shaping success - john keells holdings plc, sri lanka · 26 john keells holdings plc | annual...

This section introduces the Board of Directors and Senior

Management Committees that oversee the Group of

Companies. It also offers a detailed analysis of the John

Keells Group governance framework; the mandatory

requirements complied with as well as the Group’s own

internal benchmarks of good governance.

21 Board of Directors • 23 Group Executive Committee • 24 Group Operating Committee • 26 Corporate Governance Commentary

G O V E R N A N C E

Shaping Success

26 John Keells Holdings PLC | Annual Report 2016/17

Corporate Governance Commentary

Executive SummaryThe corporate governance framework at John Keells Holdings PLC (JKH) is built on the core principles of accountability, participation and transparency and is the bedrock for the creation, enhancement and maintenance of a sustainable business model. It has been institutionalised across all levels through a strong set of Corporate Values, a written Code of Conduct, a well articulated Operating Model and a proven Performance Management System and is designed to be a working structure for principled actions, effective decision making and appropriate monitoring of both compliance and performance.

Against this backdrop, the Group confirms that it is fully compliant with all the mandatory provisions of the Companies Act, Listing Rules of the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission of Sri Lanka Act (SEC) and all

other legislation and rules applicable to the businesses of the Group. Further, the Group’s practices are in line with the Code of Best Practices on Corporate Governance jointly advocated by the SEC and the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). All systems and procedures are continuously reviewed to provide transparency and accountability, and as such, are continuously updated to adhere to the stipulated guidelines.

The ensuing sections will describe in greater detail, where material and relevant, the components of the JKH Corporate Governance System; the mechanisms in place to ensure strict adherence to the Group’s governance policy and gain assurance of its disciplined application and effectiveness, and an outlook and summation of the emerging challenges in the area of corporate governance.

Highlights of the 37th Annual General Meeting held on 24 June 2016

• Mr. R Peiris, who retired in terms of Article 84 of the Articles of Association of the Company, was re-elected as a Director of the Company

• Mr. A Omar, who retired in terms of Article 84 of the Articles of Association of the Company, was re-elected as a Director of the Company

• Ernst & Young were re-appointed as the External Auditors of the Company

This Corporate Governance Commentary is available on our corporate website at www.keells.com/governance

• Plans of succession of the Deputy Chairman, and the Group Finance Director, who retire at the end of December 2017, and the Chairman, who retires at the end of December 2018, were announced in November 2016

• Plans of succession of various Key Management Personnel who are due to retire by the end of the calendar year 2018 were announced in February 2017

• In line with the Group’s digitisation initiatives, as elaborated in last year’s Report, the Group businesses invested in information technology systems. As a step towards supporting the digitisation drive, the Strategic Group Information Technology division of the Group revamped its service offerings for the financial year 2016/17. The “John Keells X - Open Innovation Challenge 2016” was also launched, as part of a broader digitisation drive with the aim of providing a platform for innovative ideas that can disrupt traditional business models and open new avenues for enhancing customer experiences

• The Group Business Process Review division implemented a digital forensic tool, Forestpin, to analyse transactional data from key systems using techniques such as standard deviations, Z-scores, and time series analysis in detecting outliers and raising alerts for management actions and responses. It further serves to enhance the internal audit function by providing a platform for regular management reporting around existing processes and controls that safeguard stakeholder interest for improved assurances

• The Group has embarked on the first steps of the “Framework for Improving Critical Infrastructure Cybersecurity” as developed by the National Institute of Standards and Technology (NIST) in addressing cyber risks. Approval has been received, and funds have been allocated, to address security in a systematic manner, within a culture of enhanced security awareness, to facilitate an environment which supports the Group’s ongoing digitisation initiatives. The Group is in the process of establishing

a Managed Security Operations Centre (MSOC). This will strengthen our present layered security filters and ensure that our critical IT assets, concentrated in our data centers and cloud platforms, are optimally protected from cyber threats and intrusions

• A new automated, centralised procurement platform was implemented to assist in enhancing the sourcing, contracting and supplier management initiatives

• The Group engaged a global software company, to provide a software solution for its Enterprise Risk, Audit and Incident Management processes. As the system offers real-time and online visibility of the risks and audit framework across the companies within the Group, this platform will enable the Group to move towards a digitally driven internal audit function

Key corporate governance initiatives undertaken at JKH for the year 2016/17

In order to ensure a clear dissemination of information, a two-tier structure has been employed in authoring this Commentary. As such, key details with regard to the JKH corporate governance framework will be discussed in the ensuing sections, whilst, detailed regulatory related information will be discussed in the compliance tables that follow this Commentary.

27Group Highlights | Governance | Management Discussion & Analysis | Financial Statements | Supplementary Information

The diagram above depicts the key components of the JKH Corporate Governance System and their inter-linkages. The Corporate Governance Commentary is broadly sequenced in keeping with this diagram as follows:

Internal Governance StructureSection 1 of this Commentary - Internal Governance Structure, discusses and contains information about the committees which formulate, execute and monitor strategies, initiatives, policies and processes, and procedures employed throughout the Group.

The Corporate Governance SystemJKH Corporate Governance System within a Sustainability Development Framework

Integrated Governance Systems and ProceduresSection 2 of this Commentary - Integrated Governance Systems and Procedures, discusses the overarching frameworks which govern the key functions of the Group, which support businesses in conducting their activities more effectively and efficiently in keeping with best practices and in line with ethical and transparent corporate conduct.

Assurance MechanismsSection 3 of this Commentary - Assurance Mechanisms, discusses the “bodies and mechanisms” which are employed in enabling regular review of progress against objectives, with a view to highlighting deviations and quick redress, and in providing assurance that actual outcomes are in line with expectations. Where appropriate, and relevant, best practices are sought, proposed and implemented.

LEVEL INTERNAL GOVERNANCE STRUCTURE

Board of Directors and SeniorManagement Committees

Integrated Governance Systems and Procedures

INTEGRATED GOVERNANCE

ASSURANCE MECHANISMS

Key Components

REGULATORY BENCHMARKS

GROUP

GROUP + INDUSTRY /FUNCTION

INDUSTRY /FUNCTION

SECTOR / FUNCTION / SUBSECTOR

BUSINESS / FUNCTION / BU / DEPT

Human Resources and Compensation

Committee

Nominations Committee

AuditCommittee

Chairman-CEO

Group Executive Committee (GEC)

Group Operating Committee (GOC)

Group Management Committee (GMC)

Sector Committee

Management Committee

Employee Empowerment

Senior Independent

Director

Strategy Formulation and Decision Making

Process

Human Resource Governance

Integrated Risk Management

IT Governance

Stakeholder Management and

Effective Communication

Sustainability Governance

Board Committee

Employee Participation

InternalControl

JKH Code of Conduct

ExternalControl

Ombudsperson

Companies Act No. 7 of 2007

Mandatory compliance

Related Party Transaction

Review Committee

Listing Rules of the Colombo Stock Exchange (CSE)

Mandatory compliance

Recommendations of the UK Corporate Governance Code as practicable in the context of the nature of businesses and risk profiles

Voluntary compliance

The Code of Best Practice on Corporate Governance as published by the Securities and Exchange Commission and the Institute of Chartered Accountants, Sri Lanka

Voluntary compliance

• All 4 Board Sub-Committees are chaired by Independent Directors appointed by the Board• The Chairman-CEO attends the Human Resource and Compensation Committee with the Group Finance Director and President - HR as frequent

attendees • The Audit Committee is attended by Chairman-CEO, Group Finance Director, Group Financial Controller, Head of Group Business Process Review and

External Auditors • The Group Operating Committee (GOC) acts as the glue binding the various businesses within the Group towards identifying and extracting Group

synergies and driving Group initiatives• Only the key components are depicted in the diagram due to space constraints



Regulatory and Performance BenchmarksSection 4 of this Commentary - Regulatory and Performance Benchmarks, summates, among others, the regulations which govern all JKH corporate activities from the Companies Act to the Listing Rules of the CSE and the rules of the SEC. It also indicates, where relevant, the benchmarks set for the Group in working towards local and global practices.

1. Internal Governance StructureThis section details the components that are embedded within the Group, and as a result, have an impact on the execution, and monitoring of all governance related initiatives, systems and processes. The Internal Governance Structure encompasses:

i. The Board of Directorsii. Board Sub Committeesiii. The Combined Role of the Chairman-CEO iv. Group Executive Committee, Group

Operating Committee and other Management Committees

v. Employee Empowerment

As depicted in the Governance framework, the above components in the structure are strengthened and complemented by internal policies, processes and procedures such as strategy formulation and decision making, human resource governance, integrated risk management, IT governance, stakeholder management, and effective communication.

1.1 The Board of Directors1.1.1 Board ResponsibilitiesThe Board’s key responsibilities include:

• Providing direction and guidance to the Group in the formulation of high-level medium, and long term strategies which are aimed at promoting the sustainable long term success of the Group

• Reviewing and approving annual plans, and longer term business plans

• Tracking actual progress against plans

• Reviewing HR processes with emphasis on succession planning for the top management

• Appointing and reviewing the performance of the Chairman-CEO

• Monitoring systems of governance and compliance

• Overseeing systems of internal control, risk management, and monitoring and establishing whistle-blowing conduits

• Determining any changes to the discretions/authorities delegated from the Board to the executive levels

• Reviewing and approving major acquisitions, disposals and capital expenditure

• Approving any amendments to constitutional documents

• Approving in principle the issue of JKH equity/debt securities

Key decisions made by the Board during the year under review included:

• In May 2016, the Board recommended an increase of the number of shares of the Company in issue by way of a share sub division whereby seven (7) existing ordinary shares were divided into eight (8) ordinary shares

• Increasing the dividend pay-out ratio (excluding any special dividends) by declaring higher than previously declared dividends per share in the first and second interim dividends for the financial year 2016/17, in October 2016 and February 2017 respectively

• Submission of an Expression of Interest (EOI) for the East Container Terminal of the Port of Colombo

• Consideration of a proposal from its subsidiary, John Keells Hotels PLC, to extend the head lease on the Dhonveli Island in Maldives

• Consideration of proposals from its subsidiary, Ceylon Cold Stores PLC, to construct two production facilities: an ice cream plant in the Seethawaka Export Processing Zone, and a bottling line in Ranala

• Recommendation to shareholders for the issue of share options under an Employee Share Option Plan 9, in which the shares on offer will be a maximum of 2.25 per cent of the issued shares of the Company, of which not more than 0.75 per cent will be issued annually over a period of three years

1.1.2 Board CompositionThe Group’s policy is to maintain a healthy balance between the Executive, Non-Executive and Independent Directors with the Executive Directors bringing in deep knowledge of the businesses, and Non-Executive Independent Directors bringing in experience, objectivity, and independent oversight.

As at 26 May 2017, the Board comprised of 10 Directors, with 5 of them being Non-Executive and Independent. The current Board composition will change on 31 December 2017, following the retirement of the Deputy Chairman and the Group Finance Director. Thereafter, the composition of the Board will comprise of a majority of NEDs, similar to previous years.

During the year under review, the Board membership changed as follows:

• Mr. F Amerasinghe and Mr. T Das, who are over the age of 70 years, and who have served the Company for over 9 years, did not offer themselves for re-election and accordingly ceased to be Board Directors with effect from 24 June 2016

• Dr. I Coomaraswamy resigned from the Board with effect from 3 July 2016, in order to assume duties as the Governor of the Central Bank of Sri Lanka

• Dr. H Wijayasuriya was appointed as a Non-Executive Director to the Board with effect from 4 October 2016

• In keeping with the succession plans approved by the Board, Mr. K Balendra and Mr. G Cooray were appointed as Executive Directors with effect from 5 November 2016

Accordingly, the composition of the Board as at the end of the financial year is illustrated as follows:

0 2 4 6 8 10

Designation

Gender

Age group (years)

Board tenure - Executive Directors (years)

Board tenure - Non-Executive Directors (years)

NED SID ED

MaleFemale

40-50 51-60 61-70

<5 5-20 >20

<3 3-7

29

1.1.3 Board SkillsCollectively, the Board brings in a wealth of diverse exposure in the fields of business, finance, economics, banking, marketing, tax, IT, and human resources, which facilitates constructive and challenging discussions in the Board room. Further details of their qualifications and experience are provided under the Board Profiles section of this Annual Report.

