COMMITTED TO GOOD GOVERNANCE

INTRODUCTION


Good corporate governance is at the heart of our business and, as such, defines and directs the structure and responsibilities of our Board and its committees, the Executive Management, and the systems and processes applied by our employees on a daily basis.

KEY GOVERNANCE INITIATIVES FOR THE YEAR


In 2017, the focus was on enhanced transparency and taking positive steps to manage conflicts of interest. The main initiatives are summarised in the table below.

KEY GOVERNANCE INITIATIVES FOR 2017

GOVERNANCE FRAMEWORK

LEGISLATION, CODES OF BEST PRACTICE AND POLICIES

Our governance framework comprises:

  • The Industrial Development Corporation Act 22 of 1940 (IDC Act)
  • The PFMA
  • Treasury Regulations
  • The Companies Act 71 of 2008
  • King III
  • The Board Charter
  • Various other policies, and internal systems and procedures.

BOARD OF DIRECTORS

COMPOSITION

Our Board of Directors guides the strategy of the Corporation and carries the ultimate responsibility for its performance. The Board is constituted to ensure the wide range of skills and knowledge required to meet the Corporation’s strategic objectives.

The size of the Board is determined by the IDC Act, which permits a minimum of five and a maximum of 15 directors to be appointed by the shareholder. A unitary board structure is applied, with the majority (11 members) being non-executive directors.

As at 31 March 2017, the Board comprised one executive and 11 non-executive members and a gender composition of seven female and four male directors. The positions of Chairperson and Chief Executive Officer are separately held to ensure a clear separation of responsibilities. The Chairperson of the IDC Board is a non-executive director, in line with the recommendations of King III.

The Board retains full and effective control and is responsible to the shareholder for setting strategic objectives and key policies, major plans of action, a risk policy, annual budgets and business plans. It ensures that the performance objectives set by the shareholder are achieved through performance monitoring systems and reporting.

Directors have complete access to senior management through the Chairperson, CEO or Company Secretary at any time. In addition to regular presentations by senior management at Board meetings, directors may seek briefings from senior management on specific matters.

INDUCTION

All new directors participate in a formal induction process coordinated by the Company Secretary. The induction process includes briefings on financials, strategic, operational and risk management policies and processes, governance framework, culture and values, and key developments at the IDC and in the sectors and environments in which the IDC operates.

BOARD MEETINGS AND ATTENDANCE

The IDC Board meets at least six times a year and holds a strategy session at least once a year. Special Board meetings are convened when necessary. During the reporting period the Board met a total of 11 times and in addition, a Board strategy session was held over two days during September 2016.

CHANGES TO THE BOARD

In line with our normal practice, all non-executive directors of the IDC Board will retire and make themselves available for re-appointment at the Corporation’s next AGM. Mr Brian Molefe resigned his position with effect from 25 January 2017.

BOARD CHARTER

The Board has a charter which sets out its responsibilities, including the adoption of strategic plans, the development of a clear definition of materiality, the monitoring of operational performance and management, and the determination of policy processes to ensure the integrity of the Corporation’s risk management and internal controls, communication policy, and director selection, orientation and evaluations.

After the revision that was reported on in last year’s report, a further revision of the Board Charter was completed. This revision was deemed appropriate in order to take into account changing circumstances and feedback received from stakeholders. The Board Charter was accordingly amended to provide for changes to the rotation policy and refinement of processes for arriving at decisions.

BOARD COMMITTEES

The Board has established five standing committees to assist it in exercising its authority – the Board Investment Committee, the Board Human Capital and Nominations Committee, the Board Audit Committee, the Board Risk and Sustainability Committee, and the Board Social and Ethics Committee. All Board committees operate under Board-approved terms of reference which are regularly updated to stay abreast of developments in corporate law and governance best practice.

The chairperson of each Board Committee is a non-executive director. The members of each Board committee are appointed by the Board of Directors, except for Audit Committee members who are appointed by the shareholder at the AGM. At a Board meeting following each committee meeting, the Board receives a report on deliberations, conclusions and recommendations. The reports of the various Board committees appear on pages 65 to 68 of this report.

ETHICS AND MANAGING DIRECTORS’ CONFLICTS OF INTERESTS

At every meeting involving Board members, subsidiary directors and executive management, members are required to disclose any potential conflicts and if required, to withdraw from the proceedings. Declarations of conflict are also made to the Company Secretary as and when necessary. This is done in compliance with section 50(3) of the PFMA, the guidance provided by section 75(4) of the Companies Act, the IDC Guidelines on Conflict of Interest and the Conflict of Interest Policy. The declarations are made at each Board meeting and at meetings of the Board committees responsible for considering transactions.

A NEW DIRECTORS’ CONFLICT OF INTEREST POLICY

During February 2017 the Board approved a new Directors’ Conflict of Interest Policy, effective from 1 April 2017, which:

  • Prohibits directors of the IDC from doing business with the IDC
  • Provides for a process to ensure that directors are not provided with Board papers, and do not participate in matters in which they are regarded as being conflicted.

COMPANY SECRETARY

The Company Secretary plays a pivotal role in the corporate governance of the Corporation. The Company Secretary is responsible to the Board for, inter alia, acting as a central source of information and advice to the Board on matters of ethics, adherence to good corporate governance principles, and compliance with procedures and applicable statutes and regulations.

The Company Secretary is not a director of the Corporation and acts independently from the Board. In line with good governance practice, the appointment and removal of the Company Secretary is a matter for the Board.

The Company Secretary fulfils a dual role in that he is also the General Counsel of the Corporation.

STRUCTURE

All members of Board Committees are non-executive directors. The IDC’s Board structure is depicted in the diagram on page 56.

REMUNERATION REPORT

Remuneration Philosophy

Our employees are integral to achieving our corporate objectives. We therefore strive to keep them engaged, motivated and appreciated. We endeavour to attract and retain high-calibre, high-performing individuals who subscribe to the values and culture of the organisation. Performance management and development are key enablers in establishing and reinforcing employee behaviours and outputs that will help achieve our business goals and objectives. This requires continuous formal and informal feedback as part of an ongoing performance improvement process.

