Consumers and the small- and medium-sized enterprise (SME) sector in South Africa remain vulnerable, with low real wage growth, high unemployment levels (currently estimated at 27.7%), the persistently high cost of household essentials despite slightly lower levels of inflation, only slightly reduced levels of household debt to income (72.6% for the second quarter of 2017) and muted gross domestic product (GDP) growth continuing to impact business confidence.
The combined effect of these factors is seen in the results of Transaction Capital’s Consumer Credit Rehabilitation Index (CCRI), which samples over five million consumers from Transaction Capital Risk Services’ proprietary database. It showed that the national rehabilitation prospects of South African consumers already in a default position deteriorated by 1.1% in the second quarter of 2017 (compared to
the corresponding quarter in 2016), followed by a further deterioration of 0.9% in the third quarter of 2017 (compared to the third quarter
While household debt to income has reduced, this is mainly due to debt growing at a slower pace than income, rather than an absolute decline in household debt. The 25 basis points rate cut in July 2017 and lower inflation (5.1% at 30 September 2017) may improve the debt servicing ability of households, albeit moderately. No meaningful improvement in the consumer environment is expected, and tighter retail credit extension will support this gradual decrease in the debt burden of consumers.
Stable medium-term GDP growth is expected in Australia, which will serve to further diversify Transaction Capital’s earnings over time.
Despite persistent challenges in the South African market, Transaction Capital has continued to deliver high-quality organic earnings growth with high cash conversion rates since it listed on the JSE Limited five years ago. Headline earnings per share for the five years to 30 September 2017 grew at a compound annual growth rate (CAGR) of 21%, with dividends per share growth at a CAGR of 36% since 30 September 2014.
The board welcomed two new non-executive directors in the year. Olufunke Ighodaro, appointed to the board on 1 April 2017 as an independent non-executive director, brings a wealth of business experience and chairs the group’s audit, risk and compliance committee. Olufunke has served as chief financial officer of Tiger Brands Limited and Primedia Limited. Paul Miller, a qualified corporate lawyer who built his career at the international law firm Berwin Leighton Paisner LLP, was appointed to the board on
1 July 2017. Paul has executed numerous equity capital market transactions and merger and acquisition deals during his 25-year legal career, and is also the chief executive officer of Everglen Capital Proprietary Limited. We welcome Olufunke and Paul
to the board, and look forward to their contribution to Transaction Capital’s growth.
We also welcome Theresa Palos, who was appointed as company secretary with effect from 2 March 2017. Theresa replaces Statucor (Pty) Ltd.
David Woollam and Dumisani Tabata resigned as independent non-executive directors with effect from 2 March 2017, and Moses Kgosana resigned as an independent non-executive director with effect from 8 September 2017. The board thanks these directors for their years of service to the group, and wishes them well in their future endeavours.
The annual performance evaluation of the board, conducted in November 2017, reaffirmed the effectiveness of the board in its direction of the group.
The King IV Report on Corporate Governance (King IV), released in November 2016, further advances South Africa’s leadership in corporate governance and places the spotlight firmly on ethical and effective leadership. Transaction Capital conforms to the principles contained in King IV.
In February 2017, Transaction Capital returned to the equity market for the first time since listing. In an accelerated bookbuild, the group issued 28.4 million shares, raising R419 million to create the capacity for further acquisition opportunities. The issuance was oversubscribed and predominantly taken up by institutional investors.
As management was not permitted to participate in the bookbuild, the shareholding of directors decreased from 46% to 44%. Thus, the group’s free float percentage is now at 56% (2016: 54%), with its institutional shareholding and foreign ownership increasing to 31% (2016: 28%) and 6% (2016: 3%) respectively.
The implementation of the Transaction Capital Limited Conditional Share Plan (CSP) was approved by shareholders on 20 October 2016.
The CSP strengthens Transaction Capital’s ability to attract and retain key employees while providing them with the opportunity to share in the success of the relevant division in which they are employed, and creates alignment between their interests and that of shareholders. The remuneration report provides further detail on the CSP.
The dividend policy has been amended to a reduced cover ratio of 2 to 2.5 times (previously 2.5 to 3 times). This change has been implemented due to the improved quality of earnings as evidenced by high cash conversion rates and lower balance sheet risk, the stable capital requirements of the group and the ungeared net position of the holding company. All of these factors allow for a higher sustainable dividend pay out going forward.
Following the interim dividend of 15 cents per share (2016 interim: 12 cents per share), and in line with the new dividend policy, the board has declared a final gross cash dividend of 25 cents per share (2016: 18 cents per share) for the six months ended
30 September 2017.
Transaction Capital owns businesses that operate in highly specialised and under-served segments of the South African and Australian financial services market. Its market-leading divisions, SA Taxi and Transaction Capital Risk Services, led by entrepreneurial and experienced management teams, represent a diversified and scalable financial services platform, underpinned by a mature governance framework. The divisions leverage their proprietary data and technology to create value for their customers. Positioned deliberately in relation to demographic and socio-economic realities, they deliver both commercial returns and social benefits.
Despite persistent challenges in the economic environment, these defensive businesses continue to deliver strong performance and high-quality earnings.
