Corporate Governance
The company is committed to an open governance process through which its shareholders may derive assurance that, in protecting and adding value to SABMiller's financial and human investment, the group is being managed ethically, according to prudently determined risk parameters and is striving to achieve and advance local best practices in the territories in which it operates. Corporate Governance is regarded as the prudential system by which the companies in the group are managed and controlled in support and furtherance
of the company's strategies and policies.

The company recognises worth in the values expressed in the Combined Code – Principles of Good Governance and Code of Best Practice – appended to the Listing Rules of the UK Listing Authority (the Combined Code), together with guidance principles included from the Turnbull Report on Internal Control: Guidance for Directors on the Combined Code. Account is also taken of trends in evolving institutional shareholder and government guidance on disclosure and shareholder authorisation, including other regional governance initiatives. This section describes the way in which the company seeks to comply with the Combined Code and believes it has done so in the past financial year. Recognising also the importance of the company's substantial, new operating presence in the United States of America (USA), the company intends, over the medium term, to achieve substantive compliance with the USA Sarbanes-Oxley legislation and related regulation.

The board of directors has given attention to the Higgs review on the role and effectiveness of non-executive directors and the chairman submitted comment reflecting the preliminary views of the board on a number of aspects. Insofar as the company will be affected by potential material changes to its present board and committee composition and the roles of certain directors in terms of principles which might be adopted in the Combined Code as a result of the Higgs review, the board will seek over time to achieve the appropriate level of new compliance consistent with the interests of the company and the shareholders, including the major shareholders who are outside the UK, as well as the contractual commitments to Altria Group, Inc. (previously Philip Morris Companies Inc.). The Smith Report on the functions and constituents of the audit committee and the company's relationship with, and independence of, the external auditors has also received attention from both the board and the audit committee.

 
The board and board committees
The board sets the strategic objectives of the group, determines investment policy, agrees on performance criteria and delegates to management the detailed planning and implementation of that policy, in accordance with appropriate risk parameters. The board monitors compliance with policies and achievement against objectives, by holding management accountable for its activity through the measurement and control of operations by regular reports to the board, including quarterly performance reporting and budget updates. The board reserves to itself a schedule of matters to be dealt with exclusively by the board. These include strategies and policy on social and environmental responsibility. Appropriate structures for those authorities delegated to management and board committees are in place, accompanied by monitoring and reporting systems. Each standing board committee has specific written terms of reference issued by the board and adopted in committee. All chairs of committees report orally on the proceedings of their committees at the next meeting of the board and minutes of committee meetings are provided to the board. All the committees have a majority of members who are considered to be independent in any jurisdiction.

Following the company's extraordinary general meeting (EGM) on 1 July 2002 (held to approve the Miller Brewing Company transaction), from 1 August 2002 the board was reconstituted and reduced in number from 16 to 13 directors. Four of the six executive directors stepped down and Mr Slack and Dr Strauss retired from the board at the annual general meeting (AGM) on 31 July 2002. Mr Bible, Mr Cameilleri and Ms De Lisi were appointed to the board as non-executive directors on behalf of Altria Group, Inc. Until the end of July 2002, a majority of six of the ten non-executive directors were regarded by the company as independent. Following the reconstitution of the board from 1 August 2002 to meet the requirements of the transaction agreements, four of the 11 non-executive directors are considered in all jurisdictions to be fully independent and the executive presence on the board has been reduced to two, being the chief executive and chief financial officer. Including
the three directors nominated by Altria Group, Inc., four of the non-executive directors represent shareholders. The company is fortunate in having on its board persons of unquestioned integrity who can be relied upon to exercise their best judgement in the interests of the company and its shareholders. In the USA, all the directors except for Mr Mackay, Mr Wyman and Mr Ning would be regarded as being independent for governance purposes.
The details of the directors appear here.

