The Board acknowledges the need for and continued maintenance of the highest standards of corporate governance practice and ethical conduct by all Directors and employees of Michael Hill International Limited and its subsidiaries.

The Board endorses the overall principles embodied in the New Zealand Institute of Directors' "Code of Proper Practice for Directors". It has a majority of Independent Directors on the Board, to provide balance and a cross section of skills and experience.

Role of the Board

The Board is responsible to shareholders for charting the direction of the Group by participation in the setting of objectives, strategy and key policy areas. It is then responsible for monitoring management's running of the business to ensure implementation is in accordance with the agreed framework. The Board delegates the conduct of the day-to-day affairs of the company to the Chief Executive Officer within this framework.

The workings of the Board and its code of conduct are governed by the Company's constitution and a Board Operations Manual, committed to by all Directors. This manual sets out all the functions and operating procedures of the Board, including charters for each sub-committee. The Board Operations Manual also clearly sets out those matters that only the Board can make decisions on. These include dividend payments, solvency certificates, raising new capital, major borrowings, approval of the annual accounts, provision of information to shareholders, major capital expenditure, acquisitions, and approval of store leases.

Each year, the company produces a comprehensive five year plan and an operating budget which are both reviewed and approved by the Board. Financial statements are prepared monthly and reviewed by the Board progressively through the year to monitor management's performance against the budget and five year plan.

Board Membership

The Constitution currently sets the size of the Board at a minimum of three and a maximum of eight and at least two Directors must be resident in New Zealand. The Board currently comprises six Directors, comprising an Executive Chairman, a Chief Executive Officer, and four independent Directors. The Board met on six occasions in the financial year ended 30/6/00. Mr Wally Yovich retired at the Annual Meeting in November 1999, after 12 years on the Board, and Mr Murray Doyle was appointed to the Board in February 2000, having worked with the Board as a consultant for the previous six months. Mr Howard Bretherton retired from the company as joint Managing Director on 30 June 2000, after 13 years on the Board. Profiles of the current Directors appear on page 21 of this Report. Under the Company's constitution, one half of all Directors must retire every year, but can be re-elected at an annual meeting if eligible.

The Company has no requirement for Directors to hold shares in the Company but actively encourages them to do so.

Directors' Meetings

The table below sets out the Board and sub-committee meetings attended by Directors during the course of the Financial Year.

Board Review

During the course of the last financial year, the Board conducted a self assessment of its performance over the previous 12 months and a number of changes to policies and procedures were made as a result.

Board Committees

The Board has established a number of sub-committees to guide and assist the Board with overseeing certain aspects of corporate governance - the audit process, determination of compensation issues and the structure of the Board itself. Each sub-committee is empowered to seek any information it requires from employees in pursuing its duties and to obtain independent legal or other professional advice.

Audit Sub-Committee

The Audit sub-committee, which is chaired by John Ryder and consists of Messrs Doyle and Peters, met three times during the year. The function of the Audit sub-committee is to assist the Board in carrying out its responsibilities under the Companies Act 1993 and the Financial Reporting Act 1993, regarding Management's accountancy practices, policies and controls relative to the Group's financial position and to review and make appropriate inquiry into the audits of the Group's financial statements by both internal and external auditors. This responsibility includes advising on the appointment of the external auditor and reviewing the scope and quality of the audit. The committee also reviews areas of financial and other risks faced by the company, and the steps being taken to minimise such risk.

Remuneration Sub-Committee

This sub-committee, chaired by Wayne Peters, comprises Messrs Hill, Doyle, Ryder, Gwynne and Peters. The function of the Remuneration sub-committee is to make recommendations to the Board concerning the Chief Executive's and Senior Managements' remuneration. This role also includes responsibility for share option schemes, incentive performance packages, and fringe benefit policies. The sub-committee also advises on proposals for significant company wide remuneration policies and programs. In carrying out this role, the sub-committee operates independently of Senior Management of the Company, and obtains independent advice on the appropriateness of the remuneration packages. The committee met on two occasions during the year.

