Corporate governance statement
Compliance with the Combined Code
Throughout the period 1 August 2008 to 31 July 2009 the Company has been in full compliance with the June 2008 issue of the Combined Code on Corporate Governance (the 'Code'), published by the Financial Reporting Council and available on its website www.frc.org.uk, except that the value of any fees received by executive directors in respect of external non-executive directorships is not disclosed in the Directors' remuneration report, as this is not considered relevant to the Company.
Directors
The Board
In reviewing the performance of the Board during the year, the Board determined that the following statement of its role would be used to judge its success:
'Good corporate governance is about helping to run the Company well.
It involves putting in place an effective internal framework of authority and accountability that promotes success whilst permitting the management of risk to appropriate levels. It involves the exercise of judgement as to definitions of success and of appropriateness of risk. The exercise of this judgement is the responsibility of the Board and involves consideration of processes as well as outcomes.
It also involves the creation of a sensitive interface for the views of shareholders and other stakeholders to be given appropriate consideration when reaching these judgements.
The executive is required to provide such information to the Board as it needs to enable it to exercise its judgement over these matters.
There is a very fine distinction between the approval of processes and their definition. Wherever possible it is the role of the Board to approve process rather than initiate or define it. Only exceptionally would the Board intervene to initiate or define.
The Board also sets the tone for the Company. The way in which it conducts itself, its attitude to ethical matters, its definitions of success and appropriate risk all define the atmosphere within which the executive team works.
Good corporate governance is not about adhering to codes of practice (although adherence may constitute a part of the evidence of good governance) but rather about the exercise of a mindset to do what is right. Recent changes to the law have, of course, changed some of the associated responsibilities.
One of the challenges facing any Board is the way in which the non-executive and the executive directors interact. It is clear that they each have the same legal responsibility but it is generally unrealistic to expect executive directors to speak individually on all occasions with the same freedom as the non executive directors. Equally executive directors who just “toe the executive line” in contradiction to their own views may not be effectively contributing to good governance. A well-functioning Board needs to find the right balance between hearing the collective executive view and being aware of the natural internal tensions in an executive team.
One of the consequences of both increasing the watchdog role of the Board, for example setting and examining the pay of executive directors, and this balance between individuality and team behaviour is driving more and more Boards to have fewer and fewer executive directors. We are part of this trend. In our circumstances as a holding company for a number of businesses, the reduced Board size works effectively.
In a successful Board, all the members should endeavour to form a team notwithstanding the inherent tensions created by many external expectations, some of which may be wholly or in part unrealistic. Ideally it should be composed of a group of respected, experienced, likeminded but diverse people who coalesce around a unified vision of the definitions of success and appropriate risk, endeavour to be the friends of management (ie those who honestly criticise at times but encourage all the time) and who create confidence in all stakeholders in the integrity of the business.
Board meetings should feel like a meeting at which everyone is participating to solve problems together. Above all, all participants should be able to say after a Board meeting that value has been added as a result of the meeting taking place. This added value will come in many forms: comfort, advice, clarity, imagination, support, sharing of problems, or creating strategic intent. The list is not exhaustive.
Board membership is for 365 days of the year. Responsibilities do not start and end with formal meetings. Board members, on the Company's and their own initiative, should endeavour to engage outside of meetings to bring their experience to the assistance of the executive team whenever possible.
Above all there should be a sense of value added from the engagement of the Board members in all their interaction with the Company, formal or otherwise.'
During the last financial year the membership of the Board was unchanged. On 1 August 2009 Ms A C Quinn was appointed as an independent non-executive director of the Company.
As at 26 September 2009, the Board comprises Mr Brydon (Chairman), Mr Bowman (Chief Executive), Mr Langston (Finance Director) and five 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 in the Board of Directors section. 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 in the Corporate Responsibility section.