The Corporation’s remuneration philosophy is designed to ensure that employees are remunerated fairly, equitably and consistently based on individual performance, market remuneration trends and the relative value of each position within the business. The principle of performance-based remuneration is one of the cornerstones of the remuneration policy and it is underpinned by sound governance principles which are reviewed periodically in order to drive alignment with changes in remuneration trends and practices.

Employee Remuneration

The Board and shareholder have directed that the outcomes of performance should reward increased efforts and sustainable successes and that incentives should only be payable for exceptional performance. Targets for certain strategic indicators must be met for incentives to be considered, in particular those indicators related to job creation/saving, disbursements and impairments.

Incentives

The short-term incentive (STI) is aligned to recognise and reward performance which exceeds expectations in terms of short-term corporate indicators, and team and individual performance indicators. The on-target STI amounts are aligned to those of other SOEs as provided for by the remuneration guidelines for SOEs. An annual non-pensionable allowance (NPA) is payable to employees with acceptable performance ratings in terms of the Corporation’s performance management process.

The long-term incentive (LTI) is based on performance against the IDC’s long-term objectives. In line with emerging local and international trends, the incentive vests in three years and is paid over three years from the year of vesting. The amounts for the subsequent two years will be paid provided that performance against long-term objectives does not drop below the target performance level in any of the years.

The allocation of awards is discretionary and the Board has the authority to change or withdraw the awards. The Board also has the discretion to withdraw a vested incentive on the basis of a material event occurring. In respect of the LTI, the overall on-target incentive over the three-year vesting cycle has been aligned with the remuneration guidelines for SOEs.

Board Remuneration

The Board Human Capital and Nominations Committee plays an advisory role on the remuneration of IDC staff employees and non-executive directors. The directors are remunerated for the meetings they attend at rates approved by the shareholder. No performance-based remuneration or retainer fees are paid to directors.

During the reporting period IDC directors were remunerated as per the table on page 56.

1. These directors do not derive direct financial benefit from services rendered to the IDC. Their fees are paid directly to their employers.
2. Mr A Kriel and Ms M More were appointed to the IDC’s Board on 1 April 2016 and did not receive any fees for 2016.
3. Mr NE Zalk is employed by the dti and does not earn directors’ fees for services rendered to the IDC nor are fees paid to his employer.

Board Composition

DELEGATED LEVEL OF AUTHORITY

While the Board has the authority to delegate powers to Executive Management and Board Committees, it remains accountable to the shareholder. A Delegation of Authority is in place, which is updated on a regular basis.

DELEGATION OF CREDIT APPROVAL

As depicted in the diagram on the next page, specific powers and authority have been delegated to those Board and Executive Committees responsible for credit approvals. Each of these committees has a clearly defined mandate outlined in written terms of reference. The management of day-to-day operations is delegated by the Board to the CEO, who is assisted by the Executive Management Committee and its subcommittees.

COMPLIANCE

The IDC recognises its accountability to all its stakeholders under the regulatory requirements applicable to the Corporation. Our compliance philosophy recognises the importance of ensuring continual adherence to regulatory requirements as a critical part of effective regulatory compliance risk management.

Whereas the ultimate responsibility for ensuring that the Corporation complies with all the applicable regulatory requirements as stipulated in the PFMA remains with the IDC Board, the Compliance and Regulatory Affairs department assists the Board in mitigating the risk of non-compliance with these requirements. The compliance function also assists business units/departments in identifying and assessing regulatory risks, and developing compliance risk management plans to mitigate and control them. Regulatory risks are monitored and reported to the relevant stakeholders.

During the year under review, the process of compliance awareness training to IDC employees which was embarked upon during the previous year continued, with compulsory FICA training provided to 683 employees. Anti-Money Laundering and Terrorist Financing Control policies were adopted, replacing the FICA Manual. The implementation of the anti-money laundering programme is currently our particular area of focus.

During the reporting period, there were no contraventions, penalties, sanctions or fines imposed on the IDC due to non-compliance with regulatory requirements.

GOVERNANCE AT SUBSIDIARIES

GOVERNANCE STRUCTURES AND FRAMEWORKS

A formal governance framework for IDC subsidiaries and investee companies is in place. This framework enables the IDC, as an institutional investor, to have an awareness of the material risks and issues that affect our investee companies and the industries in which they operate. Through this framework, we are able to exercise adequate oversight over our subsidiaries and investee companies.

The governance framework will be reviewed during the current financial year to bring it up to date with changes required in terms of King IV.

The extent of our influence on subsidiaries and other companies in which we have an ownership share is determined by the size of our shareholding in the various companies. We have a large measure of influence over wholly-owned subsidiaries and less influence over companies where our investment is limited to a minority shareholding or a loan. Care is taken to ensure that all our clients and investee companies have effective and fit-for-purpose governance structures in place.

HUMAN CAPITAL

BACKGROUND

As a leader in industrial development finance operating in a competitive environment, we recognise the need for employees with appropriate skill sets who are driven by a high-performance culture. Our initiatives in this regard have been met with positive results and in the year under review, the IDC was accredited by the Top Employers’ Institute as a Top Employer for the second consecutive year.

Delegation of credit approval

STRATEGY

Our strategy of attracting and retaining top employees is based on the following:

  • Building capacity
  • Ensuring an enabling working environment
  • Providing the necessary development and growth opportunities
  • Supporting broader skills development in our country
  • Enabling customer-centric values-based service delivery to internal and external stakeholders.

LEADERSHIP FRAMEWORK

We are building our unique leadership brand. A leadership framework was developed to define the critical leadership competencies required to take our business forward. To this end, we have assessed all our executives against the framework and in the next financial year we will assess all our senior managers and potential successors for critical roles. In this way, we are meeting our objectives of enhancing the IDC’s leadership capability and ensuring continuity by building leadership bench strength for our future needs.

The IDC’s definition of leadership is: “To lead, influence and inspire oneself and others to achieve the IDC’s vision by being accountable and responsive in the way leaders deliver and lead selflessly”.

