Corporate governance report
Compliance with the Combined Code
Throughout the period 1 August 2007 to 31 July 2008 the Company has been in full compliance with the June 2006 issue of the Combined Code on Corporate Governance (the Code) except that the value of any fees received by executive directors in respect of external non-executive directorships is not disclosed in the Remuneration Report, as this is not considered relevant to the Company.
Directors
The Board
The Board is collectively responsible for the Company's success. The Board's role is to provide entrepreneurial leadership within a framework of controls that allow risk to be assessed and managed. The Board sets strategic aims and the Company's values, ensuring that obligations to shareholders are met. Non-executive directors have a particular role in overseeing the development of strategy, scrutinising management performance and ensuring the integrity of financial information and systems of risk management. The Board is satisfied that it has met these requirements.
During the last financial year the membership of the Board has changed. Mr K.O. Butler-Wheelhouse retired as Chief Executive on 10 December 2007 and was succeeded on that date by Mr P. Bowman. Mr P.H. Loescher, who had been a non-executive director since 1 June 2007, resigned on 4 April 2008. Mr D.P. Lillycrop, who was appointed as an executive director on 4 December 2000 and as Company Secretary on 11 December 2000, resigned from both offices on 3 June 2008. Ms S.L. Cameron was appointed as the Company Secretary on 1 July 2008.
As at 19 September 2008, the Board comprises Mr Brydon (Chairman), Mr Bowman (Chief Executive), one other executive director and four independent non-executive directors. Mr Jackson is the senior independent director. Biographies of these directors, giving details of their experience and other main commitments, are set out elsewhere in this report. The wide-ranging experience and backgrounds of the non-executive directors ensure that they can debate and constructively challenge management in relation to both the development of strategy and the evaluation of performance against the goals set by the Board.
The Board normally holds formal meetings at least six times a year to make and review major business decisions and monitor current trading against plans which it has approved. It additionally exercises control by determining matters specifically reserved to it in a formal schedule which only the Board may change: these matters include the acquisition of significant companies, the issue of shares, significant contractual commitments, the review of the effectiveness of risk management processes and major capital expenditure. Once a year, the Board meets with a particular focus on long-term strategy and developments affecting the Company. Additional meetings are arranged as necessary to deal with urgent items.
The Board sets the Company's values and standards and has adopted a Code of Business Ethics which is referred to elsewhere in this report.
The Chairman meets the non-executive directors without the executive directors present at least three times per annum. The senior independent director meets the other non-executive directors without the Chairman present at least annually.
Directors and officers of the Company and its subsidiaries have the benefit of a directors' and officers' liability insurance policy.
The following table shows the number of scheduled Board and Board Committee meetings held during the financial year ended 31 July 2008 and opposite each director's name the number of meetings they were eligible to attend and the number actually attended. However, directors attend many other meetings and make site visits during the year. The Board views directors’ contributions as measured beyond meeting attendance records.
|
Board Meetings |
Audit Committee |
Remuneration Committee |
Nomination Committee |
|||||
|
|
|
|
|
|
|
|
|
|
|
D H Brydon |
7 |
7 |
– |
– |
5 |
5 |
4 |
4 |
|
P Bowman (appointed 10/12/2007) |
5 |
5 |
– |
– |
– |
– |
– |
– |
|
D J Challen |
7 |
7 |
3 |
3 |
5 |
5 |
– |
– |
|
S J Chambers |
7 |
7 |
– |
– |
5 |
5 |
– |
– |
|
P J Jackson |
7 |
7 |
3 |
3 |
3 |
3 |
4 |
4 |
|
J Langston |
7 |
7 |
– |
– |
– |
– |
– |
– |
|
Sir Kevin Tebbit |
6 |
6 |
2 |
2 |
3 |
2 |
3 |
3 |
|
K O Butler-Wheelhouse (retired 10/12/2007) |
2 |
2 |
– |
– |
– |
– |
– |
– |
|
D P Lillycrop (resigned 03/06/2008) |
6 |
6 |
– |
– |
– |
– |
– |
– |
|
P H Loescher (resigned 08/04/2008) |
4 |
2 |
– |
– |
2 |
1 |
– |
– |
- indicates not a member of that Committee in 2007/08
Chairman and Chief Executive
The Board has established clearly defined roles for the Chairman and the Chief Executive, in writing. The Chairman is responsible for leadership of the Board, ensuring its effectiveness and setting its agenda. Once agreed by the Board as a whole, it is the Chief Executive's responsibility to ensure delivery of the strategic and financial objectives.
