Corporate Governance

“The Board takes overall responsibility for the Group”

Compliance

The Telkom Board subscribes to, and is fully committed to, sound business principles and practices of integrity and accountability, and values of good corporate governance as espoused in the Code of Corporate Practices and Conduct of King II (the Code). In so doing, the directors recognise the need to conduct the enterprise in accordance with best corporate practices. We are in the process of implementing the requirements of King III.

The Board is of the view that Telkom complies in all material respects to the principles of the Code. While it acknowledges the importance of good governance, the Board is aware that Telkom does not strictly comply with certain principles set out in the Code. These areas of non-compliance stem mainly from certain provisions in Telkom's articles of association which make provision for certain rights associated with the Class A and B shareholders. Most of the areas of non-compliance will be resolved by no later than March 2011, when the provisions of Telkom's articles of association resulting in non-compliance with the Code fall away or earlier if the shareholding of the Class A shareholder falls below certain stipulated levels.

Chairman and Board of Directors

The Board takes overall responsibility for the Group and its role is to exercise leadership and sound judgement in directing the Group to achieve continued prosperity and to act in the best interests of stakeholders.

Telkom has a unitary Board comprising 12 directors. In accordance with Telkom's articles of association, five non-executives including the Chairman have been appointed by the Government of South Africa (the Class A shareholder) and one non-executive appointed by Black Ginger (the Class B shareholder).

There are four other non-executive directors who are appointed at the Company's annual general meeting or by the Board and are considered to be independent, as set out in King II and the JSE Listings Requirements. The executive directors on the Board are the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). In line with best practice, the roles of the Chairman and Chief Executive Officer are separated. The Board is led by Mr J Molobela, the Chairman, while operational management of the Telkom Group was the responsibility of Mr RJ September, Chief Executive Officer up to 6 July 2010. Mr RJ September resigned from the Group on 7 July 2010 and will assume a consulting role up to 1 November 2010. Mr Jeffrey Hedberg has been appointed as acting Chief Executive Officer. Mr Peter Nelson, Chief Financial Officer resigned effective 9 October 2010. The Board is in the process of sourcing a permanent CEO and CFO.

In terms of the articles of association, the non-executive directors appointed by the Class A shareholder have a fixed term of three years and may be re-elected to the Board by that shareholder. The Chairman has a term of one year and is re-elected as Chairman for the ensuing year by the Class A shareholder. The four independent non-executive directors are subject to retirement by rotation and re-election by shareholders at least every three years in accordance with the articles of association and JSE Listings Requirements.

The holders of the Class A and B ordinary shares are the government of the Republic of South Africa and Black Ginger respectively. The only significant shareholder is the Class A shareholder who currently holds 39.8% of the issued ordinary shares in the Group. The significant shareholder has certain Board-reserved matters which are detailed in the Group's articles of association. Pursuant to the articles of association, while the government is a significant shareholder, neither Telkom nor any of its subsidiaries may take action with respect to certain reserved matters unless authorised by the Board. In addition, the authorising resolution of the Board must have received the affirmative vote of at least two of the directors appointed by the Class A shareholder.

The members' resignations and appointments to the Telkom Board of Directors during the year under review are as follows:

Resignations

ST Arnold (Chairman) - 1 November 2009
KST Matthews - 30 October 2009

Appointments

J Molobela (Chairman) - 1 November 2009
JN Hope - 1 November 2009

Company Secretary

All directors have access to the advice and services of the Group Company Secretary, who is responsible for ensuring the proper administration of the Board and corporate governance procedures. The Group Company Secretary provides guidance to the directors on their responsibilities within the prevailing regulatory and statutory environment and the manner in which such responsibilities should be discharged.

Details of the secretary's business address and the Group's registered office are set out on the inside back cover of this annual report.

Delegation of authority

The ultimate responsibility for the Group's operations rests with the Board. The Board retains effective control through a well-developed governance structure of Board committees which specialise in certain areas of the business. Certain authorities have been delegated to the CEO to manage the day-to-day business affairs of the Group. The Group executives assist the CEO in discharging his duties and the duties of the Board when it is not in session. However, in terms of statute and the Group's constitution, together with the revised delegation of authority, certain matters are still reserved for Board and/or shareholder approval.

Board meetings

Board meetings are held at least once a quarter. In addition to these meetings, whenever circumstances dictate the necessity, special Board meetings are convened. During the year under review, four scheduled Board meetings were held and three additional special Board meetings were convened. Details of attendance by each director of the Board are set out in the table alongside. Certain members of senior management attend Board meetings when invited to make presentations on particular issues of interest to the Board. A majority of directors, one of whom must be a representative of the Class A shareholder, are required for a quorum for Board meetings.

The following table presents the attendance of meetings held during the 2010 financial year by directors:

Committees

The Board is assisted in discharging its duties through its committees.

Executive Committee

This committee consists of the two executive directors that serve on the Board of Directors and chief executives and managing directors of the Telkom Group. The Chief Executive Officer is the Chairman of this committee and has the power of authority to, among other things:

• Implement approved business plans, annual budgets and all other matters and issues relating to the achievement of Telkom's obligations under its licences, including without limitations network expansion, equipment procurement, tariff setting and packaging, customer service and marketing; and
• Prepare, review and recommend to the Board the annual budgets and any amendments thereto.

