Corporate Governance Statement

Introduction

This statement sets out Hills' commitment to business practices and corporate governance.  It also describes the Hills approach to corporate governance and summarises the main policies and procedures that Hills has in place.

ASX Principles of Good Corporate Governance

Hills places great importance on the proper governance of the Company and has always had policies to ensure good business practices.

A description of the Company's main corporate governance practices is set out below. They comply with the August 2007 ASX Principles of Good Corporate Governance and Best Practice Recommendations.

Hills' commitment to reviewing and complying with the ASX recommendations is an ongoing one and the Board continues to review the framework and practices to ensure they meet the interests of shareholders.

The ASX recognises that in their Principles they are making recommendations, not prescriptions. Where a recommendation is not considered appropriate to Hills particular circumstances, Hills has the option of not adopting it, as long as it explains why it has chosen not to adopt it.

The ASX Principles make recommendations on materials to be made available. Hills has made all of the recommended documents available and have established links from this website to those documents.

ASX Corporate Governance Principles:

Principle 1: Lay solid foundations for management and oversight

In Principle 1, ASX recommends establishing and disclosing the respective roles and responsibilities of Board and management. Hills addresses this recommendation as follows.

1.1 Establish functions reserved to the Board and those delegated to senior executives

The Board is responsible to shareholders for the performance of the Company in both the short and the longer term and it seeks to balance sometimes competing objectives in the best interests of the Group as a whole.  Its focus is to enhance the interests of shareholders and other key stakeholders and to ensure the Group is properly managed.

The Board remains responsible for overseeing the performance of the management team on behalf of shareholders, but delegates responsibility for the day-to-day management of Hills to the Managing Director and senior executives.

To ensure that this delegated responsibility is clearly defined, the Board has formally delegated a range of authorities to management. These include limited expenditure authority and the authority to enter into certain contracts.

The Board Charter can be viewed by clicking here.

1.2 Disclose the process for evaluating the performance of senior executives

As part of overseeing the performance of senior executives, the Board has established a process of annual performance review and goal planning, whereby each executive is evaluated against a range of criteria, including achievement of strategic and financial goals, safety performance and business excellence.  All senior executives participated in this evaluation, which was conducted in accordance with the prescribed process, during the year ended 30 June 2009.

Principle 2: Structure the Board to add value

ASX recommends having a Board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. Hills address this recommendation as follows.

2.1 A majority of the Board should be independent Directors

Board Composition

The Hills Constitution allows for a maximum of ten directors. The Hills Board currently comprises seven directors, six being non-executive directors plus the Managing Director. The directors come from a variety of business and professional backgrounds and bring to the Board a range of skills and experience relevant to Hills. Details of the directors' experience, expertise, qualifications and terms in office are set out in the Directors’ Report under the heading “Information on Directors’. The latest details are set out in the 2009 Concise Annual Report and can be viewed by clicking here.

The Board believes that the first priority in the selection of directors is their ability to add value to the Board and enhance Hills' performance whilst safeguarding shareholders' interests. Accordingly, relevant expertise and competence is considered as important as technical independence.

Directors’ independence

In assessing whether a Director is independent the Board considers whether there are any, or the extent of any business or other relationships, between the Director and the Company and whether such relationships could, or could reasonably be perceived to, materially interfere with the Director's independent exercise of their judgement.

In determining whether a relationship between a Director and the Company is considered to be material, the Board assesses a range of quantitative and qualitative matters including the proportion the transactions represent to both the Company and the Director and the value or strategic importance of the relationship to both the Company and the Director.

Currently, the Board has five independent and two non-independent directors.  Of the six non-executive directors, five are independent and one is non-independent. Ms JH Hill-Ling is not defined as an independent director primarily due to her ownership interest in Hills.

Details of the directors' independence status and relationships affecting their independence are set out in the Directors’ Report under the heading “Information on Directors’”.

Details of transactions between directors and members of the Hills Group are provided in the Concise Annual Report. The latest details are set out in the 2009 Concise Annual Report and can be viewed by clicking here.

Directors and Board committees have the right, in connection with their duties and responsibilities, to seek independent professional advice at the Company’s expense, subject to approval of cost by the Chairman.

2.2 The chair should be an independent director

The Board believes that the role of chairman should be filled by the person most suited to the role, with the most relevant skills and experience and who adds the greatest value to the Board and to Hills.

The Chairman, Ms J H Hill-Ling, whilst non-executive, is a non-independent director. This is not in accordance with ASX recommendation 2.2 but is considered appropriate given:

• the Hill-Ling family's interest in Hills;
• Ms Hill-Ling's considerable experience on the Board of Hills; and
• the various positions and activities engaged in outside Hills, which are considered invaluable in her role as chairman.