Board balance and independence
There is a balance of executive and non-executive directors such that no individual or small group can dominate the Board's decision taking. Throughout the financial year at least half the Board, excluding the Chairman, has comprised independent non-executive directors.
In deciding the chairmanship and membership of the Board Committees, the need to refresh membership of the Committees is taken into account.
All the non-executive directors are considered to be independent and Mr Brydon was considered independent at the time of his appointment as Chairman.
Appointments to the Board
The Nomination Committee has a formal, rigorous and transparent procedure for the appointment of new directors, which are made on merit and against objective criteria.
Information and professional development
The Board is provided with detailed information several days in advance on matters to be considered at its meetings and non-executive directors have ready access to the executive directors. Regular site visits are arranged and non-executive directors are encouraged to visit sites independently. During site visits, briefings are arranged and the Board is free to discuss aspects of the business with employees at all levels.
Newly-appointed directors undergo an induction programme to ensure that they have the necessary knowledge and understanding of the Company and its activities. They undertake briefing sessions on corporate governance, strategy, stakeholder issues, finance and risk management and HR strategy, as well as meetings and site visits to business locations in the UK and overseas. Each director's individual experience and background is taken into account in developing a programme tailored to his own requirements.
Ongoing training is provided as and when necessary. The suitability of external courses is kept under review by the Company Secretary who is charged with facilitating the induction of new directors and with assisting in the ongoing training and development of directors.
All directors have access to the advice and services of the Company Secretary and a procedure is in place for them to take independent professional advice at the Company's expense should this be required.
Performance evaluation
The Board undertakes a formal and rigorous annual evaluation of its own performance and that of its Committees and the directors. It is confirmed that all the non-executive directors have sufficient time to fulfil their commitments to the Company, that the Chairman does not hold the office of chairman of another FTSE 100 company and that no executive director holds more than one non-executive directorship of another FTSE 100 company.
A formal evaluation of the performance of the Board, its Committees and the directors was conducted by means of detailed questionnaires completed by each director. The answers to the questionnaires formed the basis of a review by the whole Board, led by the Chairman.
The performance evaluation of the Chairman was led by the senior independent director who obtained the views of both the executive and non-executive directors.
Re-election
Non-executive directors are appointed for a specified term of three years and re-election for a second term is not automatic. In exceptional circumstances and only after rigorous review, a non-executive director may serve for a third term. Any non-executive director who has served for more than nine years is subject to annual re-election. Directors stand for re-election by the shareholders at the first Annual General Meeting (AGM) following their appointment and subsequently at least every three years.
Remuneration
Information regarding the Remuneration Committee is set out in the Corporate governance report and the Directors’ remuneration report.
Accountability and audit
Financial reporting
The Board is required to present a balanced and understandable assessment of the Company's position and prospects in the Annual Report and in interim and other public reports. The Board is satisfied that it has met this obligation. A summary of the directors' responsibilities for the financial statements is set out elsewhere.
The 'going concern' statement required by the Code is set out in the Group directors’ report.
Internal control
The Board maintains a sound system of internal control to safeguard shareholders' investment and the Company's assets. The effectiveness of the internal control system is reviewed at least annually, covering all material controls, including financial, operational and compliance controls and risk management systems, and the Board reports to shareholders that it has done so. The Financial Reporting Council's report, "Internal Control: Revised Guidance for Directors on the Combined Code (October 2005)" provides guidance.
The Company's internal control is based on assessment of risk and a framework of control procedures to manage risks and to monitor compliance with procedures. The procedures for accountability and control are outlined below.
The Company's internal control systems are designed to meet the Company's particular needs and the risks to which it is exposed and, by their nature, can provide only reasonable, not absolute, assurance against material loss to the Company or material misstatement in the financial accounts.
