Introduction

Highlights

• Maintaining a balanced board structure equipped to take business to the next level.
• Evolving governance structures at all levels of the business.
• Review of risk management structures across the bank.
• Launching the revised vision and values through a series of 25 presentations: 15 in South Africa, eight in the rest of Africa, and two internationally.

Challenges in 2005

• Achieving a balance between conformance and performance.
• The implementation of a matrix structure within the bank’s reporting lines.
• Ongoing preparation for the implementation of Basel II.
• Ongoing education of the board of directors in light of the changing regulatory environment.

Looking ahead we will:

• Maintain good governance and risk management throughout the business.
• Continue to work towards full implementation of Basel II by 1 January 2008.
• Further embed the vision and values.

A detailed corporate governance section can be found in the 2005 Annual Report.

Overview

The group is committed to good governance in every aspect of its operations and complies with the King Code of Corporate Practices and Conduct (King II).

We believe that adherence to governance best practice not only minimises risk and assists in achieving the intended aims of the regulatory authorities, but also delivers significant business benefits over the long-term. Our governance framework enables our directors to balance their responsibility to provide oversight with their role as providers of strategic counsel, thereby achieving a proper balance between conformance and performance.

Given our global footprint, a matrix structure of reporting lines is steadily being implemented to ensure the appropriate degree of oversight and control throughout the group. Ongoing attention is given to ensure that governance structures and policies are applied effectively both at group and business unit levels.

Although its subsidiaries, Liberty Life and Stanlib, operate according to their own governance structures, these are aligned to the group’s governance principles and differ only where necessary to ensure operational relevance.

Board of directors and committees

The Standard Bank board has been constituted to ensure a balance of perspectives, expertise, experience and diversity relevant to the strategic direction of the group and the markets it operates in. The governance processes and performance are reviewed annually and documented by the board.

Board profile as at 8 March 2006

Governance structures

Risk

A detailed risk management section can be found in the 2005 Annual Report.

Risk management

Risk management is central to good governance and, in many important respects, defines our ability to operate profitably and sustainably in developing economies. Our risk management structures are geared to ensure the effective identification, measurement, management and control, and reporting of the risks we face.

The management of risk is a complex undertaking for the financial services sector. The proactive and ongoing evaluation of risk, across financial and non-financial categories, allows the leadership of a business to mitigate and manage its risks to within the limits of its appetite for risk and tolerance for deviation from set parameters.

During 2005, the bank’s risk management structures, policies and processes were revisited and are being updated. In future all principle risks will be subject to overarching board governance standards. All standards are to be applied consistently across the group and are owned by the group risk management committee. The standards will ensure alignment and consistency in the way that pervasive risk types are managed across the bank. This is in line with the bank’s minimum control requirements for each risk type.

The risk governance principles are integral to a risk management approach that balances risk oversight at group level with independent risk management structures within individual business units, ensuring a strong risk management focus at all times.

As we strengthen our international presence, we continue to review our compliance and risk management skills, systems and processes and, where appropriate, enhance these further. We will be looking to leverage the bank’s South African learnings to apply a structured approach to implementing governance and risk management structures in new markets, while ensuring frameworks and systems are developed to meet the requirements of each individual market.

The Basel Capital Accord (Basel II)

During June 2004, the Bank of International Settlement released the final Basel II Capital Adequacy Framework (Basel II). It was introduced to promote greater consistency in the way banks and banking regulators approach risk and capital management across national borders.

To promote greater stability in the financial system, Basel II recommends three pillars:

• Minimum capital requirements.
• Supervisory review.
• Market discipline.

The South African Reserve Bank (SARB) has announced that the South African implementation dates of the new capital adequacy framework will be 1 January 2008, with banks in South Africa and the regulator evaluating the impact of the new framework on the capital requirements and risk management processes during a parallel run to be conducted for one year prior to implementation (i.e. commencing on 1 January 2007).

The group is currently working towards meeting the “advanced approaches” requirements for all risk categories. The approaches on commencement will be Advanced Internal Ratings Based (IRB) for Personal & Business Banking, Foundation IRB for Corporate & Investment Banking and Standardised approach for operational risk. A detailed migration plan for all the entities across the group has been prepared for approval by the SARB.

Numerous projects are in progress across the group to ensure:

• Basel II risk management principles are incorporated into the day-to-day risk management functions within the group.
• Optimal benefit is obtained through compliance with the new regulations, specifically in terms of the bank’s capital obligations.

The Basel II programme of projects is managed through a groupwide governance structure, which includes dedicated Basel II co-ordinators and business unit level Basel II steering committees. The primary function of this structure is to oversee projects and provide monthly updates to senior management and the board.

Ethics

Like effective risk management, building a corporate culture based on high ethical standards is central to ensuring good governance. Our values, which were revised during the year to ensure relevance both to our people and our markets, provide the basic criteria for ethical behaviour for all employees. An ongoing aim of our employee communications is to further embed this common set of ethical standards and associated behaviours across the bank. To further reinforce this, the code of ethics is being revised to bring it into alignment with the revised values.

Financial crime

Our approach

Standard Bank has a policy of zero tolerance to fraud that has created an environment hostile to any form of crime or dishonesty. We are committed to listing the names of dishonest employees in the Register of Employees Dismissed database (REDs) maintained by the Banking Association of South Africa. Criminal conduct is reported to the authorities and we actively pursue the recovery of assets defrauded.

Policies

Standard Bank’s group money laundering control policy and standards have been updated to incorporate the terrorist financing controls promulgated in terms of the Protection of Constitutional Democracy Against Terrorist and Related Activities Act (POCDATARA). The policy and standards require that all employees be trained with specific reference to money laundering control. Industry training material has been developed to perform this function and is used both for workshops and electronic training for new employees, as well as for refresher training for existing employees.

Fraud prevention and detection

To bring Standard Bank in line with leading practice and good corporate governance, the bank’s fraud hotline (0800 113 443) has been outsourced to the KPMG Ethics Line. The hotline allows employees and customers to report suspicious activity anonymously –without fear of recrimination or victimisation.

The fraud hotline is currently only available within South Africa. This facility is in the process of being implemented in other countries in which the bank operates. Anyone outside of South Africa may however provide details of suspected fraud via a hotmail address.

The 2005 Fraud Miles million rand reward winner frustrated the activities of a cheque fraud syndicate that could have cost Standard Bank substantially in excess of a million rand, had they been successful.

Sustainability reporting

Reporting on our non-financial performance in a transparent and balanced way is an important part of staying accountable to stakeholders. Responsibility for overseeing sustainability issues is shared by the board committees shown above.

An indicator of Standard Bank’s operational commitment to sustainability reporting is its participation in two key sustainability indices.

The Dow Jones Sustainability Index

The bank has participated in this index for the sixth consecutive year, and is one of only four South African companies included.

JSE SRI Index (JSE Limited Socially Responsible Investment Index)

Standard Bank has participated in this index for the second consecutive year. A total of 58 (2004: 74) companies participated in the survey and 49 (2004: 51) met the criteria.

Overview of Standard Bank’s performance on the Dow Jones Sustainability Index