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Corporate governance

Doing what we do, better than we already do aptly summarises the mindset that we have applied in the past year, and will be applying in the year ahead of us, to all our endeavours, including corporate governance.

The key reference point in most of our corporate governance enhancements in 2007/08 has been the Companies Act of 2007 which became effective in May 2007. The new Act demands, in the main, greater disclosure, transparency, shareholder empowerment and higher levels of personal responsibility and accountability, particularly at board and senior management levels. Whilst acknowledging that the thrust of the Act is to improve the status quo, which resonates well with our own thinking of doing what we do, better than we already do, there are areas of the Act which are not very clear. We are confident that dialogue, and discussion, among the various stakeholders will result in greater definition being achieved in the coming year.

The new rules of governance and disclosure requirements for listed companies, as mandated by the Securities and Exchange Commission of Sri Lanka, also came in to effect during the financial year 2007/08. JKH was in full compliance of this last year. JKH is also in compliance with all aspects of the governance requirements of the listing rules of the Colombo Stock Exchange.

We follow, and comply with, the recommendations of the Combined Code of 2006 to the extent that they are practicable in the context of the nature of our diverse businesses and their risk profiles. Our policy in this regard, is to comply, or explain.

The following report has been structured, at minimum, to address all provisions of the code of governance of the Institute of Chartered Accountants of Sri Lanka.

JKH corporate governance framework

John Keells Holdings PLC (JKH) is committed to the highest standards of business integrity, ethical values and professionalism in all its activities towards rewarding our stakeholders with greater creation of value, yearonyear. Our governance framework is based on the following

• The board of JKH is responsible to shareholders to fulfill its stewardship obligations, in the best interest of the company and     its stakeholders

• Maximising shareholder wealthcreation on a sustainable basis while safeguarding the rights of multiple stakeholders is a    fundamental value shared by all levels of our management

• The methods we employ to achieve our goals are as important to us as the goals themselves, and this has been well    communicated to the individual businesses and functional units within the group

• Our operating models facilitate the making of business decisions, and resource allocations, in an efficient and timely manner, within a framework that ensures transparent and ethical dealings which are compliant with the laws of the country and the standards of governance our stakeholders expect of us

• We believe that building and improving stakeholder relationships is an integral aspect of board effectiveness and a responsible approach to business

• We will take an active role in discussions with the relevant regulatory bodies regarding the implementation of governance regulations, accounting standards, and economic reforms in Sri Lanka, and any other jurisdiction where the group has major business interests

• We opt for early adoption of best practice governance regulations or accounting standards, where practicable

• We understand that our resolve to maintain strong governance practices presents strong commercial advantages for us and the reduction of our cost of capital via the strengthening of stakeholder confidence, particularly the confidence of our investors, both institutional and individual

THE BOARD OF DIRECTORS

Board responsibilities and “decision matrix”

The Board of Directors is accountable to the shareholders for the governance of the company. All directors are accountable for the proper stewardship of the company's affairs and share a responsibility in ensuring the highest standards of public information, particularly financial information, ethics and integrity across the group. Powers specifically reserved for the board as highlighted in the JKH “decision matrix” include

• Guiding the overall direction, strategies and financial objectives of JKH and monitoring the implementation of the same

• Reviewing HR processes with emphasis on top management succession planning

• Appointing and reviewing the performance of the ChairmanCEO

• Approving major acquisitions and disposals and capital expenditure

• Monitoring systems of governance and compliance

• Overseeing systems of internal control and risk management

• Approving of annual budgets and strategic plans

• Approval of any issue of JKH equity/debt securities

• Determining any changes to the discretions delegated from the board to the executive levels

Delegation of authority

The board has, subject to predefined limits, delegated its executive authority to the ChairmanCEO who exercises this authority through the use of the Group Executive Committee (GEC), which he heads and to which he provides leadership and direction.

While the board sets the strategic direction and the overall policy framework of the group, it has delegated strategy formulation at industrygroup level and the implementation of board set strategies/policies to the ChairmanCEO. Details of the group's management, operating and overlay structures are detailed later in the report.

Board decision rights, as opposed to executive director decision rights, covering people, strategy and planning and finance are well defined and meticulously followed and ensure the balance between the speed of decision and appropriate debate. These decision rights are subjected to regular review and were recently revised to reflect the current needs of the group.

The board has also delegated some of its functions to board committees, while retaining final decision rights pertaining to matters under the purview of these committees. The Audit Committee and Remuneration Committee consist solely of independent directors whilst 4 out of the 5 members of the Nominations Committee, the exception being the ChairmanCEO of the company, are independent directors. All three committees are chaired by independent directors.