I extend my appreciation to the group’s leadership for providing strategic clarity and direction, and for the dedication and commitment of its more than 4 000 employees. My thanks also extend to the board for ongoing guidance and insight, and the group’s bankers, funders and advisers for their continued support.
THE BOARD OF DIRECTORS OF TRANSACTION CAPITAL IS THE FOCAL POINT OF ITS CORPORATE GOVERNANCE FRAMEWORK. THE GROUP FOLLOWS A STAKEHOLDER-INCLUSIVE APPROACH TO GOVERNANCE, WITH THE BOARD BEING ULTIMATELY RESPONSIBLE AND ACCOUNTABLE TO STAKEHOLDERS FOR THE PERFORMANCE, ACTIVITIES AND CONTROL OF THE GROUP.
The King IV Report on Corporate Governance for South Africa was released on 1 November 2016 and is effective for financial years commencing from 1 April 2017. In line with the JSE Listings Requirements, Transaction Capital has transitioned to the new code, as encouraged. King IV advocates an outcome-based approach and defines corporate governance as the exercise of ethical and effective leadership towards achieving the following governance outcomes:
The board is committed to complying with legislation, regulations and best practices relevant to the group. The board regards the process of assessing and monitoring adherence to adopted governance standards as dynamic and endeavours to continually improve governance structures within the group. This is aligned with the aspirational nature of the King IV principles.
The governing body should lead ethically and effectively.
The board maintains a high level of individual and collective responsibility, accountability, fairness and transparency, which together drive a culture of risk awareness, ethical behaviour and value creation.
The board is responsible for the strategic direction of the group, which it considers in conjunction with the group’s values and ethics charter. The group’s values provide the foundation for effective and ethical leadership, and are the basis for all deliberations, decisions and actions at board level and within every area
of the business.
BOARD OF DIRECTORS
The board provides effective and responsible leadership based on an ethical foundation by directing strategy and operations in a way that supports sustainable business, while considering the short- and long-term impacts on society, the environment and stakeholders, as per the group’s sustainability policy.
The board acts as the custodian of governance and has approved a formal charter that sets out its responsibilities in this regard. The board is responsible for appointing the chief executive officer (CEO) and for monitoring his management of the performance of Transaction Capital’s assets and resources against approved strategic and financial objectives.
The board delegates specific responsibilities to appropriately mandated and constituted sub-committees, set out on page 79 in the PDF download version of this section.
The audit, risk and compliance (ARC) committee and the social and ethics committee both fulfil the statutory governance requirements on behalf of Transaction Capital and its divisions.
DETAILS OF RISK CATEGORIES MANAGED BY THE BOARD SUB-COMMITTEES ARE INCLUDED IN THE RISK REPORT.
Organisation values, ethics and culture
The governing body should govern the ethics of the organisation in a way that supports the establishment of an ethical culture.
Transaction Capital’s ethics charter outlines the group’s core values of integrity, respect, excellence and innovation. In addition, it describes Transaction Capital’s guiding business principles that direct all business dealings within the group, by employees and with other stakeholders. As an ethical roadmap for the group, the ethics charter requires all group operations to conduct business with honesty and integrity, and in accordance with the highest legal and ethical standards.
The CEO is the custodian of the charter, and is assisted by the group’s ethics officer. The board reviews the charter annually.
Transaction Capital maintains an independent whistle blowing hotline operated by an external service provider. Reports can be made anonymously through the hotline and are directed to the group ethics officer for investigation or escalation. In addition, reporting of unethical or fraudulent behaviour to line management and the respective human resources departments of the group’s businesses
is encouraged. This is reported on in the social and ethics committee meetings as well as the relevant board meetings.
Responsible corporate citizenship
The governing body should ensure that the organisation is and is seen to be a responsible corporate citizen.
Responsible corporate citizenship is integrated into the group’s strategy, and its principles underpin all key aspects of the business.
Ultimate responsibility lies with the board, with oversight vested in the social and ethics committee and the ARC committee.
The social and ethics committee monitors targets and measures many of the aspects listed under the King IV practices (including employment equity, fair remuneration, equal work for equal pay, safety, health, economic transformation, public health and safety, consumer protection, community development and protection of human rights). The ARC committee is responsible for the prevention, detection and response to fraud and corruption. It is also responsible for tax policy.
The sustainability policy governs interactions with the group’s stakeholders. Stakeholder engagement takes place at all levels, across the subsidiaries and group. The sustainability policy has been approved by the board and adopted by the group.
In addition, the ARC committee oversees the preparation of the integrated report, with certain sections being reviewed by the external and internal auditors where appropriate.
Each division’s societal relevance is core to achieving the group’s strategic objectives.
FURTHER DETAIL ON THE SOCIETAL RELEVANCE OF TRANSACTION CAPITAL’S DIVISIONS.
Strategy, implementation and performance
The governing body should appreciate that the organisation’s core purpose, its risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process.
The board has set out its mission, strategy and associated risks in this integrated report, with Transaction Capital’s core values . In directing strategy, the board considers the risks and opportunities related to the context in which the group operates, to create value for all stakeholders.
The board has delegated the formulation and implementation of group strategy to management with the required input from the board. The board has approved the group strategy along with key performance criteria and targets for management to assess the implementation of the group strategy.