The executive directors generally have responsibility for proposing strategy and for making and implementing operational decisions on running the group's businesses. Non-executive directors complement the skills and experience of the executive directors, contributing to the formulation of policy and decision-making through their knowledge and experience of other businesses and sectors. All directors bring an independent judgement to the issues of strategy, performance, and resources, including key appointments and standards of conduct. The board continues to regard commercial experience and industry exposure as key ingredients in the range of talents appropriate in a non-executive director of the company.

The board and its committees are supplied with full and timely information which enables them to discharge their responsibilities. All directors have access to the advice of the company secretary and independent professional advice is available to directors in appropriate circumstances at the company's expense. The board met eight times in the year ended 31 March 2003 (against a scheduled seven meetings) and ad hoc committees of the board met twice to deal with investment, financing and reporting issues.

The roles of chairman and chief executive are separate with responsibilities divided between them. The senior non-executive director is Lord Fellowes.

 
Following the appointment of new directors to the board, an induction programme is arranged, which also involves updates and industry specific retraining for existing directors, including visits to the group's businesses and meetings with senior management as appropriate, to facilitate understanding of the group. In addition to operations, directors are given exposure to internal controls at business unit level.

All directors are subject to retirement and re-election by shareholders every three years. In addition, all directors are subject to election by shareholders at the first opportunity after their initial appointment. The names of directors submitted for election or re-election are accompanied by sufficient biographical details to enable shareholders to make an informed decision in respect of their election. Non-executive directors are appointed for specified terms subject to re-election and to Companies Act provisions relating to the removal of directors. The reappointment of non-executive directors is not automatic. In general, the board will ask a director reaching the age of 70 years to stand for re-election annually or to retire, as the case may be.

Performance of the executive directors and senior executives is assessed by the remuneration committee against defined, pre-agreed goals and applicable strategic objectives. Performance of the non-executive directors is assessed formally on an annual basis by the chairman and the senior non-executive director, in accordance with a set matrix covering items ranging from strategic contribution to attendance. The chairman reports these outcomes to the board in broad terms, indicating that if further consultation or remedial action is needed, it will be pursued through the nomination committee before being brought back to the board. The chairman's performance is assessed by the senior non-executive director, following the same matrix and process.
Board committees
Specific responsibilities have been delegated to board committees with defined terms of reference. The principal board committees are as follows:
 
The audit committee
Throughout the financial year, the audit committee was chaired by Mr Manser FCA, an independent non-executive director. Lord Fellowes, Mr Levett and Mr Morland served on the committee throughout the year. Mr Slack and Dr Strauss left the committee on 31 July 2002, when they retired from the board. Ms De Lisi joined the committee from 4 September 2002. The committee met three times during the year and an associated reporting committee met twice more. The external auditors, the chief executive and the chief financial officer are in attendance at each meeting and other members of the management team, including internal audit staff, attend as required. Executive attendees are excused for periodic discussions with the external auditors. The committee has the power to examine any financial operating and strategic matters in, and relating to, the group in accordance with its written terms of reference. This includes reviewing the annual accounts, internal control procedures, accounting policies, compliance and regulatory matters, reviewing and approving the appointment of the external auditors and other related issues.

The audit committee reviews in annual cycles with management, that adequate and suitable internal controls are in place and are appropriate to meet future needs; that significant business, strategic, statutory and financial risks have been identified and are being monitored and managed; that appropriate standards of governance, reporting and compliance are in operation; and it advises the board on issues relating to the application of accounting standards to published financial information.
 
Internal audit structures in the major operating subsidiaries and divisions function under the direction of, and report to, their respective audit committees. The internal audit functions are performed either by teams of appropriate, qualified and experienced employees, or through the engagement of external practitioners upon specified and agreed terms with equivalent access. These structures are reviewed for effectiveness with external consultants at least once a year. The primary mandate of the group's internal auditors is to examine and evaluate the effectiveness of the applicable operational activities, the attendant business risks and the systems of internal operational and financial control, so as to bring material deficiencies, instances of non-compliance and development needs to the attention of the applicable audit committee, external auditors and operational management, for resolution. The company's audit committee has access to the proceedings of the reports to the divisional audit committees and to subsidiary internal audit practitioners; the last having access to both central management and to the company's audit committee.