Attendance of board and committee meetings

	meetings		Committee meetings		Committee meetings		Committee meetings
	HEA	A	HEA	A	HEA	A	HEA	A
S Ratnayake - Chairman	5	5	1	1	-	-	-	-
A Gunewardene	5	5	-	-	-	-	-	-
S Gunesekera	5	5	-	-	-	-	-	-
R Peiris	5	5	-	-	-	-	-	-
F Amerasinghe - Chairman, Remunerations Committee	5	5	-	-	2	2	5	5
T Das - Chairman, Nominations Committee	5	5	1	1	-	-	-	-
S Enderby	5	5	1	1	-	-	5	2
M Muhsin	5	5	1	1	2	2	-	-
D Rodrigo - Chairman, Audit Committee	5	5	-	-	2	2	5	5
S Tiruchelvam	5	5	1	1	-	-	5	5
R Captain (resigned w.e.f. 6th May 2008)	5	5	-	-	-	-	-	-

HEA - Meetings held and eligible to attend
A - Attended

Role of the Chairman-CEO
The Chairman, who is also the Chief Executive Officer (CEO), is responsible for leading the board and for its effectiveness, as well as executing the strategies and policies of the board. The board has deemed that combining the two roles is more appropriate for the group at present, in meeting stakeholder objectives in a conglomerate setting. The board composition, group organisation, and in particular, the committee overlay structures discussed, under the heading “Group organisation & operational controls” later in this report, ensure that no one individual has unfettered powers of decision making. As the head of the Group Executive Committee (GEC), the Chairman-CEO provides the overall direction and policy/execution framework for the board's decisions via this structure. This enables him to effectively balance his role as the Chairman of the board and the CEO
of the company/group.

The Chairman, while leading the board in effectively discharging its duties towards all stakeholders, ensures with the assistance of the Board Secretary, that board procedures are followed and directors receive timely, accurate and clear information, before board meetings and updates on matters arising between meetings. As the CEO, he guides and
supervises executive directors in striking a balance between their board and executive responsibilities. The Chairman also
ensures that constructive working relations are maintained between the executive and non-executive members of the board so that every member is able to contribute effectively within their respective competencies. Finally, he sets the tone for the governance and ethical framework of the group.

Board meetings, agenda and attendance

The board of JKH, as decided during the previous financial year, meets once every quarter. During the year under review, the board met on 5 occasions; 4 being regular meetings and 1 being a special-purpose meeting.

The formal schedule of matters reserved for board consideration, and decision, include the items of the Decision Matrix as aforementioned, and other matters having a material effect on the company and the group.

Your board states that every one of its members dedicated adequate time and effort in discharging their duties and that member attendance during board meetings and board committee meetings (as highlighted in the table on the previous page) was healthy.

Allowing for nonexecutive director involvement in various board committees and time spent by them in considering various matters that require discussion, and decision, in between the formal board meetings, the company estimates that nonexecutive directors devoted around 25 full time equivalent days each to the group during the year.

Board composition and independence

As at 31st March 2008, the board consisted of 11 directors of whom 4, including the Chairman, are executive and 7 are nonexecutive. The board considers that 6 of the 7 nonexecutive directors are independent in accordance with the criteria suggested by the Combined Code and the criteria proposed for listed companies by the Securities and Exchange Commission of Sri Lanka, and have been identified as such in the board profiles given earlier in this report. Mr Rusi Captain is the only nonexecutive director considered by the board to be not independent, given that he and his connected parties have a significant shareholding in the company. The 6 independent nonexecutive members represent a majority on the board.

The nonexecutive directors had direct discussions with the ChairmanCEO, on 1 occasion during the year, without the presence of the other executive directors. Although a lead nonexecutive director has not been formally appointed, such discussions were led by Mr Tarun Das, an independent director. Nonexecutive directors are encouraged to propose discussion items and are provided with the agenda and supporting material well in advance to facilitate awareness and preparation.

The board is of the view that its present composition ensures a right balance between executive expediency and independent judgment. Collectively, the nonexecutive directors bring a range of value adding domestic and international experience, and expertise, in specialist functions. Biographical details of directors are set out in the Board of Directors section of the annual report. The nonexecutive directors of the board collectively possess strong financial acumen and are in good positions to assess the integrity of the group's financial reporting systems and controls, continually review and critique these systems and make changes to them as necessary.

The company is conscious of the need to maintain an appropriate mix of skills and experience on the board and to refresh progressively its composition over time. The company also notes the value that has been brought to bear by the non executive directors on the governance of the group.

Conflicts of interest

Over and above the issue of independence, each Director has a continuing responsibility to determine whether he or she has a potential or actual conflict of interest arising from external associations, interests or personal relationships, in material matters which are considered by the board from time to time. In the past, directors who have had an interest in a matter under discussion have excused themselves from deliberations on the subject matter and have abstained from voting on them. Abstentions, where applicable, from board decisions, are duly minuted.

Prior to appointment to the board, eligible persons are requested to make known their various interests that could potentially conflict with the interest of the company. Once appointed to the board, all directors are expected to inform the board of any new conflicting interests and obtain board clearance prior to accepting any position, or engaging in any transaction that could create a potential conflict of interest. All nonexecutive directors are required to notify the Chairman of changes in their outside board appointments, and the Chairman reviews such appointments in consultation with other directors, where necessary, in order to ascertain potential conflict situations. Details of companies in which board members hold board or board committee membership is available with the company, for inspection by shareholders on request.

