Country risk Country grades Country risk grades are assigned to all countries where the Group has, or is likely to have, exposure and are reviewed every quarter to ensure they remain appropriate. Country grades are derived from long-term sovereign foreign currency ratings and range from 1 (lowest probability of default) to 21 (highest probability of default). A ceiling is applied where a country is graded 12 or worse, so that the counterparty cannot be graded better than the country, unless some form of protection is available in the event of a cross-border event, such as a significant portion of a counterparty’s assets or income being held or generated in hard currency. Country risk appetite To manage exposure to country risk, the Group uses two country limits; the prudential guideline and the country guideline. The prudential guideline is identified through the strict mapping of a country grade to derive a model-driven acceptable level of loss given default. The country guideline for all graded countries is set by the Group Credit Committee (GCC) based on the prudential guideline and the internal appetite for country risk. The country guideline may therefore be above or below the prudential guideline. Measuring country risk Country risk is managed by applying country loss given default (CLGD). All cross-border or domestic foreign currency transactions incur CLGD from the country guideline as agreed at the GCC. The level of CLGD incurred by a counterparty transaction will largely depend on three main factors: the country severity, the product severity and counterparty grade. CLGD is incurred in the country of direct risk, defined as where the majority of operating assets are held. This may be different to the country of incorporation. However, where transactions are secured with collateral, the country risk can be transferred from the country of the borrower to the country of the collateral provider. This is only permitted where the collateral definitely covers the borrowing and is not expected to decrease over time. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 135 Country executives There are country managers for all countries where the Group has exposure and they, under the direction of the GCC, have responsibility for allocating country risk to individual transactions. The total allocation of country limits is monitored daily by the Credit Risk team. Other credit risks In addition to drawn loans and advances, Absa is exposed to other credit risks. These exposures comprise loan commitments, contingent liabilities, debt securities and other exposures arising in the course of trading activities. The risks are managed in a similar way to those in loans and advances, and are subject to the same or similar approval and governance processes. The nature of the credit risks among these exposures differs considerably. • Loan commitments may become loans and the risks are thus similar to those attached to loans. • Contingent liabilities (such as guarantees, assets pledged as security, acceptances and endorsements) historically experience low loss rates. • Losses arising from exposures held for trading (derivatives, debt securities) are accounted for as trading losses, rather than credit charges, even though the drop in value causing the loss may be attributable to credit deterioration. The most notable risks are to guarantees and irrevocable loan commitments, to settlement risk and to debt securities. Guarantees and irrevocable loan commitments The Group is exposed to loss through the financial guarantees it issues to customers and commitments to provide loan finance that cannot be withdrawn once entered into. The credit risks associated with such contracts are managed in a similar way to loans and advances, and form part of the exposure at default measure. Settlement risk Absa is also exposed to settlement risk in its dealings with other financial institutions. For example, this risk arises in foreign exchange transactions when Absa pays away its side of the transaction to another bank or other counterparty before receiving payment from the other side. The risk is that the counterparty may not meet its obligation. While these exposures are of short duration, they can be large. In recent years, settlement risk has been reduced by several industry initiatives that have enabled simultaneous and final settlement of transactions (such as payment- versus-payment through continuous linked settlement). Absa has worked with its peers in the development of these arrangements. Increasingly, the majority of high-value transactions are settled by such mechanisms. Where these mechanisms are not available, the risk is further reduced by dealing predominantly with highly rated counterparties, holding collateral and limiting the size of the exposures according to the rating of the counterparty, with smaller exposures to those of higher risk. Debt securities Assessing the creditworthiness of debt securities differs in two important respects from the assessment process for loans. Firstly, a market price is generally available for a bond or other debt security, which gives a good indicator of creditworthiness. However, the financial position of the issuer still needs to be assessed and monitored, just as it would in the case of a borrower taking out a loan. Moreover, care needs to be taken when using market price as a proxy for credit risk. To give a simple example, if a bond pays a coupon higher than equivalent market yields, it will tend to trade at below par (say 98 rather than 100) so as to re-align the yield to market levels. In this case, the market is not expecting a credit loss of 2% of the face value of the bond. 136 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report A second key difference is that many debt securities are rated by independent rating agencies, giving a further indicator of credit quality. However, even with continuous monitoring by the rating agencies, there is often a lag between a credit event and rerating. So, while useful, external ratings can only inform and are not a substitute for the credit assessment Absa undertakes for each exposure using its own grading system. Interest rate sensitivity of the retail portfolio Various economic factors will impact on the actual future credit losses that will be realised. The non-retail segment of Absa’s