The Group has an embedded process for the identification, evaluation and management of significant business risks. The process is reviewed through the Audit Committee and monitored by the Group Internal Audit Department. The Company has during the year identified and evaluated the key risks under three categories - Strategic; Operational; and Corporate Responsibility, including ethical matters and information provision - and has ensured that effective controls and procedures are in place to manage these risks.
In the highly regulated environment of the industries in which the Company operates, procedures are codified in detailed operating procedures manuals and are reinforced by regular educational programmes. These are designed to ensure compliance not only with the regulatory requirements but also with general principles of business integrity.
A key element in any system is communication: the executive directors and senior corporate staff meet regularly with representatives from the businesses to address financial, human resource, risk management and other control issues.
Throughout the financial year the Board, through the Audit Committee, reviews the effectiveness of internal control and the management of risks. In addition to financial and business reports, the Board has reviewed medium and longer-term strategic plans; capital expenditure and development programmes; management and product development programmes; reports on key operational issues; tax; treasury; risk management; insurance; legal matters; and Audit Committee reports, including internal and external auditor reports.
Audit Committee and Auditor
The Audit Committee makes formal and transparent arrangements for considering how financial reporting and internal control principles are applied and for maintaining an appropriate relationship with the external auditor, PricewaterhouseCoopers LLP.
Relations with shareholders
Dialogue with shareholders
The Chief Executive, Finance Director and the Director, Investor Relations communicate with institutional investors through analysts' briefings and extensive investor roadshows in the UK, US and continental Europe, as well as timely Stock Exchange announcements, meetings with management and site visits. Members of the Board, and in particular non-executive directors, are kept informed of investors' views in the main through distribution of analysts' and brokers' briefings. At least twice a year a report is made to the Board on the number and types of meetings held with institutional shareholders. The Chairman and the non-executive directors are available in the event of shareholder concerns which cannot be addressed through management. On appointment, new non-executive directors are available to meet shareholders on request.
Constructive use of the AGM
All directors normally attend the Company's AGM and shareholders are invited to ask questions during the meeting and to meet directors after the formal proceedings have ended. It is intended that there shall be a poll vote on each resolution at the 2008 AGM. Shareholders will be advised as to the provisional results of the poll vote on each resolution immediately after each poll is taken. The audited, final results of the poll votes will be released to the London Stock Exchange and published on the Company's website, www.smiths.com, as soon as is practicable after the conclusion of the AGM.
The Chairmen of the Audit and Nomination Committees were available at the 2007 AGM to answer shareholders’ questions. Mr Chambers, the Chairman of the Remuneration Committee, was not able to attend the meeting: Mr Brydon, a member of the Committee, was available to answer shareholders' questions in his stead. All the directors, apart from Mr Chambers, were in attendance. The notice of the AGM and related papers were sent to shareholders 20 working days before the meeting.
Board Committees
The full terms of reference of the following Board Committees are available upon request and on the Company's website, www.smiths.com.
Audit Committee
The members of the Committee during the financial year were Mr Challen (Chairman), Mr Jackson and Sir Kevin Tebbit.
The Board has determined that the Committee members have the skills and experience necessary to contribute meaningfully to the Committee's deliberations. In addition, the Chairman of the Committee has requisite experience in accounting and financial management.
The Committee meets at least three times per year to monitor the integrity of the Company's financial statements and the effectiveness of the external audit process, Corporate Governance issues and, in particular, the implementation of the Company's Code of Business Ethics and the arrangements for employees to raise confidentially (and anonymously, if they so choose) concerns about possible wrongdoing in financial reporting and other matters. It is responsible for ensuring that an appropriate relationship between the Company and the external auditor is maintained, including reviewing non-audit services and fees and implementing the Company's audit partner rotation policy. The Committee has primary responsibility for making recommendations to the Board on the appointment, reappointment and removal of the external auditor.
