Corporate governance
Statements of appliance of and compliance with the Combined Code
The Board supports the highest standards of corporate governance and bases its arrangements on the Combined Code on Corporate Governance (“the Combined Code”) issued by the Financial Services Authority dated June 2006. The following report shows how, in the year ending 31 March 2008, the Board applied the fourteen principles of good governance set out in Section One. The Group was fully compliant with the supporting provisions in the reporting year.
Directors
Board composition
The Board during the year comprised a Chairman, two Executive Directors and four Non–Executive Directors. The Board has agreed a written split of the responsibilities of the Chairman and the CEO. Between them, the Directors have a range of international business and financial expertise relevant to the Company and its future. The biographies of the Directors as at 31 March 2008 are listed in the Board of Directors, showing the Board Committees they chair or sit on, and their attendance record during the year at Board and Committee meetings. Where they have exceptionally missed a meeting, arrangements exist for them to comment on the business of the meeting. The attendance record does not bring out the time put in by the Non–Executives outside of formal meetings.
The Board has satisfied itself that each Non–Executive Director is independent, meaning in character and in judgement, and free of relationship or circumstance which is likely to affect, or could appear to affect, the exercise of independent judgement.
Dr Leslie Atkinson is the Senior Independent Director. In this role, he is responsible for leading an annual review of the Chairman’s performance and for acting as a communications channel for shareholders if required.
At all times during the year, the Non–Executives have comprised over one half of the Board. The Chairman meets the Non–Executives without the Executives present. The Non–Executives also meet without the Chairman at least annually to appraise the Chairman’s performance and on such other occasions as they decide.
Under the Company’s Articles of Association, all Directors must stand for election by shareholders at the first opportunity after their appointment and must stand for re–election every three years. Care is taken to give adequate information to enable shareholders to take an informed decision. In line with best practice under the Combined Code, Non–Executive Directors who have served more than nine years are required to submit themselves for annual re–election. Accordingly Dr Leslie Atkinson, who was first appointed in August 1996, is now subject to annual re–election and, as noted above, the Board is satisfied that he continues to be independent and free of relationship or circumstances which are likely to affect, or could appear to affect, the exercise of independent judgement.
Role of the Board
The Board is collectively responsible for the performance of the Group. Its role is to provide entrepreneurial leadership, to set and implement strategy within a framework of effective internal controls, and to ensure the best performance of Group resources for shareholders.
The Board has scheduled meetings monthly except in August. It has agreed a written schedule of matters reserved for its decision as opposed to what is delegated to executive management, and keeps this under regular review. These reserved powers are built into management authorities and procedures. Amongst the reserved decisions are: agreeing the annual financial budget; approval of major acquisitions and divestments; major investment proposals; large contract bids; and major decisions regarding pensions.
The Board receives a monthly review of operating, financial and cash performance and regular reviews on key aspects of the Group’s activities. It has regular presentations from senior managers and advisers. Through the Company Secretary, Directors receive papers on all substantive agenda items in sufficient time before meetings to be meaningful and the Chairman ensures that all Directors are properly briefed on issues arising at the Board. All Directors are encouraged to bring an independent judgement to bear on issues of strategy, performance, resources, key appointments and standards of conduct.
All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures are complied with and that the Board complies with applicable rules and regulations. The appointment and removal of the Company Secretary is a matter for the Board as a whole.
Directors have the right to obtain independent professional advice at the Company’s expense in connection with discharging their responsibilities as Directors.
Directors receive induction and continued training, and regard is paid to best practice advice, for example, from the Institute of Chartered Secretaries and Administrators. Their needs are discussed with the Company Secretary on appointment, and continuing needs are discussed in the evaluation processes described below. They are encouraged to update their skills and knowledge.
The Company buys Directors’ and Officers’ insurance. This provides, amongst other things, for appropriate cover in respect of legal action against its Directors, as recommended in the Combined Code.
Directors have been made aware of the Combined Code recommendation that, where they have concerns that cannot be resolved about the running of the Group or a proposed action, they should ensure that their concerns are recorded in the Board minutes. Non–Executive Directors have also been made aware of the recommendation that, on resignation, they should provide a written statement to the Chairman, for circulation to the Board, if they have any such concerns.
Board evaluation
The Combined Code attaches importance to Boards having processes for individual and collective performance evaluation.
For the individual performance evaluation, Executive Directors are assessed by the Remuneration Committee against annual quantified performance targets. The Chairman talks to each Director at least annually to appraise their performance, and the Senior Independent Director leads an evaluation of the performance of the Chairman in discussion with the other Non–Executives and taking account of the views of the Executives.