credit portfolio is influenced by several economic factors, whereas changes in interest rates are the main driver of credit quality for the retail segment. An analysis of the historical relationship between interest rates and impairments indicates that the lower the interest rates, the weaker the correlation, and vice versa. Consumers will be able to absorb some increase in the current low level of debt servicing cost relative to disposable income before cash flow strains are experienced. Extreme interest rate increase scenarios make the sensitivity more severe as additional factors determining credit risk (such as recovery rates and loan growth) are negatively affected. Sensitivity levels are considered acceptable and in line with risk appetite and tolerances. Basel II and credit risk The Basel Committee on Banking Supervision published the new Basel II framework in 2004 in an effort to update the original international bank capital accord (Basel I), in effect since 1988. The goal of the Basel II framework is to improve the consistency of capital requirements internationally, make regulatory capital more risk sensitive and promote enhanced risk management practices among large, internationally active banking organisations. Absa supports the overall objectives of the Basel II framework. Basel II will significantly impact banks’ credit risk management practices worldwide. Absa has made significant progress in the implementation of internal credit rating systems in accordance with the Basel II requirements for the internal ratings based (IRB) approach. During the past year, major Basel II implementation focus areas have been internal rating systems that segment borrowers based on homogenous risk characteristics, measure default risk, assign facility ratings and measure recovery risk. Market risk Deﬁnition of market risk Market risk is the risk that Absa’s earnings or capital, or its ability to meet business objectives, will be adversely affected by changes in the level or volatility of market rates or prices such as interest rates, foreign exchange rates, equity prices and commodity prices. Categorisation of market risk To facilitate the management, control, measurement and reporting of market risk, Absa has categorised market risk into three broad categories, as described below. • Trading market risk This risk arises in trading transactions where Absa takes principal positions based on expectations of customer demand or a change in market conditions. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 137 • Asset and liability market risk This risk arises from banking activities, including those risks incurred on non-trading positions such as customer assets and liabilities and capital balances. • Other market risks Absa also incurs market risks that do not fit into the above categories. The principal risks of this type are: investment risk, asset management structural market risk, and defined benefit pension fund risk. Market risk management and control responsibilities A comprehensive market risk framework is in place to ensure that market risk is managed effectively, and to assist the board in its responsibility to oversee that market risks are understood and managed effectively. The GRC approves the market risk appetite for all types of market risk. The MRC is responsible for the market risk control framework and policies and sets a limit framework within the context of the approved market risk appetite. The MRC is assisted by a central market risk team and by risk management departments in the businesses. The head of each business, assisted by the business risk management team, is accountable for identifying, measuring and managing all market risks associated with its activities. In Absa Capital, a dedicated market risk team is responsible for implementing the market risk control framework. Day- to-day responsibility for market risk lies with the senior management of Absa Capital, supported by the market risk team that operates independently of the trading areas. Daily market risk reports are produced. More detailed trading market risk presentations are discussed at the Trading Risk Committee. Outside Absa Capital, the treasuries manage treasury market and structural interest rate risk. The chart on the following page gives an overview of the business control structure. A comprehensive market risk framework is in place to ensure that market risk is managed effectively, and to assist the board in its responsibility to oversee that market risks are understood and managed effectively. 138 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report Managing market risk – organisational overview Risk type . . . managed by and reviewed by the central market risk team, Market Risk Committee and . . . Trading market risk • Absa Capital market risk team Absa Capital • Trading Risk Committee Group Treasury Asset and liability market risk • Treasury management market risk • Country asset and liability • Structural interest rate risk committees Foreign business treasuries • Absa market risk supervision visits Other market risks • Asset management • Absa Capital • Absa Financial Services Risk structural risk • Absa Corporate and Governance and Control • Investment risk Business Bank Committee • Defined benefit pension • Absa Financial Services • Group Investment Committee fund risk Basel ll and market risk Absa’s progress towards compliance with the Basel II Pillars 1, 2 and 3 market risk requirements is in line with the SARB and industry timelines. During the past year, good progress has been made in respect of the following remaining Basel II focus areas: implementing tighter model risk controls; implementing more sophisticated asset and liability management systems; implementing economic value sensitivity and value-at-risk measures for the banking book; and formalising the internal capital adequacy assessments on the banking book and financial services businesses. Trading and investment risk measurements are continually being enhanced. Liquidity risk Liquidity risk is the risk of the Group being unable to meet its payment obligations when they fall due and to replace funds when they are withdrawn, the consequence of which may be the failure to meet obligations to repay depositors and fulfil commitments to lend. Prudent management of liquidity contributes positively