The Committee also reviews annually the Group's systems of internal control; the processes for monitoring and evaluating the risks facing the Group; and the effectiveness of the internal audit function: it is responsible for approving the appointment and removal of the Director, Internal Audit. The Committee reviews annually its terms of reference and its effectiveness and recommends to the Board any changes required as a result of such review.
In July 2008 the annual review of the Committee's terms of reference resulted in a number of largely clarificatory changes.
In the year to 31 July 2008, the Audit Committee discharged its responsibilities by reviewing:
- the Group's financial statements and interim results statement prior to Board approval and the external auditor's detailed reports thereon;
- the audit fee and non-audit fees payable to the Group's external auditor;
- the external auditor's effectiveness and plan for the audit of the Group's 2007/08 accounts, which included confirmations of auditor independence and the proposed audit fee, and approving the terms of engagement for the audit;
- an annual report on the Group's systems of internal control and their effectiveness, reporting to the Board on the results of the review and receiving regular updates on key risk areas of financial control;
- the risks associated with major business programmes; and
- the internal audit function’s terms of reference, its 2007/08 work programme and regular reports on its work during the year.
The Committee has authority to investigate any matters within its terms of reference, to access resources, to call for information and to obtain external professional advice at the cost of the Company.
No one other than the members of the Committee is entitled to be present at meetings. However, the Chairman and the non-executive directors who are not members of the Committee, the Chief Executive, Finance Director, Group Financial Controller, Director, Internal Audit and external auditor are normally invited to attend. Others may be invited to attend by the Committee. The papers for and Minutes of each Committee Meeting are sent to all directors. At least once a year, there is an opportunity for the external auditor, the Director, Internal Audit and the Director of Business Ethics to discuss matters with the Committee without any executive management being present. The Director, Internal Audit, the Director of Business Ethics and the external auditor have direct access to the Chairman of the Committee outside formal Committee meetings.
The Committee reviews the nature and extent of non-audit services provided by the external auditor in order to ensure that objectivity and independence are maintained. Under the audit independence policy, approved by the Committee, certain non-audit services may not be provided by the external auditor, certain services require the approval of the Finance Director and other services require the approval of the Chairman of the Committee. Where the cost of the services is expected to exceed £100,000, the engagement will normally be subject to competitive tender. The external auditor has in place processes to ensure that its independence is maintained including safeguards to ensure that where it does provide non-audit services, its independence is not threatened. The external auditor has written to the Audit Committee confirming that, in its opinion, it is independent.
Remuneration Committee
Mr Brydon and Mr Challen were members of the Committee throughout the financial year. Mr Chambers served as Chairman of the Committee throughout the year. Mr Loescher was a member of the Committee until his resignation as a director on 4 April 2008. Mr Jackson and Sir Kevin Tebbit were appointed as members of the Committee on 16 April 2008.
The Committee's responsibilities and terms of reference are described in the Directors' remuneration report.
Nomination Committee
During the financial year the members of the Committee were: Mr Brydon, as Chairman of the Committee, Mr Jackson and Sir Kevin Tebbit.
The Committee leads the process for identifying, and makes recommendations to the Board regarding, candidates for appointment as directors of the Company and as Company Secretary, giving full consideration to succession planning and the leadership needs of the Group. It also makes recommendations to the Board on the composition of the Nomination Committee and the composition and chairmanship of the Audit and Remuneration Committees. It reviews regularly the structure, size and composition of the Board, including the balance of skills, knowledge and experience and the independence of the non-executive directors, and makes recommendations to the Board with regard to any changes.
The Committee meets periodically when required. No one other than members of the Committee is entitled to be present at meetings but the non-executive directors who are not members of the Committee and the Chief Executive are normally invited to attend and external advisers may be invited by the Committee to attend.
The Committee has access to such information and advice both from within the Group and externally, at the cost of the Company, as it deems necessary. This may include the appointment of external search consultants, where appropriate. The Committee reviews annually its terms of reference and effectiveness and recommends to the Board any changes required as a result of such review. In July 2008 the annual review of the Committee's terms of reference resulted in a number of revisions.
The procedures referred to above, including the use of an external search consultant, were used by the Nomination Committee in recommending the appointment of Mr Bowman as the Chief Executive on 10 December 2007.