The diagram on page 59 represents our defined leadership framework and competencies.

TALENT

Through our talent management strategy, we have identified all critical roles in the Corporation that require ongoing and focused attention to ensure the retention of individuals in these roles. Over the reporting period the voluntary turnover of individuals in critical roles has increased from 5.6% to 6.7%. In ensuring the Corporation is continuously capacitated to deliver on its strategy a comprehensive talent review process was undertaken to identify potential successors for critical roles. As a corporation we have determined the coverage ratio (i.e. percentage of potential successors identified at different readiness levels for all critical roles). Currently we have an overall 76% coverage ratio for all critical roles, excluding executives, across all readiness levels. In the immediate readiness level we have a 69% coverage ratio, in the 1-3 years readiness level the ratio is 89% and in the 3+ years readiness level, 72% of roles are covered with identified potential successors. The focus is on ensuring that a plan is developed to fast-track development and capability building in respect of gaps that have been identified for potential successors, which will be informed by the leadership assessment process.

PEOPLE DEVELOPMENT

Customer-centricity training was made available to all employees as part of our aim of ensuring that employees are skilled in customer service through being accountable, adhering to service commitments and effective communication. Commitments made by

employees during the training will be used to measure customer satisfaction on an ongoing basis.

The development of leadership competencies through building and developing the IDC’s leadership DNA is undertaken in order to deliver on our strategic objectives and positively impact the desired culture of the IDC. This is achieved by way of:

  • Executive and leadership coaching, to assist with the transition into leadership roles, address leadership challenges and unlock potential
  • Mentorship training for operations divisions, to build capability and create a conducive environment for the effective transfer of critical skills.

Particulars of training provided to employees during the reporting period are set out in the graphs on page 60.

The total staff cost during the year under review was R998 million. The training expenditure, expressed as a percentage of staff costs remained the same at 2% (2016: R1 011 million, 2%). A comparative summary of investment in staff training is available online.

AN ENABLING CULTURE

Since the implementation of the Project Evolve initiative reported on in our last two Integrated Reports, we have focused on building an enabling culture, and an environment within which our people can thrive. To enable our culture vision, we have been driving the required culture shift with an approach based on performance and consequence management, engagement, customer-centricity and promoting greater accountability, trust and decision-making.

In order to ensure that our people are change-agile, a change forum network was established, with the focus for the year ahead on ensuring that all our people are appropriately and effectively engaged on changes that impact both them and the IDC’s business, and to ensure that we are responsive to it. As a business, we aim to improve the functioning of the forum and build change-agile staff.

REWARD AND RECOGNITION

Our Remuneration and Benefits Philosophy is designed to attract and retain high performing employees. Total Remuneration consists of the following:

  • A guaranteed package based on cost to company consisting of a cash portion and compulsory benefits such as retirement funding and medical aid
  • Short-term incentives are made up of two components, a nonpensionable allowance payable at a performance score of 3 and a performance bonus at a performance score of 3.5 and above are awarded on the achievement of predetermined performance objectives and targets. All permanent employees irrespective of level are eligible to participate
  • Our long-term incentive scheme vests over a period of three years and supports to facilitate retention of individuals in critical leadership, management and professional roles. Administrative and support bands are excluded from the long-term incentive.

In addition, to recognise our people the “IDC Star Awards” function was held in November 2016 whereby we pay tribute to our “Star” performers as identified and nominated by fellow employees and adjudicated by a panel. Understanding that teams are also critical to business success we recognise teams who have made a difference in projects involved in the business which directly supported the IDC objectives.

Our tailored recognition programme (e-Wards) shows our appreciation for staff who go the extra mile to serve our clients, both internal and external. This platform has grown year-on-year and remains a positive way for staff to recognise their colleagues.

STAFF COMPLEMENT

In ensuring that we are properly resourced and capacitated, our staff complement remained relatively constant at 839 employees (2016: 848). Of the 839 employees, 818 were permanent employees and 21 were on three-year fixed-term contracts, of whom 9 were trainee accountants on a chartered accountant learnership and 12 were employed in the Presidential Infrastructure Co-ordinating Commission’s technical unit.

Of the 21 fixed-term contractors, 38% were female and 62% male. Furthermore, 86% of the fixed-term contract employees were from designated groups. A comprehensive breakdown of staffing numbers by level is provided in the online section of this report.

DIVERSITY

Diversity is a critical enabler. Being a proudly South African state-owned entity, we continuously strive to ensure that our staffing profile is representative of the broader society. Our overall equity representation of designated groups increased by 1% to 92% (2016: 91%).

Gender diversity is an imperative, and to this end 54% of all employees are female and 46% male. The composition of people with disabilities decreased slightly from 1.5% to 1.4% over the past year.

HEALTH AND SAFETY

We continue to drive our commitment to minimising work-related injuries and illness through the IDC’s Occupational Health and Safety structures, such as the Occupational Health and Safety Committee and the Emergency Response Team, and Employee Wellness programmes, in compliance with the Occupational Health and Safety Act, 1993.

Only one Lost Time Injury and two Medical Aid Incidents were recorded during the financial year under review, which required management intervention and enhancement of Occupational Health and Safety activities. This approach will ensure that the health and safety of employees and visitors continue to be a key focus.

A company-wide safety awareness campaign will be rolled out. The Occupational Health and Safety programme will be benchmarked against similar institutions to ensure a focused approach in improving the performance of the Occupational Health and Safety Committee and reduction of health and safety incidents.

Training investment

LEARNERSHIPS

During the reporting period the Corporation prioritised supporting our existing graduates on our Graduate Development Programme to obtain suitable employment. The number of people enrolled on the programme in 2016 was 40, being initially placed across all the IDC offices nationally. The main objective of this programme is to expose our graduates to practical work experience and equip them with the required skills in preparing for the world of work and ultimately being employed.

The IDC has facilitated the employment of 25 individuals through various opportunities (IDC, IDC subsidiaries and the external market). The year ahead will focus on continuing to provide remaining learners with work-based exposure and assist to secure employment.

