Directors’ Report – Governance.

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This report combines the Directors’ Report required to be produced by law and the management report and corporate governance statement required by the Disclosure & Transparency Rules. It also includes sections reporting on the role and work of the Audit & Risk Committee and the Nomination Committee, respectively required by the Disclosure & Transparency Rules and The UK Corporate Governance Code. The Directors’ Remuneration Report is contained in the Remuneration Committee Report.

1.

Governance of the Company

The Company is led and controlled by the Board of Directors, collectively responsible for the long term success of the Company. The Board is fully committed to maintaining the highest standards of corporate governance, as it believes this will help facilitate the sustained success of the Company.

As an English-incorporated company with a premium listing on the London Stock Exchange, Lonmin is subject to The UK Corporate Governance Code published by the Financial Reporting Council (FRC) in June 2010 and its supporting guidance, all of which is available on the FRC website, www.frc.org.uk. During the year to 30 September 2011 and to the date of this report, the Company has in all respects complied with the provisions of the Code.

Almost all of the Company’s business is based in South Africa, where the prevailing governance code is the King Report on Governance for South Africa 2009, more commonly known as ‘King III’. While the Company and its subsidiaries are not subject to King III the Board has identified certain provisions which it feels are of benefit to the Company’s overall governance framework, primarily in relation to ethical and other considerations as to how our business is managed sustainably, which we follow on a voluntary basis.

2.

How the Board of Directors operates

2.1

The role of the Board

The primary purpose of the Board is to create and deliver the long term success of the Company and protect the interests of shareholders. The Board provides the entrepreneurial leadership, direction and control of the Company and is the custodian of the Company’s strategic aims, vision and values. It assesses whether the necessary financial and human resources are, and will continue to be, in place to enable the Company to meet its objectives and ensure that it takes full account of safety, environmental and social factors.

The Board is the senior decision making forum in the Company, and has a formal schedule of matters reserved for its decision, most recently reviewed in November 2005. This is available on the Company’s website and confirms the Board’s exclusive right to take decisions of strategic importance, or in relation to material financial and other commitments, or where significant reputational or other risk may exist.

The Board met ten times during the year and used its time in those meetings as shown in the chart alongside. Inevitably, any agenda item can involve a degree of overlap between two or more of the categories.

2.2

Key Board roles

The division of responsibilities between the Chairman and the Chief Executive Officer are set out in writing and are summarised below, together with the primary responsibilities of the Senior Independent Director and Non-executive Directors.

Chairman – Roger Phillimore
(based in the United Kingdom)
  Chief Executive Officer – Ian Farmer
(based in South Africa)
Lead and manage the Board   Provide leadership to the executive team in running the business
Provide strategic guidance to the executive team   Develop proposals for the Board to consider in all areas reserved for its judgement
Promote the highest standards of corporate governance   Ensure effective internal controls and risk management systems are in place
Ensure effective communication with shareholders   Implement all Board approved actions
Senior Independent Director – Michael Hartnall   Non-executive Directors
To act as an intermediary for the other Directors when necessary   Scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance
To be available to shareholders if they have concerns which contact with the chairman, chief executive or other Executive Directors has failed to resolve, or would be inappropriate   Review the integrity of financial information and determine whether internal controls and systems of risk management are robust
    Determine appropriate levels of remuneration of Executive Directors, be involved in the appointment and, where necessary, the removal of Executive Directors and monitor succession planning

Given their geographical separation, the Chairman has a weekly call with the CEO to discuss current material matters, and the Chairman also visits the operations outside the Board meeting schedule to meet a wider range of senior executives and managers.

Clearly, having a detailed knowledge of South Africa, the mining industry, the PGM business and Lonmin’s operations is crucial to the Non-executive Directors’ ability to contribute. On appointment each is provided with a tailored induction, and all are then expected to devote time to developing their knowledge and skills. The Company supports this with a number of working sessions with a wide range of operational managers (including site visits) and external subject-matter experts throughout the year. The Non-executive Directors have regular contact with the Exco members (see Section 10 below) and the broader management team through the working sessions as well as social occasions. The Chairman routinely holds discussions with Non-executive Directors without the Executive Directors being present.

2.3

Appointments to the Board

The Company’s Articles of Association empower the Board to appoint new Directors. To ensure a formal, rigorous and transparent procedure for appointing new Directors to the Board, a Nomination Committee has been created, whose work is described in section 7 of this report.

