UK Corporate Governance Code
The Board is pleased to report that throughout the year the Company complied with all provisions of the UK Corporate Governance Code (the ‘Code’) as applicable to a small market capitalisation company. The Chairman’s Statement which appears on pages 3 and 4 includes a section relating to Corporate Governance and provides context to this detailed report.
The Board has a schedule of matters that are reserved for its decision, including:
determination of the Group’s overall strategy
the approval of annual targets and financial reporting including annual and half year results and interim management statements
the recommendation and approval of dividends and other capital distributions
the approval of significant acquisitions and disposals
the approval of policies and systems for risk management and assurance
the appointment of key advisers to the Group
the approval of major items of capital expenditure
the settlement of major litigation.
At the date of this report the Board comprised two Executive Directors, three Non-Executive Directors and the Chairman. Andrew Page retired as a Non-Executive Director on 26 April 2016 and Phil Williams retired as an Executive Director on 30 September 2016. John Bennett was appointed as Non-Executive Director on 27 April 2016. Ken Lever was appointed as Group Chairman on 1 November at which time Brook Land stood down from the Board. The Executive Directors are responsible for the day-to-day management of all the Group’s business activities.
The Non-Executive Directors are, in the opinion of the Board, all independent of management and contribute independent judgement as well as bringing extensive knowledge and experience to the proceedings of the Board. In particular the Board is of the view that John Bennett, who having previously served for nine years and was reappointed as a Non-Executive Director during the year, satisfies this test of independence. The Chairman and the Non-Executive Directors are generally appointed for three-year terms, which may subsequently be extended. John Bennett was re-appointed to the Board on the basis that he would serve for a maximum term of two years. Any term beyond six years for a Non-Executive is rigorously reviewed, taking account of the requirement to refresh the Board. Ken Lever and John Bennett having both been appointed during the year will be subject to election at the forthcoming Annual General Meeting. All Directors are subject to annual re-election by shareholders.
The Chairman and Chief Executive have clear and distinct roles. The Chairman provides leadership to the Board of Directors and is responsible for its overall effectiveness. This will include ensuring that all Directors are properly briefed in order to take a full and constructive part in Board discussions. The Chairman will meet regularly with major shareholders in order to understand their views and seek their input on specific matters. The Chief Executive is responsible for all executive management matters within the Group. This incorporates the development of Group Strategy, financial targets and business plans having regard to the interests of the Group’s shareholders, clients and employees.
The Senior Independent Director is available to shareholders who wish to raise concerns that cannot be resolved through the Chairman, Chief Executive or Finance Director. Robert Miller-Bakewell acted as the Senior Independent Director throughout the year.
The Board is assisted by the Audit, Remuneration and Nomination Committees. The Chairman of each Committee provides updates as to its activities at Board meetings.
The table below shows the number of Board and Committee meetings attended by each of the Directors during the year.
The Board generally meets eight times annually, although additional meetings may be held should circumstances require. The Board agenda gives significant focus to business performance and strategy balanced by consideration of emerging risks and the control environment. Comprehensive papers are circulated well in advance of Board meetings which include general updates and briefings on significant issues from the Chief Executive, the Finance Director and the Company Secretary. These regular reports and other matters of immediate importance are discussed at each meeting. The Company Secretary assists the Chairman in ensuring that Board procedures are followed and advises on matters of Corporate Governance. The services of the Company Secretary are available to Directors generally. Outside of Board meetings the Chairman has regular individual discussions with all Directors.
The Non-Executive Directors hold meetings with the Chairman without the Executives present at least twice a year.
The Executive Committee, which has historically consisted of the Executive Directors supported by the Company Secretary, meets regularly throughout the year and has overall responsibility for all operational matters within the Group, subject to those matters that remain reserved for the Board. With effect from 1 January 2017 the Executive Committee has been enlarged to include the Group’s three Regional Business Leaders. The minutes of all Executive Committee meetings are circulated to the Non-Executive Directors.
Where Directors have concerns that cannot be resolved regarding the management of the Company or a proposed action, these concerns are recorded in the Board minutes. In accordance with Company policy any concerns expressed by a Director on resignation are provided, in a written statement, to the Chairman for circulation to the Board. No matters of this nature have arisen during the year.