The size of our Chartered Accountant Learnership programme remained stable with 12 trainees at different levels of the 3-year programme (3 of these have since joined IDC's operations training programme).

Our partnership with Scaw Metals has seen us continuing to support 30 young people on an apprenticeship programme in various trades. This programme started in 2014 and will continue until 2018.

Our external bursary programme supports talented students from previously disadvantaged backgrounds who cannot afford tertiary fees. In the 2016 academic year, we supported 221 (2016:223). The Corporation is also supporting three learners with disabilities to undertake their studies.

ENVIRONMENTAL AND SOCIAL GOVERNANCE

ENVIRONMENTAL AND SOCIAL POLICY

We recognise that sustainable economic growth is integrally connected to the sustainability of the environment and society. As the IDC, we are committed to investing in activities that enhance environmental protection measures, in compliance with occupational health and safety regulations, and that avoid negative social impact on communities, while promoting the sustainable use of natural resources. The IDC has adopted five principles to promote environmental and social protection in all its investments and activities:

  1. All activities must be environmentally and socially responsible
  2. All investments must comply with national legislation and international environmental protection conventions
  3. All investments must respect local communities and people
  4. Investee companies must create favourable working conditions< that are not harmful to employee health and well-being
  5. Investee companies shall develop and implement environmental management systems in line with international best practice

ENVIRONMENTAL AND SOCIAL DUE DILIGENCE FRAMEWORK

Our Environmental and Social Due-Diligence Framework governs our approach to environmental and social due diligence in the funding request process. Investments are categorised in terms of inherent industry risk, as Category A (high risk), Category B (medium risk) and Category C (low risk), which enables risk-based due diligence procedures. In addition to the risk category, the Credit Committees’ investment decisions are informed by a company’s Environmental and Social Risk Rating, or ESRR, which reflects how well the company manages environmental and social risk exposure.

The Environmental and Social Risk Categories and ESRR are set out in the table on page 62

*The IDC’s Executive Committee approved the ESRR4 rule as part of the Corporation’s Environmental and Social Policy during the 2017 financial year. In terms of this rule, companies rated ESRR4 cannot be funded.

ENVIRONMENTAL AND SOCIAL RISK MONITORING

77% of the clients analysed are classified as Category B projects which are “those with potential limited adverse environmental or social impacts that are few in number, site specific, largely reversible and readily addressed through mitigation measures”. This category encompasses the manufacturing sector, therefore in the context of the IDC, most of the business partners fall into this category.

Of the clients assessed, 30 maintained the same rating as per their previous assessment, while 10 showed an improvement in their E&S risk category and 4 deteriorated. An additional 21 clients were assessed for the first time.

In the past year, IDC re-assessed 100% of the ESRR4 clients identified in the previous year. Engagements with these clients are assisting them to quantify and cost the corrective measures needed to improve their performance. Two further ESRR4 clients were identified this year and are being engaged to ensure that poor performance is addressed.

CARBON FOOTPRINT

Information on our carbon footprint is available online. We include selected subsidiaries in the annual scope 1 greenhouse gas emissions calculations. Subsidiaries contribute 15% to IDC’s scope 1 emissions. Of the six subsidiaries included, only two make a material contribution to IDC’s scope 1 emissions. We continue to engage these companies on carbon-tax readiness.



ENGAGING SUBSIDIARIES ON ENVIRONMENTAL AND SOCIAL ASPECTS

Dedicated Company Compliance Engagements

Scaw

The IDC assisted Scaw South Africa with more than R201 million to implement corrective action of non-compliances issues identified through monitoring programmes (including non-compliance notices and directives issued by authorities) to ensure compliance with relevant statutory and regulatory requirements. To this end Scaw has secured most of the mandatory operational licences/permits, registrations and certificates.

African Chrome

During the past year IDC spent a further R2.8 million on care and maintenance activities on this legacy remediation project.

Columbus JV

We contribute, along with Samancor, toward the effective management of the Columbus landfill site in Middelburg. R6.4 million was spent on this during the year.

INTERNAL AUDIT FUNCTION

BACKGROUND

The purpose, authority and responsibilities of our Internal Audit department are set out and formally defined in a charter approved by the Board Audit Committee.

Combined risk assurance model

Internal Audit forms part of the Corporation’s Enterprise Risk Management Framework (ERM), as a third line of defence. ERM facilitates our objective to effectively govern and manage the Corporation’s approach to risk management and to create sustainable value for our stakeholders through business objectives. These are defined in terms of achieving developmental outcomes and ensuring financial sustainability and satisfactory customer service.

Our operating environment is dynamic and is influenced by factors such as adverse economic conditions and social and political dynamics which require proactive action to address risks and ensure that we achieve our developmental mandate.

Effective ERM involves the strategic implementation of three lines of defence as set out in the figure on page 62.

ROLE OF INTERNAL AUDIT

The primary objective of the Internal Audit function is to provide independent, objective assurance to the Board that the IDC’s governance processes, management of risk and systems of internal control are adequate and effective in mitigating the most significant risks that threaten the achievement of the group’s objectives and, in so doing, help to improve the control culture of the Corporation.

MANAGEMENT’S RESPONSIBILITY FOR RISK MANAGEMENT AND FRAUD

Whereas management is responsible for the development, revision and implementation of our systems and procedures, the Internal Audit department provides support and advises management on the adequacy and effectiveness, or otherwise, of developed or revised systems and procedures.

During the reporting period, Internal Audit conducted face-to-face fraud awareness training and education to 29 of the Corporation’s strategic business units and departments, 10 regional offices and 8 members of Executive Management (67%), covering a total of 345 staff members (40% of all employees). All 12 members of Executive Management (100%) received communication with regards to financial crime policies. Training was also extended to some of the major subsidiaries (sefa, Scaw and Foskor) and a number of business partners. All active business partners received communication on financial crime policies.

We have distributed our Financial Crime Awareness brochure on Social Engineering to 864 individuals, and we continued with other initiatives to enhance financial crime awareness, which included the hosting of a Fraud Awareness Week. Awareness initiatives were also extended to business partners through bulk SMS and regular website and email updates.