In order for any board to discharge its duties and responsibilities effectively, it must comprise the right blend of individuals, whose skills and experience were gained in a diverse range of backgrounds. Above all, the Directors must exhibit independence of mind, integrity and the courage to challenge constructively when appropriate. Appointments are therefore made on personal merit and against objective criteria. In the case of candidates for Non-executive directorships, care is taken to ascertain that they have sufficient time to fulfil their Board and, where relevant, Committee responsibilities. As part of this process, candidates disclose all other time commitments and, on appointment, undertake to inform the Board of any changes. The Non-executive Directors’ letters of appointment are available for public inspection and the generic template is provided on the Company’s website.

As the current composition of the Board and Exco demonstrates, Lonmin strongly supports the benefits of diversity, both in the boardroom and in the business. As the Chairman confirmed in his remarks in the Chairman’s Letter, our principal challenge is in meeting the transformation and employment equity targets we face in South Africa. Given this, we are not choosing to impose further gender-based targets on ourselves, as these could create an unhelpful constraint on future Board appointments.

2.4

The Board of Directors

The Board currently has eleven members: a Non-executive Chairman, eight Non-executive Directors and two Executive Directors. The names of the current Directors and biographical details are set out in the Board of Directors. All served throughout the year, save for Mahomed Seedat, who joined the Board as a non-independent Non-executive Director on 1 January 2011. In addition, Alan Ferguson served as an Executive Director until 31 December 2010, when his role was declared redundant.

Michael Hartnall has been a Director for almost nine years, and has indicated his intention to retire from the Board at the AGM in January 2012. It is not currently intended to recruit another Director in his place.

2.5

Board balance and independence

The Board believes that it has an acceptable number of members with a sufficiently diverse balance of backgrounds, experience and skills to discharge its functions effectively and to manage succession issues. A Board with eleven members is felt to be at the upper end of the preferred range, but is not unwieldy. The blend of individuals and their personal qualities are determining factors in the Board’s effectiveness; importantly, no one individual or group of individuals is able to dominate decision taking. The Board keeps its membership, and that of its Committees, under review, to ensure gradual refreshing of skills and experience. It is satisfied that all Directors have sufficient time to devote to their roles and that it is not placing undue reliance on key individuals.

Cyril Ramaphosa was nominated to the Board by Shanduka, the parent company of Incwala, Lonmin’s BEE partner, and as a result, the Board does not judge that Mr Ramaphosa is independent. In addition, Mahomed Seedat was formerly the Company’s Chief Operating Officer and is therefore not regarded as independent. However, all of the other Non-executive Directors are regarded as independent by the Board.

The experience, professional backgrounds and international diversity of the current nine Non-executive Directors can be summarised as follows:

A number of the Non-executive Directors have lived and worked in countries other than those in which they currently reside, and the vast majority have strong links with South Africa as evidenced in the biographical details in the Board of Directors.

2.6

How we assess and refresh the Board

There are three ways in which we make sure that the Directors continue to provide suitable leadership and direction to the Company: performance evaluation, succession planning and annual re-election by shareholders.

Performance evaluation

The Board believes that annual evaluations are helpful in maintaining an effective, challenging and dynamic Board, not least in identifying improvement opportunities. Last year’s evaluation, which was externally facilitated, confirmed that the Board was effective and identified two focus areas:

Issue   How was this addressed?
Closer involvement in contributing to the assumptions underpinning the development of strategy proposals   Additional board time has been devoted to debating supply and demand fundamentals and metal price forecasts, the political and economic positioning of South Africa and the implications for its currency
Increase Board level focus on delivery of the Company’s Social & Labour Plan commitments and other transformation initiatives   A Transformation Committee was formed under the chairmanship of Cyril Ramaphosa, comprising Directors with strong knowledge of doing business in South Africa. Further information can be found in the Transformation section and in section 9 below

This year the Directors were asked to complete questionnaires, the collective results of which were used to set the agenda for 1:1 meetings between Chairman and each Director. This process confirmed that the Board believed that it remained effective, revealed no issues and identified three priorities for the next twelve months:

  • While the Company’s strategy remains appropriate, accelerating the delivery of this (subject to favourable market conditions) is crucial to the creation of value for shareholders;
  • In pursuit of that strategy, there must be an unrelenting focus on safety, transformation and the delivery of operational results, specifically in achieving improved levels of cost-effectiveness; and
  • While the Board is satisfied with the quality of the corporate risk register, further work needs to be done on the prioritisation of these risks to ensure that mitigation actions are delivered to greatest effect.

