How our leadership supports value-creation
The board embraces the importance of good governance and King IV governance outcomes of ethical culture, good performance, effective control and legitimacy. Our application of King IV is detailed in the report available on our website. Our corporate governance report on page 86 demonstartes how we achieve the governance outcomes desired by King IV.
I am honoured to address our valued stakeholders through our 2018 integrated report.
Following political instability, policy uncertainty, weak economic growth, the deterioration of SOCs and the increasing budget deficit, South Africa's sovereign credit rating was downgraded to sub-investment grade by global credit ratings agencies S&P and Fitch Ratings, and put on review by Moody's. This lowered business and consumer confidence, consequently lowering investments and decreasing spending.
We felt the impact in the ICT sector, as the private and public sectors respectively deferred and lowered their spend on ICT. This impacted Telkom's performance, particularly BCX, which serves all sectors of the economy.
In December 2017, the African National Congress elected a new party president, who became the country's president in February 2018. He presented the State of the Nation Address in the same month during which he reassured investors and provided clarity on government's plans to grow the economy and deal with corruption. Restoring SOCs' credibility and sustainability by eliminating irregular and excessive expenditures, evaluating their funding models and building the integrity of governance are a key focus.
The national budget tabled in February 2018 showed the hallmarks of fiscal consolidation. Value added tax was increased for the first time in 23 years to plug the fiscal gap, while basic goods and services are under review to be zero-rated to protect the indigent.
These political developments, combined with more transparent and predictable policy, have improved the outlook of credit ratings agencies and thus that of potential investors. Moody's affirmed South Africa's investment-grade sovereign credit rating and revised its credit outlook from negative to stable in March 2018. Telkom's outlook was also revised in line with the sovereign outlook. S&P affirmed the sovereign ratings with a stable outlook.
In the financial year ahead, we see positive sentiments contributing to improved business confidence while acknowledging that actual investments will lag.
There is uncertainty around the policies for the ICT White Paper. The Independent Communications Authority of South Africa's (ICASA's) calls for transforming South Africa into an inclusive and innovative digital society. The goal is increased access to a wide range of affordable high-quality communication services. Movements such as #datamustfall have placed pressure on South African mobile network operators to reduce the cost to communicate. In August 2017, the Competition Commission launched an inquiry into communication services and pricing structure of the South African telecommunications market. Telkom has developed innovative products that offer data bundles at lower prices, with free voice and WhatsApp calling as well as uncapped and unlimited products. Unfortunately, regulatory uncertainty, among others, makes future operating conditions less predictable.
Telkom continues to evalute the changing policy landscape and monitors legislative and regulatory changes to proactively mitigate risks, benefit from opportunities and remain competitive. To implement the ICT White Paper, existing legislation will need to be amended.
The Electronic Communications Act Amendment Bill aims to address supply-side challenges and mainly proposes legislation around the creation of a wholesale open access network and the assignment of spectrum, among others.
The board sets the strategy and ensures good performance by measuring performance against agreed key metrics. Performance is managed through KPIs that drive high employee performance. Remuneration incentives are linked to the delivery of the strategic objectives.
Despite Telkom’s performance being negatively impacted by the weak economic environment, we are pleased with two themes that came through our annual results, which attest to success of the strategy. The mobile business, which is a fourth player in the industry, is now a driver of growth in the group and the new generation revenue streams are offsetting the revenue decline from our traditional products and services. The investment in our mobile network is paying dividends with expected returns, while the returns in our fibre investment are expected over the medium- to long-term. We will continue to invest in our future growth, including but not limited to fibre, as this investment will ensure Telkom’s sustainability and the relevance in future just as Telkom continues to benefit from the investment in copper more than 30 years later.
Telkom views transformation as a catalyst to address South Africa’s socio-economic challenges and the associated impacts on business. We aim for sustainable transformation and go beyond compliance to B-BBEE certification. We have initiated strategies and programmes to improve our B-BBEE certification level as it affects our ability to attract business. These include a transformation and compliance plan to address the three priority elements: implementation of aggressive Skills Development and Enterprise Supplier Development programmes; and applying the B-BBEE certification plan; and targets to individual teams to incentivise performance.