The ARC committee assists the board with the governance of risks, as detailed in the committee’s terms of reference. The board assesses the overall viability of the company with regards to its reliance and effects on capital, solvency and liquidity, and its status as a going concern.
Reports and disclosure
The governing body should ensure that reports issued by the organisation enable stakeholders to make informed assessments of the organisation’s performance and its short-, medium- and long-term prospects.
The board has approved the group’s strategy, together with its risks and opportunities, which are all included in this integrated report. The integrated report enables stakeholders to make an informed decision about the group’s direction.
Based on the recommendation of the ARC committee, the board approves the annual financial statements, the integrated annual report and any other reports published by the company.
Role of the governing body
The governing body should serve as the focal point and custodian of corporate governance in the organisation.
The board of directors of Transaction Capital is the focal point of its corporate governance framework. The group follows a stakeholder-inclusive approach to governance, with the board being ultimately responsible and accountable to stakeholders for the performance, activities and control of the group.
The board has adopted the board charter and approves board sub-committee terms of reference and group policies. The board charter and group policies regulate how the board conducts itself in the best interest of the company and its stakeholders, taking into account the principles of good corporate governance and legislation.
Annual reviews are conducted as part of the board’s work plan.
The board charter provides for obtaining independent, external professional advice and for non-executive directors to set up meetings with management, where necessary.
SEE PRINCIPLE 1 FOR MORE DETAIL
Transaction Capital’s governance and compliance framework facilitates the board’s role of providing direction and oversight. It sets a high level of accountability to support consistent compliance with regulatory requirements and the group’s risk appetite, and at the same time encourages an entrepreneurial mindset as a key driver
Each of Transaction Capital’s divisions has its own board of directors, with each division’s governance processes aligned to Transaction Capital’s governance framework, thereby appropriately allocating various levels of authority to individuals and committees
throughout the group structure. The activities of each division’s board include reviewing and providing input on the corporate strategy, business plans, risk propensity, budgets and sustainability. The strategies, business plans and performance criteria for each division are clearly defined, with appropriate key performance indicators in place to measure and monitor performance against their strategies.
Composition of the governing body
The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively.
The board, in conjunction with the nominations committee, assesses the composition and membership of the board and board committees holistically on an annual basis.
The non-executive directors bring independent judgement and experience to the board’s deliberations and decisions. Non-executive directors are chosen based on the appropriateness of their business skills and expertise to the strategic direction of the group. The nominations committee and the board take into account the diversity of academic qualifications, technical expertise, industry knowledge, experience, business acumen, race and gender when board appointments are considered. No one individual or group of individuals has unfettered powers of decision-making.
In addition, Transaction Capital supports the principles and aims of gender diversity at board level. The group has adopted a gender diversity policy with a voluntary target of employing at least two female directors at board level, which was met in the reporting period. The nominations committee will assess the set targets and fulfilment thereof annually.
Based on its most recent assessment performed in November 2017, the board, together with the nominations committee, is satisfied that the board’s composition reflects the appropriate mix of knowledge, skills, experience, diversity and independence.
In terms of their fiduciary duties, directors should act independently in exercising their judgement and fulfilling their duties, and should not have their discretion fettered in any way. This requires that directors apply their minds honestly and make decisions in the best interest of the organisation on all matters presented to the board.
Directors do not participate on matters in which they may be conflicted. The notion of the independence of directors is also a structural issue that considers their relationship to other parties in assessing their independence. The independence of non-executive directors is assessed annually.
All committees have fully functional structures, with clear objectives set out in their respective terms of reference. Through the chairman of each committee, the committees report back to the board at each board meeting. The committees also report to stakeholders annually as required (be it in the integrated report and/or at the annual general meeting (AGM)).
The composition of each division’s board includes non-executive directors, some of whom may be executive or non-executive directors of Transaction Capital. Directors of these boards are of sufficient calibre, experience, diversity and number for their views to carry significant weight in the decisions of the group and divisional CEOs.
Appointment and induction process
The nominations committee assists in identifying suitable board members, and performs background and reference checks prior to their appointment.
New directors are introduced to Transaction Capital through a formal induction programme, which is the responsibility of the company secretary and/or financial director, and consists of an information pack, detailed discussions on the environment and operations of each of the major businesses, and site visits. Formal induction processes were fulfilled for all director appointments during the period.
Directors are encouraged to take independent advice, where necessary, for the proper execution of their duties and responsibilities.
This is done at Transaction Capital’s expense, after consultation with the chairman. In addition, directors have unrestricted access to the group’s auditors and professional advisers, and to the advice and services of the company secretary.
After advising the CEO of their intention to do so, directors may attend any committee or subsidiary board meeting, and have unrestricted access to any executive, manager or employee in the group as well as to any information generated by the group.
In addition, the company provides training to directors, as required.
BOARD APPOINTMENTS, EVALUATIONS AND PROCESSES
Transaction Capital’s board comprises of the following members:
Independent non-executive directors
THE BIOGRAPHIES OF GROUP DIRECTORS ARE PROVIDED IN THE DIRECTORATE SECTION
This year, Christopher Seabrooke, David Hurwitz and
Mark Herskovits will retire by rotation and are standing for re-election at the AGM. These directors have been appraised by the board and their re-election is recommended. In addition, those directors appointed during the year will also be nominated for election as directors.