Whilst Ms Hill-Ling is not an independent Chairman, Mr RB Flynn is the appointed lead independent director.

2.3 The role of Chairman and Managing Director should not be exercised by the same individual

The Board charter specifies that the Chairman should not be the same person as the Managing Director. These are separate roles to be undertaken by separate people, with Mr GL Twartz appointed to the position of Managing Director.

2.4 Nomination Committee

The Board has established a Nomination Committee to ensure that the Board retains a sufficiently wide mix of expertise to fulfil its responsibilities.

The Nomination Committee comprises three Directors, two of whom are independent. The Committee is chaired by an independent Director.  Membership of the Nomination Committee and details of their attendance at meetings are set out in the Directors' Report.  The latest details are set out in the 2009 Concise Annual Report and can be viewed by clicking here.

The Nomination Committee is responsible for devising criteria for Board membership for approval by the full Board, except the Managing Director, for identifying individuals for nomination and making recommendations to the Board for new directors and membership of committees.

When a new Director is to be appointed the Committee reviews the range of skills, experience and expertise on the Board, identifies its needs and prepares a short-list of candidates with appropriate skills and experience.

The full Board then appoints the most suitable candidate who must stand for election at the next Annual General Meeting of the Company.  The Committee's nomination of existing Directors for reappointment is not automatic and is contingent on their past performance, contribution to the Company and the current and future needs of the Board and Company.  The Board and the Committee are also aware of the advantages of Board renewal and succession planning.

The Charter for the Nomination Committee can be viewed by clicking here.

2.5 Disclosure the process for evaluating the Board, its Committees and individual Directors

Board operations

The Board has formalised a process for the selection and induction of new directors to ensure they are provided with the information required to properly perform their role.

The Board meets regularly, usually monthly, as well as to approve annual and half yearly reports. The directors' attendance at those meetings is set out in the 2009 annual report and can be viewed by clicking here. The directors receive a comprehensive Board pack before each meeting. Senior executives meet regularly and present to Board and committee meetings on particular issues.  All directors have unrestricted access to Company records, information and personnel.

The Board has established three committees, the Audit and Compliance Committee, the Remuneration Committee and the Nomination Committee. Each committee operates in accordance with a Board-approved charter. Details of committee membership and details of meetings and attendance at those meetings are provided in the Concise Annual Report. The latest details are set out in the 2009 Concise Annual Report and can be viewed by clicking here.

Performance assessment

The Chairman undertakes a regular assessment of the performance of individual Directors, the Board as a whole and its Committees and meets privately with each Director to discuss this assessment.  The assessment is facilitated by an independent external consultant and comprises both top down and bottom up components, with a peer review of the Board’s performance, the performance of the Chair and of its committees, as well as an assessment of the adequacy of induction and continuing education, access to information and the support provided by the Company Secretary.  Management also provide input to the appraisal process.  The results and any action plans are documented together with specific performance goals which are agreed for the coming year.  An assessment carried out in accordance with this process was undertaken during August 2009.

Principle 3 Promote ethical and responsible decision-making

In Principle 3, ASX recommends actively promoting ethical and responsible decision-making. Hills address this recommendation as follows.

3.1 Establish a code of conduct – Hills' commitment to ethical business practices

While the Hills Board has adopted the ASX principles of good corporate governance and implemented most of the ASX recommendations, it believes that these types of rules and regulations are of limited value unless supported by a foundation of honesty and integrity which has been a foundation of Hills' business practice.

The Board has adopted a Code of Conduct for Hills. The Code of Conduct can be viewed by clicking here.

The Code applies to all employees within Hills from the Board, through management to all other staff. The Code encourages all staff and other stakeholders to report any breaches of the Code in accordance with the Hills' Whistleblower Protection Policy which can be viewed by clicking here.

3.2 Share dealings by directors and officers

Hills' Securities Trading Policy prohibits trading in Hills Securities by all Hills employees and directors who possess inside information.

The Policy prohibits certain designated persons (Directors, The Company Secretary, members of the Executive Management Group and their direct reports and such other employees nominated by the Managing Director) trading in Hills securities during 'black out' periods leading up to the next ASX trading day after the day on which the half yearly and annual results are released to the ASX.

The Securities Trading Policy can be viewed by clicking here.

Principle 4 Safeguard integrity in financial reporting

In Principle 4, ASX recommends having a structure to independently verify and safeguard the integrity of the company's financial reporting. Hills address this recommendation as follows.