The Chairman meets the non-executive directors without the executive directors present at least three times a year. 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 2009 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 |
||||
|---|---|---|---|---|---|---|---|---|
Name |
Eligible to attend |
|
Eligible to attend |
|
Eligible to attend |
|
Eligible to attend |
|
D H Brydon |
7 |
7 |
– |
– |
4 |
4 |
2 |
2 |
P Bowman |
7 |
7 |
– |
– |
– |
– |
– |
– |
D J Challen |
7 |
6 |
3 |
2 |
4 |
4 |
1 |
1 |
S J Chambers |
7 |
6 |
2 |
2 |
4 |
4 |
1 |
1 |
P J Jackson |
7 |
6 |
3 |
3 |
4 |
2 |
2 |
1 |
J Langston |
7 |
7 |
– |
– |
– |
– |
– |
– |
Sir Kevin Tebbit |
7 |
7 |
3 |
3 |
4 |
3 |
2 |
2 |
– indicates not a member of that Committee in 2008/09
Chairman and Chief Executive
The Board has established clearly defined roles for the Chairman and the Chief Executive. 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 or her 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.
Conflicts of interest
The new statutory duties for directors relating to conflicts of interest, set out in the Companies Act 2006 (the '2006 Act'), came into force on 1 October 2008. Under the 2006 Act a director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company's interests. The requirement is very broad, and could apply, for example, if a director becomes a director of another company or a trustee of another organisation. The 2006 Act allows directors of public companies to authorise conflicts and potential conflicts where appropriate and where the articles of association contain a provision to this effect, as the Company's Articles do.
The Board has put procedures in place for directors to report any potential or actual conflicts to the other members of the Board for their authorisation where appropriate. The initial Board-wide review process was completed in September 2008, and repeated in March 2009. Each director is aware of the requirement to seek approval of the Board for any new conflict situations, as they may arise. The process of reviewing conflicts disclosed, and authorisations given, will be repeated at least annually. Any conflicts or potential conflicts considered by the Board and any authorisations given are recorded in the Board minutes and in a register of directors' conflicts which is maintained by the Company Secretary.
Performance evaluation
The Board undertakes a formal and rigorous annual evaluation of its own performance and that of its Committees and the individual directors. In 2008 this process was facilitated by Professor Goffee of the London Business School. The evaluation process 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.
The directorships in listed companies and other significant commitments of the Chairman and the non-executive directors are shown in the Board of Directors section. It is confirmed that the Chairman and 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.
Re-election
Currently, all directors stand for election by the shareholders at the first Annual General Meeting ('AGM') following their appointment and subsequently for re-election at least every three years. With effect from 2010, the Board has resolved that all directors who are willing to continue in office will stand for re-election by the shareholders each year at the AGM. Non-executive directors are appointed for a specified term of three years and reappointment for a second three-year term is not automatic. In exceptional circumstances and only after rigorous review, a non-executive director may serve for a third term.
Remuneration
Information regarding the Remuneration Committee is set out below 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 in the Statement of directors' responsibilities.
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 has in place internal control and risk management systems in relation to the Company's financial reporting process and the Group's process for preparation of consolidated accounts. These systems include policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards ('IFRS'); require representatives of the businesses to certify that their reported information gives a true and fair view of the state of affairs of the business and its results for the period; and review and reconcile reported data. The Audit Committee is responsible for overseeing these internal control and risk management systems.
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, including ethical matters, 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 training 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 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, the 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 between the Company and 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 Annual General Meeting
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 2009 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.
All the directors, including the Chairmen of the Audit, Nomination and Remuneration Committees, were available at the 2008 AGM to answer shareholders' questions. The notice of the AGM and related papers were sent to shareholders at least 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 of the Committee), Mr Jackson and Sir Kevin Tebbit. On 20 January 2009 Mr Chambers was appointed to the Committee.
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 a 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 2009 the annual review of the Committee's terms of reference resulted in a small number of largely clarificatory changes.
In the year to 31 July 2009, 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 2008/09 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 2008/09 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; Chief Executive; Finance Director; Group Financial Controller; Director, Tax and Treasury; 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 Chambers (Chairman of the Committee), Mr Brydon, Mr Challen, Mr Jackson and Sir Kevin Tebbit were members of the Committee throughout the financial year.
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. On 20 January 2009 Mr Challen and Mr Chambers were appointed to the Committee.
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 Chief Executive is 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 2009 the annual review of the Committee's terms of reference resulted in no 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 Ms Quinn as a non-executive director on 1 August 2009.
Disclosure & Transparency Rule 7
This statement complies with sub-sections 2.1; 2.2(1); 2.3(1); 2.5; 2.7; and 2.10 of Rule 7 of the UK Listing Authority Disclosure Rules. The information required to be disclosed by sub-section 2.6 of Rule 7 is shown in the Group directors' report and is incorporated in this Corporate governance statement by reference.