1.1.4.1 Board AgendaThe Chairman-CEO ensured that all Board proceedings were conducted in a proper manner, approving the agenda for each meeting prepared by the Board Secretary. The typical Board agenda in 2016/17 was:

• Confirmation of previous minutes

• Ratification of Circular Resolutions

• Matters arising from the previous minutes

• Board Sub-Committee reports and other matters exclusive to the Board

In choosing Directors, the Group seeks individuals who have a very high level of integrity, business savviness, shareholder orientation and a genuine interest in JKH. The Group is conscious of the need to maintain an appropriate mix of skills and experience in the Board, and thus, a regular review of the Board is conducted to ensure that the skills representation is in alignment with the current and future needs of the Group.

• Status updates of major projects

• Review of performance - in summary, and in detail, including high level commentary on actual performances and outlook

• Summation of strategic issues discussed at Pre-Board meetings

• Approval of quarterly and annual financial statements

• Ratification of capital expenditure and donations

• Ratification of the use of the company seal and share certificates issued

1.1.4 Board MeetingsDuring the financial year under review, four pre-scheduled Board meetings, and three special meetings were convened. All pre-scheduled Board meetings are generally coupled with a Pre-Board meeting, which is usually held on the day prior to the formal Board meeting. Pre-Board meetings serve as a forum to discuss issues of strategic importance requiring extensive discussions. The Board also communicates regularly on routine matters depending on the need.

• New resolutions

• Report on corporate social responsibility

• Review of Group Risks, Sustainability/ CSR, HR practices/updates, Tax and Treasury updates

• Any other business

Group Highlights | Governance | Management Discussion & Analysis | Financial Statements | Supplementary Information

The attendance at the Board meetings held during the financial year 2016/17 was as follows:

Year

of

appo

intm

ent t

o th

e Bo

ard

Board meeting attendance

24/0

5/20

16

25/0

5/20

16

28/0

7/20

16

04/1

0/20

16

04/1

1/20

16

26/0

1/20

17

16/0

3/20

17

Elig

ible

to

atte

nd

Atte

nded

ExecutiveS Ratnayake - Chairman-CEO 1992/93 7 7A Gunewardene - Deputy Chairman 1992/93 7 7R Peiris - Group Finance Director 2003/04 7 7K Balendra+ 2016/17 3 3G Cooray+ 2016/17 3 3Senior Independent Non-ExecutiveF Amerasinghe¡ 1999/00 2 2N Fonseka 2013/14 7 7Independent Non-ExecutiveA Cabraal 2013/14 x 7 6I Coomaraswamy* 2010/11 2 2T Das¡ 2000/01 x x 2 0A Omar 2012/13 7 7P Perera 2014/15 By Phone By Phone 7 7H Wijayasuriya+ 2016/17 By Phone 3 3

¡ Ceased to be a Director during the year 2016/17* Resigned from the Board during the year 2016/17+ Appointed to the Board during the year 2016/17



1.1.5 Board Evaluation The Board conducted its annual Board performance appraisal for the financial year 2016/17. This formalised process of individual appraisal enabled each member to self-appraise, on an anonymous basis, the performance of the Board under the areas of:

• Role clarity and effective discharge of responsibilities

• People mix and structures• Systems and procedures• Quality of participation• Board image

The results of the evaluation revealed that the Board has improved in all areas mentioned above in comparison to the previous year, and consequently, improved Board dynamics. There was however, a lack of clarity amongst few Non-Executive Directors regarding the Board’s decision rights and the Group Executive Committee’s (GEC) decision rights. The “Decision Rights Matrix” was circulated among all Directors subsequently.

We believe in a diverse workforce to serve our diverse consumer base. Inclusion is the foundation of a sustainable, strong culture. We want our people to feel confident, comfortable and able to reach their potential regardless of gender, age, ability, background or sexual preference. The Board acknowledges the need for diversity and is committed to make progress in improving the gender diversity of the Board and the senior management.

1.1.6 Access to Independent Professional Advice In order to preserve the independence of the Board, and also to strengthen its decision making, the Board encourages its members to seek independent professional advice, in furtherance of their duties, at the Group’s expense. This is coordinated through the Board Secretary as and when requested.

Prior to appointment Once appointed During Board meetings

Nominees are requested to make known their various interests

Directors obtain Board clearance prior to:

• Accepting a new position

• Engaging in any transaction that could create or potentially create a conflict of interest

All NEDs are required to notify the Chairman-CEO of any changes to their current Board representations or interests and a new declaration is made every financial year

Directors who have an interest in a matter under discussion:

• Excuse themselves from deliberations on the subject matter

• Abstain from voting on the subject matter (abstention from decisions are duly minuted)

The independence of all its Non-Executive Directors was reviewed on the basis of criteria summarised below.

Definition Status of conformity

1. Shareholding carrying not less than 10 per cent of voting rights

None of the individual EDs or NED/IDs shareholding exceeds 1 per cent

2. Director of another company* None of the NED/IDs are Directors of another related party company as defined

3. Income/non cash benefit equivalent to 20 per cent of the Director’s income

NED/ID income/cash benefits are less than 20 per cent of individual Director’s income

4. Employment at JKH two years immediately preceding appointment as Director

None of the NED/IDs are employed or have been employed at JKH or any of its subsidiaries

5. Close family member who is a Director, CEO or a Key Management Personnel

No family members of the EDs or NED/IDs is a Director or CEO of a related party company

6. Has served on the Board continuously for a period exceeding nine years from the date of the first appointment

No NED has served on the Board for more than nine years from the date of their first appointment

* Other companies in which a majority of the other Directors of the listed company are employed, or are Directors or have a significant shareholding, or have a material business relationship.We believe in a diverse workforce

to serve our diverse consumer base. Inclusion is the foundation of a sustainable, strong culture.

1.1.7 Managing Conflicts of Interests and Ensuring Independence In order to avoid potential conflicts or biases, the Directors make a general disclosure of interests, as illustrated below, at the time of appointment, at the beginning of every financial year, and during the year as required. Potential conflicts are reviewed by the Board from time to time to ensure the integrity of the Board’s independence.

31

1.2 Board Sub-CommitteesThe Board has delegated some of its functions to the Board Sub-Committees, whilst retaining final decision rights. Members of these Sub-Committees are able to focus on their designated areas of responsibility and impart knowledge and oversight in areas where they have greater expertise.

The four Board Sub-Committees are as follows:

i. Audit Committee

ii. Human Resources and Compensation Committee

iii. Nominations Committeeiv. Related Party Transaction Review

Committee

During the year, Board Sub-Committees were reconstituted in order to accommodate new appointments to, and resignations from, the Board. The current membership of the four Board Sub-Committees is as follows:


In addition to the profiles of the Directors provided in the Report, the following table illustrates the total number of Board seats (excluding Group Board seats on the basis of subsidiary or equity accounted investees) held in other listed companies outside the Group by each serving Director as at the end of the financial year 2016/17.

Name of Director Directorship status at JKH

Board seats held in other listed Sri Lankan companies

Executive capacity Non-Executive capacity

ExecutiveS Ratnayake Chairman-CEO N/A Ceylon Tobacco Company PLCA Gunewardene Executive Director N/A NilR Peiris Executive Director N/A NilK Balendra Executive Director N/A NilG Cooray Executive Director N/A NilSenior Independent Non-ExecutiveN Fonseka Non-Executive Director N/A DFCC Bank PLCIndependent Non-ExecutiveA Cabraal Non-Executive Director Nil Ceylon Beverage Holdings PLC

Hatton National Bank PLCLion Brewery (Ceylon) PLC

A Omar Non-Executive Director Nil Textured Jersey Lanka PLCP Perera Non-Executive Director Nil Ceylon Tobacco Company PLCH Wijayasuriya Non-Executive Director Nil Dialog Axiata PLC

Board Sub-Committee Membership(as at 31 March 2017) Audit Committee

Human Resources and Compensation

Committee

Nominations Committee

Related Party Transaction Review

Committee

ExecutiveS Ratnayake - Chairman-CEO ● ●

A Gunewardene - Deputy ChairmanR Peiris - Group Finance Director K BalendraG Cooray Senior Independent Non-ExecutiveN Fonseka ●

Independent Non-ExecutiveA Cabraal ● ●

A Omar ●

P Perera ● ●

H Wijayasuriya ● ●

Committee Chair● Committee Member

The Board has delegated some of its functions to the Board Sub-Committees, whilst retaining final decision rights.



1.2.1 Audit Committee

Composition All members to be exclusively Non-Executive, Independent Directors with at least one member having significant, recent and relevant financial management and accounting experience and a professional accounting qualification.

The Chairman-CEO and the Group Finance Director are permanent invitees for all Committee meetings. The Group Financial Controller is also present at discussions relating to Group reporting.

Mandate Monitor and supervise management’s financial reporting process in ensuring:

• Accurate and timely disclosure• Transparency, integrity and quality of financial reporting

Scope 1. Confirm and assure:

• Independence of External Auditor • Objectivity of Internal Auditor

2. Review with independent auditors the adequacy of internal controls and quality of financial reporting

3. Regular review meetings with management, Internal Auditor and External Auditors in seeking assurance on various matters

Report of the Audit CommitteeRole of the Committee The role of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities in relation to the integrity of the financial statements of the Company and the Group, the internal control and risk management systems of the Group and its compliance with legal and regulatory requirements, the External Auditors’ performance, qualifications and independence, and, the adequacy and performance of the Internal Audit function, undertaken by the Group Business Process Review division (Group BPR). The scope of functions and responsibilities are adequately set out, in the terms of reference of the Committee which has been approved by the Board and is reviewed annually.

The Committee’s responsibilities pertain to the Group as a whole and in discharging its responsibilities, the Committee places reliance on the work of other Audit Committees in the Group without prejudicing the independence of those Committees. However, to the extent, and in a manner it considers appropriate, the Committee provides feedback to those entities for their consideration and necessary action. An interactive forum with the participation of members of Audit Committees of Group

entities was held to discuss ways and means of improving coordination with Group BPR and to exchange information on best practices.

The effectiveness of the Committee is evaluated annually by each member of the Committee and the results are communicated to the Board.

Composition of the Committee and Meetings There was a change in the composition of the Committee during the financial year whereby Dr. I Coomaraswamy resigned, effective 3 July 2016. Thereafter the Audit Committee comprised the undersigned and the following Independent Non-Executive Directors:

A Cabraal

P Perera

The Head of the Group BPR division served as the Secretary to the Audit Committee.

The Audit Committee convened seven times during the financial year. Information on the attendance at these meetings by the members of the Committee is given in the ensuing section. The Chairman-CEO, the Group Finance Director, Group Finance Director-

Designate, Group Financial Controller and the External Auditors attended most parts of these meetings by invitation. The Internal Auditors carrying out outsourced assignments and other officials of the Company and the Group also attended these meetings on a needs basis. The Committee engaged with management to review key risks faced by the Group as a whole and the main sectors, with a view to obtaining assurances that appropriate and effective risk mitigation strategies were in place.

The activities and views of the Committee have been communicated to the Board of Directors quarterly through verbal briefings, and by tabling the minutes of the Committee’s meetings.

Financial Reporting The Audit Committee has reviewed and discussed the Group’s quarterly and annual financial statements, prior to publication, with management and the External Auditors. The review included ascertaining compliance of same with the Sri Lanka Accounting Standards, the appropriateness and changes in accounting policies and material judgemental matters. The Committee also discussed with the External Auditors and management, any matters communicated to the Committee by the External Auditors in their reports to the Committee on the audit for the year.

The External Auditors were also engaged to conduct a limited review of the Group’s interim financial statements for the six months ended 30th September 2016. The results of this review were discussed with the External Auditors and management.

Internal Audit, Risks and Controls The Committee reviewed the adequacy of the Internal Audit coverage for the Group and the Internal Audit Plans for the Group with the Head of the Group BPR division and management. The Internal Audit function of most Group companies is outsourced to leading professional firms under the overarching control of the Group BPR division.

The Group BPR division regularly reported to the Committee on the adequacy and effectiveness of internal controls in the Group and compliance with laws and regulations and established policies and procedures of the Group. Reports from the outsourced Internal Auditors on the operations of the Company


and some of the unquoted direct subsidiaries of the Company were also reviewed by the Committee. Follow-up action taken on the recommendations of the outsourced Internal Auditors and any other significant follow-up matters were documented and presented to the Committee on a quarterly basis by the Head of Group BPR.