Key operational areas are investigated for corruption risks. Eight out of 16 high risk areas were assessed during the year. High risk areas include all operational units (12 SBUs), and the Financial Management, Procurement, Human Capital and Post- Investment Management departments. During this risk identification process, the significant risks identified are fed back into Internal Audit’s fraud and corruption training activities. These include:

  • Clients: Fraudulent audit certificates; non-compliance with drawdown procedures; overstated revenue; dishonest clients; fraudulent BEE certificates
  • Other: Falsified invoicing; related party transactions; falsified IDC documentation/letters
  • General: Offering gratification to an IDC employee to unduly influence an official decision.

ASSISTANCE TO SUBSIDIARIES

Our Internal Audit department worked very closely with some of our key subsidiaries to provide support and oversight during the year. Amongst others, we shared some of the audit programmes, reviewed some of the work performed by subsidiaries and deployed IDC Internal Audit staff to perform audits in the subsidiaries where capacity or skills needed to be supplemented.

COMBINED ASSURANCE

During the reporting period, a Combined Assurance Policy was approved by the Board Audit Committee and Board Risk and Sustainability Committee. The policy clearly sets out the responsibilities of each assurance provider and the nature of assurance to be provided. On implementation, the combined assurance approach will ensure that all risk areas are adequately covered and that assurance is provided in an optimal manner whilst avoiding duplication.

FORENSIC INVESTIGATIONS

As a result of the extended crime awareness programmes and education provided to employees and business partners, we have seen a reduction in the number of cases reported during the current year as compared with the prior year.

A total of 26 cases were reported for investigation, of which 17 were client-related. This compares favourably with the total of 36 matters during the previous year, of which 7 were internal cases and 29 external. This reduction is attributed to improvement in the control environment as well as vigilance in our employees and business partners in deterring and preventing fraudulent activities.

RISK MANAGEMENT

RISK STRATEGY

Our approach to risk management is that the Corporation is fully aware, at all times of the existing and future material risks that impact the attainment of its strategic objectives. Therefore, our risk management processes are fully integrated with our strategic planning process, guided by an Enterprise-wide Risk Management Framework that is applied uniformly throughout the organisation.

Our Risk Appetite Statement clearly sets out the levels of risk that the Corporation is willing to accept in order to achieve its strategic goals. For more details on our ERM process, refer to page 64.

RISK CULTURE AND GOVERNANCE

The IDC has strong risk management culture, this is enforced by setting the right tone at the top and by having clearly defined risk governance structures and an independent and adequately resourced risk management function. The Corporation has zero tolerance for non-compliance with laws and regulations and promotes ethical behaviour.

ENTERPRISE-WIDE VIEW OF RISK

The Corporation assesses and manages its risks on an enterprisewide basis, taking a holistic view of risks across the organisation. We identify our risks at a material strategic level as well as at an operating business unit level. All our employees, regardless of level, have a responsibility for the management of risks. The responsibilities are clearly set out in line with the three lines of defence model.

In terms of the three lines of defence model as applied by the Corporation, all business units are the first line of defence in the identification, assessment and management of risks emanating from their operations. The Risk Management and Compliance departments are the second line of defence. They provide oversight, establish limits, frameworks and policies under which the first line activities are to be performed. Internal Audit comprise the third line of defence and they provide independent assurance to the Board and executive management over the effectiveness of controls and processes employed by the first and second line of defence.

THE IDC’S MATERIAL RISKS

In accordance with our risk management framework and process, we assessed (identified, analysed and evaluated) existing and emerging material risks that could hamper the attainment of our strategic objectives.

These risks were captured in the Corporation’s Risk Register that is formally approved by the Board. Once so approved, the risks are managed within approved appetite levels by their respective risk owners.

Risks that migrate beyond the Corporation’s desired appetite levels are escalated and reported in accordance with our approved matrix so as to ensure that necessary remedial actions are taken.

Taking into account the mitigating actions and controls implemented by the organisation, we are satisfied that the material risks will be managed within the Corporation’s tolerable levels.

The Risk Assessment process identified several major risks that could have a material impact on the Corporation achieving its objectives. The list of material risks are shown on pages 10 and 11.

The IDC’s risk assessment process

RISK APPETITE

We define risk appetite as the level of risk that the Corporation is prepared to accept in pursuit of its strategy. Our risk appetite is articulated in a set of statements, limits, thresholds and guidelines that are captured in our risk appetite statement that is formally approved by the Board.

The risk appetite metrics are reviewed annually in accordance with our dynamic strategy and changing risk landscape. Our risk appetite is prudent, whilst not being overly conservative and is in sync with our mandate as development finance institution. The risk appetite statement is communicated and cascaded down to the operating units and actively monitored and reported by the Risk Management department to the appropriate governance structures in the Corporation.

OPERATIONAL RISK MANAGEMENT

Given the changing risk landscape and adoption of Project Evolve, all departments’ Risk and Control Self-Assessments (RCSAs) were reviewed. RCSAs are a key component of the Operational Risk Management framework and enable a dynamic and iterative process for identifying and assessing key operational risks and controls. Mitigating actions were also put in place to proactively address control weaknesses and identified deficiencies.

The key operational risks attendant to a majority of our operations are:

  • Internal and external fraud
  • Data accuracy and integrity
  • Retention of adequate skills.

Another key focus area for the Corporation during the year under review was the implementation of the Loss Data Collection (LDC) policy. LDC provides an overview of the operational risk environment in terms of the risks that are actually materialising (losses incurred) and the adequacy of controls. Through LDC, operational losses and near-miss events are collected and analysed. Action plans are then developed to address control weaknesses and prevent further losses from recurring.

BUSINESS CONTINUITY MANAGEMENT (BCM)

During the financial year, critical plans were tested at the IDC work area recovery site. A crisis management table-top simulation training exercise was conducted for the Crisis Management Team (CMT). The main objective of the exercise was to test the BCM plans and IT infrastructure as well as the CMT’s readiness to respond to a crisis. The outcome demonstrated that the organisation is well prepared to recover in the event of a disaster.