Audit and Risk Committee (ARC)

The ARC is chaired by Mr PCS Luthuli, an independent non-executive director. It held four scheduled meetings and two special meetings during the financial year. Mr Luthuli is a Chartered Accountant.

In terms of its charter, the ARC evaluates the Group's systems of internal and financial control; reviews accounting policies and financial information issued to the public; reviews the performance of the internal and external auditors and determines the fees payable to the external auditors. It also determines and monitors the use of the external auditors for non-audit related services. The committee reviews financial results and recommends same to the Board for approval. A quorum for a meeting is a majority of directors (one of whom must be a Class A representative).

As at 31 March 2010, the committee comprised six non-executive directors of which four are considered independent:

PCS Luthuli (independent)
RJ Huntley
DD Barber (independent)
PG Joubert (independent)
B du Plessis
B Molefe

The terms of reference of the committee were reviewed and approved during the year.

The Audit and Risk Committee conducts the Chief Financial Officer's evaluation as well as a self-evaluation exercise into its effectiveness on an annual basis. The committee conducted the Chief Financial Officer's evaluation, and the committee confirms that it is satisfied with the appropriateness of the expertise and experience of the Chief Financial Officer.

The internal and external auditors have unlimited access to the Chairman of the Audit and Risk Committee.

The Audit and Risk Committee is satisfied that Ernst & Young is independent in accordance with section 270A of the Corporate Laws Amendment Act, and nominated the re-appointment of Ernst & Young as registered auditors for the 2010/2011 financial year.

Nominations Committee

The Nominations Committee, which must have a minimum of three members and is chaired by a non-executive director, consists of Mr Molobela (Chairman), Mr PCS Luthuli, Mr B du Plessis and Ms JN Hope. A quorum for a meeting is two members (one of whom must be a Class A shareholder representative).

The Nominations Committee held three scheduled meetings and two special meetings during the financial year.

The committee makes recommendations to the Board on the composition of the Board, and the balance between executive, non-executive and independent non-executive directors with respect to all aspects of diversity and experience.

The committee is responsible for identifying and nominating candidates and formulating succession plans in conjunction with the Human Resources Review and Remuneration Committee (HRRRC) for the approval of the Board.

In addition, the committee recommends to the Board, continuation (or not) of services of any director who has reached the retirement age as well as directors who are retiring by rotation, for re-election.

Investment and Transactions Committee

The Investment and Transactions Committee, consists of Mr DD Barber (Chairman), Dr E Spio-Garbrah, Ms RJ Huntley, MR PCS Luthuli, Ms JN Hope, Mr B Molefe,Mr RJ September, Mr PG Nelson and Dr VB Lawrence.

The Investment and Transactions Committee held three scheduled meetings and two special meetings during the financial year.

The function of the committee is to assist the Board in evaluating investments, corporate actions and key funding and financial proposals.

Human Resources Review And Remuneration Committee (HRRRC)

The committee consists of non-executive directors and executive management as provided by the Group's Articles of Association. Ms RJ Huntley, a non-executive director, was appointed Chairman of the HRRRC as of December 2009. The HRRRC comprises the following non-executive directors of which two must be independent:

RJ Huntley (Chairman)
B du Plessis
PG Joubert (independent)
JN Hope
E Spio-Garbrah
RJ September
JC Smit

The HRRRC held four scheduled meetings and three special meetings during the financial year.

HRRRC

This HRRRC, in consultation with management, ensures that the Group's top management and senior executives are fairly rewarded for their individual contribution to the Group's performance. In fulfilling its duties, the HRRRC gives consideration to industry and local benchmarks to ensure that remuneration packages remain competitive. Senior executives receive a salary, short-term incentive and an allocation of shares in terms of the rules of the Telkom Conditional Share Plan. Medical and retirement benefits are also offered. Remuneration packages are reviewed annually and performance bonuses are linked both to individual performance and to the performance of the Group. Non-executive directors are paid fees for their services as directors of the Group and for their participation as members of the Board committees.

Board effectiveness

An appraisal of the effectiveness of the Board was conducted externally during the year. The appraisal was benchmarked against the strategic requirements of Telkom SA to ensure the capacity to deliver these requirements and strengthen the diversity and sector expertise of directors. The appraisal was positive and its recommendations will be implemented.

Share dealings

In line with JSE Listings Requirements and the Group's insider trading policy, executives who wish to trade in Telkom securities are required to obtain prior written approval from the Chairman of the Board and the Group Company Secretary before dealing in Telkom securities. The Group operates closed periods as defined in the JSE Listings Requirements. Additional closed periods are enforced, when required, in terms of corporate activities as and when these occur.

Telkom practices in respect of corporate governance are listed in the table below.

Internal controls

Telkom has a well established internal control environment monitored by the ARC, whose duties include:

• Assessing the Group's risk areas;
• Consistent monitoring of systems, and processes in place to prevent and/or mitigate these risks; and
• Reviewing the quality of reporting and adherence to internal policies.