During the year a corporate governance manager was appointed to co-ordinate group-wide internal audit activity, internal control monitoring and governance reporting.

The audit committee is comprised of five non-executive directors, of whom independent directors (Lord Fellowes, Mr Manser and Mr Morland) are in the majority.

The nomination committee

The nomination committee is chaired by Lord Renwick. The other members, Mr Kahn, Lord Fellowes, Mr Manser, and Mr Morland ensure a majority of independent non-executive directors on the committee.

The committee considers the composition of the board and its committees, retirements and appointments of additional and replacement directors and makes appropriate recommendations to the board. Executive directors are considered for appointment to the board on the basis of their experience, skills and level of contribution to, and impact upon, the group. Non-executive directors are selected for recommendation on the basis of industry knowledge, professional skills and experience and, where appropriate, the directors believe that significant shareholders in the company should be represented on the board. All directors are subject to retirement and re-election by shareholders at least once every three years in accordance with the company's Articles of Association and the requirements of the Combined Code. After recommendation by the nomination committee, the appointment of a new director is dealt with directly by the board.

This committee meets as often as required, usually twice a year. The board chairman conducts annual appraisals of the performance of each of the non-executive directors and reviews these with the senior non-executive director and the company secretary. The senior non-executive director reviews the performance of the chairman of the board. Thereafter, where appropriate, individual directors may be interviewed. The results are reported to the nomination committee and the board.

The committee follows a process of recruitment and selection to fill non-executive vacancies on the board, using external agencies when appropriate to present selections for consideration and interview, in consultation with the executive directors and for presentation to the board. The composition and size of the board is now regulated in terms of the agreements with Altria Group, Inc. covering the Miller Brewing Company transaction, but outside those requirements, the company continues to follow the process described. The executive director membership of the board is limited to two, the chief executive and chief financial officer, within the arrangements which currently require three Altria Group, Inc. nominees in a maximum of 13 board members.

The remuneration committee
The remuneration committee is chaired by Lord Renwick, the other members are Mr Kahn, Lord Fellowes, Mr Manser and Mr Morland. The committee has a majority of independent non-executive directors. The committee sets short, medium and long-term remuneration for the executive directors. More generally, the committee is responsible for the assessment and approval of a broad remuneration strategy for the group. The determination of short and long-term incentive pay structures for group executives, the positioning of senior executive pay levels relative to local and international industry benchmarks and the assessment and authorisation of specific reward proposals for the company's executive directors and those executives reporting directly to the chief executive. In order to promote an identity of interests with shareholders, share incentives are considered to be critical elements of executive incentive pay.

The remuneration committee's overall strategy is to ensure that employees are rewarded for their contribution to the group's operating and financial performance at levels which take account of industry, market and country benchmarks, as well as the requirements of collective bargaining. While Mr Kahn is not regarded as fully independent, his experience of the group and external remuneration matters brings worthwhile balance and perspective to the committee's deliberations.

 

The corporate accountability and risk assurance committee (CARAC)
Lord Fellowes chaired the committee throughout the year and Mr Kahn, Mr Mackay, Mr Manser, Mr Ramaphosa and Mr Wyman served as members. Mr Adami contributed as a committee member until he stepped down from the board on 31 July 2002 and continues as a co-opted member. The committee's activities (which include examination of prospective risk) are described in the separate corporate accountability review.

The committee meets twice a year and reports to the board on its activities, as do the other board committees. Additionally, the director of corporate affairs who chairs the group-wide corporate accountability working committee (a management committee) meets regularly with the chairman of CARAC on implementation and planning issues.