Name of director	Type	Involvement/interest
		Share holding	Management	Material business relationship
S Ratnayake	ED	Yes	Yes	No
A Gunewardene	ED	Yes	Yes	No
S Gunesekara	ED	Yes	Yes	No
S Gunesekara	ED	Yes	Yes	No
F Amerasinghe	NED/ID	Yes	No	No
T Das	NED/ID	No	No	No
S Enderby	NED/ID	No	No	No
M Muhsin	NED/ID	Yes	No	No
D Rodrigo	NED/ID	No	No	No
S Tiruchelvam	NED/ID	No	No	No
R Captain*	NED/NID	Yes	No	No

* (resigned w.e.f. 6th May 2008)
ED - executive director
NED - non executive director
ID - independent director
NID - non independent.

Supply of information and board induction

All directors are fully briefed on important developments in the various business activities of the group and they regularly receive information concerning the group's operations, finances, situations which may give rise to conflicts of interest, risks and its people, enabling them to fulfill their duties and obligations effectively. A monthly CEO's report informs directors of shares that they cannot deal in during periods where the director may have information which is not in the public domain.

Steps are taken in ensuring that newly appointed nonexecutive directors are apprised of the operations of the group, its values and culture, strategies, its operating model, governance framework and processes. Their attention is also drawn to their responsibilities as directors in terms of prevailing legislation and to the code of conduct demanded by the company.

The directors have access to auditors, senior managers under a structured arrangement and information, as is necessary, to carry out their duties and responsibilities effectively and efficiently. Apart from periodic performance reports, directors also receive information updates, from management, on topical matters, new regulations and best practices as relevant to the group's businesses. Additionally, all directors have access to the services of the company secretaries whose appointment and/or removal is the responsibility of the board.

External professional advice

The board seeks independent professional advice when and where necessary. During the year under review, professional advice was sought on various matters including

• The Companies Act 2007

• Tax and regulations prevailing in certain Indian states

• Compensation and benefits applying to businesses, functions and industries that the group is involved in

• Asset impairment accounting and the practicability of some of the provisions of the new standard, early adoption of SLAS 16 covering employee benefits (gratuity) and, in particular, its actuarial valuation, and deferred tax in tax exempt companies

• Extensions to SAP HR and SAP business integration

• Employee Share Options and its accounting

• Sustainability reporting

• Carbon trading, among others

Board and CEO's performance appraisal

In the financial year 2007/08, an appraisal of the board's efectiveness was conducted on the basis adopted in the last year, thereby giving the board the opportunity of better understanding areas that had room for improvement. It is a formalised process of self appraisal, whereby each member assessed, on an anonymous basis, the performance of the board under the headings of “role clarity and effective discharge of responsibilities” (in relation to the responsibilities highlighted earlier in this report), “people mix and structures”, “systems and procedures”, “quality of participation” and “board image”. The scoring, and open comments, were collated by a nominated independent director and the results were analysed to give the board an indication of its effectiveness as well as areas that required addressing and/or strengthening. The open and frank discussions that followed the evaluation reflected the keenness of the board on doing what we do, better than we already do. While the analysis concluded that the board was functioning effectively, it did highlight some areas which could be improved on and action plans to address such highlighted issues were agreed.

The Remuneration Committee appraises the performance of the ChairmanCEO on the basis of preagreed objectives for the group, set in consultation with the board. Such performance is not merely judged in terms of the group's performance against plan but also considers the group's performance against its peers in areas such as revenue growth, market share, profit growth and earnings per share. Non quantifiable issues such as company image, customer orientation, societal trust are also considered in the overall assessment.

Board appointments and Nominations Committee

The responsibility for identifying and proposing suitable candidates for appointment as nonexecutive directors to the board of JKH, in keeping with the target board composition and skill requirements, lies with the Nominations Committee. It also manages the process of appointing the Chairman of JKH. Board appointments follow a formal and transparent procedure. There were no new appointees to the Board in the financial year 2007/08.

The Nominations Committee, comprises of 4 independent directors (including the chairman of the committee) and the ChairmanCEO of JKH.

The detailed Nominations committee report is given in the Board Committee reports section of the annual report.

Tenure, retirement and reelection

The executive directors are appointed and reappointed only until their prescribed company retirement age. The nonexecutive directors on the other hand, are appointed for a term of three years, ideally up to a maximum of three terms each subject to the age limit as per statutory provision at the time of reappointment following the end of a term.

Onethird of the directors, except the Chairman, retire by rotation on the basis prescribed in the articles of the company. A director retiring by rotation is eligible for reelection by a shareholder resolution at the annual general meeting.

All directors are subject to election by shareholders at the first annual general meeting after their appointment. The board recommends that shareholders vote in favour of the resolutions to elect the relevant directors whose biographical profiles have been provided in the annual report.

The board recommends the reelection of Messers E F G Amerasinghe, G S A Gunesekera and S Enderby who retire this year and become eligible for election at the Annual General Meeting to be held on the 27th of June 2008. Mr R S Captain resigned from the board on the 6th of May 2008.