BOARD COMMITTEE REPORTS

BOARD INVESTMENT COMMITTEE (BIC)

The purpose of the BIC is to consider transactions mandated to it by the Board which would, prior to the creation of the committee, vest with the Board. The BIC considers transactions as per the Delegation of Authority which is summarised on page 58 of this report, and it makes recommendations to the Board.

The BIC contributed significantly to the overall funding approvals, with new funding of R7.8 billion approved by the committee in 14 transactions. Details of these and other transactions are provided in the Impacting on Industrial Development section of this report.

In order to align itself further with the IDC’s development mandate, and to assess the catalytic role that the Corporation plays in the development of the country, the Committee instituted measures to assess the economy-wide impact of investment proposals that it is considering. This will ensure that investments are not only assessed on their direct economic impact, but consideration is now also given to other development aspects of transactions.


HUMAN CAPITAL AND NOMINATIONS COMMITTEE (HCNC)

The Committee annually manages the Board’s evaluation of the performance of the Chief Executive Officer and supports the Board in fulfilling its oversight responsibilities relating to succession planning as well as overall compensation and human capital policies for all IDC employees.

The specific responsibilities of the HCNC, as set out in the Board-approved terms of reference, includes:

  • Recommending the appointment of directors to the boards of key subsidiaries and investee companies for consideration by the Board
  • Recommending the appointment of the CEO to the Board
  • Setting the criteria to evaluate the performance of the CEO
  • In consultation with the CEO, setting the criteria for evaluating the performance of executives
  • Determining the CEO’s salary based on the evaluation of his/her performance together with relative market benchmarks
  • Overseeing the setting and implementation of remuneration policies and programmes at all levels of the Corporation, including the payment of performance incentives
  • Ensuring that human capital expertise and capacity facilitate the achievement of the business objectives
  • Ensuring development of strategies to retain key IDC personnel and playing an integral part in the succession planning, especially of the CEO and executive management
  • Supporting the Board in defining corporate performance indicators as well as the evaluation of the performance thereof

For more information on remuneration and incentives, refer to page 55.

During the past financial year, the Committee ensured that the performance objectives of the Corporation, the CEO and that of executives were aligned to achieve the strategic imperatives of the Corporation from both a short- and long-term perspective.

The Board’s oversight role included the evaluation of corporate and individual executive performance. On the basis of the achieved performance, the Committee recommended the payment of applicable incentives for the year under review.

In support of the corporate strategy and to drive a culture of high performance, the Committee provided oversight in the implementation of the Corporation’s revised Remuneration Philosophy and Policy which was approved by the Board during the previous year.

The Committee also considered a report and provided guidance on the Corporation’s Employment Equity Plan, reports on the Review of Talent Retention Strategies and the Implementation of Talent Management and Succession Strategy of the business, and approved the Succession Plan for Critical Leadership Roles including that of the CEO.

In Board deliberations the facilitation and embedding of a conducive culture was highlighted as a key imperative. Through the Board Human Capital and Nominations Committee, direction, guidance and input was provided into the culture transformation proposal that was presented for implementation. Furthermore, in order to successfully drive the IDC strategy as envisioned through Project Evolve, the committee provided guidance and input in the articulation of the leadership framework and capabilities required by leaders for the IDC. All leaders will be assessed in line with the leadership requirements and the committee will consider and evaluate the existing leadership bench-strength and how the capabilities can be further enhanced to execute the IDC mandate.


BOARD AUDIT COMMITTEE (BAC)

The BAC assists the Board in fulfilling its oversight responsibilities, in particular with regard to the evaluation of the adequacy and efficiency of accounting policies, internal controls, risk management and financial reporting processes. In addition, the BAC assesses the effectiveness of the internal auditors and the independence and effectiveness of the external auditors.

Responsibilities, Composition and Functions of the Committee

The Committee’s roles and responsibilities include its statutory duties as per the PFMA, the requirements of the King III Codes of Governance, the Companies Act and the responsibilities assigned to it by the Board.

The Committee therefore reports that it has adopted appropriate formal terms of reference as approved by the Board, and is satisfied that it has discharged its responsibilities as per the Companies Act, King III and the PFMA.

The Committee has carried out its functions through attendance at BAC meetings and discussions with Executive Management, Internal Audit and external advisers where appropriate. The BAC meets at least four times per annum, with authority to convene additional meetings as circumstances require.

Invitees to the meetings of the Committee include the CEO, Chief Financial Officer (CFO), Chief Risk Officer and internal and external auditors, as well as the Head of Information Technology, and any other executives as may be required.

To execute its key functions and discharge its responsibilities as outlined in its terms of reference during the period under review, the Committee:

  • Assisted the Board in its evaluation of the adequacy and efficiency of the internal control systems, accounting practices, information systems, risk management and auditing processes applied within the Corporation in the day-to-day management of its business
  • Facilitated and promoted communication between the Board, management, the external auditors and Internal Audit department on matters which are the responsibility of the Committee
  • Introduced measures that, in the opinion of the Committee, may enhance the credibility and objectivity of the financial statements and reports prepared with reference to the affairs of the Corporation (and the IDC Group)
  • Nominated and recommended for appointment as external auditors the firms of registered auditors KPMG, SNG and Ngubane & Co who, in the opinion of the Committee, are independent of the IDC
  • Determined the fees to be paid to the external auditors as well as the auditors’ terms of engagement
  • Ensured that the appointment of the external auditors complied with the Companies Act and any other legislation relating to the
  • appointment of auditors.

Internal Control

The BAC monitored the effectiveness of the IDC’s internal controls and compliance with the Enterprise-wide Risk Management Framework (ERMF). The emphasis on risk governance is based on three lines of defence and the BAC uses the regular reports received from the three lines of defence (process owners and department heads, Risk and Compliance departments, management, and the Internal Audit department) to evaluate the effectiveness of the internal controls (for more on the three lines of defence and risk assessment, refer to page 62).

The ERMF places weight on accountability, responsibility, independence, reporting, communication and transparency, both internally and with all the IDC’s key external stakeholders.