Under the leadership of the Senior Independent Director, Michael Hartnall, the Board met in November 2011 without the Chairman present to discuss his effectiveness as Chairman. There were no areas of concern or any actions arising from this session.

The effectiveness of each of the Committees was also reviewed, both in the Chairman’s conversations with each Director and by each Board Committee at their September 2011 meetings. No material issues were identified in these reviews.

Succession planning

The Board is ultimately responsible for succession planning for directorships and key management roles. The purpose of this is twofold – to mitigate the risk of not having identified successors for key roles, and to identify development opportunities for talented individuals within agreed career plans, which may help to retain them in the Group’s employment. During the year, the Board discussed succession planning and, at its instigation, the Remuneration Committee reviewed the current plan and provided detailed feedback to management, which was summarised to the Board. Around 80% of senior managers have now undertaken Career Path Appreciation interviews. This tool aims, in conjunction with other psychometric tests, to establish current and projected executive capability and provide objective input into the succession planning process.

Re-election of Directors

All Directors will retire from the Board at the Company’s AGM in January 2012, and each wishes to seek re-election other than Michael Hartnall who has indicated his intention to retire from the Board after almost nine years’ service.

Sufficient biographical and other information is provided in this Annual Report and the AGM Circular to enable shareholders to make an informed decision. The Nomination Committee has carried out formal performance evaluations of all the Non-executive Directors seeking re-election and concluded that each is effective and continues to demonstrate commitment to his or her respective role.

2.7

Board meetings

The Board met ten times during the year, of which six were scheduled meetings, including two three-day trips to South Africa. The other four meetings were called in response to specific events or to issue approvals, usually at short notice, and did not necessarily require full attendance. In addition to their meeting commitments, the Non-executive Directors also make themselves available to management whenever required and there are regular contacts outside the Board meeting schedule. Attendance at Board meetings during their period of tenure in the year to 30 September 2011 was as follows:

Director Scheduled
meetings
Extra
meetings
Ian Farmer 6 of 6 4 of 4
Alan Ferguson 1 of 1 1 of 1
Michael Hartnall 6 of 6 2 of 4
Len Konar 6 of 6 3 of 4
Jonathan Leslie 6 of 6 0 of 4
David Munro 6 of 6 2 of 4
Roger Phillimore 6 of 6 4 of 4
Cyril Ramaphosa 6 of 6 2 of 4
Mahomed Seedat 5 of 5 3 of 3
Karen de Segundo 6 of 6 2 of 4
Simon Scott 6 of 6 3 of 4
Jim Sutcliffe 6 of 6 3 of 4

Whenever a Director is unable to participate in a meeting, either in person or remotely, the Chairman will speak to them ahead of time to solicit their views on key items of business, in order that these can be presented at the meeting and influence the debate.

2.8

How the Committees support the Board in its work

To fulfil its role in the time available, the Board must delegate some of its duties and powers to committees. As well as the committees recommended in the Code, the Board has established two other Committees to deal with specific business needs, the Safety & Sustainability and Transformation Committees. Importantly, each Committee and its members are provided with sufficient resources to enable them to undertake their duties. Membership of the Committees during the year to 30 September 2011 is shown below, together with individual attendance at the Committee meetings held during their tenure.

  Audit & Risk Nomination Remuneration Safety &
Sustainability
Transformation
Non-executive Directors          
Michael Hartnell Member2 Member Member    
  4 of 4 2 of 2 4 of 4    
Len Konar Chairman1 Member     Member4
  4 of 4 2 of 2     2 of 2
Jonathan Leslie   Member Member Chairman  
    2 of 2 4 of 4 4 of 4  
David Munro   Member Member   Member1
    2 of 2 4 of 4   1 of 1
Roger Phillimore   Chairman      
    2 of 2      
Cyril Ramaphosa         Chairman4
          2 of 2
Mahomed Seedat       Member 3 Member 3
        3 of 3 2 of 2
Karen de Segundo Member Member Member1 Member  
  4 of 4 2 of 2 1 of 1 4 of 4  
Jim Sutcliffe Member Member Chairman   Member4
  4 of 4 2 of 2 4 of 4   2 of 2
Executive Directors          
Ian Farmer       Member Member4
        4 of 4 2 of 2
1
From 20 July 2011
2
Ceased to be Chairman (but remained a member) on 20 July 2011
3
From 1 January 2011
4
From 11 November 2010, when the committee was created.