REMUNERATION

A customised “pay for performance” scheme based on the pillars of individual performance rating and organisational performance rating was implemented during the subject financial year for all group employees at manager level and above, and based purely on individual performance rating for all group employees at assistant manager and executive levels. The rationale for the exclusion of organisational rating in linking pay to performance at the lower levels was that the individuals at those levels had little direct influence on bottom line of their organisations.

Whilst there were initial concerns regarding the acceptance by the subject employees of the raison d'etre of the new scheme, actual experiences are proving that the scheme is achieving the objectives of employee motivation towards better performance, employee recognition and reward and the alignment of employee, management and stakeholder interests.

The pay for performance system has, as its bedrock, the performance management system that the group has been perfecting over the last four years and the detailed remuneration surveys that the group conducted, using the services of Ernst and Young, Sri Lanka and Cornucopia Lanka Limited, Sri Lanka, in mid 2007, in addition to ongoing reviews of remuneration based on the participation in various surveys relevant to the group. During the year under review, the group participated in three specific surveys, all conducted by Mercer on behalf of a leading private sector company in Sri Lanka, a leading hotel based in Sri Lanka and our transportation company based in India.

Remuneration Committee

The Remuneration Committee, comprising three independent directors, is responsible for assisting the Board of Directors in establishing remuneration policies and practices in the group and in reviewing and recommending to the board appropriate remuneration packages for the ChairmanCEO and the other executive directors. In addition to being fully apprised of the “pay for performance” system introduced during the year under review, the Committee had discussions with various experts in understanding the rationale, and the operations, of various ESOP schemes in Sri Lanka.

The Remuneration Committee in consultation with the ChairmanCEO ensures that

• Levels of remuneration are sufficient to attract, retain and motivate directors of the desired quality at the right price

• Share options are not awarded below market price, and

• Statutory and legal requirements are complied with

None of the executive directors or members of the GEC are involved in influencing, or determining, their own compensation packages.

For the purpose of this report, the terms “Compensation” and “Remuneration” have been used in reference to cash and non cash benefits received in consideration of employment (excluding statutory entitlements such as employees provident fund and employees trust fund contributions), unless otherwise qualified.

Key principles

The key principles underlying the group's remuneration policy are
• All AVP and above roles across the group have been banded by an independent third party on the basis of the relative worth of    jobs, thereby enabling internal equity

• Compensation is set at levels that are competitive to enable the recruitment and the retention of high calibre executives in the    identified career levels/job bands as guided by the median, 65th percentile and 75th percentile of the best comparator set of    companies (from Sri Lanka and the region, where relevant)

• Compensation, comprising of fixed (base) payments, short term incentives and long term incentives are tied to individual    performance at all levels and organisational performance at manager levels and above

• Performance is measured annually on well defined individual and organisation objectives and metrics which reflect, and are    positively correlated to, the company's objectives, thereby aligning employee, management and stakeholder interests.    Organisational ratings are additionally modified to reflect market conditions via a set of preagreed peer comparators

• The more senior the level of management, the higher the proportion of the incentive component, and thereby lower proportion    of the fixed (base) component of total compensation

• As the decision influencing capability of the position on organisational results, increases, the individual performance will hold lesser weightage than the organisational performance when determining total compensation and incentives

• Long term incentives currently take the form of Employee Share Options and are offered to employees, in defined career levels, based on predetermined criteria which are uniformly applied across the same. Such options are offered at market prices prevailing on the date of the offer

• Affordability and sustainability

• Communication and transparency

Board remuneration

The remuneration of the ChairmanCEO, the executive directors and other members of the Group Executive Committee are determined as per the above principles. At these higher levels, the benchmark weightage between individual and organisation performances in establishing compensation is a 20:80.

The remuneration of executive directors have a significant element which is variable, such variability being linked to the peer adjusted consolidated group bottomline and minimum returns on shareholder funds.

The ratio between fixed and variable in 2007/2008, with variable being based on the actual performance in 2006/2007 was;

Compensation of nonexecutive directors (NEDs) is determined in reference to fees paid to other NEDs of comparable companies. The fees received by NEDs is determined by the Board and reviewed annually.

NEDs receive a fee for devoting time and expertise for the benefit of the group in their director capacities, and additional fees for either chairing or being a member of a committee. NEDs do not receive any performance/incentive payments and are not eligible to participate in any of the group's pension plans or share option plans. Non executive fees are not time bound or defined by a maximum/minimum number of hours committed to the group per annum, and hence is not subject to additional/lower fees for additional/lesser time devoted.

Makeup of remuneration for executive directors

The levels and makeup of remuneration, organisationwide, are linked to the key principles highlighted before.

In order to further align the interests of executive directors and shareholders, the executive directors, like other eligible employees, receive employee share options based on role responsibility and actual performance against the same. The number so awarded are recommended to the board by the remuneration committee. Such options are awarded at the closing market price on the date of award.

The share options made available to each of the executive directors for the year has been disclosed in the Directors' Report of the JKH Annual Report 2007/08.