Christopher Seabrooke is the independent non-executive chairman of the Transaction Capital board and is responsible for leading the board in fulfilling its mandate. The offices of chairman and CEO are separate. The board appoints the chairman from among its members annually and, together with the nominations committee, is responsible for the succession plan of the chairman. The chairman’s performance is reviewed as part of the board’s annual assessments, the result of which showed that the chairman leads ethically and effectively.
Chief executive of officer
David Hurwitz is the group CEO, responsible for the leadership of Transaction Capital and the implementation of the strategies, structures and policies adopted by the board. The board appoints the CEO and sets the terms of his employment contract.
The board and its sub-committees have delegated authority to the CEO and management in line with the approved authority framework. Each year during November, the chairman and company secretary facilitate a formal performance appraisal of the CEO comprising an evaluation by each director. In addition, the CEO’s employment contract is assessed for adequacy on an annual basis.
Ronen Goldstein is the financial director of Transaction Capital and is responsible for reporting on Transaction Capital’s financial performance. The ARC committee and the board are satisfied with the financial director’s qualifications, experience and competence to fulfil this role. The finance function was assessed as adequate by the ARC committee for the full financial period.
With effect from 2 March 2017, Theresa Palos replaced
Statucor (Pty) Ltd as company secretary. The board is satisfied with the qualifications, experience and competence of Theresa Palos.
All directors have access to the services and advice of the company secretary, who supports the board as a whole and the directors individually in fulfilling their duties.
The company secretary is required to fulfil duties under the Companies Act and the JSE Listings Requirements, and to ensure that appropriate procedures and processes are in place for board proceedings. The company secretary is a resource in the group on governance, ethics and legislative changes. The company secretary is entitled to obtain independent advice to achieve these objectives.
The board has assessed the company secretary function as adequate and is satisfied that an arm’s length relationship is maintained.
Directors are required to attend all board meetings. The board follows a formal work plan that includes strategy, operational and financial performance, risk and governance. Progress against the group’s strategic objectives is reported on at each meeting.
The company secretary is responsible for circulating the agenda and other meeting papers in good time. Formal board papers are prepared for each item on the meeting’s agenda, including reports by the executive office. At least four board meetings are held annually, one of which includes a strategic review.
The nominations committee is responsible for formulating the formal succession plans of the board, the CEO and the CEO’s direct reports. The committee reviews these succession plans annually. On approval of the succession plans, the CEO conducts alignment discussions with potential successors, where necessary, which may result in direct development interventions.
Committees of the governing body
The governing body should ensure that its arrangements
for delegation within its own structures promote independent judgement, and assist with balance of power and the effective discharge of its duties.
A delegation of authority is in place for board sub-committees. Board sub-committees have terms of reference, which are reviewed annually.
The governance function of the board sub-committees is outlined in the respective approved committee terms of reference.
Included in each committee’s terms of reference is the imperative to enhance the standard of governance within the group, together with clearly defined authority delegation and reporting procedures. The board receives formal feedback from the chairman of each committee at each board meeting. Copies of the minutes of committee meetings are included in board documentation.
To align with King IV, changes were made to committee compositions, which were effective from 1 November 2017. Paul Miller has been appointed to the remuneration committee, replacing Jonathan Jawno, and Kuben Pillay has been appointed to the social and ethics committee, replacing Ronen Goldstein.
Delegation to management
The governing body should ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, support continued improvement in its performance and effectiveness.
Assessment of the effectiveness of the board,
its committees and the company secretary
A formal performance evaluation of the board, its committees and the company secretary is conducted annually by means of an evaluation questionnaire, to review the mix of skills, performance during the year, contribution and independence of individual directors, and
the effectiveness of committees. Results of the evaluations provide
the basis for improvement of the board and its committees for the following year.
The nominations committee work plan allows for a discussion of board performance as well as that of committees, the chair and members.
Based on the annual evaluations undertaken during November 2017, the board is satisfied that:
Performance and effectiveness
The governing body should ensure that the appointment of, and delegation to, management contributes to role clarity and effective exercise of authority and responsibilities.
The board appoints the CEO and has a delegation of authority in place, in terms of which the CEO clearly leads the implementation and execution of strategy and policy, and serves as the link between the board and management. The CEO is accountable to and reports to the board. The role of CEO is clearly defined and his performance assessed by the board.
The board approves the appointment of the company secretary. Access to the company secretary and independent advice is available, where necessary.
An authority matrix is in place for the group governing the authority delegated to group management and matters reserved for decision by the board.
Annual reviews of directors, committees and the company secretary are performed.
Risk and opportunity governance
The governing body should govern risk in a way that supports the organisation in setting and achieving its strategic objectives.
Transaction Capital has a board-approved risk framework, policy, risk appetite and tolerance levels, top risks and ongoing risk oversight and monitoring.
FURTHER DISCLOSURE IS MADE IN THE RISK REPORT
Technology and information governance
The governing body should govern technology and information in a way that supports the organisation setting and achieving its strategic objectives.
The board has delegated the governance of information and technology to the ARC committee, which also ensures that an
IT governance reporting framework is in place. Chief information officers (CIOs) are appointed at each of the divisions, with the appointments ratified by the group CEO. IT expenditure is reported on and governed under the group’s authority framework.