No findings have come to the attention of the Committee to indicate that any material breakdown in internal controls has occurred during the financial year under review. The Committee is of the opinion that the internal accounting controls are adequate to ensure that the financial records may be relied upon for preparing the consolidated Annual Financial Statements, that accountability for assets and liabilities is maintained, and that this is based on sound accounting policies which are supported by reasonable and prudent judgements and estimates. The BAC is further of the opinion that the internal controls of the Corporation have been effective in all material aspects throughout the year under review.

This opinion is based on the information and explanations given by management regarding various processes and initiatives aimed at improving the internal control environment and the integrity of information, discussions with internal audit, and with the independent external auditors, on the results of their audits.

To formulate its opinion, the Committee:

  • Monitored the identification and correction of weaknesses and breakdowns of systems and internal controls
  • Monitored the adequacy and reliability of management information and the efficiency of management information systems
  • Reviewed quarterly, interim and final financial results and statements and reporting for proper and complete disclosure of timely, reliable and consistent information
  • Evaluated on an ongoing basis the appropriateness, adequacy and efficiency of accounting policies and procedures, compliance with generally accepted accounting practice and overall accounting standards as well as any changes thereto
  • Discussed and resolved any significant or unusual accounting issues
  • Reviewed reports supplied by management regarding the effectiveness and efficiency of the credit monitoring process, exposures and related impairments, and the adequacy of impairment provisions, to discharge its obligations satisfactorily
  • Reviewed and monitored all key financial performance indicators (KPIs) to ensure that they are appropriate and that decision-making capabilities are maintained at high levels
  • Reported to the Board on the effectiveness of the Corporation’s internal reporting controls.

External Auditors

The IDC’s external auditors are KPMG, SNG and Ngubane & Co. Ngubane & Co were introduced as a third firm of auditors as part of an effort to contribute to transformation by offering an emerging black-owned audit firm an opportunity to gain auditing experience in respect of a Corporation of the size of the IDC.

The BAC has a well-established policy on auditors’ independence and audit effectiveness. The committee has satisfied itself that the external auditors, KPMG, SNG and Ngubane & Co were independent of the Company as set out in sections 90(2)(c) and 94(8) of the Companies Act, which includes consideration of compliance with criteria relating to independence or conflicts of interest as prescribed by the Independent Regulatory Board for Auditors.

Requisite assurance was sought and provided by the external auditors that their claim to independence was supported and demonstrated by internal governance processes within their entities. The Committee, in consultation with Executive Management, agreed to the engagement letter, terms, audit plan and audit fees for the financial year ended 31 March 2017.

The Committee:

  • Approved the external auditors’ annual plan and related scope of work
  • Monitored the effectiveness of the external auditors in terms of their skills, independence, execution of the audit plan, reporting and overall performance
  • Considered whether the extent of reliance placed on internal audit by the external auditors was appropriate and whether there were any significant gaps between the internal and external audits
  • Approved the Non-audit Services Policy, which stipulates that the external auditors are precluded from engaging in non-audit related services.

Financial Statements

The Committee has reviewed the financial statements of the Corporation and the IDC Group and is satisfied that they comply in all material respects with IFRS and the requirements of the Companies Act and PFMA. During the period under review the Committee:

  • Reviewed and discussed the audited Annual Financial Statements included in this Integrated Report with the external auditors, the Chief Executive and the Chief Financial Officer
  • Reviewed the external auditors’ report and management’s response to it
  • Reviewed any significant adjustments resulting from external audit queries and accepted unadjusted audit differences
  • Reviewed areas of significant judgements and estimates in the Annual Financial Statements
  • Received and considered reports from the internal auditors.

Expertise and Experience of the Finance Function

The Committee has considered, and has satisfied itself of the overall appropriateness of the expertise and adequacy of resources of the IDC’s finance function and the experience of the senior members of management responsible for the financial function.

Duties Assigned by the Board

Integrated and Sustainability Reporting

The BAC fulfils an oversight role regarding the Company’s Integrated Report and the reporting process, and considers the level of assurance coverage obtained from management and internal and external assurance providers, in making its recommendation to the Board.

The Committee considered the Company’s information as disclosed in the Integrated Report and has assessed its consistency with operational and other information known to Committee members, and for consistency with the Annual Financial Statements. The Committee discussed the information with management and has considered the conclusions of the external assurance provider.

The BAC is satisfied that the sustainability information is, in all material respects, reliable and consistent with the financial results. Nothing has come to the attention of the Committee to indicate any material deficiencies in this regard.

Combined Assurance

The BAC is responsible for monitoring the combined assurance model detailing significant processes, line management monitoring, Internal Audit and external assurances. This model is used to assess the appropriateness of assurance over risks/controls provided to the Board.

Engagement regarding the extent to which the various assurance providers rely on each other’s work take place continuously and the Committee is of the view that a better coordination between External and Internal Audit has been achieved.

During the year, a Combined Assurance Policy was approved by the BAC which includes a coordinated assurance effort with other assurance providers such as Risk Management and the Compliance function. This will assist in averting assurance gaps or duplication of efforts, and ensuring efficiency across various assurance services.

Going Concern

After having reviewed a documented assessment by management of the going concern premise of the Corporation and the IDC Group, the Committee concurs that the adoption of the going concern assumption in the preparation of the consolidated Annual Financial Statements is appropriate and sound.

Governance of Risk

The Board has assigned oversight of the Corporation’s risk management function to a separate Board Risk and Sustainability Committee (the BR&SC). The Chairperson of the BAC attends meetings of the BR&SC as an ex officio member to ensure that information relevant to these Committees is shared regularly.

The Committee fulfils an oversight role regarding financial reporting risks, internal financial controls, fraud risk and information technology risks as they relate to financial reporting. The BAC is satisfied that appropriate and effective risk management processes are in place.

Internal Audit

The Internal Audit department has a functional reporting line to the Committee Chairperson and an operational reporting line to the CEO. The BAC, with respect to its evaluation of the adequacy and effectiveness of internal controls, receives reports from Internal Audit on a quarterly basis, assesses the effectiveness of the internal audit function, and reviews and approves the Internal Audit department’s Audit Plan.