Value of total remuneration (cash)	Rs.million
Executive Directors (company)	100.0
Non Executive Directors (company)	12.5

“Cash” compensation highlighted above comprises salary, pension contributions, short term incentive plans and other nonshare based benefits. In accordance with the guidelines of the Securities & Exchange Commission of Sri Lanka, we have disclosed the aggregate remuneration paid to executive and nonexecutive directors during the financial year 2007/2008. We have also disclosed the total value of share options granted to executive directors during the same financial year.

ACCOUNTABILITY & AUDIT

Your board has taken necessary steps to ensure the integrity of the group's accounting and financial reporting systems and internal control systems and also their review and monitoring on a periodic basis. Our systems of risk management, financial and operational control, ethical conduct, compliance with legal and regulatory requirements and corporate social responsibility are detailed below.

Audit Committee, external auditors and independence

The Audit Committee comprises of three independent directors. It is governed by a charter which, in the main, covers the principles governing financial reporting, internal control and the management of risks, both financial and operational, and the workings of the committee.

The committee is responsible for the consideration and appointment of external auditors, the maintenance of a professional relationship with them, reviewing the accounting principles, policies and practices adopted in the preparation of public financial information and examining all documents representing the final financial statements. A quarterly self certification programme that requires the chief financial officers of industrygroups, heads of finance of sectors and finance managers of operating units to confirm compliance with financial standards and regulations and requires the CEOs of business units to confirm operational compliance with statutory and other regulations and key control procedures, coupled with the identification of any deviations from the expected norms have significantly aided the committee in its efforts in ensuring correct financial reporting and effective internal control and risk management.

The ChairmanCEO, the Group Finance Director, the Group Financial Controller and the Head of Risk Control and Review and the external auditors are regular invitees to the meetings of the Audit Committee.

The detailed Audit Committee report including the areas reviewed during the financial year 2007/2008 is found in the Board Committee report section of the annual report.

Although Ernst & Young are the external auditors of the holding company and many other group companies and also audit the consolidated financial statements, the individual group companies employ many other audit firms, these being KPMG Ford, Rhodes, Thornton & Co, Pricewaterhouse Coopers, SJMS Associates, Deloitte and Touché, India and Luthra and Luthra, India. The audits have been distributed in a manner that does not give rise to one dominant external auditor in terms of fees. In addition to the normal audit services, Ernst and Young and the other external auditors, have also provided certain non audit services to the group. All such services have been provided with the full knowledge of the respective audit committees and are assessed to ensure that there is no compromise of external auditor independence. The board has agreed that, ideally, such non audit services should not exceed the value of the total audit fees charged by the subject auditor within the relevant geographic territory.

We have separately classified the audit and non audit fees paid by the company and group to our principal auditor, Ernst & Young, and to other auditors of companies in the group in the notes to the financial statements of the comprehensive Annual Report.

Care is taken to ensure that the internal audit function in group companies is not outsourced to the external auditor of that company. The group attempts, where practical, to give preference to audit firms who are not external auditors of any group company, in carrying out internal audit work in a further attempt to ensure external auditor independence.

The Auditors’ report on the financial statements of the company for the year under review in the Financial Reports section of the annual report.

Combining internal audit, risk management and insurance

During the latter part of the financial year, a key move was made in bringing the functions of internal audit, risk management and insurance under a common risk umbrella.

The group has identified a synergising relationship among these functions and aims to have in place, in the future, subject to further study and costbenefit/riskreward analysis, better risk management and risk transfer mechanisms, including the establishment of a captive insurance scheme that uses the strength of the group balance sheet, in optimising the residual cost of risks.

The proactive identification of all risks, both operational and financial, has helped in ensuring that internal, and external, audit programmes are tailored to the current needs of the subject entities.

Risk Management is now a key heading in all feasibility reports of new investments.

System of internal control

Your board has, through the involvement of the risk review and control department, taken steps to gain assurance that systems, designed to safeguard the company's assets, maintain proper accounting records and provide management information are in place and are functioning according to expectations. The risk review programme covering the internal audit of the whole group is outsourced and the reports arising out of such audits are, in the first instance, considered and discussed at the business/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.

Risk management

The GEC has adopted a groupwide risk management programme to identify, evaluate and manage significant group risks and stresstest for 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 shareholder and other stakeholder wealth. The detailed Risk Management Report of the comprehensive Annual Report describes the process of risk management as adopted by the group and the key risks to the achievement of the group's strategic business objectives.

During the year, JKH further reviewed and updated its groupwide financial policies and procedures, taking in to consideration new technology, the existence of a shared services arm, regulations and best practices. This has resulted in greater uniformity in financial and management reporting processes and has facilitated better discipline and easier monitoring. The highlight of the year was the review, and strengthening, of the VAT accounting and VAT returns/claims processes in catering to the prevailing requirements of the Inland Revenue Department.