Each Committee has written terms of reference, approved by the Board, summarising its objectives, remit and powers. All Committee members are provided with appropriate induction on joining their respective Committees, as well as ongoing access to training. Minutes of all meetings of the Committees (save for private sessions of Committee members at the end of meetings) are circulated to all Directors and presented by the Committee Chairmen at the next Board meeting. The Committee Chairmen attend the AGM to answer any questions on the Committees’ activities.

The interaction between the Board, its Committees and the management of the Company can be summarised as follows:

2.9

How the Board manages conflicts of interest

Directors have a statutory duty to avoid actual or potential conflicts of interest. As permitted in law, the Board is empowered to ‘authorise’ such conflicts and has a documented procedure in place. This requires that when a Director becomes aware that he or she:

  • is in a ‘situation’ which does or could create a conflict of interests; or
  • has an interest in an existing or proposed transaction in which the Company has an interest

then they are required to notify the Board in writing of the situational or transactional conflict as soon as possible, and certainly prior to any transaction being concluded. Directors have a continuing duty to update the Board on any changes to their other appointments and in any event the Board carries out an annual review. The interests of new Directors are reviewed in the recruitment process and authorised (if appropriate) by the Board at the first meeting following their appointment. An annual review of the Directors’ external business interests and other appointments was carried out in March 2011.

Other than the agreements relating to the investment by Shanduka Resources (Proprietary) Limited (a company ultimately controlled by Cyril Ramaphosa) in Incwala, the Company’s BEE partner and the loans made by the Company to facilitate that investment, further details of which are set out in paragraph 4.4 below, no Director had a material interest in any contract of significance in relation to the Company’s business at any time during the year or to the date of this report.

The interests in the Company’s shares of the Directors who held office during the year, and to the date of this report are shown in the Remuneration Committee Report. Save for Mr Ramaphosa, no Director held any beneficial interest in the share capital of any other Group company at any time during the year or to the date of this report.

2.10

How we support the Board

The Board is supplied with regular, comprehensive and timely information in a form and of a quality that enables it to discharge its duties. All Directors are encouraged to make further enquiries of the Executive Directors or management whenever necessary, and have access to the services of the Company Secretary. There is a procedure in place for Directors to take independent professional advice, if they judge this to be necessary, at the Company’s expense.

The Board is provided with detailed insight into shareholders’ views including, where appropriate, the opportunity to meet major investors. Copies of sell-side analysts’ notes on the Company are circulated to all Directors, as are summaries of their views collected anonymously by the Company’s financial PR advisors and summaries of shareholders’ views collated by the Company’s joint brokers.

2.11

Directors’ remuneration

A report on Directors’ remuneration is set out in the Remuneration Committee Report.

2.12

Protection available to Directors

In law, Directors are ultimately responsible for most aspects of the Company’s business dealings. As a consequence, they face potentially significant personal liability under criminal or civil law, or the UK Listing, Prospectus, Disclosure & Transparency Rules, and face a range of penalties including private or public censure, fines and/or imprisonment. The Company believes that it is in the Company’s best interests to protect the individuals prepared to serve on its Board from the consequences of innocent error or omission, as it enables us to attract prudent individuals to act as Directors.

The Company maintains, at its expense, a Directors’ & Officers’ liability insurance policy to afford an indemnity in certain circumstances for the benefit of Group personnel including the Directors. The insurance policy does not provide cover where the Director or Officer has acted fraudulently or dishonestly.

As permitted by law, Deeds of Indemnity have been issued which, in general terms, protect all past, present and future Directors and officers of the Company from all costs and expenses incurred in the defence of any civil or criminal proceedings in which judgement is given in their favour or the proceedings are otherwise disposed of without a finding of fault or where there is a successful application to court for relief from liability. Under the terms of these indemnities, the Company may advance money to fund a Director’s defence costs which, should the Director not be exonerated, would be repayable to the Company. The indemnities are expressed to operate only to the extent that the Directors’ and Officers’ liability insurance policy fails to respond to a claim. All these indemnities were in force throughout the financial year and to the date of this report.

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