Where a Non–Executive Director stands for re–election, the Chairman will confirm to shareholders in the AGM Notice whether he is satisfied from formal performance evaluation that the person’s performance continues to be effective and to demonstrate commitment to the role. The Chairman will give this confirmation in the AGM Notice in respect of Dr Leslie Atkinson who is standing for re–election at this year’s AGM.
Nomination Committee
The Nomination Committee has written terms of reference that meet the guidance of the Combined Code. Its role is to lead the process for new Board appointments and succession planning, and to make recommendations in these areas to the Board. The terms of reference make clear that the aim is to identify potential candidates from a wide range of backgrounds on the basis of personal merit and suitability. They are available on the corporate governance section of the Company’s website. The Committee is chaired by Dr Leslie Atkinson as the Senior Independent Director and it met on one occasion during the year to 31 March 2008. The terms of reference provide that all Non–Executive Directors shall be members, subject to a restriction that members must not be involved in processes relating to their successor or to posts for which they may be candidates.
The Committee has reviewed its processes in the light of the revised Code to ensure that it adopts a demonstrably rigorous, structured and independent recruitment approach to the appointment of new Non–Executives. The starting point is considering an analysis of the skills, knowledge and experience brought by the existing Directors, identifying gaps in terms of future needs that particular new appointments should fill, and going on to agree a description of the role and capabilities required.
Letters of appointment to Non–Executives set out the expected time commitment. A check is made in the appointment process that they undertake to have sufficient time to meet what is expected of them. Their other significant commitments are disclosed to the Board and substantial subsequent changes are brought to their attention.
Executive Committees
A committee comprising the Executive Directors and senior operational managers meets weekly to manage operations of the Group within the strategy and controls set by the Board.
A governance committee comprising the Executive Directors and senior corporate and business managers meets monthly to consider key strategic issues, and review Board papers and internal audit reports.
Remuneration Committee and Directors’ remuneration
The role and work of the Remuneration Committee is described in the Report on Directors’ remuneration.
Audit Committee
The members of the Audit Committee are Rodney Westhead (Chairman), Dr Leslie Atkinson and Dr Paul Golby. Rodney Westhead has professional accounting qualifications and significant recent and relevant financial experience whilst Dr Leslie Atkinson and Dr Paul Golby are experienced businessmen.
The Committee held three scheduled meetings in the year, with external auditors present. The Committee talks to the auditors without executive management present. Its Chairman reports the main work and findings of the Committee to the Board. All Directors receive the minutes and papers of Audit Committee meetings.
Its written terms of reference are published on the Company’s website. In line with these, it reviews financial statements before these are considered by the Board, including the accounting policies adopted and the implementation of changes, and it reviews the significant financial reporting judgements in them. It ensures consistency of reporting from year to year. The review of trading statements and associated announcements is a matter the Board has reserved for itself.
The Audit Committee reviews the scope, results and cost–effectiveness of internal and external audit, and has delegated power from the Board to exercise the power from shareholders to agree fees for external auditors. The Committee is responsible for satisfying itself on the independence of internal auditors and on the independence and objectivity of external auditors. The Committee reviews the operation of internal controls and reports to the Board on the annual review of the internal control and risk management. The terms of reference also require the Committee to review the arrangements whereby staff can raise concerns about possible improprieties in financial reporting or other matters, and to satisfy itself that these ensure the proportionate and independent investigation of such matters and appropriate follow–up action. No such concerns were raised in the year.
No Director has a significant connection with the auditors. The Committee has the power to engage outside advisers to provide support, but saw no occasion to use this power last year.
The Committee reviews each year the arrangements for safeguarding auditor objectivity and independence. It satisfied itself that these were maintained in the last year. Its assessment includes a review of the auditor’s internal quality control procedures.
The Committee put the audit appointment out to tender in 2007, and the Board accepted its advice to reappoint PricewaterhouseCoopers LLP. The current senior partner of PwC was appointed on the rotation of the previous senior partner after the last Annual Report. The Board operates on the basis that non–audit work is not placed with the audit firm without specific prior Board approval taken in the best interest of the Group.
Relations with shareholders
The Group actively pursues two–way dialogue with its shareholders through its Annual Report, through information placed on its website, and through a planned investor relations programme. The website includes a corporate governance section with the terms of reference of Board committees. Regular meetings are held between Executive Directors and institutional investors, for example after the publication of interim and annual results, which involve a wide–ranging discussion about Company performance and plans. The Chairman discusses governance and strategy with major shareholders.
The Board keeps under regular review its arrangements for identifying and responding to the concerns and priorities of its shareholders. These include reports of meetings with individual shareholders from Directors and from external advisers, circulation of analyst reports, and reports on developments in the corporate governance guidelines of institutional investors. The Senior Independent Director (SID) is available as a channel of communication if shareholders have concerns that are not appropriately handled through other channels. Institutional shareholders also have the opportunity to meet new Non–Executive Directors.