The Company’s Articles of Association contain provisions that allow Directors to authorise conflicts in accordance with the Companies Act 2006. These provisions enable the Directors to authorise a conflict, subject to such terms as they may think fit, which may include exclusion from voting in respect of the relevant issue and exclusion from information and discussion relating to the matter. The procedure approved by the Board for authorising conflicts reminds Directors of the need to consider their duties as Directors and not to grant an authorisation unless they believe, in good faith, that this would be likely to promote the success of the Company. A potentially conflicted Director cannot vote on such an authorising resolution or be counted in a quorum for that purpose. Any authority granted may be terminated at any time and the Director is informed of his obligation to inform the Company without delay should there be any change in the nature of the conflict previously authorised. In addition, the Board requires the Nomination Committee to check that any individual it nominates for appointment to the Board is free of any potential conflict of interest.
There is an agreed procedure for Directors to take independent professional advice and training at the Company’s expense. The Company maintains Directors and Officers liability insurance with a current limit of indemnity of £20m.
The Group’s strategy and its business model are described on pages 5 and 6.
The Board undertakes an annual appraisal of its performance. Following his appointment as Group Chairman, Ken Lever undertook an initial review of the operation and effectiveness of the Board. For this purpose Mr. Lever engaged with all of the Company’s Directors across a range of topics to ascertain their opinions. No material matters of immediate concern arose. Non-Executives, led by the Senior Independent Director, meet on an annual basis to appraise the Chairman’s performance.
On appointment Directors receive information on the Company as well as the Board and its procedures. They also meet other members of the Board to be briefed on strategy, financial matters and other key issues. Advice is available from the Company’s solicitors, auditors and brokers if required. During the year updates are provided on key technical issues as required including those relating to corporate governance and corporate social responsibility. Non-Executive Directors periodically undertake visits to operating companies and attend their Board meetings in order to improve their understanding of the issues facing the Group’s businesses.
The Company attaches great importance to communication with its shareholders and other stakeholders. In addition to regular financial reporting the Group website provides up-to-date information about its organisation, the services it offers and newsworthy subjects. The Company also responds to enquiries from shareholders and others with an interest in the Group.
In addition to presentations of full and half-year results, the Executive Directors hold meetings with the Company’s principal shareholders to discuss the Company’s strategy and performance. The Chairman and Senior Independent Director also meet with major shareholders. An investor relations report is presented at all regular Board meetings to ensure that the Board is kept aware of the views of larger shareholders and the investment community generally.
The Chairman of each of the Board Committees attends the Annual General Meeting and is available to answer questions.
Audit and internal controls
The respective responsibilities of the Directors and the independent auditors in connection with the accounts are explained on pages 20 to 21 and 36 and the statement of the Directors in respect of going concern appears on page 20. The long term viability statement is set out on page 13.
The Board has throughout the year and up to the date of approval of the financial statements had procedures in place as recommended in the guidance in the UK Corporate Governance Code and the supporting document issued by the Financial Reporting Council ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’. The principal risks to which the Group is exposed and the measures to mitigate such risks are described on pages 11 to 13.
The Board is responsible for the Group’s systems of risk management and internal control, which are designed to provide reasonable but not absolute assurance against material misstatement or loss. This subject is kept under ongoing review and the Board receives and considers regular reports relating to the Group’s system of risk management and internal control. In addition a detailed review of the Group’s system of internal control and risk management was undertaken by the Audit Committee during the year, the outcome of which was reported to and discussed with the Board. The Audit Committee and the Board were satisfied that the systems in place are appropriate and effective.
The key procedures that the Directors have established to provide effective internal financial controls are as follows.
The results for the Group are reported to and reviewed at each Board meeting. A detailed formal budgeting process for all Group businesses culminates in an annual Group budget which is approved by the Board.
Financial and accounting principles and internal financial controls assurance
The Group’s accounting policies, principles and minimum standards required for effective financial control are communicated to all accounting teams. The Group Finance function undertakes periodic detailed reviews at key centres within the Group to ensure that policies and procedures are being followed as well as to identify any control weaknesses or failings.
The Group has clearly defined guidelines for capital expenditure. These include detailed appraisal and review procedures as well as due diligence procedures in respect of potential business acquisitions.
The Group operates a central treasury function that undertakes required borrowing and foreign exchange transactions as well as the daily monitoring of bank balances and cash receipts. Appropriate payment authorisation processes are in place in all parts of the Group.