Each subsidiary sets its own strategy with regard to technology and information, and reports thereon to its board. Disaster recovery and business continuity plans are in place for the group and are tested regularly. Compliance, information security, risk and the control environment are all dealt with within each IT team.
SEE STRATEGIC OBJECTIVE 3 THAT SETS OUT DETAILS OF TRANSACTION CAPITAL’S STRATEGY AROUND DATA AND TECHNOLOGY
The governing body should govern compliance with applicable laws and adopted standards in a way that supports the organisation being ethical and a good corporate citizen.
The ARC committee and social and ethics committee takes responsibility for compliance oversight. Board processes are in place to keep up to date with changes in the legislative landscape.
The group-wide risk framework specifically manages compliance risk, with dedicated internal compliance functions in place in the divisions.
Regulatory compliance is non-negotiable. This approach is explicitly articulated in Transaction Capital’s values and ethics charter.
The board proactively oversees the review of the group’s systems of control and governance. It also continuously recommends enhancements to ensure that each division is managed ethically,
in compliance with legislative requirements and in line with best practice governance guidelines.
Suitably qualified compliance officers are employed in the divisions, which have high levels of regulatory compliance requirements, interaction and reporting. The roles of the compliance officers are to:
Quarterly compliance reports are submitted by the divisions to the group legal and compliance function, which in turn prepares a consolidated compliance report that is submitted to the ARC committee for consideration.
The divisions actively engage with legal counsel to garner advice on the application and implementation of any proposed new legislation, as well as potential effects on their respective businesses. No fines or non-monetary sanctions for non-compliance were levied against any business in the group during the year.
Due to the nature of its businesses, the group is subject to a range of regulations and legislation including, without limitation:
Compliance with the letter and spirit of all laws, regulations and codes is required. The board, supported by the ARC committee, is responsible for keeping abreast of changes to the legislative landscape.
The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.
The remuneration committee is responsible for establishing and overseeing remuneration policy that promotes the achievement of strategic objectives and encourages individual performance at all levels within the group.
Shareholder approval is required for the remuneration policy and its implementation, and the non-executive directors’ fees.
Remuneration consists of base pay and short- and long-term incentives that are deemed to adequately remunerate executives while aligning executives with the requirements of shareholders.
DETAILS OF THE REMUNERATION POLICY AND ITS IMPLEMENTATION ARE SET OUT IN THE REMUNERATION REPORT
The governing body should ensure that assurance services and functions enable an effective control environment, and that these support the integrity of information for internal decision-making and of the organisation’s external reports.
The ARC committee is responsible for monitoring the appropriateness of the combined assurance model and applies a co-ordinated approach to all assurance activities. This includes considering the objectives of combined assurance and assessing its effectiveness.
In addition, the ARC committee considers the robustness of the combined assurance model in order to place reliance thereon.
The ARC committee oversees the internal audit function and the external audit function. The ARC committee is satisfied that the external auditor remains independent of the organisation and the group has a policy in place to address the provision of non-audit services by the external auditors.
The ARC committee considers the financial reporting procedures that are in place and whether these procedures are operating effectively.
The purpose, authority and responsibility of the internal audit function are defined in the internal audit charter, which is aligned with the requirements of the International Standards for the Professional Practice of Internal Auditing.
The group internal audit executive reports administratively to the Transaction Capital CEO and functionally to the ARC committee chairman. Internal audit has remained independent of all operational functions.
The role of internal audit is to support the achievement of strategic objectives (and the supporting operational, financial and compliance objectives) through a systematic, disciplined approach to evaluating and recommending improvements that serve to increase the effectiveness of internal controls, risk management and governance processes. The annual internal audit plan is based on an assessment of risk areas identified by internal audit and management, and is updated as appropriate to ensure it is responsive to changes in the business. An independent quality review on internal audit was conducted during 2016, and the internal audit function was found to generally conform to the International Standards for the Professional Practice of Internal Auditing, which is the highest rating awarded during such a review.
In accordance with Transaction Capital’s combined assurance model, internal audit continues to liaise with external audit and other identified assurance providers to effectively assure against key risks.
In the execution of its governance role and responsibilities, the governing body should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time.
Transaction Capital’s sustainability policy governs the relationship with stakeholders, with the board and social and ethics committee assuming responsibility for stakeholder engagement.
Engagement with stakeholders is considered and discussed at divisional and group board level. Group-wide stakeholder engagement is reported on at each social and ethics committee meeting, the minutes of which are included in the board packs ahead of quarterly board meetings. A stakeholder engagement report is submitted to divisional and group boards bi-annually. The divisions have detailed stakeholder engagement plans in place and report on these to their boards.
SEE THE RISK REPORT THAT SETS OUT DETAILS ON THE RELATIONSHIP WITH KEY STAKEHOLDERS
Download the full governance report including all the principles
Transaction Capital defines risk as uncertain future events that could influence its ability to achieve its objectives.
Risk is quantified by the combination of the probability of an event occurring and the consequence thereof. Risk is a condition in which the possibility of loss is inextricably linked to uncertainty. Thus, a detailed framework for managing risk is required to facilitate rational decision-making under uncertain circumstances.
