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 managements 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 Companys 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 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 managements 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 30/6/01. Mr John Ryder retired at the Annual Meeting in November 2000 after 13 years on the Board,and Mrs Christine Hill was appointed to the Board in February 2001. Profiles of the current Directors appear on page 21 of this Report. Under the Companys 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 Murray Doyle 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 managements accountancy practices,policies and controls relative to the Groups financial position and to review and make appropriate inquiry into the audits of the Groups 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 audit sub-committee has the responsibility of monitoring the Groups Risk Management practices and procedures. The Groups auditors,both internal and external, have direct access to the committee and may discuss any matters in connection to audits,the Groups risk and control environment or any other matters relating to the Groups financial and non-financial affairs.

REMUNERATION SUB-COMMITTEE

This sub-committee,chaired by Wayne Peters,comprises all Directors except M.Parsell. The function of the Remuneration sub-committee is to determine the Chief Executives 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.

The committee has continued 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 operations to protect its employees, assets,earnings and reputation. The Board has implemented a risk management framework which is designed to identify the sources of risks and opportunities,quantify the impact and implement processes to control and reduce risk and maximise opportunities. The Board recognises that its Risk Management Programme identifies both risk and opportunities for the Group.
Risk Management processes are subject to review by the Audit Committee. The Committee is supported by the Groups Internal Audit function,which has the responsibility for the maintenance of the framework,programmes, assessment and reporting to the Committee.
The Group has in place a Risk Management framework which involves:

• Management commitment
• Maintenance of a Group and individual Company Risk Registers
• Quarterly reporting by line management and analysis by the Groups Internal Audit function on the progress of mitigation plans
• On going identification of risk and opportunities
• Half yearly risk assessment and review by the Groups Internal Audit function
• Regular reporting to the Audit Committee
• Comprehensive annual insurance programme;and
• The establishment of appropriate policies and procedures.

INSURANCE PROGRAMME

The Group has a comprehensive insurance programme which is a component within the Groups Risk Management programme. Insurance needs and coverage are scrutinised progressively to ensure the Companys risk profile and exposure is at appropriate levels.

BUSINESS CONTINUITY PLANNING

During the past 12 months,the Group has developed and practiced a comprehensive Business Continuity Plan,in both Australia and New Zealand. The plan is flexible and can be used to handle a wide range of crisis situations that could arise in the course of business conducted by our Company.

INTERNAL CONTROL

The Group has an internal audit function that has the responsibility in providing objective assurance activity designed to add value by ensuring the Groups compliance with its policies and procedures,assessment of controls and systems, recommendations on control and system improvements and involvement in system design.

xxThe internal auditors have direct access to the Audit Committee members and report regularly to the Audit SubCommittee on their findings.

ETHICAL STANDARDS

The Board acknowledges the need and insists on the highest standards of ethical conduct by all Directors and employees of the Michael Hill Jeweller Group. The Board has adopted a Code of Conduct,which sets out the minimum acceptable standards of behaviour expected of its Directors and employees of the Group in their dealings and relationships with its shareholders,customers,suppliers,and the community at large. A copy of the Code of Conduct appears on page 19.