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. Michael Hill International has earned a reputation as a leader and an innovator in the area of corporate governance reporting.

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 non-executive Directors on the Board, to provide balance and a cross section of skills and experience.

The Board is accountable for the performance of the Group
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 and acquisitions.

Each year, the company produces a five year business 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 non-executive Directors. The Board met on six occasions in the financial year ended 30 June 2003. Profiles of the current Directors appear on page 29 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. Newly appointed Directors must seek re-election at the first annual meeting of shareholders following their appointment.

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

Directors’ Shareholdings - Refer Analysis of Shareholding

The agenda for meetings is prepared by the Company Secretary in conjunction with the Chairman and the Chief Executive Officer. Any member of the Board may request the addition of an item to the agenda. Board papers are circulated to Directors a week in advance of meetings.

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

The Work of Directors

Non-executive directors normally spend around 22 days per year on board and sub-committee meetings. Board meetings are held in different locations in Australia and New Zealand, and where possible the Board endeavours to visit Michael Hill Jeweller stores in the area during the course of a meeting in a particular city. This enables the Directors to keep in touch with the staff at the coalface and to keep abreast of the latest store designs and shopping mall developments.

Board Review
During the course of the last financial year,the Board conducted a self assessment of its performance over the previous 12 months. There were no substantial changes made to any of the Board’s processes as a result of this review.

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. The provision of such advice, if required, would be arranged in consultation with the Chairman. In circumstances where a Director was to obtain separate advice from that obtained on behalf of the Group, that advice would normally be provided to all Directors.

Audit Sub-Committee
The Audit sub-committee, which is chaired by Murray Doyle and consists of Messrs Doyle and Peters, met twice 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 audit sub-committee has the responsibility of monitoring the Group’s Risk Management practices and procedures. The Group’s auditors,both internal and external,along with other relevant senior executives,attend all meetings and may discuss any matters in connection to audits, the Group’s risk and control environment or any other matters relating to the Group’s financial and non-financial affairs.

At least once a year, the Chairman and non-executive Directors on this Committee meet with the external auditors privately without the presence of Company executives.

Remuneration Sub-Committee
This sub-committee, chaired by Wayne Peters, comprises all Directors except Mike Parsell. The function of the Remuneration sub-committee is to determine the Chief Executive’s and Senior Executives’ 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 once 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 nonexecutive Directors and Michael Hill. The function of the subcommittee 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.

The Directors named below have disclosed to the Board under Section 148 of the Companies Act 1993, particulars of the following acquisitions or dispositions of relevant interests in the ordinary shares of the company during the year. The relevant interest acquired or disposed of includes beneficial ownership.

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.

Non-Executive Directors’ Fees
Fees for non-executive directors are based on the nature of their work and their responsibilities. Over the past five years the company has become a truly Australasian company with 65% of the Group’s stores in Australia. Accordingly, the fees for non-executive Directors have been set at approximately the average of the mean level of base directors fees for New Zealand and Australian Directors of publicly listed companies. Research two years ago carried out by Korn Ferry and available to the Board,indicated these averages were approximately NZ$34,000 and A$53,000, before taking into account any extra fees for participation on Board sub-committees. Shareholders at the Annual Meeting in November 2001 approved a maximum amount of $215,000 to be paid to Directors. Each NZ resident Director is currently paid $50,000 per annum and our Australian resident Director A$50,000 per annum.

No equity incentives are offered to non-executive Directors.

A resolution is being put to the Annual Meeting on 7 November 2003 to alter the Company’s Constitution relating to the payment of retirement allowances for Directors. Under the proposed change, no retirement allowances will be payable to Directors unless they are first approved by an ordinary resolution of shareholders.

Share Purchase Scheme
The Company has a Share Purchase Scheme for management in operation.

The scheme was designed to encourage Store Managers,Regional Managers and other senior employees of the Company to purchase shares in the Company. In order to provide a pool of shares for eligible employees to purchase, the Company from time to time will buy Michael Hill International shares on the New Zealand Stock Exchange. In the year ended 30 June 2003, the Company purchased 80,000 shares on market at an average acquisition price of $5.30 per share. These shares were purchased during the window periods available for Directors to deal in shares of Michael Hill International.

On the 4th of April 2003, the Company sold 27,810 shares to 22 employees of the company. The rules of the scheme provide for the Company to on sell shares to purchasing employees at a 10% discount to the weighted average price for the ordinary shares during the 10 working day period ending 2 working days immediately prior to the date on which the Company offers shares to the employees. The discount is deemed to be “financial assistance” under the Companies Act 1993. The total discount relating to this issue of shares was $12,236. After taking the discount into account, the purchasing employees paid $112,391 for the shares which was equivalent to an average acquisition price of $4.04 per share.

The Trustees of the scheme hold the shares for a restrictive period of one year, which is to promote the concept of encouraging long-term investing in the Company. The balance of shares purchased amounting to 139,438 shares are held as “Treasury Stock” and will be used for the next issue of shares under the scheme in February 2004.

Share Options

On the 22nd August 2002, the Directors issued a further 200,000 options to two senior management personnel in the Company, including 100,000 to Emma Hill in her capacity of General Manager, Canada. The issue of options for Emma Hill was subject to the approval of shareholders at the annual meeting on the 28th November 2002, as she was deemed a “related party” in terms of the New Zealand Stock Exchange listing rules. The resolution approving the options for Emma Hill was passed.