During the year, the Group BPR division successfully implemented a digital forensic project across the entire Group, for analysing transactional data, to report on outliers for management oversight and continuously improve controls to enhance assurances in relation to establishing the integrity of data used for reporting purposes.

The Sustainability and Enterprise Risk Management division (SRM) reported to the Committee on the process of identification, evaluation and management of all significant risks faced by the Group. The report covered the overall risk profile of the Group for the year under review in comparison with that for the previous year, and the most significant risks from a Group perspective together with the remedial measures taken to manage them.

Formal confirmations and assurances were obtained from the senior management of Group companies on a quarterly basis, regarding the efficacy and status of the internal control systems and risk management systems, and compliance with applicable laws and regulations.

The Committee reviewed the whistleblowing arrangements for the Group and had direct access to the Ombudsperson for the Group.

The effectiveness and resource requirements of the Group BPR division were reviewed and discussed with management and changes were effected where considered necessary.

External Audit The External Auditors’ Letter of Engagement, including the scope of the audit, was reviewed and discussed by the Committee with the External Auditors and management prior to the commencement of the audit.

The External Auditors kept the Committee advised on an on-going basis regarding matters of significance that were pending resolution. Before the conclusion of the Audit,

the Committee met with the External Auditors and management to discuss all audit issues and to agree on their treatment. This included the discussion of formal reports from the External Auditors to the Committee. The Committee also met the External Auditors, without management being present, prior to the finalisation of the financial statements.

The External Auditors’ reports on the audit of the Company and Group financial statements for the year, were discussed with management and the auditors.

The Committee is satisfied that the independence of the External Auditors has not been impaired by any event or service that gives rise to a conflict of interest. Due consideration has been given to the nature of the services provided by the Auditors and the level of audit and non-audit fees received by the Auditors from the John Keells Group. The Committee also reviewed the arrangements made by the Auditors to maintain their independence and confirmation has been received from the Auditors of their compliance with the independence guidance given in the Code of Ethics of the Institute of Chartered Accountants of Sri Lanka.

The performance of the External Auditors has been evaluated and discussed with the senior management of the Company and the Committee has recommended to the Board that Ernst & Young be re-appointed as the Lead/Consolidation Auditors of the Group for the financial year ending 31 March 2018, subject to approval by the shareholders at the Annual General Meeting.

N Fonseka Chairman of the Audit Committee

26 May 2017

Audit Committee Meeting Attendance

17.0

5.20

16

24.0

5.20

16

27.0

7.20

16

24.1

0.20

16

03.1

1.20

16

25.0

1.20

17

27.0

3.20

17

Elig

ible

to

atte

nd

Atte

nded

A Cabraal X 7 6I Coomaraswamy* 2 2N Fonseka 7 7P Perera 7 7By InvitationS Ratnayake X 7 6R Peiris 7 7

* Resigned during the year 2016/17


Human Resources and Compensation Committee Meeting Attendance

23.06.2016 31.03.2017 Eligible to attend Attended

F Amerasinghe¡ 1 1A Cabraal 2 2I Coomaraswamy* 1 1N Fonseka 1 1A Omar 2 2H Wijayasuriya 1 1By invitationS Ratnayake 2 2R Peiris 2 2

¡ Ceased to be a Director during the year 2016/17* Resigned during the year 2016/17


Report of the Human Resources and Compensation CommitteeThe Committee met twice during the year. The Committee, together with the other Board members, reviewed the outcomes of the Group-wide “Great Place to Work” Employee Survey (GPTW survey) which was conducted in the third quarter of 2016/17. It was noted that, at the Executive level, the survey has shown a significant improvement in every dimension when compared with the overall GPTW survey results of 2014, and that such improvement has brought the organisation closer to the global benchmarks. Whilst this augurs well for the company, issues which require attention were noted for further action.

An important task that was carried out during the year was the deliberation of plans for succession at the senior management level. These plans were announced in November 2016 and in the quarter ended 31 March 2017. It is to be noted that further plans for succession to senior positions will be announced in a phased manner over the next two years.

A report from the Chairman of the Committee continues to be a standing agenda item at the quarterly Board meetings. The Chairman of the Committee reports on the developments

which have taken place since the last Board meeting, if any, and also updates the Board on various matters, as requested and as relevant.

The Committee wishes to report that the Company has complied with the Companies Act in relation to remuneration of Directors. The annual appraisal scheme, the calculation of short term incentives, and the award of

ESOPs were executed in accordance with the approvals given by the Board on the basis of discussions conducted between the Committee and Management.

The performance of the Chairman-CEO was evaluated and remuneration determined as per the methodology set out by the Board. The Chairman-CEO’s evaluation of the performance of the Executive Directors, and the members of the Group Executive Committee was considered by the Committee and accepted. The remuneration of the Executive Directors and the other Members of the Group Executive Committee was determined on the basis of performance, market comparators, and in line with Company C&B policy.

I wish to note that Mr. F Amerasinghe and Dr. I Coomaraswamy served until June 2016 and July 2016 respectively. I thank Mr. F Amerasinghe for the leadership and guidance given to the Committee during his tenure as Chairman.

I wish to thank my colleagues for their valuable inputs in guiding the Committee in its deliberations, and the President responsible for Human Resources of the Group for enabling fruitful interactions at the meetings of the Committee.

A CabraalChairman of the Human Resources and Compensation Committee

26 May 2017

1.2.2 Human Resources and Compensation Committee

Composition The Chairperson must be a Non-Executive Director. Committee should comprise exclusively of Non-Executive Directors, a majority of whom shall be independent.

The Chairman-CEO and Group Finance Director are present at all Committee meetings unless the Chairman-CEO or Executive Director remuneration is under discussion respectively. The President, Human Resources and Legal, is also present at all meetings.

Mandate Determine the quantum of compensation (including stock options) for Chairman and Executive Directors, conduct performance evaluation of Chairman-CEO, review performance evaluation of the other Executive Directors and key Executives and establish a Group Remuneration Policy

Scope i. Determine and agree with the Board a framework for remuneration of the Chairman and Executive Directors

ii. Consider targets, and benchmark principles, for any performance related pay schemes

iii. Within terms of agreed framework, determine total remuneration package of each Executive Director, keeping in view;

• Performance • Industry trends • Past remuneration

iv. Succession planning of Key Management Personnel

v. Determining compensation of Non-Executive Directors will not be under the scope of this Committee

During the year 2016/17, the Great Place to Work (GPTW) survey was conducted across the entire Group. Following its conclusion, the resultant report was placed before the Board. The management also briefed the Committee of an action plan geared towards addressing the findings of the survey at the meeting held on the 31 March 2017. Please see Section 3.4.1 for more information.


Report of the Nominations CommitteeThe Nominations Committee, as of 31 March 2017, consisted of the following.

• A Omar• P Perera• S Ratnayake• H Wijayasuriya

The mandate of the Committee remains;

• To identify suitable persons who could be considered for appointment to the Board of JKH PLC or other Listed Company in the Group as Non-Executive Directors

• To recommend to the Board the process of selecting the Chairman and Deputy Chairman.

• Make recommendations on matters referred to it by the Board.

During the period under review, the Committee had one formal meeting, with all members in attendance, and several other informal discussions.

During the year, the Committee recommended the following appointments to the various JKH PLC subsidiaries.

Name of subsidiary

Name of appointee

Keells Food Products PLC

Shehara de SilvaIndrajit SamarajivaPravir SamarasingheAmal Sanderatne

Ceylon Cold Stores PLC

Sharmini RatwatteDr. Shanthi Wilson

John Keells Hotels PLC

Anarkali Moonesinghe

John Keells PLC

Anandhiy GunawardhanaAruni RajakariarCharitha Wijewardene

Tea Smallholder Factories PLC

Manjula de Silva

These recommendations were accepted by the Board.

The Committee was also apprised, regularly, by the Chairman - JKH PLC, of the succession plans in respect of Susantha Ratnayake, Ajit Gunewardene and Ronnie Peiris. As a part of such succession plan, the Chairman nominated Krishan Balendra and Gihan Cooray to the Board of the Company, and also as successors to Ajit Gunewardene and Ronnie Peiris, respectively, who retire at the end of December 2017. The Nominations Committee, in discussion with the Board, considered the Chairman’s recommendation and agreed with the same.

The Committee, with the undersigned abstaining, recommended to the Board that Mr. Ashroff Omar be reappointed as a Non-Executive Director for a further period of 3 years commencing 1 March 2016. The Board ratified its acceptance of such recommendation at its meeting of 25 May 2016.

A OmarChairman of the Nominations Committee

26 May 2017

1.2.3 Nominations Committee

Composition The Chairperson must be a Non-Executive Director. The Chief Executive Officer should be a member.

Mandate Define and establish the nomination process for Non-Executive Directors, lead the process of Board appointments and make recommendations to the Board on the appointment of Non-Executive Directors.

Scope i. Assess skills required on the Board given the needs of the businesses

ii. From time to time assess the extent to which the required skills are represented on the Board

iii. Prepare a clear description of the role and capabilities required for a particular appointment

iv. Identify and recommend suitable candidates for appointments to the Board.

v. Ensure, on appointment to Board, Non-Executive Directors receive a formal letter of appointment specifying clearly

• Expectation in terms of time commitment • Involvement outside of the formal Board meetings • Participation in Committees

The appointment of Chairperson and Executive Directors is a collective decision of the Board

Nominations Committee Meeting Attendance

28.07.2016 Eligible to attend Attended

A Cabraal* 1 1A Omar 1 1P Perera 1 1S Ratnayake 1 1H Wijayasuriya* 0 0

* The Committee was re-constituted during the year 2016/17


Report of the Related Party Transaction Review CommitteeThe undersigned and the following Directors served as members of the Committee during the financial year:

F Amerasinghe (ceased to be a Board member with effect from 24 June 2016) A CabraalN FonsekaS Ratnayake

In addition, the Group Finance Director Mr. Ronnie Peiris, the Group Finance Director - Designate Mr. Gihan Cooray and the Group Financial Controller Mr. Mano Rajakariar attended meetings by invitation, and the Head of Group Business Process Review, served as the Secretary to the Committee.

The objective of the Committee is to exercise oversight on behalf of the Board, of John Keells Holdings PLC and its listed Subsidiaries, to ensure compliance with the Code on Related Party Transactions, as issued by the Securities and Exchange Commission of Sri Lanka (“The Code”) and with the Listing Rules of the Colombo Stock Exchange (CSE). The Committee has also adopted best practices as recommended by the Institute of Chartered Accountants of Sri Lanka and the CSE.

The Committee in discharging its functions primarily relied on processes that were validated from time to time and periodic reporting by the relevant entities and Key Management Personnel (KMP) with a view to ensuring that:

• there is compliance with the Code;• shareholder interests are protected; and• fairness and transparency are

maintained

The Committee reviewed and pre-approved all proposed non recurrent RPTs of the parent, John Keells Holdings PLC, and all its listed subsidiaries, namely: John Keells PLC, Tea Smallholder Factories PLC, Asian Hotels and Properties PLC, Trans Asia Hotels PLC, John Keells Hotels PLC, Ceylon Cold Stores PLC, Keells Food Products PLC, and Union Assurance PLC. Further, recurrent RPTs were reviewed annually by the Committee. Other significant transactions of non-listed subsidiaries were presented to the Committee for information.

In addition to the Directors, all Presidents, Executive Vice Presidents, Chief Executive Officers, Chief Financial Officers and Financial Controllers of respective companies/sectors were designated as KMPs in order to increase transparency and enhance good governance. Annual disclosures from all KMPs setting out any RPTs they were associated with, if any, were obtained and reviewed by the Committee.

The Committee held four meetings during the financial year. Information on the attendance of these meetings by the members of the Committee is given below.

The activities and views of the Committee have been communicated to the Board of Directors, quarterly through verbal briefings, and by tabling the minutes of the Committee’s meetings.