to earnings and is pivotal to the viability of the Group and the maintenance of overall banking stability. Absa believes that the management of liquidity should encompass an overall balance sheet approach, which consolidates all sources and uses of liquidity, while aiming to maintain a balance between liquidity, profitability and interest rate risk considerations. Absa Group Treasury’s Liquidity and Funding Management function is responsible for the management of liquidity risk on behalf of the Group in accordance with the liquidity risk control framework and policies and within the risk appetite as approved by the GRC. The MRC monitors funding and liquidity management monthly. A daily liquidity dashboard is used to monitor money market shortage participation, short- and long-term funding ratios, short-term maturity mismatch, concentration of deposits and off-balance sheet liquidity risk. Absa Group Treasury holds weekly meetings with key stakeholders from retail banking, Absa Corporate and Business Bank and Absa Capital aimed at the tactical management of liquidity. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 139 Operational risk Deﬁnition of operational risk Operational risk is the risk of direct or indirect losses resulting from inadequate and/or failed internal processes or systems, human factors, or from external events. Operational risk is thus the risk of failure, or near failure, of critical business processes and their underlying operational systems and data. Operational risk is typically not taken in return for expected reward, but exists in the natural course of corporate activity. Major sources of operational risk include: fraud; regulatory compliance; dependence on key suppliers; customer service quality; recruitment; training and retention of talent; process reliability; and systems availability. For the purpose of the Basel II regulatory operational risk capital charge, legal risk is included, but strategic and reputation risks are excluded. Measuring and managing operational risk Absa recognises the significance of operational risk and is committed to the enhanced operational risk measurement and management requirements of the Basel II advanced measurement approach (AMA). Absa’s current operational risk framework was implemented in 2003 to meet internal and regulatory requirements (including Basel II AMA requirements). Since that time, implementation activity has taken place continuously across all strategic business units and Group specialist functions. Absa has made a significant investment in the implementation of operational risk practices and systems to support operational risk management. The role of the centralised Operational Risk department in Absa Risk is to establish and implement the operational risk control framework for modelling and managing Absa’s operational risk, while reinforcing an enabling operational risk management culture throughout Absa. The aim is to integrate all operational risk activities in Absa, based on international norms and best practices, and to compile a reliable operational risk profile contributing to the Group’s risk-reward profile. An integral element of the operational risk framework is the risk and control library, which includes the following level 1 risks and the minimum control requirements to manage these risks: financial crime; financial reporting and tax; legal; operations; people; regulatory compliance; and technology. The key advance introduced by the current framework is the financial quantification and modelling of operational risk. This capability has significantly improved Absa’s operational risk measurement and management capabilities. Within Absa’s operational risk framework, qualitative and quantitative methodologies and tools are applied Group-wide to identify and assess operational risks and to provide management information for determining appropriate mitigating measures. These include: • categorising operational risk data using the risk and control library; • a loss database of operational risk events; • access to external databases and the use of external risk events to support risk identification and assessment; • key risk scenarios, based on internal risk experience and external data; • a database of key risk indicators (KRIs). (These metrics, reported on scorecards, are used to track levels and trends of identified operational risk drivers.); and • a Group-wide detailed risk and control assessment (DRCA) process to facilitate the consistent qualitative assessing, treating, monitoring and communicating of operational risks and controls associated with the business processes and activities per business unit and support function. 140 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report The primary responsibility for managing operational risk rests with the business unit/support function. Operational risk management forms part of the day-to-day responsibilities of all business unit and support function management. All employees share responsibility for the effective management of operational risk. They must report any known breakdowns in control and any risk events that may result in financial loss and/or reputation damage. The business unit/support function head is responsible for ensuring that the operational risk framework has been embedded within the business unit/support function. Operational risk management is monitored at the Operational Risk Committee (ORC) and at the divisional risk, governance and control committees (DRG&CCs). Control effectiveness is monitored at the DRG&CCs and at the Absa Group Governance and Control Committee (GGCC). Absa’s Internal Audit function provides the board and senior management with an independent assurance process for operational risk control across the organisation. There are some areas of the operational risk control framework where additional refinement is taking place. Nevertheless, the operational risk framework is sufficiently embedded for Absa senior management to have confidence in the AMA capital model (and its inputs and outputs) as a basis for calculating Absa’s operational risk capital charge. Absa will align with Barclays while providing continuous enhancement to its AMA model up to and during the 2007 regulatory parallel run period. Absa is confident that it will be in a position to adopt the AMA model to calculate