This sub-committee also has the responsibility to review the performance of the Chief Executive Officer on an annual basis.

A change implemented this year by this committee has been to structure Senior Management bonuses around a return on capital employed basis, to emphasise efficient use of capital.

Nominations Sub-Committee

This sub-committee, chaired by Michael Hill, consists of the independent Directors and Michael Hill. The function of the sub-committee is to make recommendations to the Board regarding the most appropriate Board structure. It also advises on the appointment of additional Directors. Board membership is reviewed periodically to ensure the Board has an appropriate mix of qualifications, skills and experience. External advisors may be used to assist this process. Any person who is to be considered as a Director of the company must attend three Board meetings in the capacity of a Consultant before being eligible for appointment as a Director.

Share Trading by Directors

The Board Operations manual sets out a procedure which must be followed by Directors when trading in Michael Hill International shares. Directors must notify and obtain the approval of the Company before trading in MHI shares and are only permitted to trade in two window periods. The window periods commence at the time the half yearly or yearly results are announced and expire five months after the end of the financial year or four months after the end of the half yearly accounting period of the company, as the case may be.

Conflicts of Interests

The Board Operations manual sets out a procedure to be followed where Directors are faced with a conflict of interest.

At all times a Director must be able to act in the interests of the organisation as a whole. The interests of associates, individual shareholders and the personal interests of the Director and his family must not be allowed to prevail over those of the Company and its shareholders generally.

Michael Hill Jeweller is committed to the management of risk throughout its operation in order to protect its employees, assets, earnings and reputation.

Reporting

The Audit sub-committee is responsible for overseeing the Group's risk management programme. The Audit sub-committee receives detailed Risk Management reports from each country, updating them on the progress of the risk programme and the identification of new risks. A brief Risk Management report is provided to the Board of Directors when the Audit sub-committee is not scheduled to meet. In addition, the sub-committee are provided with internal audit reports on internal controls and identified risk exposures.

Our progress to date has been encouraging and has seen the implementation and continued progress of the following:

Australia

• Departmental strategic planning addressing risks identified in the annual risk review
• Ongoing risk assessment of Company assets
• Monitoring the management of identified risks
• Risk profiling of business units
• Security assessments of stores
• New security initiatives in stores
• Upgrade of security for the new Head Office building

New Zealand

• Management Seminar facilitated by outside Consultants to identify the major risks facing the company
• Identification of the key risk areas to be addressed in the coming year
• Ongoing risk management of identified risks
• Upgrading of security systems and monitoring of their performance
• Security training increased for all Store staff and Head Office staff

Group

• Policy development with regards to the management of financial and treasury operations including exposures to foreign exchange movement, derivative trading, movement in exchange rates
• Employment of additional resources within internal audit (Australia and New Zealand)

Business Continuity Planning

As a major risk identified in the risk review, management from both countries are currently reviewing a number of different approaches with a view of implementing one strategy and plan for the entire Group.

Insurance Programme

The Group undertakes a comprehensive annual insurance programme that examines the Group's residual risk exposure.

The Environment, Occupational Health and Safety

The Group recognises the importance of environmental and occupational health and safety issues and we are committed to the highest levels of performance within the Group.

The Group's aims are to

• Comply with all relevant legislation
• Encourage employees to actively participate in the management of environmental and occupational, health and safety issues
• Employ consultants where required to raise standards or improve existing conditions
• Use energy and other resources efficiently
• Encourage the adoption of similar standards by the Group's principal suppliers, contractors and distributors.

Year 2000

No major issues were encountered in relation to the roll over to the year 2000 in relation to the operating computer software and microprocessors within the Group and its external parties. Operations in both countries were unaffected.

Australia - Goods and Services Tax (GST)

The Australian Government introduction of a new tax system including "GST" came into effect 1 July 2000. As a consequence, significant resources and costs were allocated to implement major changes to the Company's software, product repricing and accounting. Overall the implementation has been successful with no major issues arising.