The group continues its phased implementation of actions in order to align its groupwide common processes such as vendor payments, bank account reconciliations, inter company reconciliations and invoice verification, among others, in line with the COSO framework, which is the framework commonly used for assessing the effectiveness of internal controls over financial reporting under section 404 of the SarbanesOxley Act 2002, with a view to assessing the degree of internal control when recording transactional data under SAP. The phased implementation is aimed at streamlining transaction authorisation access based on role requirement, making user administration easier, enabling users access for roles they perform in full as well as ensuring a more effective categorisation of user IDs for licensing purposes.

Some of the issues faced by the group in the 3phased implementation process include certain roles requiring a greater degree of flexibility based on the nature of the business, difficulty in altering the system in existing businesses vs. implementation in new business units, and changes to authorisation matrices arising out of periodic review and restructuring. An authorisation matrix based on roles, as opposed to individuals, has been identified as a possible part solution to changes required in SAP due to changes in personnel.

Organisational and operational control

The operating model currently in place clearly defines authority limits, responsibilities and accountability facilitating operating expediency, healthy debate and decision freedom. The committee structure, as depicted below, whilst ensuring that no one operating body or individual has unfettered powers of decision making, allows consensus to as great an extent as practical, but it is the ChairmanCEO, the presidents, sector/functional heads and profit centre/function managers, who are accountable for the total group, industry/ functions groups, the sectors/functions and the business units/subfunctions respectively.

The independence of the finance function is preserved through a structure that has executive vice presidents finance and sector financial controllers having a direct functional reporting line to the Group Finance Director in a setting that allows them to contribute and add value to operations via their direct administrative reporting links with presidents and sector heads.

Group Executive Committee (GEC) and succession planning

The 7 member GEC consists of the ChairmanCEO, the Deputy Chairman, the executive director presidents and the presidents.

The GEC is the overlay structure that implements, under the leadership and direction of the ChairmanCEO, the policies and strategies determined by the board, manages, through delegation and empowerment, the business and affairs of the group, makes portfolio decisions and prioritises the allocation of capital, technical and human resources.

The GEC also assists the ChairmanCEO in succession planning and the appointment of presidents, sector heads, functional heads and other senior managers and the career management of assistant vice presidents and above. This process is well tested and on a proactive basis, a pool of potential successors for a number of key positions is identified and earmarked for specific training and development as is necessary. A key feature of the operating model is that the GEC members, particularly the presidents, not only play a mentoring role, but are totally accountable for the businesses and functions under them.

Group Operating Committee (GOC)
The 22 member GOC consists of the ChairmanCEO, the Deputy Chairman, the executive director presidents, the presidents and the executive vice presidents.

The GOC provides a platform to share learning on issues that cross industry groups, sectors, business units and functions. It is also the forum to discuss group strategy, group initiatives and group best practices. Its main purpose is to act as a “glue” in connecting the various businesses within the group towards identifying and extracting group synergies and implementation of such.

Group Management Committee (GMC) and other committees and succession planning
The other key operating committees are the GMCs, the Sector Committees and the Management Committees that focus on strategy, performance monitoring, career management and succession planning of employees below assistant vice president level, risk management and group initiatives at an industry group, sector, strategic business unit and business unit levels respectively. Functions have GMCs and functional committees. Business units are encouraged to take responsibility and accountability to the lowest possible level via suitably structured committees and teams in a management by objectives setting.

The agendas of these committees are carefully structured to avoid duplication of effort and ensure that discussions and debate are complementary both in terms of a bottomup and topdown flow of accountabilities and information. As stated earlier, the responsibility and accountability lie with the ChairmanCEO, the presidents, the sector/functional heads and the profit centre/function managers as applicable.

The introduction of peer adjusted organisational ratings in determining pay for performance has resulted in the search by business units, sectors and industry group of productivity enhancements, process improvements and cost efficiencies within a framework of better teamwork.

Operations planning, monitoring and decision rights
A planning and monitoring process, which facilitates and encourages the involvement of staff through annual plans that articulate strategy at industry group, sector, strategic business unit, business unit, departmental and functional unit levels, ensures employee involvement and empowerment. Decision rights are defined for each level and this has resulted in an inculcation of a sense of ownership, the reduction of bureaucracy and speedier decisionmaking. Annual and five year plans are formulated on a bottomup basis using futuristic scenarios developed by the GEC and GMCs and macro economic factors developed by the corporate centre.

Actuals are compared against the original plan and/or the reforecast on a monthly basis at GMC, Sector Committee, Management Committee and Departmental Committee levels and are reviewed at least quarterly by the GEC. The ChairmanCEO and the GEC are able to view key financial information for all group companies on a real time basis via the group ERP system while the presidents and executive vice presidents, the CEOs of business units and managers of functions are able to view, on an online basis, information relevant to their areas of responsibility.

Responsibility for monitoring and achieving plans as well as ensuring compliance with group policies and guidelines rests with the chief executive officers of each group company and heads of functions at the corporate centre at the business unit and function levels.

Individual performance objectives are established for all staff from executives to the ChairmanCEO and such objectives are linked to the group objectives. A performance management system that is founded on the performance objectives and a competency matrix developed as a part of the human resources management process provides the basis for training and development while individual performance ratings coupled with organisational rating, at levels applicable, form the basis of a pay for performance system.