the operational risk capital charge from 2008. Underwriting risk Deﬁnition and categorisation of underwriting risk Underwriting risk, originating from insurance activities, refers to unexpected losses owing to events that result in exceeding predetermined prudent forecast exposures. Underwriting risk consists of the following elements: • Life insurance underwriting risk is the risk associated with insuring the life and/or health of an individual or groups of individuals and can be seen as the risk that the actual results of an insurer are impacted and differ from expected results relating to assumptions with respect to mortality and morbidity. • Short-term insurance underwriting risk is the risk associated with the short-term underwriting of fixed and/or moveable assets, accidents, guarantees and liabilities and can be seen as the risk that the actual results of an insurer are impacted and differ from expected results relating to assumptions with respect to the frequency and severity of claims. Underwriting risk is influenced by the type and nature of insurance activities undertaken and includes: • the risk appetite of the firm; • the nature of underwriting exposures involved in the products and services; • portfolio characteristics; and • the nature and extent of reinsurance cover. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 141 Underwriting risk measurement and control The principal measurement techniques used to measure and control underwriting risk are the following: Life insurance underwriting risk Life insurance underwriting risk is measured at the maximum exposure on a single life. The risk is monitored by monitoring the actual claims experience and by using investment guarantees and exposure analyses done during the annual actuarial valuation, as well as managing the underwriting costs per policy to ensure the right balance between the actual risk exposure and the cost of underwriting. Short-term insurance underwriting risk Short-term insurance underwriting risk is measured by calculating the estimated maximum loss and maximum probable loss per policy. Risk measurement also includes the measuring of geographical and other concentrations of risk and an evaluation of individual risk, including specialised risks. The risk is monitored by monitoring the claims experience, policy movements, concentration of exposures and changes in the environment. Risk control In addition to managing the principal risk areas described above, the Group relies on two specialist risk control functions. Their activities are described below. Group Compliance Regulatory compliance Absa is committed to and requires all its employees to display the highest standards of integrity, professionalism and ethical behaviour, and to comply with all relevant laws, rules and standards when conducting the business of the Group. Since behaviour that may be legally defensible can still damage the reputation of the Group, these requirements go beyond minimum legal standards and embrace broader norms of integrity and fair dealing. Compliance risk is the potential that the procedures implemented by the entity to ensure compliance with the relevant statutory, regulatory and supervisory requirements may not be adhered to and/or may be inefficient and ineffective. Absa’s board, through the Group chief executive and Group Exco, delegates to the Group compliance officer the authority to ensure that the compliance process is running effectively and to monitor adherence to the statutory, regulatory and supervisory requirements. The Group compliance officer and the Group chief executive are required to submit a monthly checklist to the SARB detailing adherence to specific sections of the Banks Act and regulations. Absa’s compliance function supports management in managing compliance risk in the organisation. It monitors whether effective compliance policies and procedures are followed and whether corrective action is taken when compliance breaches are identified. Absa’s compliance function is an independent function that identifies, assesses, advises on, monitors and reports on the Group’s compliance risk. Without impairing independence, compliance employees are located in various business units to oversee the application of the policy. The function is further assisted by other legal functions in the Group. Although independent, the compliance function is an integral part of the broader risk management framework, established in the interest of joining forces and providing an integrated view on risk. 142 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report The compliance function follows an integrated risk management approach. The major methodologies currently used are control self-assessment (CSA) and the Compliance Institute of South Africa’s compliance methodology. Compliance risk management tools provided to management include compliance manuals, compliance risk profiles, compliance risk management plans, compliance opinions, and compliance control adequacy and effectiveness reports. These tools are increasingly technology-enabled. Absa views compliance with laws, regulations and supervisory requirements as very important. Compliance risk management is a formalised, distinct risk management discipline and a core risk management activity in the Group. Apart from reducing losses, mitigating risks and contributing to effective corporate governance, the efficient compliance process also unlocks strategic business value. Value is realised through new product and business approval processes, increased vigilance, freed-up capital from reduced risk premiums, and enhanced reputation and regulatory relationships. Absa further leverages its compliance capabilities to the benefit of the wider financial services community through proactive industry involvement. Money laundering and sanctions risk management Absa has aligned its anti-money laundering (AML) and sanctions policies and procedures with those of Barclays. The main business imperatives relating to the management of the anti-money laundering and sanctions risk relate to the training of employees and the implementation of a control environment to identify business relationships and transactions that may pose a risk to Absa. Absa employs the Searchspace automated detection tool as its primary method of detecting suspicious and unusual