P PereraChairperson of the Related Party Transaction Review Committee

28 April 2017


Related Party Transaction Review Committee Meeting Attendance

24.0

5.20

16

27.0

7.20

16

24.1

0.20

16

25.0

1.20

17

Elig

ible

to

atte

nd

Atte

nded

F Amerasinghe¡ X 1 0A Cabraal 4 4N Fonseka 4 4P Perera 4 4S Ratnayake X 4 3By InvitationR Peiris 4 4

¡ Ceased to be a Director during the year 2016/17

1.2.4 Related Party Transaction Review Committee

Composition The Chairperson must be a Non-Executive Director. Must include at least one Executive Director.

The Chairman-CEO, Group Finance Director and Group Financial Controller are permanent invitees for all Committee meetings.

Mandate To ensure on behalf of the Board that all related party transactions of JKH and its listed subsidiaries are consistent with the Code of Best Practices on related party transactions issued by the SEC.

Whilst the above requisitions the minimum required by the CSE, the Group has broadened the mandate to include senior decision makers in the list of Key Management Personnel, whose transactions with Group companies are also reviewed by the Committee.

Scope i. Develop and recommend for adoption by the Board of Directors of JKH and its listed subsidiaries, a Related Party Transaction Policy which is consistent with the operating model and the delegated decision rights of the Group.

ii. Update the Board on related party transactions of each of the listed companies of the Group on a quarterly basis.

iii. Define and establish threshold values for each of the subject listed companies in setting a benchmark for related party transactions, related party transactions which have to be pre-approved by the Board, related party transactions which require to be reviewed annually and similar issues relating to listed companies.


1.3 The Combined Role of the Chairman-CEO The Group’s Chairman continued to play the role of the CEO during the financial year 2016/17. The Board deems that combining the two roles is more appropriate, for the Group at present, in meeting stakeholder objectives.

As the head of the Group Executive Committee, the Chairman-CEO provides the overall direction and policy execution framework for the Board’s decisions via this structure.

Experience has proved that the healthy balance of the JKH Board composition coupled with the role of the Senior Independent Director, and other supporting Board dynamics, enable him to effectively balance his role as the Chairman of the Board and the CEO of the Company and Group.

Given the above, the Chairman-CEO does not come up for re-election as is the case with other Executive and Non-Executive Directors. It should be noted that the Articles of Association of the Company allow for this. In order to bolster the Board’s, and by extension, the Group’s adherence to corporate governance best practices, the Senior Independent Director acted as the independent party to whom concerns could be voiced on a confidential basis.

1.3.1 Chairman-CEO AppraisalThe Human Resources and Compensation Committee, chaired by the Senior Independent Director together with all other Independent Directors, appraised the performance of the Chairman-CEO on the basis of pre-agreed goals for the Group, set in consultation with the Board, covering the following broad aspects:

• Creating and adding shareholder value• Achievement of financial goals• Execution of sustainability developments

and green agenda • Success in identifying and implementing

projects• Sustaining a first class image• Developing human capital• Promoting collaboration and team spirit• Building sustainable external relations• Leveraging Board members and other

stakeholders• Ensuring good governance and integrity

in the Group

1.4 Group Executive Committee and Other Management CommitteesThe Group Executive Committee and the other Management Committees met regularly as per a time table communicated to the participants 6 months in advance. In the absence of a compelling reason, attendance at these Committee meetings is mandatory for the Committee members. All the Committees carried out their specific tasks as expected.

Whilst the Chairman-CEO and Presidents are ultimately accountable for the Company/ Group and the industry groups, businesses and functions respectively, all decisions are taken on a committee structure as described below.

1.4.1 Group Executive Committee (GEC) As at 26 May 2017, the 9 member GEC consisted of the Chairman-CEO, the Deputy Chairman, the Group Finance Director and the Presidents of each business/function. The GEC is the overlay structure that implements, under the leadership and direction of the Chairman-CEO, the strategies and policies determined by the Board. The GEC manages through delegation and empowerment, the business and affairs of the Group, makes portfolio decisions and prioritises the allocation of capital and technical and human resources. A key responsibility of the members of the GEC is to act as enablers of the Operating Model of the Group. The members of the GEC are well equipped to execute these tasks and bring in a wealth of experience and diversity to the Group in terms of their expertise and exposure (refer the GEC Profiles section of this Annual Report for more details).

1.4.2 Group Operating Committee (GOC) As at 26 May 2017, the 22 member GOC consisted of the Chairman-CEO, the Deputy

Chairman, the Group Finance Director, the Presidents and Executive Vice Presidents. The GOC provided a forum to share learnings, and identify synergies, across industry groups, sectors, business units and functions. The GOC is instrumental in preserving a common group identity across diverse business units (refer the GOC Profiles section of this Annual Report for more details).

1.4.3 Other Management Committees These include the Group Management Committee, Sector Committee and Management Committee which are responsible at the industry group level, sector level and business unit level respectively. The underlying intention of forming these Committees is to encourage the respective business units to take responsibility and accountability at the grass-root level via suitably structured Committees and teams in a “Management by Objectives (MBO)” setting.

Illustrated below is the structure of the three Committees.

1.5 Employee Empowerment Given the importance the Group places on its employees for the growth of the organisation, policies, processes and systems are in place to ensure effective recruitment, development and retention of this vital stakeholder. The bedrock of these policies is the Group’s competency framework. To support these policies, the Group continued with, and further strengthened, the following practices.

• Top management and other senior staff are mandated to involve, as appropriate, all levels of staff in formulating goals, strategies and plans

• Decision rights were defined for each level of employment in order to instil a sense of ownership, reduce bureaucracy and speed-up the decision making process

• Strategy formulation • Performance

monitoring • Career management

and succession planning

• Risk management • Implementation of

Group Initiatives

Industry group

Sector

Business unit/ Function

Group Management Committee

Sector Committee

Management Committee

President

Executive Vice President

Vice President/ Assistant Vice President/Manager



• A bottom-up approach was taken in the preparation of annual and long-term plans and the Group also ensured employee involvement in strategy, and thereby empowerment, in the process

• Organisational and Committee structures are designed to enable, and facilitate, high accessibility of all employees to every level of management

• Open, honest and constructive communication was encouraged at all levels. The Group strongly believes that constructive disagreement is essential for optimal decision making

Moreover, the Group provides a safe, secure and conducive environment for its employees, allows freedom of association and collective bargaining, prohibits child labour, forced or compulsory labour and any discrimination based on gender, race, religion, gender identity or sexual orientation, and promotes workplaces which are free from physical, verbal or sexual harassment. In furtherance of this, the Group continued its CSR initiative, Project WAVE (Working Against Violence through Education), aimed at combating gender based violence and child abuse through awareness creation. Approximately 10,000 Group employees have been sensitised under the project as at 31 March 2017. During the year, the Group continued its project to sensitise employees regarding gender identity and sexual orientation towards building a truly inclusive culture within the Group. Additionally, the Group strives to incorporate these practices, where relevant, in its sourcing initiatives undertaken by the Group.

2. Integrated Governance Systems and ProceduresListed below are the main governance systems and procedures of the Group. These systems and procedures strengthen the elements of the JKH Internal Governance Structure, and are benchmarked against industry best practices.

i. Strategy formulation and decision making process

ii. Human resource governance

iii. Integrated risk management

iv. IT governance

v. Stakeholder management and effective communications

vi. Sustainability governance

2.1 Strategy Formulation and Decision Making Processes The Group’s investment appraisal methodology and decision making process ensures the involvement of all key stakeholders that are relevant to the evaluation of the decision.

In this manner:

• Several views, opinions and advice are obtained prior to making an investment decision

• A holistic view is taken on the commercial viability and potential of any project, including operational, financial, funding, legal, risk, sustainability and tax implications

• All investment decisions are consensual in nature, made through the aforementioned management committee structure where no single individual has unfettered decision making powers over investment decisions

• The ultimate responsibility and accountability of the investment decision rests with the Chairman-CEO

The illustration below depicts the Group’s strategy formulation process:

The following section further elaborates on the Group’s project appraisal and execution process.

2.1.1 Project Approval Process Projects undertaken at the Group follow a detailed feasibility report covering key business considerations under multiple scenarios, within a framework of sustainability. The feasibility stage is not restricted to a financial feasibility only, but encompasses a wider scope of work covering risk management, sustainable development and HR considerations.

Subsequent to the project satisfying the Group’s investment criteria, the final approval to proceed will be granted by the Board. When appropriate, the GEC is empowered to approve such proposals in terms of the delegated decision rights with the Board being kept informed.

GEC approval

second half of the year and obtaining

Reforecasting targets for the

Perfo

rman

ce evaluation of the

seco

nd half/full year

Formulating business strategy,

objectives and risk management for

each BU for the fi nancial year

GEC re

view

and

app

rova

l

Business performance evaluation of the fi rst six months

against target

Continuous performance monitoring at BU/

sector/industry group level


2.2 Human Resource GovernanceThe Group human resource governance framework is designed in a manner that enables high accessibility by any employee to every level of management. Constant dialogue and facilitation are also maintained ranging from work related issues to matters pertaining to general interest that could affect employees and their families. The Group follows an open door policy for its employees and this is promoted at all levels of the Group.

The Group performance management dynamics and compensation policy is explained in the ensuing sections.

2.2.1 Performance Management The Performance Management System, as illustrated below, is at the heart of many supporting human resource management processes such as learning and development, career development, succession planning, talent management, rewards/recognition and compensation/benefits.

2.2.2 Succession PlanningOur Board has in place plans to ensure the progressive renewal of the Board. As part of the Group’s talent identification initiative, the Group has continuously introduced innovative and effective ways of focusing on promising talent.

For succession planning at senior management levels, a sub-committee of the Board - the Human Resources and Compensation Committee, is mandated to review the performance evaluation of Executive Directors and key Executives, apart from establishing the Group remuneration policy. The scope of this committee entails succession planning of Key Management Personnel.

Annually, the Executive Directors and the Group Executive Committee are evaluated based on measurable criteria, which have been pre-agreed on an individual basis. The evaluation involves the closer examination of achieved results in a background of controllable and/or non-controllable external conditions which have impacted performance either favourably or adversely. Further, the senior management holds regular talent discussions to further develop and identify “talent”.

Learning and Development

Career Development

Compensation and Benefits

Succession Planning

Rewards and Recognition

Talent Management

Identification of:• Long term development plans• Competency based training needs• Business focused training needs

Identification of:• Promotions• Intercompany transfers• Inter department transfers

Identification of:• Jobs at risk • Suitable successors• Readiness level of successors• Development plans • External recruitments

Identification of• High performers• High potential

Nomination for Awards:• Chairman’s Award• Employee of the Year• Champion of the Year

Pay decisions based on:• Performance rating• Competency rating

Performance Management

System

The aforementioned project appraisal framework flow is illustrated below:

Project origination

Feasibility study

Due diligence

Review by the GEC

Board/GEC approval

Risk management

Sustainability management



2.2.3 Performance Based Compensation Philosophy The JKH Group Compensation Policy is as follows:

2.2.3.1 Equity Sharing Employee Share Option Plans are offered at defined career levels based on pre-determined criteria which are uniformly applied across the eligible levels and performance levels. These long term incentives have been instrumental in inculcating a deep sense of ownership in the recipients. Share options are awarded to individuals on the basis of their immediate performance and potential importance of their contribution to the Group’s future plans.

2.3 Integrated Risk ManagementJKH’s Group-wide risk management programme focuses on wider sustainability development, to identify, evaluate and manage significant Group risks and to stress-test various risk scenarios. The programme ensures that a multitude of risks, arising as a result of the Group’s diverse operations, are effectively managed in creating and preserving stakeholder wealth.

The steps taken towards promoting the Group’s integrated risk management process are:

• Integrating and aligning activities and processes related to planning, policies/procedures, culture, competency, internal audit, financial management, monitoring and reporting with risk management;

• Supporting executives/managers in moving the organisation forward in a cohesive, integrated and aligned manner to improve performance, while operating effectively, efficiently, ethically and legally, within the established limits for risk taking. The risk management programmes have allowed greater visibility and understanding of risk appetite

Please refer the Risks, Opportunities and Internal Controls section and Notes to the Financial Statements of the Annual Report for a detailed discussion on the Group’s Integrated Risk Management process and the key risks identified in achieving the Group’s strategic business objectives.

2.4 Information Technology (IT) Governance IT governance stewardship roles are governed through layered and nested committees, cascading from the GEC to the Group IT Management Committee to the Group IT Operation Committee with well-defined roles and responsibilities at a Group, sector and business unit level.