A system of delegated authorities, whereby the incurring of expenditure and assumption of contractual commitment can only be approved by specified individuals and within pre-defined limits, is in place throughout the Group.
Review and reporting
Internal controls and in particular any failures are reported to and reviewed at Group and operating Board meetings in order that changes to systems can be implemented where required. In addition the Audit Committee maintains a brief to keep the overall systems of internal control under review. Although the Group does not at present operate a distinct internal audit department, it does, through a Group Assurance Manager, undertake a structured programme of control reviews at its various operating companies.
The Audit Committee currently comprises two Independent Non-Executive Directors, John Bennett and Robert Miller-Bakewell. Andrew Page served as a member of the Committee and as its Chairman until his retirement from the Board. John Bennett assumed the role as Chairman on his appointment to the Committee in April 2016. The Committee has written terms of reference which are available on the Company’s website and on request from the Company Secretary. Although the Board considers that both members of the Committee have experience that is relevant to the role, John Bennett is the member of the Committee identified as having recent and relevant financial experience.
The Committee holds three regular meetings during the year, one to consider audit planning and one to coincide with each of the publication of Group’s annual and interim financial results. Other matters which fall within the Committee’s terms of reference are included on the agendas of these meetings as required.
At its annual planning meeting in September the Committee reviews and approves plans with the Auditors including the locations to be audited as well as the scope and key areas of audit focus. At the conclusion of the audit the Committee reviews the integrity of the Group’s financial statements and the report and accounts as a whole prior to their submission to the Board. This review includes ensuring that statutory and associated legal and regulatory requirements are met as well as considering significant reporting judgements, the adoption of appropriate accounting policies and practices and compliance with accounting standards. In respect of the year under review the Committee considered the following significant issues in relation to the financial statements and in each case addressed these as indicated.
This classification of assets is by far the largest on the Group balance sheet and as such receives careful attention from the Board and Committee which need to be satisfied that its carrying value is appropriate. Goodwill impairment testing was undertaken on the November balance sheet. The Board and Committee considered the appropriateness of the cash generating units for goodwill testing and the assumptions and estimates used in the modelling, including approved budgets for 2017. The conclusion was that no impairment was necessary. Consideration was also given as to whether there were any indicators of impairment in respect of other intangible assets. The Board and Committee agreed that no indicators of impairment exist.
One acquisition was completed in the year and estimates are made with respect to the fair value of the net assets acquired and the consideration transferred. The valuation work undertaken uses a spreadsheet model constructed with the help of valuation experts and the inputs to the model are derived from data provided by the entity acquired and from recognised sources or using prior experience. The Group Finance Director presented a paper to the Audit Committee on this subject in respect of the acquisition and the Committee agreed with and approved the valuations made.
Recoverability of trade debtors and accrued Income
The risk that trade debtors and accrued income may not be collected and therefore may be overstated in the accounts is considered by the Board at its regular meeting when it reviews business performance. The reports prepared for those meetings contain age profile information by segment and consider specific issues in more detail as necessary. The Board reviewed a detailed paper presented by the Group Finance Director on debtors and accrued income as at the end of September and concluded that trade receivables were then appropriately stated. The Board received an update paper in respect of trade receivables within the Energy segment as at the year end and concluded that they were appropriately stated at that point.
The Committee appreciates that there is estimation applied in the recognition of revenue but does not consider this to be a key area of risk. The number of projects undertaken at any time is large and there are relatively few that are individually material. The procedures in place for recognising revenue are well established and comprehensive financial review of monthly results provides a good level of assurance.
Following the review conducted by the Audit Committee and its own consideration, the Board was able to conclude that the Report and Accounts for 2016, taken as a whole, is fair, balanced and understandable as well as providing the information necessary for shareholders to assess the Group’s performance, business model and strategy. In reaching this conclusion the Board was satisfied that the Group’s performance across its segments, as well as its business model, strategy and the key risks that it faces are clearly explained in the relevant sections of the Report and Accounts.
The Audit Committee keeps the scope, cost and effectiveness of the external audit under review. The Committee reviews the effectiveness of the annual audit prior to making recommendations as to the annual re-appointment of Auditors. To facilitate this process the Group Finance Director canvasses the views of the Group’s operating companies on the conduct of the audit. He then reports this feedback to the Committee as well as the performance of the Auditors at Group level. Deloitte LLP was appointed as Group Auditors in June 2012 following a tender process. The independence of the external auditor is also reviewed each year and audit partners are rotated at least every five years. The Company’s policy is that Group audit appointment should be retendered at least every ten years.