At the GMC level and above, the focus is more on headline financial and nonfinancial indicators, strategic priorities, risk management, use of IT as a tool of competitive advantage, new business development, continuous process improvements and human resource management.

Going concern and financial reporting

The directors are satisfied that the company has sufficient resources to continue in operation for the foreseeable future. In the unlikely event that the net assets of the company fall below a half of shareholders funds, shareholders would be notified and an extraordinary resolution passed on the proposed way forward.

The going concern principle has been adopted in preparing the financial statements. All statutory and material declarations are highlighted in the Annual Report of the Board of Directors in the comprehensive Annual Report. Financial statements are prepared in accordance with the Sri Lanka Accounting Standards (SLAS), including all the new standards introduced during the subject year, and International Accounting Standards (IAS), as applicable.

Information in the financial statements of the Annual Report are supplemented by a detailed “Management Discussion and Analysis” which explains to shareholders the strategic, operational, investment and risk related aspects of the company that have translated in to the reported financial performance and are likely to influence future results.

The Statement of Directors' Responsibilities in relation to financial reporting is given in the Financial Reports Section of the annual report. The Directors' Interests in contracts of the company are addressed in the Annual Report of the Board of Directors.

The directors have taken all reasonable steps in ensuring the accuracy and timeliness of published information and in presenting an honest and balanced assessment of results in the quarterly and annual financial statements. As discussed in the shareholder relations section of this note, all price sensitive information has been made known to the Colombo Stock Exchange, shareholders and the press in a timely manner and in keeping with the regulations.

Ethical and responsible decision making values

The board encourages management to promote valuebased decision making across the organisation. The culture within JKH draws upon a set of unifying values to guide the actions and decisions of the board and all employees. The group's values are found in the “Our Values” section of the Annual Report and are/have been constantly referred to by the ChairmanCEO, Presidents and BU heads during employee, agent and other key stakeholder engagement. The group believes that the main source of its competitive advantage is the trust that the stakeholders place on the core values underlying its corporate activities.

The group's core values are regularly displayed in the group's intranet and are also disseminated in many other ways, including new employee induction sessions, feedback sessions and performance management feedback sessions, just to name a few. The senior management of the group, generally recognised as AVP and above grades including the ChairmanCEO, are expected to walk the talk and their management behaviour is monitored through an annual 360degree feedback. All the group's recognition schemes insist, as a minimum, that all nominees have lived the JKH Values.

Code of conduct
A code of conduct has been formally communicated to all employees, executives and above and are now a component of the employee self service HR portals developed by group HR and group IT on a SAP platform and is based on four basic principles, namely
• The allegiance to the company and the group

• The compliance with rules and regulations applying in the territories that the group operates in

• The conduct of business in an ethical manner at all times and in keeping with acceptable business practices, and

• The exercise of professionalism and integrity in all business and “public” personal transactions

The subject employees are expected to adhere to the code in the performance of their official duties and in other situations that could affect the group's image and are expected to entrench the expected behaviour at all levels in the organisation through communication and role modelling.

Securities trading policy

The group's securities trading policy prohibits all employees and agents engaged by JKH who are aware of unpublished pricesensitive information from trading in JKH shares or the shares of other companies in which the group has a present business interest. The board, GEC, GOC as well as certain identified employees in senior executive roles who are privy to JKH's results prior to its availability to the public are prohibited from trading during periods leading up to the release of quarterly and annual results, new investments, particularly mergers and acquisitions, announcements of scrip issues and dividend payments.

Open communications

JKH board believes in maintaining opendoor policies for its employees and key stakeholders and this is promoted at all levels of the group.

Given the hierarchical structures that are unavoidable in an organisation as diverse as JKH, the entrenchment of open communications is yet to take the form and be in the extent desired. The importance of communication, topdown, bottomup and lateral in gaining employee commitment to organisational goals through a sense of belonging as a result of being better informed has been emphasised through various communiqués issued by the ChairmanCEO and other senior managers.

Skiplevel meetings, which were introduced for employees at assistant manager and above levels throughout the group companies in 2006/2007 and enabled employees to get an opportunity to interact, and discuss, with superiors who are at a level higher than their own immediate supervisor, gained in stature during 2007/2008 and proved to be more effective as the subject employees gained more confidence in its intent. This has furnished the management with a conduit, via firsthand feedback, to information, which has been helpful in improving operations and work relationships.

Whistleblower policy

The group has established a mechanism for employees to report to the Chairman through a communication link named “Chairman Direct”, concerns about unethical behaviour and any violation of group values. Employees reporting such incidents are guaranteed complete confidentiality and such complaints are investigated and addressed via a select committee under the direction of the Chairman.
While this is a key process within JKH to support and promote honest and ethical behaviour, this course of action is to be used where the systems and processes that are already in place do not, or are not, capable of addressing the issue at hand.

Compliance

The board is conscious of its responsibility to the shareholders, the government and the society in which it operates and is committed to upholding the highest standards of ethical behaviour in conducting its business. The board, through the group legal division, the group finance division and its other operating structures, strives to ensure that the company and all of its subsidiaries and associates comply with the laws and regulations of the countries they operate in.