Risk management entails the deliberate planning, arranging and controlling of activities and resources to minimise the negative impact of all risks to tolerable levels, and to maximise potential opportunities and positive impacts of all risks in the pursuit of achieving the group’s strategic objectives.
Risk tolerances on key performance and strategic metrics are determined by each of the group’s divisions and approved and monitored by the ARC committee.
In terms of the enterprise-wide risk management framework, the board itself retains responsibility for monitoring reputational and sustainability risk. The monitoring of all other risks is assigned to sub-committees with continuous board oversight, in line with the overall governance structure.
The risk framework specifically identifies the risk categories that comprise the group’s risk universe. These risk categories, and the respective committees to which oversight responsibility is mandated.
TOP RISKS ARE IDENTIFIED THROUGH THE ENTERPRISE RISK MANAGEMENT (ERM) PROCESS. THE GROUP’S TOP RISKS, MITIGATING ACTIONS AND RELATED STAKEHOLDER CONCERNS ARE AS FOLLOWS:
A dedicated capital markets team is focused on managing the group’s funding requirements, including a diversified fundraising strategy and applying a focused strategy to each funding source. The group’s funding strategy seeks to diversify funding sources on the basis of:
Quarterly asset and liability committee (ALCO) meetings provide rigorous monitoring and oversight of concentration, roll-over, interest rate, counterparty, liquidity and regulatory risks. ALCO has approved and established policies and tolerances to manage these risks, while providing the flexibility needed to maintain agility in responding to changing economic and business conditions.
The above-mentioned measures have led to SA Taxi fulfilling its annual debt requirements for the 2018 financial year, and Transaction Capital Risk Services (TCRS) raising adequate funding facilities to fund its book buying aspirations.
Over R500 million of capital was deployed in accretive acquisitions during the year, generating diversified revenue streams by product and geography.
R419 million was raised in an oversubscribed accelerated bookbuild, providing the capacity and flexibility for further acquisitions.
Rigorous investment criteria are adhered to (see risk 2 and 3 that follow), with active treasury management of excess funds.
Acquisitions are assessed against Transaction Capital’s acquisition strategy and stringent investment criteria.
The board applies its collective mind to the funding of acquisitions to ensure an appropriate combination of debt and equity funding to maintain appropriate risk-adjusted returns.
In addition, appropriate board approval is required to conclude transactions. Rigorous implementation processes ensure that Transaction Capital’s governance and reporting requirements are adequately met, the progress of which is monitored by the divisional and group boards.
Transaction Capital executives are actively involved in the management and ongoing affairs of acquisitions after a transaction is completed.
In line with the strict acquisition criteria discussed under Risk 2, the group’s recent acquisitions have been ROE accretive.
In addition, recent acquisitions have diversified the revenue and earnings streams of the group, both from a geographic and product perspective.
The group continues to actively pursue various organic and acquisitive growth opportunities.
Ongoing engagement with regulators and appropriate representation on industry bodies is maintained to gain an early understanding of proposed legislation and position Transaction Capital appropriately for change.
Compliance functions are embedded within the divisions that have high levels of regulatory compliance requirements, to act as a resource for regulatory compliance information and provide guidance to avoid regulatory breaches.
The group legal function partners with the divisions to provide guidance on the interpretation of legal and regulatory requirements, and facilitates the process of obtaining independent views from attorneys and senior counsel, where doubt exists in the interpretation of regulatory requirements.
Mitigation efforts have resulted in Transaction Capital being largely unaffected by regulatory developments.
Operational initiatives include:
Management engages regularly with relevant parties in the public sector to ensure compliance with agreement terms.
SA Taxi is strategically positioned to deepen its vertical integration into its current market segment while leveraging its existing competencies. This includes expanding its direct sales retail channel, enhancing its telematics services and expanding its insurance offering.
SEE SA TAXI’S DIVISIONAL REVIEW, WHICH INCLUDES THE Q&A WITH TERRY KIER, FOR MORE INFORMATION ON HOW IT IS EXPANDING BEYOND THE FINANCING OF MINIBUS TAXIS
Key risks are those risks that require specific and ongoing operational, governance and strategic management. Key risks are different from top risks as they are anticipated to be ongoing due to the strategy and business model of the group, while top risks are identified through the ERM process.
Transaction Capital’s key risks are as follows:
IFRS 9 was early adopted in the 2015 financial year, resulting in a higher quality of earnings due to a more conservative provisioning methodology against loans and advances, and the amortisation profile of purchased book debts being better aligned with the collection profile. This early adoption has reduced balance sheet risk for Transaction Capital and removed uncertainty relating to the implementation of IFRS 9 on future financial results and ratios.
The loss allowance for a financial instrument is measured at the lifetime expected credit losses if the credit risk on that financial asset has increased significantly since initial recognition. If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the group measures the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses. Purchased NPL portfolios are considered credit-impaired assets that are specifically impaired (stage 3) and are measured using lifetime expected credit losses from the onset. These assets remain in stage 3 for the duration of the financial instrument.
Loan portfolios are divided into performing loans and NPLs. As the group’s assets are developmental in nature, in terms of the traditionally under-served market segments it lends to, a higher than average level of arrears is expected, which may not necessarily result in credit loss. The group’s impairment provision models take into account both contractual default and recent payment history.