The IT governance framework used within the Group leverages best practices and industry leading models such as CoBIT (Control Objectives for Information and Related Technology), ISO 35800, ISO27001, ISO 9000:2008, COSO (Committee of Sponsoring Organisations of the Treadway Commission)/BCP (Business Continuity Planning), ITIL (Information Technology Infrastructure Library), in providing a best of breed framework.

A comprehensive audit of the IT structure covering the entire Group was performed during the year to highlight both strengths, and weaknesses. A priority-based action plan has been formulated to address issues of concern that stemmed from the audit.

2.5 Stakeholder Management and Effective CommunicationFollowing are the key stakeholder management methodologies adopted by the Group. Please refer the Materiality and Stakeholder Relationship section of the Annual Report for a detailed discussion.

“Pay for Performance”Greater prominence is given to the incentive component of the total target compensation

Compensation Policy• Compensation comprises of fixed (base) payments, short term incentives and long term incentives• Higher the authority levels within the Group, higher the incentive component as a percentage of total pay• Greater the decision influencing capability of a role, higher the weight given to organisational performance as opposed to individual

performance• Long term incentives are in the form of Employee Share Options at JKH

• Remuneration policy is built upon the premise of ensuring equal pay for equal roles

• Manager and above level roles are banded using the Mercer methodology for job evaluation, on the basis of the relative worth of jobs

“More Than Just A Workplace”Continuously focuses on creating a sound work environment covering all aspects of employee satisfaction and engagement

• Fixed compensation is set at competitive levels using the median, 65th percentile and 75th percentile of the best comparator set of companies (from Sri Lanka and the region, as relevant) as a guide

• Regular surveys are done to ensure that employees are not under/over compensated

Performance Management

Internal Equity

Satisfaction

External Equity


• Presence of an investor relations team• Social media presence • Prompt release of information to public/CSE• Effective communication of AGM related matters• Measures in place in case of serious loss of capital

• Providing of quality and safe products• Constant engagement with customers• Procedures to ensure long term

business relationships with suppliers

• Transactions in compliance with all relevant laws and regulations, transparently and ethically

• Zero tolerance policy in ensuring that all business units meet their statutory obligations in time and in full

• Provision of formal and sometimes informal, access to other key stakeholders

• Accessibility to all levels of the management

• Various means for employee involvement • Corporate

Communications• JK Forum• Young Forum

Shareholders/Investors

Customers/Suppliers

Government

Employees

Other Key Stakeholders

Stakeholder Management

2.5.1 Annual General Meeting The Group adheres to the following procedures and makes use of the AGM constructively to enhance relationships with shareholders.

• Notice of the AGM and related documents are sent to the shareholders along with the Annual Report, within the specified time

• Summary of procedures governing voting at general meetings are clearly communicated

• All Executive and Non-Executive Directors are present at the meeting to answer queries

• The Chairman-CEO ensures that the relevant senior managers are also available at the AGM to answer specific queries

• Separate resolutions are proposed for each item

• Proxy votes, those for, against, and withheld are counted

2.6 Sustainability Governance The John Keells Group places importance on sustainable development. The Group believes that its financial performance and brand image are closely aligned with sound corporate governance practices, product and service excellence, a productive workforce, environmental stewardship and social responsibility. Please refer the Materiality

and Stakeholder Relationships section of the Report for a detailed discussion of the Group’s strategy of entrenching sustainability within its business operations, and the scope and boundary of its sustainability content.

During the year under review, a new procurement platform was implemented to streamline the Group’s sourcing, and supplier management initiatives. The current Group Initiatives process, though robust, is manually driven. Through this new platform it will be transformed in its entirety to an online, real-time platform, where the entire sourcing process from supplier identification, requesting for proposals, submission of proposals, evaluation, contracting and supplier management for products and services sourced from the Group Initiatives Division will be performed on the platform. This will enable the Group to have clear visibility of the sourcing process in real time, shorten contracting life cycles and have the ability to make better supplier related decisions based on better and more accurate analytics. The Group intends to enable Business Units of the Group to use this platform in the near future.

Furthermore, the Group has contracted a global software developer and vendor, to provide a solution to manage the Group’s Enterprise Risk, Audit, and Incident Management processes. The solution is able to aid the Group’s Risk Management

functions, by providing the ability to maintain live, dynamic risk registers which are linked to business goals and responsible personnel - along with the provision of timely alerts on action plans, and escalation processes for over-due risks. Key Management Personnel at all levels (CEOs, Sector Heads, and Presidents) will have visibility of the structure under management in terms of risk management, mitigation, and action plans for better monitoring and control. It will also enable visibility across sectors, and the Group, on risk mitigation and knowledge sharing best practices.

3. Assurance MechanismsThe Assurance Mechanisms comprise of the various supervisory, monitoring, and benchmarking elements of the Group Corporate Governance System which are used to measure “actuals” against “plan” with a view to signalling the need for quick corrective action, when necessary. These mechanisms also act as “safety nets” and internal checks in the Governance system, which are discussed in detail in the ensuing section.



3.1 The Code of Conduct

JKH CODE OF CONDUCT

• Allegiance to the Company and the Group

• Compliance with rules and regulations applying in the territories that the Group operates in

• Conduct all business in an ethical manner at all times in keeping with acceptable business practices

• Exercise of professionalism and integrity in all businesses and “public” personal transactions

The objectives of the Code of Conduct are strongly affirmed by a strong set of corporate values which are well institutionalised at all levels within the Group through structured communication. The degree of employee conformance with corporate values and their degree of adherence to the JKH Code of Conduct are the key elements of reward and recognition schemes.

The Group Values are found in the About Us section of the Annual Report, and are continuously and consistently referred to by the Chairman-CEO, Presidents, Sector and Business Unit Heads during employee and other key stakeholder engagements, in order to instill these values in the hearts and DNA of all employees.

3.2 Senior Independent Director Considering the combined role of the Chairman-CEO, the presence of the Senior Independent Director is important in ensuring that no one person has unfettered decision making powers, and that matters discussed at the Board level are done so in an environment which facilitates independent thought by individual Directors.

The Senior Independent Director meets with other Non-Executive Directors, without the presence of the Chairman-CEO, at least twice every year to evaluate the effectiveness of the Chairman-CEO and has regular meetings with the other Non-Executive Directors on matters relating to the effectiveness of the Board as appropriate. The Senior Independent Director is also kept informed by the Ombudsperson of any matters in respect of the JKH Code of Conduct which has come to his attention.

Report of the Senior Independent DirectorIndependent Directors

F Amerasinghe - (ceased to be a Board member w.e.f. 24 June 2016) A Cabraal I Coomaraswamy - (resigned w.e.f. 3 July 2016) T Das - (ceased to be a Board member w.e.f. 24 June 2016)N FonsekaA OmarP PereraH Wijayasuriya - (appointed w.e.f. 4 October 2016)

All Independent Directors serving at present have been Directors for less than nine years from their date of first appointment. The undersigned was appointed by the Board as the Senior Independent Director on 24 June 2016, succeeding Mr F Amerasinghe.

Apart from unstructured and informal contacts, the Independent Directors had two formal meetings to discuss matters relevant to their responsibilities as Non-Executive Directors. These meetings concluded with a wrap up session with the Chairman-CEO, who provided responses to matters raised, or agreed to provide further information or clarification at Board meetings. A matter that received the special attention of the Non-Executive Directors was senior management succession. A plan was approved by the Board during the year and implementation has commenced.

The meeting minutes of the Group Executive Committee (GEC) are circulated to the Non-Executive Directors and this ensures that there is a high degree of transparency and interaction between the Executive and Non-Executive members of the Board.

The Ombudsperson has reported to me that no issues have been brought to his attention that indicate mismanagement, unfair treatment or justified discontent on the part of any employee or ex-employee during the financial year.

The Independent Directors thank the Executive Directors, the GEC, Sector Heads and members of the management team for their openness and co-operation on all matters where their input was sought by the Non-Executive Directors.

N Fonseka Senior Independent Director

26 May 2017

3.3 Board Sub-CommitteesThe Board Sub-Committees play an important supervisory and monitoring role by focusing on the designated areas of responsibility passed to it by the Board. For more information on the Board Sub-Committees, refer Section 1.2 of this Commentary.

3.4 Employee Participation in AssuranceThe Group is continuously working towards introducing innovative and effective ways of employee communication and employee awareness. The importance of communication - top-down, bottom-up, and lateral, in gaining employee commitment to organisational goals has been conveyed extensively through various communications issued by the Chairman-CEO and the management. Whilst employees have many opportunities to interact with the senior management, the Group has created formal channels for such communication through feedback as listed below.

43

• Skip Level meetings• Exit interviews• Young Forum meetings• 360 degree evaluation• Employee surveys• Monthly staff meetings • Ombudsperson• Confidential access to Chairman on

“Chairman Direct”• Access to Senior Independent Director• Continuously reiterating the “Open-Door”

policy

Additionally, the Group continued with its whistle-blower policy and securities trading policy. The Group has witnessed an increased level of communication flow from employees. Such communication and feedback received from the employees by the management are recorded, irrespective of the level of anonymity, and subsequently discussed and followed up. The respective outcomes are duly recorded.

3.4.1 Great Place to WorkDuring the year, the Group conducted the “Great Place To Work” (GPTW) survey among all its employees. GPTW is conducted by the Great Place To Work Institute and seeks to provide a comprehensive insight into how employees perceive the culture, structure, and management of an organisation, among others. The feedback received from this exercise will be used towards crafting a better and more cohesive workplace, which will in turn drive productivity across the Group. The Group’s management considers the objective of an engaging, inspiring workplace which enables, and empowers people, to be a strategic priority, in keeping with JKH’s goal to be “More Than Just A Workplace”.

3.5 Internal ControlsThe Board has taken necessary steps to ensure the integrity of the Group’s accounting and financial reporting systems, and that internal control systems remain robust and effective via the review and monitoring of such systems on a periodic basis.

3.5.1 Internal ComplianceA quarterly self-certification programme requires the Presidents, Sector Heads and Chief Financial Officers of industry groups, to confirm compliance with statutory and other regulatory procedures, and also identify any significant deviations from the expected norms.

3.5.2 System of Internal ControlThe Board has, through the involvement of the Group Business Process Review function, taken steps to obtain assurance that systems designed to safeguard the Company’s assets, maintain proper accounting records and provide management information, are in place, are robust, and are functioning according to expectations.

The risk review programme covering the internal audit of the whole Group is outsourced. Reports arising out of such audits are, in the first instance, considered and discussed at the business and functional unit levels, and after review by the Sector Head and the President of the industry group, are forwarded to the relevant Audit Committee on a regular basis. Further, the Audit Committees also assess the effectiveness of the risk review process and systems of internal control on a regular basis.

3.5.3 Segregation of Duties (SoD) under Sarbanes-Oxley (SOX) GuidelinesAs discussed in the Corporate Governance Commentary section of the JKH Annual Report 2015/16, the Group reviewed the Segregation of Duties (SoD) under Sarbanes-Oxley (SOX) guidelines, and developed a revised SoD matrix. During the financial year ended 31 March 2017, the Group took steps to review and streamline the roles of each user on its Enterprise Resource Planning (ERP) system. Furthermore, in line with JKH’s digitisation initiatives, an authentication application was developed to enable a more efficient and transparent process in assigning roles to users of the ERP system.

3.5.4 Internal Audit The Group internal audit process is conducted by outsourced parties at regular intervals, and coordinated by the Group Business Process Review function (GBPR) of the Group. GBPR ensures that the internal audit plan adequately covers the significant risks of the Group, reviews the important internal audit findings and follow-up procedures.

Towards this end, an Internal Audit Process Facilitation tool is being adopted across the Group. It is envisaged that this solution, in addition to enabling a digitally driven internal audit function, will help increase internal efficiencies, transparency, accountability, and build synergy between participating entities, in order to optimise delivery of impactful process outcomes.

The Group is currently engaged with its External Auditors to jointly understand the extent of realigning the scope of the Auditor’s report in keeping with reporting best practices associated with the disclosure of Key Audit Matters (KAM) to the shareholders. The proposed revisions to the Auditor’s Report are expected to enhance the communicative value and relevance of the report via reinforced transparency, and will come into effect together with other applicable financial reporting requirements, on or after 31 March 2018.