4.1 – 4.3 Audit and Compliance Committee

The Board has established an Audit and Compliance Committee which is responsible for reviewing the financial accounts and other financial information distributed externally, monitoring the adequacy of risk management and internal control systems and monitoring procedures in place to ensure compliance with statutory responsibilities.

The committee consists of three directors, all of whom are non-executive and independent. The Chairman of the committee is an independent director who is not the Chairman of the Board. The Chairman of the Board, Managing Director, Chief Financial Officer (CFO), and external and internal auditors are invited to attend the committee meetings. Details of the members of the Audit and Compliance Committee together with details of their qualifications and attendance at committee meetings are set out in the Directors’ Report. The latest details are set out in the 2009 Concise Annual Report and can be viewed by clicking here.

The committee has a Board-approved charter setting out its role, responsibilities, structure and membership requirements. A copy of  the Audit and Compliance Committee Charter can be viewed by clicking here.

The Charter includes information on the committee’s procedures for the selection and appointment of external auditors, and for the rotation of external audit engagement partners.

Hills' financial accounts are subject to an annual audit by an independent, professional auditor, who also reviews the half-year accounts.

The Board has in place policies for ensuring the quality and independence of Hills' external auditors. The majority of fees paid to Hills' external audit firm for work other than the audit of the accounts were for taxation services. Details of the amounts paid for both audit and non-audit services are provided in the Directors’ Report. The latest details are set out in the 2009 Concise Annual Report and can be viewed by clicking here.

It is Hills auditor’s, KPMG, policy to rotate audit engagement partners on listed companies at least every five years.  The Board requires that adequate hand-over occurs in the year prior to rotation of an audit partner to ensure an efficient and effective audit under the new partner.

Principle 5 Make timely and balanced disclosure

In Principle 5, ASX recommends promoting timely and balanced disclosure of all material matters concerning the company. Hills address this recommendation as follows.

Witten policies and procedures have been established which are designed to ensure compliance with ASX Listing Rule disclosure requirements. The Board aims to ensure that all investors have equal and timely access to material information concerning the Company and that its announcements are factual and presented in a clear and balanced way.

The Board has established continuous disclosure controls throughout Hills that include senior executives providing regular sign-off concerning matters that require disclosure to the ASX.

The Board and the Audit and Compliance Committee monitor the compliance with ASX Listing Rule disclosure requirements. The Managing Director and Company Secretary are responsible for ensuring compliance with the Company’s continuous disclosure policy.

Principle 6 Respect the rights of shareholders

In Principle 6, ASX recommends respecting the rights of shareholders and facilitating the effective exercise of those rights. Hills address this recommendation as follows.

6.1 Communications with shareholders

The Board is committed to ensuring that shareholders are informed of all non-confidential material matters. It accomplishes this through:

• the annual report distributed at the end of September each year;
• the Chairman's address to the annual general meeting;
• the letter from the Chairman mailed to all shareholders on the release of the half-year financial results;
• providing information on Hills' website, which contains extensive information about the Hills Group and its activities, including annual reports and shareholder information; and
• making appropriate disclosure to the market where necessary.

The Board requests the external auditor to attend the annual general meeting each year and to be available to answer shareholder questions regarding the conduct of the audit and the preparation and content of the auditor's report.

The Board ensures that shareholders are made aware that the external auditor is present and available for questions at the annual general meeting.

A copy of the Communications and Market Disclosure Policy can be viewed by clicking here.

Principle 7 Recognise and manage risk

In Principle 7, ASX recommends establishing a sound system of risk oversight and management and internal control. Hills address this recommendation as follows.

7.1 Board to establish policies for the oversight and management of material business risks

The Board, through the Audit and Compliance Committee, is responsible for ensuring there are adequate policies in relation to risk management, compliance and internal control systems.  The Board has required management to design and implement a risk management and internal control system to manage the Company's material business risks.

In summary, the Company policies are designed to ensure strategic, operational, legal, reputation and financial risks are identified, assessed, effectively and efficiently managed and monitored to enable achievement of Hills business objectives. To realise its risk management objectives, Hills:

• Identifies and assesses risks to Hills business objectives and understands how such risks influence performance;
• Ensures that an appropriate risk management framework is in place, that it is aligned to Hills business strategy and that it evolves with Hills business;
• Supports the framework and strategy with an appropriate organisational structure and ensures that associated responsibilities are clearly defined and communicated at all levels;
• Ensures that risk management information is communicated through a clear and robust reporting structure; and
• Integrates ongoing risk management activities within the business.

7.2 Management to design and implement the risk management and internal control system to manage the Company’s material business risks and report on whether those risks are being managed effectively.