The Board of Directors have also taken all reasonable steps in ensuring that all financial statements are prepared in accordance with the Sri Lanka Accounting Standards and the requirements of the Colombo Stock Exchange and other applicable authorities. The Sri Lanka Accounting Standards, as set by the Institute of Chartered Accountants of Sri Lanka, are those, which govern the preparation of the financial statements. The International Accounting Standard is used in the rare instance where a Sri Lanka Accounting Standard does not exist. The board is aware of the growing importance of the disclosure of critical accounting policies as a part of good governance and opine that there are no instances where the use of such concept would have a material impact on the company's and the group's financial performance.

The group has made every effort to comply with the requirement of the new Companies Act which came into effect from 3rd May 2007.

Corporate responsibility

The group recognises that it exists not only to maximise long term shareholder value but also to look after the rights and appropriate claims of many nonshareholder groups such as employees, consumers, clients, suppliers, lenders, environmentalists, host communities and governments. We recognise that they have a stake in the outcome of the group's actions and, accordingly, we will accord to them an increasing status when making corporate decisions. More importantly, we are becoming more aware of the impact of our business decisions on these stakeholder groups, the environment and broader communities.

Corporate responsibility is admittedly an area that demands more prominence in the group's decision matrix. While we have been reporting on our sustainability practices in the past, we believe that our efforts, particularly on stakeholder and environmental aspects, could be more focused, further refined and better organised. This year, the group undertook an extensive audit of its operations in order to ascertain the full impacts of its business operations on the economy, environment and society and establish the gaps and shortcomings in the way we currently integrate such impacts in our short term, medium term and long term decisions and strategies. An audit of our sustainability practices was recently conducted by Det Norske Veritas (DNV) and the main findings of the audit have been captured in the Sustainability Report of the comprehensive Annual Report. A quick scan of the findings give us the confidence that much can be achieved by a few immediate actions and the group has already taken the next steps in formulating action plans and in establishing a steering committee that will monitor the actual progress against plans. It has also been agreed that sustainability priorities and objectives will be developed and adopted, for each of our major businesses and will be integrated in to the annual planning and strategy formulation processes. The John Keells Social Responsibility Foundation, the vehicle used by the group in developing and implementing the group's involvement in “the community”, is gearing itself to ensure that the social programmes of the group are consistent with the principles of sustainable development.

The company, through its Investor Relations division (IR), maintains an active dialogue with shareholders, potential investors, investment banks, stockbrokers and other interested parties. Any concerns raised by a shareholder are addressed promptly at the department level and are forwarded, when necessary, to the GEC for consideration and advice. Analysts reports are circulated among the GEC, as and when available, and its contents debated.

SHAREHOLDER RELATIONS

Constructive use of AGM

Shareholders will have the opportunity at the forthcoming AGM, notice of which has been communicated to you to put questions to the board and to the Chairman of JKH and the chairmen of the various committees. The contents of this annual report will enable existing and prospective stakeholders to make better informed decisions in their dealings with the company.

In general, all steps are taken to facilitate the exercise of shareholder rights at AGMs, including the receipt of notice of the AGM and related documents within the specified period, voting for the election of new directors, new long term incentive schemes or any other issue of materiality that requires a shareholder resolution.

Dialogue with institutional shareholders

The company has a welldeveloped investor relations programme to address the information needs of investment institutions and analysts regarding the company, its strategy, performance and competitive position. Given the wide geographic distribution of the company's current and potential shareholders, this programme includes regular roadshows to Asia Pacific, Europe and the USA conducted by the Deputy Chairman and the Head of Investor Relations. Matters discussed, and issues raised, at these meetings are brought to the attention of the GEC and/or the board, as appropriate, and addressed.

Major transactions

All material and price sensitive information about the company is promptly communicated to the Colombo Stock Exchange, where the shares of the company are listed and released to the press and shareholders. The group also publishes quarterly, halfyearly and nine months ended interim reports to all its shareholders in a timely manner. The interim and annual reports, contain a Chairman's message which explains, at a high level, the performance, background and rationale for all major transactions.

THE FUTURE

JKH is committed to conducting its affairs with integrity, efficiency and fairness to all stakeholders. Our approach to governance is of introspection, critical review, continued benchmarking and improvement. This, we believe, is not a choice as much as it is an essential, as the global investment community becomes more and more stakeholders oriented in their expectations of how companies should conduct business. As a businesses based in an emerging market, now sometimes referred to as a frontier market, we seek to remain a preferred choice for investment. Therefore, as in the past few years, our key areas of focus will continue as follows

• Creating robust operating structures that are able to evolve to face the challenges of our strategic plans and continuous reinvention of our portfolio, while maintaining sound internal controls

• Developing the depth and reach of our external stakeholder relationships, improving transparency and efficiency in information flows and promoting partnership and mutual understanding between management and external stakeholders

• Staying abreast of international best practices and adopting those that add value to the group and its stakeholders, and

• Doing what we do, better than we already do.