3.6 The Ombudsperson An Ombudsperson is available to report any complaints from employees of alleged violations of the published Code of Conduct if the complainant feels that the alleged violation has not been addressed satisfactorily by the internally available mechanisms.

The findings and the recommendations of the Ombudsperson, subsequent to an independent inquiry, is confidentially communicated to the Chairman-CEO or to the Senior Independent Director upon which the involvement duty of the Ombudsperson ceases.

On matters referred to him by the Ombudsperson, the Chairman-CEO or the Senior Independent Director, as the case may be, will place before the Board:

i. the decision and the recommendations

ii. action taken based on the recommendations

iii. in the event the Chairman-CEO or the Senior Independent Director disagrees with any or all of the findings and or the recommendations thereon, the areas of disagreement, and the reasons therefore

In situation (iii), the Board is required to consider the areas of disagreement and decide on the way forward. The Chairman-CEO or the Senior Independent Director is expected to take such steps as are necessary to ensure that the complainant is not victimised, in any manner, for having invoked this process.




Report of the OmbudspersonMandate and RoleFor purposes of easy reference, I set out below, the Ombudsperson’s mandate and role:

(a) legal and ethical violations of the Code of Conduct for employees, but in an appellate capacity, when a satisfactory outcome using existing procedures and processes has not resulted or when the matter has been inadequately dealt with;

(b) violations referred to above by individuals at the Executive Vice President, President and Executive Director levels, including that of the Chairman/CEO, in which case the complainant has the option of either complaining to the Ombudsperson in the first instance, or first exhausting the internal remedies;

(c) sexual harassment, in which event the complainant has the option of either complaining to the Ombudsperson in the first instance, or first exhausting the internal remedies

The mandate excludes disciplinary issues from the Ombudsperson’s responsibilities. The right to take disciplinary action is vested exclusively in the Chairman/CEO and those to whom this authority has been delegated.

No issues were raised by any member of the companies covered during the year under review.

Ombudsperson

26 May 2017

3.7 External Audit Ernst & Young are the External Auditors of the Company as well as many of the Group companies. The individual Group companies also employed KPMG Ford, Rhodes, Thornton & Co, PriceWaterhouseCoopers, and Luthra and Luthra, India as External Auditors. The appointment/re-appointment of these auditors was recommended by the individual Audit Committees to their respective Boards of Directors. The audit fees paid by the Company and Group to its auditors are separately classified in the Notes to the Financial Statements of the Annual Report.

4. Regulatory and Accounting Benchmarks The Board, through the Group Legal division, the Group Finance division and its other operating structures, strived to ensure that the Company and all of its subsidiaries and associates complied with the laws and regulations of the countries they operated in.

The Board of Directors also took all reasonable steps to ensure that all financial statements were prepared in accordance with the Sri Lanka Accounting Standards (SLFRS/LKAS) issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and the requirements of the CSE and other applicable authorities. Information contained in the financial statements of the Annual Report is supplemented by a detailed Management Discussion and Analysis which explains to shareholders, the strategic, operational, investment, sustainability and risk related aspects of the Company, and the means by which value is created and how it was translated into the reported financial performance and its likely influence on future results.

JKH and its subsidiaries are fully compliant with all the mandatory rules and regulations stipulated by the:

• Corporate Governance Listing Rules published by the CSE; and

• Companies Act No. 7 of 2007

Please refer section 6 of this Commentary for the compliance summary. The Group has also given due consideration to the Best Practice on Corporate Governance Reporting guidelines jointly set out by CA Sri Lanka and the SEC, and have in all instances, barring a few, embraced such practices voluntarily, particularly if such practices have been identified as relevant and value adding. In the very few instances where the Group has not adopted such best practice, the rationale for such non adoption is articulated.

5. Outlook and Emerging ChallengesIn an ever changing and dynamic world of corporate governance, JKH is acutely aware of the need to remain vigilant and geared to meet the emerging governance needs of the Group, its stakeholders and the environment in which the Group operates. As is evident from the aforesaid Commentary, the Group has continued to endeavour, in the year under

review, to stay abreast of best practices in the area of corporate governance.

Summarised below are the more significant challenges, amongst many others, being addressed by JKH.

5.1 Gender Diversity on the BoardJKH believes a wide range of people and experiences is beneficial to achieving a high performance culture, which enables innovation and thereby helps us deliver excellence. Given that women comprise a significant proportion of the customer and employee populations, the Group recognises the value of capitalising on our inclusive culture to attract, develop, and retain a talent mix to fuel our competitive advantage.

We acknowledge the challenges of increasing diversity within our industry, and the Group will make greater efforts to attract appropriately qualified women to add to the diversity of the Board.

5.2 Board Effectiveness and RefreshmentThere is increasing pressure for Boards to improve effectiveness, maintain the right combination of skills and experience, and enhance transparency and accountability. Our Board strives to take a balance of the two viewpoints of tenured Directors and the fresh perspectives of new members. With the change in Board composition, the average age of the Board is 57 years as of 31 March 2017, in comparison to an average age of 63 years as at 31 March 2016. JKH continues to take steps to seek Directors with great diversity of knowledge and experience in order to match boardroom talent with evolving business strategies.

5.3 Activist InvestorsAs stated during the last financial year, investors around the globe are increasingly active and are asking questions on issues that matter most to them - enterprise risk, strategy and execution. This has primarily led to Directors being held increasingly accountable and responsible for the company’s performance, and the Group expects this trend to continue. As a result, effective communication is emerging and designated Directors are fully prepared to engage directly with investors on appropriate matters. The Board will continue to focus on improving shareholder communication with a greater level of engagement.

45

5.4 Cyber SecurityAlong with the organisation becoming more data driven, there is a significant increase in the organisation’s reliance on technology. In such a backdrop, securing and protecting JKH’s most valuable assets becomes a priority. The Board accepts that the risk of a security breach needs to be continually managed, and that one needs to be well aware of where the vulnerabilities lie. During

the year under review, necessary steps have been taken to help curtail the exposure to cyber-attacks by reducing the threat surface and any potentially exploitable vulnerabilities.

5.5 Talent Risk ManagementAs new and complex opportunities and risks emerge with evolving strategies and growth markets, having the right people to execute on strategies is imperative for success. Boards

recognise the crucial role they play in human capital matters since talent and culture are arguably the biggest drivers of competitive advantage. Boards will play an important role in ensuring that the leadership stays focused on building the right talent strategy. The Board will focus on how to prepare for generational transitions in their organisations and anticipate the changing dynamics at the boardroom and management levels.


6. Compliance Summary6.1 Statement of Compliance under Section 7.6 of the Rules of the Colombo Stock Exchange (CSE) on Corporate Governance

CSE Rule 7.6 Compliance status

Reference in the JKH Annual Report 2016/17

(i) Names of persons who were Directors of the Entity during the financial year

Complied Board of Directors

(ii) Principal activities of the Entity and its subsidiaries during the year, and any changes therein

Complied Management Discussion and Analysis

(iii) The names and the number of shares held by the 20 largest holders of voting and non-voting shares and the percentage of such shares held

Complied Share and Warrant Information

(iv) The public holding percentage Complied Share and Warrant Information

(v) A statement of each Director’s holding and Chief Executive Officer’s holding in shares of the Entity at the beginning and end of each financial year


(vi) Information pertaining to material foreseeable risk factors of the Entity

CompliedRisk, Opportunities and Internal Controls

(vii) Details of material issues pertaining to employees and industrial relations of the Entity

During the year 2016/17, there were no material issues pertaining to employees and industrial relations of the Company

(viii) Extents, locations, valuations and the number of buildings of the Entity’s land holdings and investment properties

Complied Group Real Estate Portfolio

(ix) Number of shares representing the Entity’s stated capital Complied Share and Warrant Information

(x) A distribution schedule of the number of holders in each class of equity securities, and the percentage of their total holdings


(xi) Financial ratios and market price information Complied Share and Warrant Information

(xii) Significant changes in the Company’s or its subsidiaries’ fixed assets, and the market value of land, if the value differs substantially from the book value as at the end of the year

Complied Notes to the Financial Statements

(xiii) Details of funds raised through a public issue, rights issue and a private placement during the year


(xiv) Information in respect of Employee Share Ownership or Stock Option Schemes


(xv) Disclosures pertaining to corporate governance practices in terms of Rules 7.10.3, 7.10.5 c. and 7.10.6 c. of Section 7 of the Listing Rules

Complied Corporate Governance Commentary

(xvi) Related party transactions exceeding 10 per cent of the equity or 5 per cent of the total assets of the Entity as per audited financial statements, whichever is lower

Complied Corporate Governance Commentary



6.2 Statement of Compliance under Section 7.10 of the Rules of the Colombo Stock Exchange (CSE) on Corporate Governance (Mandatory provisions - fully complied)

CSE Rule Compliance status

JKH action

7.10 Compliance

a./ b./ c. Compliance with corporate governance rules Complied JKH is in full compliance with the corporate governance rules. Any deviations are explained where applicable

7.10.1 Non-Executive Directors (NED)

a./ b./ c. At least two members or one third of the Board, whichever is higher should be NEDs

Complied 5 out of 10 Board members are NEDs

Corporate Governance Commentary - Section 1.1.2

7.10.2 Independent Directors

a. Two or one third of NEDs, whichever is higher shall be “independent”

Complied All NEDs are independent as of 31 March 2017

b. Each NED to submit a signed and dated declaration of his/her independence or non-independence

Complied The independence of the Directors has been determined with reference to the CSE Listing Rules. The 5 Independent NEDs have submitted signed confirmations of their independence

7.10.3 Disclosures Relating to Directors

a./ b. Board shall annually determine the independence or otherwise of NEDs

Complied Each NED discloses a formal declaration to the Board of all their interests on an annual basis


c. A brief resume of each Director should be included in the Annual Report including the Directors’ experience

Complied JKH Annual Report 2016/17 - Board of Directors

d. Provide a resume of new Directors appointed to the Board along with details

Complied The new appointments of Mr. K Balendra, Mr. G Cooray and Dr. H Wijayasuriya were announced to the CSE along with the profiles of the Directors

7.10.4 Criteria for Defining Independence

a. to h. Requirements for meeting the criteria to be an Independent Director

Complied Corporate Governance Commentary - Section 1.1.7

7.10.5 Remuneration Committee

a. Remuneration Committee shall comprise of NEDs, a majority of whom will be independent

Complied The Human Resources and Compensation Committee (equivalent of the Remuneration Committee with a wider scope) only comprises of Independent NEDs


One NED shall be appointed as Chairman of the Committee by the Board of Directors

Complied The Senior Independent NED is the Chairman of the Committee

b. Remuneration Committee shall recommend the remuneration of the CEO and the Executive Directors

Complied The remuneration of the Chairman-CEO and the Executive Directors is determined as per the remuneration principles of the Group, and as recommended by the Human Resources and Compensation Committee

c. The Annual Report should disclose:

(i) The names of Remuneration Committee members


(ii) A Statement of Remuneration policy Complied Corporate Governance Commentary - Section 1.2.2

(iii) The aggregate remuneration paid to Executive and Non-Executive Directors

Complied Total aggregate of remuneration paid to the Executive Directors for the year was Rs.154 million of which Rs.41 million was variable based on performance

Total aggregate of remuneration for Non-Executive Directors for the year was Rs.17 million


CSE Rule Compliance status

JKH action

7.10.6 Audit Committee

a. Audit Committee (AC) shall comprise of NEDs, a majority of whom should be independent

Complied The Audit Committee comprises only of Independent NEDs


A NED shall be appointed as Chairman of the committee Complied The Chairman of the Audit Committee is an Independent NED

CEO and CFO shall attend Audit Committee meetings Complied The Chairman-CEO, Group Finance Director, and the Group Financial Controller are permanent invitees to all Audit Committee meetings


The Chairman or one member of the Audit Committee should be a member of a professional accounting body

Complied One member of the Audit Committee holds membership in a professional accounting body

b. The functions of the Audit Committee as set in the CSE Listing Rules 7.10.6


Overseeing the preparation, presentation and adequacy of disclosures in the financial statements in accordance with SLFRS/LKAS

Complied The Audit Committee assists the Board in fulfilling its oversight responsibilities in ensuring the integrity of the financial statements of the Company and the Group

Overseeing compliance with financial reporting requirements, and information requirements as per laws and regulations