Relations with shareholders
It is the policy of the company, where practicable, to pursue dialogue with institutional shareholders and to involve investors in its AGM. Alongside the facilities offered by the company secretary's department, the company has a dedicated investor relations and communications team to liaise with institutional investors. The investor relations team (which reports to the director of corporate affairs) is in constant contact with analysts and fund managers and arranges presentations on recent acquisitions and country business progress, as well as site visits. The executive directors and senior management conduct regular roadshows and presentations. The group corporate accountability manager maintains contact with fund managers and institutional investor representative bodies on socially responsible investment (SRI) and triple bottom line issues and initiates one-on-one interactions and briefings with interested investors.

The company encourages shareholders to attend its AGMs, which provide opportunities for shareholders to ask questions of the board, including the chairmen of the audit, remuneration and nomination committees and of CARAC.

Last year the board put its remuneration report to an advisory vote at its annual general meeting. Of the 998.7 million ordinary shares in issue, 752.2 million were voted (1.5 million by 26 shareholders present in person). Although the resolution was carried unanimously on a show of hands, the proxy votes counted represented 96.1% in favour of the resolution.

At the extraordinary and annual general meetings held respectively on 1 and 31 July 2002, all proxy votes were counted and displayed on screen during the voting processes.
 
Risk management and internal control

Responsibilities
Board of directors
Following the publication in September 1999 and application of Internal Control: Guidance for Directors on the Combined Code (the Turnbull Report), the directors report below on their review of the effectiveness of the group's systems of internal control.

The group's existing internal controls and risk management processes are subject to constant review and adaptations to the extent necessary to ensure full compliance with the requirements of the Turnbull Report, for the reporting period and to deliver improved value to the operating businesses.

In particular, the directors recognise the impact of changes such as the acquisition and integration of Miller Brewing Company and the development of a UK corporate centre. Accordingly, a programme has commenced to enhance the group's risk management framework, and related systems of internal control, appropriate to the evolving structure and needs of the group.

The directors are responsible for the group's system of internal control and for reviewing its effectiveness. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can provide reasonable, but not absolute, assurance against material misstatement or loss. In reviewing the system of internal control, the board has taken into account the results of all of the work carried out to audit and review the activities of the group. There is an ongoing process for identifying, evaluating, managing, monitoring and reporting on the significant risks faced by individual group companies and by the group as a whole. This process has been in place for the year under review up to and including the date of approval of the annual report and accounts.

In accordance with the Turnbull guidance, reviews on the effectiveness of internal control were carried out in May and November 2002 and in May 2003 by the board.
 

Board and executive committees
The executive committee (EXCOM), which is chaired by the chief executive, and comprises senior SABMiller plc managers, has specific responsibility for the system of risk management and reviews the risk reports of the group and the business units twice yearly, reporting to the board on key risks and their associated mitigating actions.

The audit committee deals primarily with operational and financial matters, including breakdowns of controls, reputation, insurance and loss prevention, litigation and listing compliance issues.

The corporate accountability committee deals with business ethics, values and principles, plus stakeholder accountability, including specialist areas such as employee, social, health, safety and environmental issues, as well as impacts on product and service quality and non-exclusively with emerging and prospective risk.
 
Business units
Responsibilities and processes are to a large extent replicated at business unit level via the existence of divisional or company audit committees and in some cases corporate accountability committees. Each local audit committee has formal terms of reference which include defined monitoring roles in relation to both risk management processes and internal audit activities.
 
Corporate functions
In line with the recent changes outlined above and as part of the current enhancement programme, the group intends to strengthen central management resource in both risk management and internal audit. This will improve group-wide co-ordination and promote best practice in each of these specialist areas.
 
Risk management
The focus of risk management in the group is to support the delivery of business objectives by identifying, assessing, managing and monitoring all known forms
of risk across the group. Management is involved in a continuous process of developing and enhancing its risk and control procedures to improve the mechanisms for identifying and monitoring risks.