Further information on options outstanding to employees are included in note 5 to the Financial Statements on page 40.

Communication with Shareholders

Michael Hill International places high importance on communication with shareholders. A half year and annual report is published each year and posted on the MHI website. Announcements to the New Zealand Stock Exchange and the media are also posted on the website as are copies of presentations to Analysts which are done once a year in conjunction with the release of the annual results for the year.

The Company Secretary takes primary responsibility for communications with the New Zealand Stock Exchange in relation to listing rule obligations and disclosure obligations.

Shareholders may raise matters for discussion at Annual meetings and have the ultimate control in corporate governance by voting Directors on or off the Board.

Continuous disclosure Policy

With the introduction of the new NZX continuous disclosure rules from December 2002,the Board has adopted the following procedure:

1. At each Board meeting, a standard agenda item is now considered - “Does the Company have anything to disclose?” The Board considers the information in its possession and decides appropriately whether any information needs to be disclosed to the market.
2. Between Board meetings,management will bring to the attention of the Directors any information they believe should be disclosed to the market for their consideration.
3. The Company will now disclose revenue figures for the group on a quarterly basis to the market. Since the introduction of the Continuous Disclosure rules,the Board has made the following disclosures to the market: 21 January 2003 Release of sales figures for the six months ended 31 December 2002.

   12 February 2003 Notice to the market advising of approximate operating profit for the six months ended 31 December 2002.

   26 February 2003 Preliminary half year profit announcement to the NZX.

   10 April 2003 Announcement to the NZSE - full year operating profit forecast revision to between $9.5 million and $10.5 million.

   5 May 2003 Release of sales figures for nine months ended 31 March 2003.

   14 May 2003 Correction to sales figure announcement for nine months ended 31 March 2003.

   14 August 2003 Preliminary audited profit announcement to the NZX for the year ended 30 June 2003.

Operating profit announced of $10,244,000. The Company believes it has complied with the NZX continuous disclosure rules.

External Audit Independence Policy

The Group has adopted the following policy to ensure that audit independence is maintained, both in fact and appearance, such that Michael Hill International’s external financial reporting is viewed as being highly reliable and credible.

The policy covers the following areas:

• Provision of non audit services by the external auditors.
• Fees and billings by the auditors
• Hiring of staff from the audit firm

Provision of non audit services by the external auditing firm

Our external auditing firm should not undertake any role not permitted under IFAC (International Federation of Accountants) regulations regarding independence of auditors. Under the IFAC guidelines, the table below sets out the type of non audit work that Michael Hill International will allow its external auditing firm to perform.

BOOKKEEPING

Prohibited, other than in emergency situations. Managerial decision making prohibited.

VALUATIONS
Prohibited.

TAX SERVICES

Permitted, as not seen to threaten independence

PROVISION OF IT SYSTEMS

Design and implementation of financial IT systems prohibited.

STAFF SECONDMENT FROM AUDITORS
These are permitted with safeguards. No management decision making. Signing agreements or discretionary authority to commit MHI is not allowed.

LITIGATION SUPPORT SERVICES
Permitted with safeguards.

LEGAL SERVICES
Permitted where immaterial to the financial statements.

EXECUTIVE SEARCH AND SELECTION

Permitted with safeguards. Making selection for MHI prohibited.

CORPORATE FINANCE
Permitted with safeguards. Promoting, dealing in or underwriting MHI Securities prohibited.

The safeguards put in place will be specific to the circumstances of each case. The general rule to be applied is whether an independent third party would consider the safeguards reasonable.

Fees and Billings
All audit and non audit fees to be reported to the Audit committee annually. Non audit fees greater than $25,000 should be reviewed by the Group Company Secretary and reported to the Audit committee for approval. (For the 2002/03 financial year audit fees amounting to $176,000 and fees for taxation compliance amounting to $320,000 were paid to PricewaterhouseCoopers.)

Hiring of Staff from the External Auditing Firm

The hiring by Michael Hill Jeweller of any partner or audit manager must first be approved by the Chairman of the Audit committee. There are no other restrictions on the hiring of staff from the audit firm.

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

Risk Management Process

The Board of Directors are responsible for Risk Management which starts each year as part of the annual strategic planning process. Risks and opportunities are reviewed and business projects formalised. The status of business projects, and associated risk,are discussed as part of the Board’s regular meeting schedule throughout the year. At management level, the status of business projects, and associated risk, are discussed as part of the Group Managers’ regular meeting schedule throughout the year.

Business Continuity Planning

The Group has a comprehensive Business Continuity Plan in effect for all operations. 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.

Insurance Programme

The Group has a comprehensive insurance programme which supports the Risk Management process. Insurance needs and coverage are scrutinised annually to ensure the Company’s risk profile and exposure is at an appropriate level.

Internal Audit

The Group has an Internal Audit function that regularly reviews and evaluates the safeguarding of assets, compliance with company policies, reliability and integrity of information, effectiveness of internal controls, and the economical and efficient use of resources. The internal auditors regularly report on their findings to the Audit Sub-Committee of the Board of Directors and have direct access to the Audit Sub-Committee members at all times.

Code of Conduct

Our Board of Directors believes that good risk management is supported by the highest standards of corporate behaviour towards our employees, customers, and other stakeholders. The Code of Conduct is a guide to help our Directors and employees live up to our high ethical standards. The Code is comprehensive and covers our roles with employees, customers, business partners, shareholders, communities, and governments.