Complied The Audit Committee has the overall responsibility for overseeing the preparation of financial statements in accordance with the laws and regulations of the country, and also recommending to the Board, the adoption of suitable accounting policies

Ensuring that internal and risk management controls are adequate, to meet the requirements of the SLFRS/LKAS

Complied The Audit Committee assesses the role and the effectiveness of the Group Business Process Review division, which is largely responsible for the internal control and risk management process

Assessment of the independence and performance of the Entity’s External Auditors

Complied The Audit Committee assesses the External Auditor’s performance, qualifications and independence

Make recommendations to the Board pertaining to External Auditors

Complied The Committee is responsible for the appointment, re-appointment, and removal of External Auditors, and also the approval of remuneration and terms of engagement

c. Names of Audit Committee members shall be disclosed Complied Corporate Governance Commentary - Section 1.2.1

Audit Committee shall make a determination of the independence of the External Auditors


Report on the manner in which Audit Committee carried out its functions



6.3 Companies Act No. 7 of 2007

Rule 168 Compliance status

Reference - JKH Annual Report 2016/17

(1) (a) The nature of the business of the Group and the Company together with any change thereof during the accounting period

Complied Group Directory

(1) (b) Signed financial statements of the Group and the Company for the accounting period completed

Complied Financial Statements

(1) (c) Auditors’ Report on financial statements of the Group and the Company

Complied Independent Auditors’ Report

(1) (d) Accounting policies and any changes therein Complied Notes to the Financial Statements(1) (e) Particulars of the entries made in the Interests Register

during the accounting periodComplied Annual Report of the Board of Directors

(1) (f) Remuneration and other benefits paid to Directors of the Company during the accounting period


(1) (g) Corporate donations made by the Company during the accounting period


(1) (h) Information on the Directorate of the Company and its subsidiaries during and at the end of the accounting period

Complied Group Directory

(1) (i) Amounts paid/payable to the External Auditor as audit fees and fees for other services rendered during the accounting period


(1) (j) Auditors’ relationship or any interest with the Company and its subsidiaries

Complied Financial Statements

(1) (k) Acknowledgement of the contents of this Report and signatures on behalf of the Board

Complied The Statement of Director's Responsibility

6.4 Code of Best practice of Corporate Governance Issued Jointly by the Securities and Exchange Commission of Sri Lanka (SEC) and the Institute of Chartered Accountants of Sri Lanka (CA - Sri Lanka) Voluntary provisions - fully complied

A. Directors

Rule Reference

A.1 The BoardA.1.1 Need for the Board to meet regularly Corporate Governance Commentary - Section 1.1.4A.1.2 The Board should be responsible for matters

including implementation of business strategy, skills and succession of the management team, integrity of information, internal controls and risk management, compliance with laws and ethical standards, stakeholder interests, adopting appropriate accounting policies, fostering compliance with financial regulations and fulfilling other Board functions

The Board provides direction and guidance to the Group in the formulation of sustainable high-level medium and long term strategies which are aimed at promoting growth and sustainability over the long term


A.1.3 Act in accordance with the laws of the country and obtain independent professional advice where necessary, at the Company’s expense

The Group is in full compliance with Corporate Governance rules, and other forms of applicable legislation in the country it conducts its business. In order to preserve the independence of the Board and to strengthen decision making, the Board seeks independent professional advice. This is coordinated through the Board Secretary as and when required




Rule Reference

A.1.4 All Directors should have access to the advice and services of the Company Secretary

The Group ensures that all Directors have access to the advice and services of the Company Secretary at all times. The President HR, Legal and Secretarial is the Secretary to the Board. In addition to maintaining Board minutes and Board records, the Board Secretary has provided support in ensuring that the Board receives timely and accurate information, advice relating to corporate governance matters and that Board procedures and applicable rules and regulations are complied with during the year

A.1.5 All Directors should bring independent judgment

All Directors possess the necessary mix of skills, expertise and knowledge complemented with a high sense of integrity and independent judgment on issues of strategy, performance, resources and standard of business conduct. Non-Executive Directors are responsible for providing independent judgment for the proposals made by the Chairman and Executive Directors


JKH Annual Report 2016/17 - Board of DirectorsA.1.6 Every Director should dedicate adequate

time and effort to matters of the Board and Company

Directors dedicated sufficient time before Board meetings to review Board papers and request additional material and information for further clarification as deemed necessary. This is supplemented by time allocation for discussions of issues of strategic importance

It is estimated that Non-Executive Directors each devoted a minimum of 30 full time equivalent days to the Group during the year

50%

Strategy and performanceAssurance and risk managementOther board matters

15%

35%

A.1.7 Board induction and training When Directors are newly appointed to the Board, they undergo a comprehensive induction where they are apprised, inter-alia, of the Group values and culture, its operating model, policies, governance framework and processes, the Code of Conduct and the operational strategies of the Group

The Directors are encouraged to adopt a mind-set of continuous learning in order to keep abreast of the Group, its dynamic business units, and even their own areas of expertise

The Board of Directors recognises the need for continuous training and expansion of knowledge and undertakes such professional development as required in assisting them to carry out their duties as Directors

A.2 Chairman and Chief Executive Officer (CEO)A.2.1 Justification for combining the roles of the

Chairman and the CEOThe appropriateness of combining the two roles has been established after rigorous evaluation and debate internally and externally. The appropriateness continues to be discussed periodically, and at minimum, at least once per year. These discussions are supported by international best practices accessed through consultancy services and experts

Corporate Governance Commentary - Section 1.3 A.3 Chairman’s RoleA.3.1 The Chairman should ensure Board

proceedings are conducted in a proper manner

The Chairman, together with the Board Secretary continues to ensure that Board proceedings are conducted in a proper manner

A.4 Financial AcumenA.4 The Board should ensure the availability

within it of those with sufficient financial acumen and knowledge to offer guidance on matters of finance

The present Board possesses the financial acumen, and knowledge to offer guidance on matters pertaining to finance


JKH Annual Report 2016/17 - Board of Directors


Rule Reference

A.5 Board Balance

A.5.1 In the event the Chairman and CEO is the same person, NEDs should comprise a majority of the Board

As at 26 May 2017, the Board comprised of 10 Directors, with 5 of them being Non-Executive and Independent. The current Board composition will change by December 2017, following the retirement of the Deputy Chairman and the Group Finance Director


A.5.2 Where the constitution of the Board of Directors includes only two NEDs, both such NEDs should be “independent”

N/A

A.5.3 Definition of Independent Directors All Independent Directors of the Group conform to a set of pre-defined criteria, which JKH recognises as global best practice


A.5.4 Declaration of Independent Directors All Directors make a formal declaration of all their interests on an annual basis

A.5.5 Board determinations on independence or non-independence of NEDs

In order to avoid potential conflicts or biases, the Directors make a general disclosure of interests, at the time of appointment, at the beginning of every financial year and during the year as required. Any potential conflicts are reviewed by the Board from time to time to ensure the integrity of the Board’s independence


A.5.6 If an Alternate Director is appointed by a NED such Alternate Director should not be an Executive of the company

N/A

A.5.7 In the event the Chairman and CEO is the same person, the Board should appoint one of the Independent NEDs to be the Senior Independent Director (SID)

Given the combined role of the Chairman-CEO, the Senior Independent Director, as part of his role, ensures adherence to the principles of corporate governance, and acts as the independent party to whom concerns could be voiced on a confidential basis

Corporate Governance Commentary - Section 3.2

A.5.8 The SID should make himself available for confidential discussions with other Directors who may have concerns

The Senior Independent Director continues to make himself available to meet with other Non-Executive Directors, without the presence of the Chairman-CEO (when required), and evaluates the effectiveness of the Chairman-CEO


A.5.9 The Chairman should hold meetings with the NEDs only, without the presence of EDs

The Chairman-CEO conducts direct discussions with the Non-Executive Directors at meetings with the Non-Executive Directors, convened by the Senior Independent Director. Issues arising from these discussions are taken up for consultation with the relevant parties

A.5.10 Where Directors have concerns about the matters of the Company which cannot be unanimously resolved, they should ensure their concerns are recorded in the Board minutes

The Secretary to the Board is responsible for maintaining Board minutes and Board records. All concerns raised and unresolved are recorded and have been documented in sufficient detail

A.6 Supply of Information

A.6.1 Management should provide the Board with appropriate and timely information

Members of the corporate and senior management team continue to have independent contact with the Directors and where necessary, make presentations to the Directors on important issues relating to strategy, risk management, investment proposals, re-structuring and system procedures

A.6.2 Timely submission of the minutes, agenda and papers required for the Board Meetings

The Board is provided with the necessary information well in advance (at least 2 weeks prior to the meeting), by way of Board papers and proposals for all Board meetings, in order to ensure robust discussions, informed deliberation and effective decision making

A.7 Appointments to the Board

A.7.1 Nomination Committee to make recommendations on new Board appointments

Board appointments follow a structured and formal process within the purview of the Nominations Committee, which identifies and recommends suitable candidates for appointment to the Board



Rule Reference

A.7.2 Assessment of the capability of the Board to meet strategic demands of the company

The Board works closely with the Nominations Committee to assess the skills required on the Board, given the needs of the businesses. In the event a “skills gap” is identified, a formal document stating a clear description of the role and required capabilities is prepared. Following this, the Committee identifies and recommends suitable candidates

The skills inventory of the company is also discussed by the Board during the Annual JKH Board Evaluation

A.7.3 Disclosure of new Board member profiles and interests

All new Board members are required to submit their profiles and interests.

Details of new Directors are disclosed to the shareholders at the time of their appointment by way of public announcement as well as in the Annual Report. The Directors are required to report any substantial changes in their professional responsibilities and business associations to the Nominations Committee, which will examine the facts and circumstances and make recommendations to the Board



A.8 Re-Election

A.8.1 Non-Executive Directors should be appointed subject to re-election and to the provisions in the Companies Act relating to the removal of a Director

All Non-Executive Directors are appointed for a period of three years, and are eligible for re-election by shareholders at the first AGM following their appointment

Non-Executive Directors can serve up to a maximum of three successive terms unless an extended Board tenure is necessitated by the exigencies of the Group

A.8.2 All Directors including the Chairman, should be subject to election by shareholders at the first opportunity after their appointment

The Executive Directors, including the Chairman-CEO, are re-elected by shareholders at the first opportunity after their appointment

A.9 Appraisal of Board Performance

A.9.1 The Board should annually appraise itself on its performance in the discharge of its key responsibilities

The Board conducted its annual Board performance appraisal for the financial year 2016/17, to ensure that it is carrying out its responsibilities effectively and on a timely basis


A.9.2 The Board should also undertake an annual self-evaluation of its own performance and that of its Committees

The Board’s annual performance appraisal covers both the Board’s own performance and that of the Board Sub-Committees


A.9.3 The Board should state how such performance evaluations have been conducted

Each member self-appraises, on an anonymous basis, the performance of the Board. The scoring and open comments are collated by the Senior Independent Director, and the results are analysed to give the Board an indication of its effectiveness as well as areas that required addressing and/or strengthening

Despite the original anonymity of the remarks, the open and frank discussions that follow include some Directors identifying themselves as the person making the remark reflecting the openness of the Board

A.10 Disclosure of Information in Respect of Directors

A.10.1 Profiles of the Board of Directors and Board meeting attendance



A.11 Appraisal of the Chief Executive Officer

A.11.1/ A.11.2

Appraisal of the CEO against the set strategic targets

The Human Resources and Compensation Committee, chaired by the Senior Independent Director, appraised the performance of the Chairman-CEO on the basis of pre-agreed goals for the Group, set in consultation with the Board



B. Directors Remuneration

Rule Reference

B.1 Remuneration Procedure

B.1.1 The Board of Directors should set up a Remuneration Committee

The Board has created a Human Resources and Compensation Committee, which comprises entirely of Non-Executive Directors

Corporate Governance Commentary - Section 1.2.2B.1.2 Remuneration Committees should consist

exclusively of NEDsAll members of the Remuneration Committee are Non-Executive Directors and are appointed by the Board

B.1.3 The Chairman and members of the Remuneration Committee should be listed in the Annual Report each year


B.1.4 Determination of the remuneration of Non-Executive Directors

The compensation of Non-Executive Directors is determined in reference to that of other comparable companies. They are paid additional fees for either chairing or being a member of a Sub-Committee and do not receive any performance/incentive payments or share option plans. The total aggregate remuneration of Non-Executive Directors amounted to Rs.17 million