transactions or activity, as well as a manual process of reporting where employees have detected behaviour that requires a report. The controls embedded in the recently implemented customer acceptance screening application (CASA) ensure that prospective customers are screened in terms of the sanctions requirements and that local regulatory requirements are adhered to when establishing customer relationships. A screening process identifies payments that may be in breach of policy requirements and flags them to be analysed prior to payment. Absa has embarked on a project to ensure the application of a risk-based approach when managing money laundering and terrorist activity risk. The project takes into account international leading practice and the local regulatory and business environments when determining the controls to be applied. Compliance initiatives The following current and future activities, co-ordinated by the centralised compliance department, deserve special mention: • Absa-Barclays integration: In terms of the ongoing Absa-Barclays integration, 10 additional policies have been implemented in Absa. These policies deal with the management of regulatory relationships and conflicts of interest, the facilitation of protected disclosures and anti-money laundering measures, among other issues. The reinforcement of the implementation of these policies will be a focus area for 2007. • Absa employee compliance conduct guide: An Absa employee compliance conduct guide was developed in line with Barclays Group compliance guidelines. The objectives of this document are to: – define acceptable standards of conduct that form the foundation for compliance with Absa policies and procedures; – inform and inspire employees to work towards the desired behaviours; – support Absa’s objective to be a leader in corporate responsibility; and – contribute to the fulfilment of Absa’s governance obligations. Risk management report [ Absa Group Limited Stakeholder report 31 December 2006 ] 143 The guide covers all eleven principles for business as defined by the Financial Services Authority in the United Kingdom as mapped to local regulatory requirements and all related policies and principles in Absa, and was distributed electronically to all employees. Each employee must acknowledge annually, in writing or electronically, to their line manager (preferably at the time of their performance development review) that they have read and understand the requirements of this guide and the policies it contains and that they comply with the provisions of the guide. • National Credit Act: The National Credit Act was promulgated on 15 March 2006 with commencement dates of 1 June 2006, 1 September 2006 and 1 June 2007. The Act stipulates what construes “unlawful credit”, “reckless lending” and “over-indebtedness” and provides for penalties to be levied against the credit provider, which is now required to play the role of a mentor or guardian of the consumer. The purpose of the Act is: – to promote and advance the social and economic welfare of South Africans; – to promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry; and – to protect customers through specific measures. A Group-wide National Credit Act project was established under the auspices of the Group Change function in 2005, with the purpose of ensuring Absa’s compliance to the Act. Group Compliance forms an integral part of the project. In addition to providing advice, awareness and training, Group Compliance monitors the adequacy of the control measures implemented to ensure compliance. Other focus areas: Continued compliance methodology enhancement and structure optimisation will remain focus areas going forward. An example is the continuous improvement of proactive compliance risk detection. Forensic Services Forensic Services is dedicated to combating the onslaught of financial crime, and more specifically fraud, by embracing the following principles: • Maintaining high standards of integrity, professionalism and ethical behaviour. • Preventing the Group’s employees, associates, agents or systems from being used for illegal purposes. • Terminating business relationships with those involved in illegal activities. • Taking relevant action against persons who fall foul of these principles. The department has created two focus areas to address the risk of fraud. These are the Forensic Investigations and Support Services functions. Forensic Investigations The core function of Forensic Absa is committed to and requires all Investigations is the investigation of its employees to display the highest standards losses and incidents relating to illegal activity. Its primary objectives are of integrity, professionalism and ethical aimed at enabling the bank to prevent additional losses, recover stolen assets behaviour. and identify operational weaknesses to prevent the reoccurrence of similar events. 144 [ Absa Group Limited Stakeholder report 31 December 2006 ] Risk management report The bulk of the investigations regarding the retail banking environment are dealt with in a decentralised structure. Representative offices are situated in each province. Specialist investigators deal with investigations into specialised areas such as internet fraud, card fraud and investigations of a sensitive nature that pose a greater risk to the Group. Support Services The Support Services function enhances the effectiveness of Forensic Services by providing and maintaining an electronic case management system that permits central record keeping of all fraud-related losses and incidents. This ensures a comprehensive overview of the fraud risk faced by the Group and assists in accurate MIS reporting. Training and awareness, as a component of the support function, aims to educate the Group’s employees about the risk posed by fraud as well as how to detect and prevent it. Various initiatives are undertaken throughout the course of the year to create general awareness of fraud and related scams among the bank’s customers. Forensic Services operates a proactive fraud prevention component, which comprises various elements aimed at reducing the Group’s overall exposure to the risk associated with commercial crime. The key component of the proactive fraud prevention strategy is the early identification of irregular transactions and their subsequent investigation.