The BAC is responsible for ensuring that the Corporation’s Internal Audit function is independent and has the necessary resources, standing and authority within the Corporation to enable it to discharge its duties. The Internal Audit function’s Annual Audit Plan was approved by the BAC. The Committee monitored and challenged, where appropriate, the action taken by management with regard to adverse Internal Audit findings.

The Committee has overseen a process by which Internal Audit has performed audits according to a risk-based audit plan where the effectiveness of the risk management and internal controls were evaluated. These evaluations were the main input considered by the Board in reporting on the effectiveness of internal controls. The Committee is satisfied with the independence and effectiveness of the internal audit function.

Conclusion

Having considered, analysed, reviewed and debated information provided by management, Internal Audit and External Audit, the Committee confirmed that:

  • The internal controls of the Group were effective in all material aspects throughout the year under review
  • These controls ensured that the group’s assets had been safeguarded
  • Proper accounting records had been maintained
  • Resources had been utilised efficiently
  • The skills, independence, audit plan, reporting and overall performance of the external auditors were acceptable.

Following its review of the financial statements for the year ended 31 March 2017, the BAC is of the opinion that they comply with the relevant provisions of the PFMA, as amended, and IFRS, and that they fairly present the results of the operations, cash flow and financial position of the Corporation.

The BAC has complied with all the King III principles, with the inclusion of integrated reporting, evidenced by the Corporation’s sixth issue of its Integrated Report 2017. The Committee is satisfied that it has complied in all material respects with its legal, regulatory and other responsibilities.

This Integrated Report was recommended by the BAC to the Board for approval.

On behalf of the Board Audit Committee


BOARD RISK AND SUSTAINABILITY COMMITTEE (BR&SC)

The primary duty of the BR&SC is the governance of risk and oversight of risk management within the Corporation.

The Committee also assists the Board in determining the maximum mandate levels for the various investment and credit approval committees. The Committee assists management with the responsible stewardship of sustainability, including stakeholder impact, management of material issues, sustainability governance and reporting. During the year under review work done by the BR&SC included the following activities, which are of critical importance to the risk management process:

Implementation of the Project Risk Framework

In light of the increased focus on project development and project risk management, it was necessary to establish a formalised project development process as well as appropriate project governance structures for managing IDC projects going forward. Project risk management is an essential management tool to support overall project management and ensures that risks are identified and effectively managed through mitigating factors.

A Project Risk Management Framework (PRMF) was established to provide guidelines for the management of risk in IDC projects.

In addition to the PRMF, a Project Risk Matrix or risk register was introduced to record and monitor identified risks and tools for their mitigation in specific projects.

Implementation of Rating and Pricing Models

The new models promote transparency in respect of the risk profile of a new business partner and migration of the credit risk of existing IDC business partners. They follow best practice, and assist in quantifying the level of subsidisation granted for risk in order to ensure that the IDC’s developmental role is achieved.

Implementation of a Risk Appetite Framework (RAF) and Limits

An effective RAF helps to reinforce a strong risk culture, which in turn is critical to sound risk management.

The IDC RAF is aligned to the Corporation’s strategy and capital planning. It includes a Risk Appetite Statement (RAS), risk limits, and an outline of the roles and responsibilities of those overseeing the implementation and monitoring of the RAF. It also explicitly defines the boundaries within which management is expected to operate when pursuing the organisation’s business strategy, and, including an appropriate combination of policies, processes, controls, systems and procedures, it is considered adaptable to changing business and market conditions.

A Risk Limits and Thresholds exercise was undertaken to manage concentration risk, which is defined as the risk posed by any single exposure or group of exposures, having the potential to produce losses large enough to threaten the sustainability of the organisation. Concentration risk arises in credit and investment portfolios due to uneven credit distribution among borrowers, industries or regions. Limits were set for single name losses and exposures, counterparty losses and exposures, industry exposure and Africa portfolio – regional exposure. Thresholds were approved for the Africa portfolio country exposure.

Credit Risk Policy

The Credit Risk Policy provides a framework for maximising the IDC’s risk-adjusted rate of return by maintaining credit risk exposures within acceptable parameters and appetite levels. This objective can be achieved and fulfils the requirements of proper risk management in line with the Corporation’s Risk Management Strategy, sound principles of corporate governance and fulfilment of the National Treasury guidelines on proper risk management (for more on risk management and governance refer to pages 63 and 64).

The BR&SC provided guidance and input to enhance the policy to ensure that financial and credit risks are adequately managed whilst providing opportunities to improve business.


Ms LI Bethlehem Chairperson of the Board Risk and Sustainability Committee 28 June 2017

SOCIAL AND ETHICS COMMITTEE (SEC)

The objective of the SEC is to promote the ideals of corporate fairness and transparency, social and economic development and good corporate citizenship, and to manage the Corporation’s exposure to reputational risk.

Part of the SEC’s work is to assist the Board in vetting funding applications, projects and any matter in which a director of the IDC has an interest. The SEC is accordingly mandated by the Board to ensure that no special or unusual treatment is accorded to any application, project and or any matters in which a director of the IDC has an interest, and to make appropriate recommendations to the Board.

During the year under review the SEC considered one matter in which IDC directors had potential conflicts of interest. Note 42 to the Annual Financial Statements, which are published simultaneously with this report, provide particulars of present and past directors’ financial interests in IDC transactions.

The SEC’s terms of reference were revised during the year to accommodate the new Conflict of Interest Policy which prohibits directors from doing business with the IDC. It is therefore anticipated that this part of the SEC’s function will fall away as only existing transactions involving IDC directors will be supported until they are concluded.

In addition to the above, the SEC considered reports on the Corporation’s Code of Ethics and the Ethics Annual Report, quarterly financial performance and the budgets for the next financial year, the Sustainability Framework Implementation Plan, Corporate Social Investment (CSI), the media and stakeholder engagement and customer service.

No material non-compliance with legislation and regulation, or non-adherence with codes of best practice, relevant to the areas within the committee’s mandate, was brought to the SEC’s attention.