The Managing Director is responsible for overall risk management leadership, policy and program implementation.  The CFO supports the Managing Director in discharging these responsibilities and is responsible for providing appropriate risk management resources to guide and support all Hills personnel in maintaining the risk management framework and the risk register, as well as coordinating regular reporting to the Audit and Compliance Committee.

The Managing Director also includes in his report to the Board a risk report that notifies directors of any issues or concerns and reports as to the effectiveness of the Company’s management of its material business risks. In addition, the Board reviews all major strategies and purchases for their impact on the risks facing Hills and takes appropriate action.

General Managers and the CFO are responsible for the implementation of the risk management process across their respective groups. This includes identifying and evaluating risks within their area of responsibility, implementing agreed actions to manage risks, reporting any activity or circumstances that may give rise to new or changed risks and monitoring the effectiveness of mitigation strategies. General Managers are also responsible for communicating the intent of the risk management policy and all other related policies to all staff under their control, and for ensuring their staff actively participate in the identification and management of risk.

Hills' internal audit department is responsible for reviewing compliance with the internal control systems and operates under a Board-approved charter.

The Internal Auditor is not an employee and has access to both the Chairman of the Audit and Compliance Committee and Chairman of the Board as and if required. The Audit and Compliance Committee oversees the operation of the internal audit department, approves its plans and reviews its work program and activities.

7.3 Declaration by Chief Executive Officer and Chief Financial Officer (CFO)

The Board has policies designed to ensure that Hills' financial reports meet high standards of disclosure and provide the information necessary to understand Hills' financial performance and position. The policies require that the Managing Director and CFO provide a written statement to the Board prior to the Board approving the annual and half-year accounts.

The Board has received assurance from the Managing Director and CFO that, in their opinion:

• The Company's financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and Group and are in accordance with relevant accounting standards.
• The above statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board and that the Company's risk management and internal compliance and control is operating efficiently and effectively in all material respects in relation to financial reporting risks.

Principle 8 Remunerate fairly and responsibly

In Principle 8, ASX recommends ensuring that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear. Hills addresses this recommendation as follows.

8.1 The Remuneration Committee

The Remuneration Committee assists and makes recommendations to the Board on remuneration policies, strategies and practises for the Board and senior executives. The committee operates in accordance with a Board approved charter and consists of three directors with a majority being independent. Details of membership and attendance at committee meetings are provided in the Directors2019 Report. The latest details are set out in the 2009 Concise Annual Report and can be viewed by clicking here.

The Remuneration Committee Charter can be viewed by clicking here.

8.2  Directors’ and executive remuneration

The Hills Board believes that it has a responsibility to ensure that executive remuneration is fair and reasonable, having regard to the competitive market for executive talent, structured effectively to motivate and retain valued executives and designed to produce value for shareholders. Details in respect of Hills' remuneration policies, their costs and benefits and the link between remuneration and corporate performance are provided in the Remuneration Report within the Directors’ Report. The latest details are set out in the 2009 Concise Annual Report and can be viewed by clicking here.

The remuneration of non-executive directors is different to that of executives. Executive directors receive a salary and may receive bonuses and options in accordance with plans approved by shareholders.

Non-executive directors receive a set fee per annum and are fully reimbursed for any out of pocket expenses necessarily incurred in carrying out their duties. They do not receive any performance related remuneration, nor shares or options as part of their remuneration.

When reviewing directors' fees, the Board takes into account any changes in the size and scope of Hills' activities, the potential liability of directors and the demands placed on them in discharging their responsibilities. The Board also considers the advice of independent remuneration consultants.

Retirement benefits

Directors receive their statutory superannuation entitlements. In addition, certain non-executive directors are entitled to receive benefits on retirement under a scheme which has now been discontinued.

Under the scheme, directors are entitled to a maximum retirement benefit of twice their annual directors' fees (calculated as an average of their fees over the last three years) accumulated over a period of eight years of service.

Since the scheme was discontinued, no new directors have become entitled to any benefit and the benefit multiple for existing directors (up to a maximum of two times fees) remains fixed.

These benefits have been fully provided for in the financial statements.

Indemnity and insurance of directors

In accordance with Hills' constitution and to the extent permitted by law, Hills indemnifies every person who is, or has been, a director or secretary and may agree to indemnify a person who is or has been an officer of a group Company against a liability incurred by that person in his or her capacity as such a director, secretary or officer, to another person (other than the Company or a related body corporate of the Company) provided that the liability does not arise out of conduct involving a lack of good faith. In addition, Hills has directors and officers insurance against claims and expenses that Hills may be liable to pay under these indemnities.