Provisions are held against financial assets to cover expected losses in terms of IFRS 9.
At group level, credit risk is monitored by the ARC committee, while SA Taxi and Transaction Capital Business Solutions (TCBS) have
their own credit committees responsible for credit risk (of which membership includes group executives), which meet at least quarterly.
Aspects of credit risk that are monitored include changes to origination strategies, new business approvals, and collections strategy and performance.
While SA Taxi exclusively services the minibus taxi industry, it has limited exposure to a single counterparty, with the largest exposure to a single borrower being negligible as a percentage of assets exposed to credit risk.
Credit risk is managed operationally at the time of origination and in terms of collections thereafter. TCR has entered into a collection agreement with various public sector counterparties. Public sector finances are generally in a poor state, making it a class of counterparty that needs to be managed closely to ensure payments are received timeously.
The credit loss ratio of 3.2% remained at the bottom end of the division’s risk tolerance of 3% to 4%, and the NPL ratio improved to 17.1% from 17.4%. A combination of strong collection performance, high credit quality of loans originated in the retail dealership, conservative credit granting criteria and the ability to refurbish and re-sell high quality vehicles supported this improvement.
Enhancing the value of vehicles through refurbishment enables
SA Taxi to recover more than 73% of loan value on the sale of repossessed vehicles. The division operates the largest minibus taxi repair facility in Africa, and the average cost to repair repossessed vehicles was reduced further in the year. This was due to efficiencies achieved in the combined auto body repair and mechanical refurbishment centre. Due to fewer NPLs, the reduced average cost to repair repossessed vehicles and higher recoveries on the re-sale of these vehicles, provision coverage reduced to 5.2%. At this level, SA Taxi’s after tax credit loss remains conservatively covered at 2.3 times.
The business continues to rely on Toyota minibus taxis for new vehicle originations, thus potential shortages of these vehicles presents a risk. The dominance of Toyota supports a stable market value for the sale of repossessed refurbished vehicles, which underpins SA Taxi’s credit model. While SA Taxi’s market share of Toyota minibus originations is steadily increasing, SA Taxi is implementing various initiatives in increasing its quota of new vehicle sales.
SA Taxi is also continually diversifying its product lines to counter the reliance on Toyota minibus taxis, including working with Nissan and Mercedes, with the Mercedes Sprinter mainly used for long-distance routes, to ensure their minibus taxi vehicle market is sustainable, and increasing the supply of repossessed refinanced (i.e. pre-owned) Toyota minibus vehicles to meet supply shortfalls.
The current economic climate and TCRS’ data, scale and capital position favour the acquisition of NPL portfolios in South Africa from risk averse clients who prefer an immediate recovery against their NPLs.
TCRS acquired 29 portfolios with a face value of R5.2 billion for R356 million during the year. TCRS now owns 195 principal portfolios with a face value of R12.2 billion, valued at R891 million at 30 September 2017.
Liquidity risk in the group is primarily controlled through cash-flow matching. This is achieved through setting the duration and repayment terms of debt facilities at the time of issue to suit the projected cash inflows from assets, and through careful monitoring and management of the maturity of debt that has a lump-sum payment due at maturity, where these exist.
The positive liquidity mismatch graph included in the capital management report on page 66 illustrates a liquidity mismatch favourable to debt investors, where asset receipts occur in advance of debt payments, resulting in reduced liquidity risk.
The group’s funding strategy is directed by the funding requirements established in the divisional budgets and forecasts, and approved by the divisional and group boards. The capital markets team is mandated to raise sufficient capital, taking into account business needs, the specific demands and the state of the debt markets, and the requirements of debt investor mandates. This results in a well-diversified funding base.
SEE THE Q&A WITH MARK HERSKOVITS, EXECUTIVE DIRECTOR: CAPITAL MANAGEMENT, FOR MORE DETAIL ON DIVERSIFICATION BY BOTH FUNDING CATEGORY AND FUNDING STRUCTURE
Equity capital is raised at group level where necessary, and then allocated to the divisions based on the capital requirements for each funding structure. Goodwill is not included in assets and is deducted from capital in line with market practices when calculating the capital adequacy ratio.
During the year under review, Transaction Capital deployed in excess of R500 million to three acquisitions. In February 2017, the group raised R419 million in an accelerated bookbuild process. The group’s balance sheet remains well capitalised, liquid and ungeared (on a net basis). With excess capital of around R650 million, the group has the flexibility for immediate cash settlement of any future acquisitions.
In addition, the dividend policy has been amended to an improved cover ratio of 2 to 2.5 times (previously 2.5 to 3 times).
SEE THE CHAIRMAN’S REPORT FOR MORE INFORMATION ON THE REVISED DIVIDEND POLICY AND THE DIVIDEND DECLARATION
The cost of borrowing increased in the year under review due to a meaningful proportion of funding being raised from international investors (in line with the group’s strategy to diversify its funding sources), offset to an extent by a decrease in the repo rate.
Loans denominated in foreign currency are all fully hedged as Transaction Capital does not take exchange rate risk. The associated hedge costs have contributed to the increase in the cost of borrowing.