Key features of the group's system of risk management comprise:

  • Group statements on strategic direction, ethics and values.
  • Clear business objectives and business principles.
  • Established risk policy.
  • An ongoing process for identification and evaluation of significant risk that may prevent achievement of business objectives.
  • Implementation of management processes to manage the significant risks to an acceptable level.
  • Ongoing monitoring of significant risks and internal and external environmental factors that may change the risk profile.

In addition, there is a process of regular reporting to the board through the audit committee on the status of the risk management and internal control systems, and any evolving risk issues or internal control breakdowns that may have occurred.
The corporate accountability committee also reports regularly to the board on social, environmental, ethical and prospective risk issues.

Key reports include those that identify, rank, monitor and measure strategic, operational and financial risks in each division and on a group basis on an annual cycle. These are supplemented by reports on internal control processes and breakdowns, along with reviews of the structure and effectiveness of internal audit functions. These reports were co-ordinated and evaluated with advice from external consultants in the period under review.

Key risks, with which the board has been concerned, and reviewed, during the year, include:
  • Miller turnaround execution risk
  • Tax risks
  • Strategic people skills
  • Industry consolidation and asset impairment
  • Fundamental consumption shifts within the liquor industry.
The current initiative to enhance the group's risk management framework seeks to standardise and strengthen existing practices for reporting and assessing risks at different levels of the group to achieve a more integrated approach to risk management. It also seeks to provide a more consistent platform for risk management process assurance by internal audit.

Internal control

The group's systems of internal control are designed and operated to support the identification and management of risks affecting the group and the business environment in which it operates. As such, they are subject to continuous review as circumstances change and new risks emerge.

Key features of the group's systems of internal control comprise:

  • Written policies and procedures, which are detailed in policy manuals, clearly defined lines of accountability and delegation of authority, and comprehensive reporting and analysis against approved standards and budgets.
  • Group treasury operations control and reduce exposure to interest rate, counterparty, liquidity and currency transaction risks and co-ordinate the activities of group companies in this area. Treasury policies, risk limits and monitoring procedures are reviewed regularly by the board.
  • Minimisation of operating risk by ensuring that the appropriate infrastructure, controls, systems and people are in place throughout the businesses. Key policies employed in managing operating risk involve segregation of duties, transaction authorisation, monitoring,financial and managerial reporting.
  • Business resumption planning, including preventative and contingency measures, back-up capabilities and the purchase of catastrophe insurance to maintain product and service delivery under adverse conditions.

Assurance

Assurance on compliance with systems of internal control and on their effectiveness is obtained through regular management reviews, control self-assessment (including letters of representation), internal audit reviews and testing, and by testing of certain aspects of the internal financial control systems by the external auditors during the course of their statutory examinations. The group's various divisional audit committees consider the results of these reviews on a regular basis, to confirm the appropriateness and satisfactory nature of these systems, while ensuring that breakdowns involving material loss, if any, together with remedial actions, have been reported to the appropriate boards of directors.

At the half year and at the year end the chief executives and the chief financial officers of all the group's operations are required to submit formal letters of representation on controls, compliance and notification of ongoing or potential operational, financial and legal risks or claims. These letters form the subject of full reports to the audit committee. Directors, executives, key managers and professionals also make annual written declarations of interests and are obliged to report without delay any potential or actual conflicts of interest which may arise.

Internal audit functions operated in all of the group's principal business units in the period under review, reporting to local management and accountable to local audit committees. The audit committee is satisfied that adequate, objective internal audit assurance standards and procedures exist in the group. The November 2002 and May 2003 audit committee meetings reviewed internal audit reports on the major business units, together with proposals for the ongoing internal assurance processes. Reports on these issues were made to the board.

The adequacy and capability of the group's internal audit structures were the subject of a review during the year by external consultants.