All Directors attend the AGM so that shareholders have the opportunity to question them, including in their role as Chairmen of Board Committees. Separate resolutions are proposed on each substantially different issue so that each receives proper consideration. Resolutions include the approval of the Annual Report and approval of the remuneration report. The proxy form allows shareholders to vote for or against each resolution or to withhold their vote. Proxy votes for and against each resolution, plus “votes withheld”, are announced at the meeting after each resolution has been dealt with on a show of hands, and are then published on the Company’s website. The Company uses its registrars to ensure that there are effective processes in place for properly receiving and recording the votes cast. Notice of AGM and related papers are sent to shareholders at least twenty working days in advance of the meeting.
In line with the regulatory requirements applying to listed companies, clear documented procedures exist to control dealing in Company shares by employees with regular or occasional access to insider information, particularly in so–called “close periods” such as the two months before the publication of half year and year end results. These controls help to contribute to an orderly market in the Company’s shares.
Accountability
The Board is aware of its duty to ensure that it presents a clear and balanced assessment of the Company and Group position and prospects in statutory and in interim and other price–sensitive public reports and in reports to regulators. It takes care to ensure that it meets this duty by reserving for itself the review and approval of such reports, and taking advice from professional advisers.
The Directors’ responsibilities for preparing the accounts are set out in the Statement of Directors’ responsibilities.
Internal control
Responsibility and process
The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. This system is designed to manage rather than to eliminate risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement and loss.
The Board confirms that there is an on–going process for identifying, evaluating and managing the Group’s significant risks, that this has been in place for the year ended 31 March 2008 and up to the date of approval of the Annual Report, that it covers subsidiaries in which the Group has an interest of 50% or more, that it is regularly reviewed by the Board and that it accords with the FSA’s internal control guidance for Directors on the Combined Code (“the Turnbull guidance”).
Control environment
The Group’s organisational structure has clearly documented and communicated levels of responsibility, delegated authority and reporting procedures. Management systems have been externally accredited. The professionalism and competence of employees is maintained through recruitment, performance appraisal, written job descriptions, and personal training and development plans. The Board supports the highest levels of commitment and integrity from employees and has endorsed a code of business ethics, a copy of which is given to all employees.
Identification of risk
Each business and corporate service is required to identify and assess risks to meeting objectives, to weight and prioritise these on the basis of their assessed impact and likelihood, and then to take timely actions to manage or eliminate them through compensating internal controls. The relevant management process approved by the Board recognises that risks arise from many internal and external sources and that a wide range should be considered. The effectiveness of these actions is monitored and reviewed regularly. These business and service reviews form the basis of an annual review to the Executive and Board. They also help to identify areas for improving risk–based internal controls and to target the Group’s insurance programme.
Regular management information includes a review of risks with specific contracts such as those with reported technical or financial problems, or where items in the accounts assume contract variations as yet unagreed.
Organisational changes can particularly give rise to risks. They are, therefore, subject to particular review to ensure that there is a documented audit of risks that have been identified and of the arrangements to control and manage these. Such reviews may take the form of papers to management committees and the Audit Committee, and reports to relevant regulators on safety aspects.
Control procedures
Control procedures are documented in the Group’s management systems, which are subject to external audit. These include a finance manual, corporate and business quality assurance manuals, safety procedures and environmental management procedures. Procedures are designed to ensure that work is carried out to meet stated objectives, that risk is managed through risk–based internal controls, that delegations are based on risk assessments, and variances are identified and reported in a timely way to enable corrective actions to be taken. Procedures are also subject to review so that improvements to enhance controls can be made.
Monitoring and corrective actions
The Board approves a three year business plan and an annual Group budget. It receives monthly reports, supplemented by other reviews, on a range of key performance and risk indicators and considers possible control issues. The indicators cover financial, operational, safety, environmental and compliance aspects of performance with budget forecasts revised in response to developments.
Throughout the year, the internal audit function reported to the Audit Committee, which approved its programme and considered its recommendations. The Board also received, and decided appropriate action on, reports from the Audit Committee and external auditors.
For its annual review of the internal control system, the Board took account of its own reviews and monitoring during the year plus an annual report in order to obtain the degree of assurance required under the Combined Code. The Board also has responsibility for satisfying itself with the effectiveness of the Group’s risk management processes.
Compliance with control procedures was monitored during the year by internal audit and through reviews of compliance with the Quality Management System.
Businesses are required to confirm their compliance annually with the internal control system.
Statement of going concern
After making appropriate enquiries, the Directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they consider it appropriate to continue to adopt the going concern basis in preparing the financial statements.
Corporate responsibility
Full details of the Group’s corporate responsibilities can be found within the Business review.
By order of the Board
Philip Roper
Company Secretary
12 June 2008
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