No forward cover has been taken on foreign exchange movements arising from Recoveries Corporation’s earnings.
The group’s general interest rate risk management strategy is to match the re-pricing characteristics of assets to liabilities; thus, if a division originates floating-rate assets, it should issue floating-rate debt or hedge accordingly.
However, each division can deviate from this policy, subject to ALCO approval. In this instance, ALCO reviews the decisions of management and can exercise its discretion to change these decisions if it considers the risk to be out of line with the group’s risk tolerance and interest rate forecast. Strategies, including hedging, are used to limit losses arising from interest rate basis risk or to take advantage of structurally low rates. Hedge accounting is applied to remove unnecessary volatility from the income statement.
Furthermore, the group typically manages interest rate risk through risk-adjusted excess spread, where asset yields are sufficient to absorb movements in interest rates, as well as interest rate risk strategies.
The group prepares an interest rate forecast quarterly that is approved by ALCO and is used for budgets, forecasts and interest rate decision-making purposes. ALCO monitors the sensitivity of the group’s net interest income in response to a parallel yield curve shift. Hedges are considered where undue volatility in earnings can materialise.
The group invests heavily in information technology to ensure that its businesses are efficient and to reduce the risk of disruption.
SEE THE Q&As WITH TERRY KIER AND DAVID MCALPIN FOR FURTHER DETAILS IN THIS REGARD
People risk relates to the risk of inadequate management of human capital practices, policies and processes, resulting in the inability to attract, manage, develop and retain competent resources. People risk management includes recruitment procedures for screening employees, training and change management programmes, and human resource and succession planning policies.
The group’s human capital statistics and policies are reviewed by the social and ethics committee. Succession planning is performed by each division, with the nominations committee (and ultimately the board) reviewing succession plans at least annually.
SEE THE REMUNERATION REPORT FOR MORE INFORMATION ON THE GROUP’S REMUNERATION POLICY AND IMPLEMENTATION
Transformation risk is monitored by the social and ethics committee, as well as the divisional and group boards.
Compliance risk is monitored by the ARC committee. Each division with high levels of regulatory compliance requirements has a suitably experienced compliance officer, who has identified the relevant regulations and similar standards applicable to that specific division.
SEE THE GOVERNANCE REPORT FOR APPLICABLE LEGISLATION
The group retains central legal advisory resources while compliance governance levels at each business remain appropriate. Ongoing engagement with regulators and appropriate representation on industry bodies is maintained to gain early understanding of proposed legislation and to appropriately position the group for change.
Download the full risk report
These principles are reflected in Transaction Capital’s fifth strategic objective, which emphasises the group’s commitment to investing in human and intellectual capital. This investment is informed firstly by the view that in every field of endeavour there is a normal distribution of talent, and secondly that the performance and sustainability of Transaction Capital will correlate highly with where its employees rank within that distribution.
Put simply, the better Transaction Capital’s people, the better the company.
Attracting and retaining high-calibre talent depends on providing both intrinsic and extrinsic rewards. While this remuneration report deals with the latter, intrinsic rewards are reflected in Transaction Capital’s employee value proposition, which strives to provide talented individuals with good leadership, personal development and support, and meaningful work in an intellectually stimulating environment. To complement this, compensation policies are directed at sustaining a performance-driven culture where the most talented people at all levels consider Transaction Capital and its divisions an employer of choice.
Principle 14 of the King IV report states:
“The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.”
Transaction Capital has considered the impact of King IV, as well as the JSE Listings Requirements, and has updated the remuneration report to align with the enhanced disclosure requirements. The board of directors approved the remuneration report and believe that the performance criteria that are used to measure and determine short- and long-term incentive awards are aligned with Transaction Capital’s goals, strategies and outcomes.
REMUNERATION COMMITTEE COMPOSITION
The board of directors of the company has ultimate responsibility for the appropriateness of remuneration policies and executive remuneration. The board has delegated oversight of this responsibility to the group’s remuneration committee, which comprises the following non-executive directors, the majority of whom are independent:
It is with this in mind that a well-designed remuneration policy strikes a balance between the interests of shareholders and executives, and the principles of good governance. The remuneration committee assesses the mix of fixed remuneration, variable remuneration and long-term incentives to meet the group’s needs and strategic objectives, in addition to reviewing the robustness of incentive schemes in ensuring continued contribution to shareholder value.
It is the responsibility of the remuneration committee to oversee that the implementation and execution of the remuneration policy achieves its objectives.
PRINCIPLES OF REMUNERATION
The following overarching principles are applied to remuneration:
At the 2016 annual general meeting, 94.2% of shareholders voted in favour of the group’s remuneration policy. No significant changes in the remuneration policy have occurred in the current year.
The group’s remuneration policy and the implementation thereof will be placed before shareholders for consideration and approval under the terms of separate advisory non-binding votes at the annual general meeting as recommended by King IV and prescribed by the
JSE Listings Requirements.
In the event that 25% or more of the votes cast are recorded against either the remuneration policy resolution or the remuneration implementation resolution, or both, then pursuant to paragraph 3.91 of the JSE Listings Requirements, the company will extend an invitation to dissenting shareholders to engage with the company to discuss the reason for their dissenting votes.
Download the full remuneration report