As part of its responsibility to ensure independence and objectivity the Committee has adopted a policy to determine the circumstances in which Auditors may be permitted to undertake tax compliance work for the Group. Under the terms of this policy the provision of certain services are prohibited and include those listed below:
preparation of financial statements
design and implementation of financial systems
investment advisory, broker and dealing services
general management services
The split between audit and non-audit fees for the year under review appears in note 8 on page 52. Certain limited scope compliance work undertaken by Deloitte LLP during the year was handled by teams that were separate and independent from the external audit team and were led by different senior partners. The Committee was satisfied that appropriate safeguards were in place and that the provision of these additional services by Deloitte LLP did not affect their independence as external auditor. Advisory work is undertaken by other firms.
The Committee also monitors the effectiveness of the Group’s internal financial controls and risk management processes; this included assisting the Board in conducting the review of internal controls described on page 25. In conjunction with this exercise the Committee also reviewed the possible need to establish an internal audit function. In considering this point the Committee was cognisant of the detailed review work undertaken by members of the Group Finance Department whilst visiting various parts of the Group’s operations and that the volume of such work increased during the year. Taking account of this and its general level of confidence in the Group’s systems of internal control it concluded that the establishment of a distinct internal audit department was not appropriate at that time but that this will be kept under regular review. Notwithstanding this the Group has continued to develop and extend a system whereby members of the Group finance function undertake control reviews at operating companies. This work has now been given greater focus and further enhanced through the appointment of a Group Assurance Manager.
The Committee also keeps under review the means by which staff may, in confidence, raise concerns about financial improprieties relating to financial reporting, internal control or other matters. The Company’s procedure allows for any such matters to be reported to the Company Secretary who will ensure that they are properly investigated and reported to the Audit Committee and the Board. An individual raising a concern need not disclose their identity and if such identity is disclosed it will not be passed on without the consent of that individual.
The Committee meets as required and currently comprises the Group Chairman who also chairs the Committee and the Company’s three Non-Executive Directors. Robert Miller Bakewell acted as Chairman of the Committee until Ken Lever assumed that role on his appointment to the Board in November 2016. Brook Land was a member of the Committee until his retirement from the Board.
The Committee’s key responsibilities include reviewing the Board structure, size and composition as well as evaluating the balance of skills, knowledge and experience which may be required in the future and making recommendations to the Board accordingly. It is also responsible for nominating candidates to the Board when vacancies arise, recommending Directors who are retiring to be put forward for re-election and where appropriate considering any issues relating to the continuation in office of any Director. It has written terms of reference which are available on the Company’s website and on request from the Company Secretary.
During the year the Nomination Committee led a process to identify and recruit a new Group Chairman. For this purpose Spencer Stuart was used as an external search consultancy; Spencer Stuart has no other connection with the Company. A detailed specification for the role was prepared and the time commitment to undertake the role considered. A structured search, referencing and interview process was then undertaken. This culminated with the Committee recommending the appointment of Kenneth Lever as a new Group Chairman. The Board then considered this recommendation and concluded that Mr. Lever should be appointed. The retiring Chairman did not participate in the Committee’s processes or deliberations relating to its recommendation to the Board.
The range of skills and experience offered by the current Directors is highlighted on page 18 and the Committee was satisfied with the balance and membership of the Board throughout the year under review. The Committee does, however, remain mindful of the need to ensure its periodic refreshment and to review the position as Non-Executive Directors terms of office expire. The Committee also maintains an ongoing brief to consider succession planning at Board and Senior Executive level.
Although the Group’s previously announced target that a minimum of 25% of its Board membership should be female is not currently being met, the Committee and the Board remain mindful of the importance of diversity and will continue to consider this in their deliberations.
Louise Charlton’s third three year term as a Non-Executive Director will expire in April 2017 and as noted in the Chairman’s Statement she will remain in office until such time as a replacement is identified.
The membership and activities of the Remuneration Committee are described in the Remuneration Committee Report on pages 29 and 30 together with the accompanying notes on pages 87 to 95.
Disclosures required under the Takeover Directive are included on page 21 and form part of the Group’s Corporate Governance report.