This incorporates internal control procedures designed to provide reasonable assurance that the Group's assets are safeguarded and the risks facing the business are being assessed and mitigated.

Telkom's internal controls are based on established written policies and procedures which are monitored throughout the Group and are applied by sufficiently skilled personnel with appropriate segregation of duties through clearly defined lines of accountability and delegation of authority.

The internal control environment is supported by the Group's Business Code of Ethics, setting the standards of professionalism and integrity. An effective internal control environment has oversight from Telkom's active and participative Board and its related committees. The Board reviews and monitors key risk areas and key performance indicators of the business that are essential components of an effective control environment.

The Group's organisational structure facilitates and allows the flow of information upstream, downstream, and across all business activities. This is supported by formal mechanisms in place to communicate the responsibilities and expectations of business activities at executive level.

The Board assesses the Group's risk dashboard and ensures that the necessary procedures are in place to facilitate effective risk management, which entails identifying, measuring and taking action to manage the risk. In discharging its duties with regard to risk management, the Board is assisted by the Telkom Risk Management Committee (TERMC), an executive committee chaired by Peter Nelson, group CFO.

Existing internal control mechanisms are in place to anticipate, identify and react to risks arising from external and internal environments. The risk analysis process is well defined at policy and procedure level providing sufficient guidance on risk assessment and mitigation.

Whilst compliance to Section 404 of the Sarbanes-Oxley Act applicable to companies listed on the NYSE is no longer a requirement, Telkom maintains a similar process to comprehensively evaluate and report on the effectiveness of its internal control over financial reporting on an annual basis. Continuing this effort ensures that Telkom is able to discharge its responsibility to meet internal financial control assessment requirements suggested by King lll. Progress reports are submitted at least quarterly to the ARC which in turn reports to the Board.

The reports are provided to the Board by Telkom's management with appropriate and timely information about the business, operations and general affairs of the Telkom Group.

Telkom's Internal Audit function, Telkom Audit Services (TAS) plays a key role in providing an objective view and continuous assurance of the effectiveness of the internal control systems throughout Telkom to both management and the ARC. Significant deficiencies and material weaknesses in internal controls are reported to top management or the ARC, and are shared with the external auditors.

Telkom Audit Services (TAS)

TAS, in accordance with best in class practices, is a value-adding, independent and objective assurance and consulting internal audit function, designed to add value to and improve the organisation's operations. Its mandate is to give independent assurance of reliability of financial reporting, validate control systems and give an oversight of management and overall business activities, bringing a systematic, disciplined approach to the evaluation and improvement of the effectiveness of risk management, internal controls and corporate governance processes. In carrying out its mandate, TAS co-ordinates with other control and monitoring functions (risk management, compliance, security, legal, ethics, environment and external audit).

TAS is required to provide reasonable assurance and to determine whether or not the organisation's control processes and systems are adequate and functioning in a manner to ensure that:

• Resources and assets are effective and efficiently utilised and adequately protected;
• Risks are appropriately identified and managed;
• Significant financial, managerial and operating information is accurate, reliable and timely;
• Employees' actions are in compliance with policies, standards, procedures and applicable laws and regulations;
• Significant legislative or regulatory issues impacting on the organisation are recognised and addressed appropriately; and
• Regularly provides an assessment of the adequacy and effectiveness of the organisation's corporate governance, risk and control processes for controlling its activities and managing its risks set down in the mission and scope of work.

To ensure the independence of TAS, the Group Executive of TAS, reports functionally to the ARC Chairman and administratively to the Chief Financial Officer with direct access to the Chief Executive Officer. In this context, the ARC oversees processes related to financial risks and internal controls, financial reporting and the monitoring of internal and external auditing processes. In carrying out its duties, the TAS team has unrestricted access to all Telkom functions, records, property and personnel.

The TAS team conducts audit work, or any other task, in accordance with the internal auditing standards set by the globally recognised Institute of Internal Auditing (IIA). This requires compliance with the Standards for Professional Practice of Internal Auditing (SPPIA), in particular, the codes of conduct and ethics that are promulgated from time to time by relevant professional bodies, and any other corporate governance initiatives. Internal Audit practices and activities are also benchmarked independently by an authoritative external party as recommended by the SPPIA and required by the ARC. TAS also provides information to management, ARC and the Board on the status and results of the annual audit plan and the adequacy of the departmental resources.

During the financial year, TAS embarked on a co-sourcing arrangement with a consortium managed by PricewaterhouseCoopers to augment the existing resource structure. This augmentation has enabled sufficient attention being directed towards the growth aspirations of Telkom in areas of new business, whilst ensuring that existing business areas receive due attention.

TAS has also initiated the Telkom Combined Assurance Forum (TCAF) as recommended by King lll, aimed at collaborating the efforts of all assurance providers at Telkom in a effort to avoid duplication of assurance effort, optimisation of assurance cost and a better understanding of the business by all participants to the forum.

Further TAS, adopted strategies and techniques aimed at addressing the specific internal audit requirements of King lll, which includes better strategic alignment of the assurance efforts of TAS.