Given the importance of the B-BBEE certification level and BCX’s ability to acquire and maintain business, BCX was rated independently. Based on the initiatives, the group rating improved from level 6 to level 4, and BCX was rated level 3. Refer to social and relationship capital on page 77 for further detail.
Board focus areas
The board remains focused on driving the Telkom strategy and ensuring that the appropriate operating model and resources are in place to meet current and future business requirements. The evolving operating model is designed to support the group strategy and improve Telkom’s competitiveness by addressing our accountability, governance, and way of working. The board is continuously stretching, testing and monitoring management’s thinking and rationale in developing this model, and the key focus this year has been the deeper operational separation of the business units.
Additional topics that were material in board discussions, and which are discussed in the report are:
- The need to constantly invest in, and improve, customer experience
- Capital investment and monitoring returns
- BCX’s performance and the portfolio review
- Size and scale of the mobile business
- B-BBEE certification level
- Continuously seeking new opportunities through technology, investments, partnering and customer-centric service to remain competitive
Looking ahead, South Africa looks set for a degree of economic recovery and improved investor and consumer confidence. The board will continue monitoring Telkom’s competitiveness, by reviewing the strategy for relevance. We compete for the skills to create innovative products and for market share through these products. Our focus will remain on attracting and developing the skills needed to compete and ensuring that Telkom is an employer of choice. BCX will complete its business portfolio review and divest from non-core businesses, while growing new generation revenue streams.
To improve the board's skills, knowledge and diversity, two independent non-executive directors were appointed during the financial year.
- Sello Moloko is the executive chairman and co-founder of Thesele Group, a 100 percent black-owned diversified investment holding company. Mr Moloko has a wealth of business experience gained from a career of more than 25 years in financial services.
- Dolly Mokgatle is currently an executive director for Peotona and the chairman of Total South Africa (Pty) Ltd. Her previous role as the chief executive officer (CEO) of Spoornet and other executive and board positions provide her with a wealth of experience in governance and leadership.
- Sibusiso Luthuli is a qualified chartered accountant, the former CEO and principal officer of the Eskom pension and provident fund and one of the founding members and deputy chairman of Batseta. He previously served as a non-executive director of Telkom, CEO of Ithala Bank Ltd and chairman of Cipla Medpro Pharmaceuticals Ltd. He serves as a non-executive director and chairman of the finance, risk and compliance committee of BCX. He has vast experience in auditing, accounting and business leadership.
- Tsholofelo Molefe was appointed as the GCFO and an executive director, effective 01 July 2018. She is a qualified chartered accountant who joined Telkom on 01 July 2016 as deputy CFO. She was subsequently appointed to exco as chief risk and compliance officer on 01 April 2017. She was formerly a finance director at Eskom and served as a director at various subsidiaries of Eskom. Her experience includes various senior positions at Eskom, ABSA and Liberty among others. She is currently a board member of Yellow Pages (know as Trudon) and serves as an independent non-executive director of First Avenue Investment Management.
The following were appointed to the board after financial year.
We welcome these appointments and the value they will bring to the board. For more information on the résumés of the new non-executives directors, refer to page 132.
During the year, Telkom announced its intentions to procure the services of new auditors for the group. Following an extensive and robust process and in accordance with paragraph 3.75 of the JSE Listings Requirements, the board, through the audit committee, recommends the appointment of PricewaterhouseCoopers and SizweNtsalubaGobodo as Telkom's new joint external auditors for the financial year ending 31 March 2019 for approval by Telkom's shareholders at the forthcoming annual general meeting (AGM) to be held on 23 August 2018. The board would like to thank EY for the services that they have provided to the group during their tenure.
This has been a year of change and consolidation amid trying economic circumstances. I extend my appreciation to our board for your continued guidance, support and robust engagement. A special thanks to Itumeleng Kgaboesele who steps down from the board after seven years. Thank you to our management team and our employees for your hard work and commitment. My appreciation extends to our customers, service providers and shareholders, without whom we could not do business. I thank you for your continued support and look forward to strengthening our relationship into the future.