B.1.5 The Remuneration Committee should consult the Chairman-CEO about its proposals relating to the remuneration of other Executive Directors

The Human Resource and Compensation Committee consults the Chairman-CEO about any proposals relating to the remuneration of Executive Directors, other than that of the Chairman-CEO

B.2 The Level and Make Up of Remuneration

B.2.1 The Remuneration Committee should provide the packages needed to attract, retain and motivate Executive Directors

The Committee determines the total remuneration package of each Executive Director in line with market trends, performance and past remuneration

B.2.2 The Remuneration Committee should judge where to position levels of remuneration of the Company, relative to other companies

The Human Resources and Compensation Committee understands the value of retaining high calibre talent within the organisation and thus determines a framework for remuneration based on industry trends

B.2.3 The Remuneration Committee should be sensitive to remuneration and employment conditions elsewhere in the Company or Group

The “Pay for Performance” scheme is monitored and the CEO-Chairman and President of Human Resources brief the Human Resources and Compensation Committee regularly on employee compensation

Corporate Governance Commentary - Section 2.2.3B.2.4 The performance-related elements of

remuneration of Executive Directors should be designed to align their interests with those of the Company and main stakeholders

The remuneration of Executive Directors has an element which is variable, linked to the expected return of shareholder funds and the peer adjusted consolidated Group bottom line

Excluding the Employee Share Options (ESOP) granted, the total aggregate remuneration paid to Executive Directors for the year under review was Rs.154 million, of which Rs.41 million was the variable portion linked to the performance benchmark as described above. This is in comparison to the total remuneration paid in 2015/16 amounting to Rs.163 million, of which Rs.76 million was the variable portion. The decline in the variable component, paid in June 2016, arises from the Group not meeting certain performance benchmarks for 2015/16. In addition, the fixed component of pay was impacted due to the inclusion of the proportionate fixed remuneration of the two new Executive Directors who were appointed to the Board with effect from November 2016

2013/14

2014/15

2015/16

2016/17

Fixed Variable

53% 47%

53% 47%

53% 47%

73% 27%

B.2.5 Executive share options should not be offered at a discount

Employee Share Options are valued using a binomial pricing model, and are granted at a price that is deemed fair and equitable

JKH Annual Report 2016/17 - Share and Warrants



Rule Reference

B.2.6 Designing schemes of performance-related remuneration

The Human Resources and Compensation Committee considers targets, and benchmark principles for any performance related pay schemes

Corporate Governance Commentary - Section 2.2.3B.2.7 / B.2.8

Compensation commitments in the event of early termination of the Directors

In the event of an early termination of a Director, there are no compensation commitments other than for:

Executive Directors: as per their employment contract similar to any other employee

Non-Executive Director: accrued fees payable, if any, as per the terms of their contractB.2.9 Level of remuneration of NEDs The compensation of Non-Executive Directors is determined in reference to that of

other comparable companies

B.3 Disclosure of Remuneration

B.3.1 Disclosure of remuneration policy and aggregate remuneration

The aggregate remuneration paid to Executive and Non-Executive Directors amounted to Rs.171 million

JKH Annual Report 2016/17 - Notes to the Financial Statements


C. Relations with Shareholders

C.1 Constructive Use of the Annual General Meeting and Conduct of General Meetings

C.1.1 Counting of proxy votes Complied at the Annual General Meeting (AGM)/Extraordinary General Meeting (EGM)

C.1.2 Separate resolution to be proposed for each substantially separate issue and adoption of Annual Report and accounts

The Group ensures that separate resolutions are proposed for each issue that is taken up at the AGM and shareholders are given an opportunity to vote on each issue separately

C.1.3 Heads of Board Sub-Committees to be available to answer queries

The Chairpersons of the Audit, Human Resources and Compensation, Nomination and Related Party Transaction Review Committees are available to answer all shareholder queries

C.1.4 Notice of Annual General Meeting to be sent to shareholders with other papers

Notice of the AGM and related documents are sent to the shareholders along with the Annual Report 30 days prior to the meeting

C.1.5 Procedures governing voting at General meetings to be informed

The Group ensures that a summary of procedures governing voting is sent to the shareholders, along with every notice of a general meeting

C.2.1 Channel to reach all shareholders to disseminate timely information

The Group makes sure that timely information reaches all shareholders by way of announcements to the CSE, press releases, the AGM and copies of the Annual Report, and Quarterly Reports

C.2 Communication with Shareholders

C.2.1 Channel to reach all shareholders of the company to disseminate timely information

The Group has “Board approved” policies of communication with shareholders. The primary channel of communication is by means of the AGM

C.2.2 Disclose the policy and methodology of communication with shareholders

The Group focuses on open communication and fair disclosure, with emphasis on integrity, timeliness, relevance. The Group announcements are made to the CSE, SEC, and the press as and when appropriate, in compliance with any applicable regulatory and statutory timelines

C.2.3 Disclose how the above policy is implemented

Information is provided to shareholders prior to the AGM to give them an opportunity to raise any issues relating to the businesses of the Group. Shareholders are provided with the Annual Report of JKH in CD form and may at any time elect to receive it in printed form, free of charge

Announcements to the CSE and SEC are directed to the said bodies as and when required, while adhering to established protocol

C.2.4 Disclose details of the contact person for such disclosure

Questions, comments and requests are addressed to the Company Secretary

C.2.5 Awareness of Directors on major issues and concerns of shareholders

Shareholders may, at any time, direct questions, and provide comments and suggestions to Directors or management of the Group by contacting the Secretaries, the Senior Independent Director or the Chairman. The Investor Relations team also contributes towards keeping the Board informed of shareholder concerns


Rule Reference

C.2.6 Contact person for shareholders Shareholders may contact the Company Secretary for queries and in addition, the Investor Relations team of the Group is responsible for maintaining dialogues and discussions with shareholders to share highlights of the Group’s performance as well as to obtain constructive feedback

C.2.7 Process for responding to shareholders The Group has a communication policy approved by the Board

C.3 Major And Material Transactions

C.3.1 Disclosure of all material facts involving all material transactions including related party transactions

There were no major or material transactions that materially affected the Group’s asset base



D. Accountability and Audit

D.1 Financial Reporting

D.1.1 The Board should present interim and other price-sensitive public reports to regulators.

The Board of Directors, in conjunction with the Audit Committee, is responsible to ensure the accuracy and timeliness of published information and in presenting a true and fair view of the results in the quarterly and annual financial statements

All price sensitive information about the Group is promptly communicated to the CSE and such information is also released to employees, the press and shareholders. The Group ensures that information is communicated accurately and in such manner as to avoid the creation, or continuation of a false market

D.1.2 The Directors’ Report, which forms part of the Annual Report, should contain declarations by the Directors

JKH Annual Report 2016/17- The Annual Report of the Board of Directors

D.1.3 The Annual Report should contain statements by Directors and Auditors on responsibilities towards financial reporting

JKH Annual Report 2016/17 - The Statement of Directors’ Responsibility

JKH Annual Report 2016/17 - The Independent Auditors’ Report

JKH Annual Report 2016/17 - The Annual Report of the Board of DirectorsD.1.4 The Annual Report should contain a

Management Discussion and Analysis section

JKH Annual Report 2016/17 - Management Discussion and Analysis

D.1.5 The Directors should report that the business is a going concern

The Directors are satisfied that the Group, its subsidiaries and associates, have adequate resources to continue in operational existence for the foreseeable future

This is further justified, by adopting a going concern basis in preparing the financial statements

JKH Annual Report 2016/17 - The Statement of Directors’ ResponsibilityD.1.6 In the event of a serious loss of capital the

Directors shall summon an extraordinary general meeting to notify the shareholders of the position

In the unlikely event that the net assets of the Group fall below half of shareholder funds, shareholders would be notified and the requisite resolutions would be passed on the proposed way forward

D.1.7 The Board should adequately and accurately disclose Related Party Transactions in its Annual Report


D.2 Internal Control

D.2.1 The Directors should conduct a review of internal controls at least annually

The Board has taken necessary steps to ensure that internal control systems remain robust and effective, via the review and monitoring of such systems on a periodic basis

Corporate Governance Commentary - Section 3.5D.2.2 Companies should have an Internal Audit

function The Group internal audit process is conducted by outsourced parties at regular intervals, and is managed by the Group Business Process Review (GBPR) function according to an internal audit plan



Rule Reference

D.2.3 The Audit Committee should review the process and effectiveness of risk management and internal controls

The Audit Committee receives regular reports on the adequacy and effectiveness of internal controls, and compliance with laws and regulations of the Group

The Audit Committee carries out regular review meetings with the management and External Auditors to seek assurance on various matters including internal controls, risk management systems of the Group and quality of financial reporting along with independent auditors

Corporate Governance Commentary - Section 1.2.1D.2.4 Responsibilities of Directors in maintaining a

sound system of internal control and content of Statement of Internal Control

JKH Annual Report 2016/17 - The Statement of Directors Responsibility

D.3 Audit Committee

D.3.1 The Audit Committee should be comprised of a minimum of two independent NEDs or exclusively by NEDs, a majority of whom should be independent, whichever is higher

As at 31 March 2017, all members including the Chairman of the Audit Committee are independent NEDs

The Corporate Governance Commentary - Section 1.2.1

D.3.2 The duties of the Audit Committee should include keeping under review the scope and results of the audit and the independence and objectivity of the auditors


D.3.3 The Audit Committee should have a written Terms of Reference, dealing clearly with its authority and duties

The Committee has access to a written version of its Terms of Reference, which sets out clearly its mandate and duties

Corporate Governance Commentary - Section 1.2.1D.3.4 Disclosure of the Audit Committee Report

and memberships Corporate Governance Commentary - Section 1.2.1

D.4 Code of Business Conduct and Ethics

D.4.1 Availability of a Code of Business Conduct and Ethics

The Group abides by the JKH Code of Conduct, which is part of the company’s culture, and is followed by personnel at all levels

Corporate Governance Commentary - Section 3.1D.4.2 The Chairman must certify that he/she

is not aware of any violation of any of the provisions of this Code

The Chairman has certified that he/she is not aware of any violation

JKH Annual Report 2016/17 - Chairman’s Message

D.5 Corporate Governance Disclosures

D.5.1 The Directors should include in the Company’s Annual Report, a Corporate Governance Report

A Corporate Governance Report, setting out the manner and extent to which the company has complied, has been included

JKH Annual Report 2016/17- Corporate Governance Commentary

E. Institutional Investors

E.1 Shareholder Voting

E.1.1 Need to conduct regular and structured dialogue with shareholders based on a mutual understanding of objectives

The Group communicates with its shareholders via announcements made to the CSE, Annual Reports, Quarterly Reports, and the AGM. The Investor Relations team is primarily responsible for such activities


E.2 Evaluation of Governance Disclosures

E.2 When evaluating Companies’ governance arrangements, particularly those relating to Board structure and composition, institutional investors should be encouraged to give due weight to all relevant factors drawn to their attention

The Group prides itself in its widely acclaimed approach to corporate governance and as such, encourages investors of all types to give weight to all relevant factors brought to their attention


F. Other Investors

Rule Reference

F.1 Investing /Divesting Decision

F.1 Individual shareholders, investing directly in shares of companies should be encouraged to carry out adequate analysis or seek independent advice in investing or divesting decisions

The Investor Relations team aids investors, both local and foreign, to carry out adequate analysis on the Group and its subsidiaries. Portfolio managers, and analysts covering the Group, are given the freedom to conduct structured discussions with the senior management, through which they are able to obtain all necessary information in order to form a sound, and accurate view of the economic prospects of the Group, and the industries it operates in

F.2 Shareholder Voting

F.2 Individual shareholders should be encouraged to participate in General Meetings of companies and exercise their voting rights

The Group encourages all shareholders to participate in the AGM/EGM, and exercise their voting rights

G. Sustainability Reporting

G. 1 Principles of Sustainability Reporting

G.1.1 / G.1.7

Disclosure on adherence to sustainability principles

The Group places great importance on sustainable development. During the 2016/17 financial year, the Group took steps to realign its approach on sustainability to support the Sustainable Development Goals adopted by the United Nations in 2015

JKH Annual Report 2016/17 - Management Discussion and Analysis


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