Headlam Group plc
Latest News
Interim Management Statement May 2012
18 May 2012
Franklin Templeton: Notification of Major Interest in Shares
25 April 2012
Corporate Governance
The Combined Code on Corporate Governance
Board of directors
Board information, induction, training and professional development
Board meetings and attendance
Directors’ interests and indemnity arrangements
Directors’ conflicts of interest
Board committees
Audit committee
Remuneration committee
Nominations committee
Communication with shareholders
Risk management and internal controls
The Combined Code on Corporate Governance
This report sets out how the principles of the UK Corporate Governance Code (the “Code”) are applied, reports on the company’s compliance with the Code’s provisions and provides an explanation where the provisions have not been complied with. This will be the first reporting period in respect of the new Code. The Code sets out guidance in the form of principles and provisions on how companies should be directed and controlled to follow good governance practice.
Whilst the company is a constituent member of the FTSE Small Cap Index, and thereby not subject to the Code, which applies to companies listed in the FTSE 100 and FTSE 250 Indices, it continues voluntarily to seek to comply with the provisions of the Code. In seeking to achieve a high standard of corporate governance, the company considers the group’s reputation and performance will be enhanced, to the benefit of all interested parties.
The board considers that it has complied with the provisions of the Code throughout the year ended 31 December 2011 and up to the date of this report, with the exception of the following:
- Code B.6.2 states that the evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years. The board considered the requirements of the Code but, mindful of the costs associated and perceived benefit of doing so, determined that board evaluation, similar to prior years, was to be undertaken in house.
- Code B.7.1 states that all directors of FTSE 350 companies should be subject to annual election by shareholders. The board does not consider the annual election of directors to be appropriate, considering that existing provisions for the re-election of directors are sufficient and better serve the interests of the company.
In addition to compliance with the Code described above, the board considers that it has complied fully with the provisions of the Quoted Companies Alliance report on Corporate Governance Guidelines for Smaller Quoted Companies issued in September 2010.
Board of directors
During the year and as at 31 December 2011 the board consisted of six members, three executive directors comprising Graham Waldron, Chairman, Tony Brewer, Group Chief Executive and Steve Wilson, Group Finance Director and three independent non-executive directors, Dick Peters, Mike O’Leary and Andrew Eastgate.
The board considers that the balance achieved between executive and non-executive directors during the year was appropriate and effective for the control and direction of the business. The company considers that diversity in the boardroom is essential to good business, appointment processes continuing to ensure that all appointments are made on merit.
The board is collectively responsible to shareholders for the proper management and success of the group. Its role is to provide entrepreneurial leadership within a framework of prudent and effective controls which enables risk to be assessed and managed; to set strategic aims, ensure that the necessary financial and human resources are in place to meet its objectives and review management performance; to set the group’s values and standards and to ensure that its obligations to its shareholders and others are understood and met.
The roles and responsibilities of the Chairman and Group Chief Executive are clearly divided and periodically reviewed by the board. Whilst collectively they are responsible for the leadership of the group, the Chairman’s primary responsibility is for leading the board and ensuring its effectiveness and the Group Chief Executive is responsible for implementing strategy, running the businesses in accordance with the objectives and policies agreed by the board and for the executive management of the group. The Chairman communicates frequently with the non-executive and executive directors and the non-executive directors have the opportunity to meet with and discuss any issues or concerns with the Chairman at any time throughout the year. Matters that are not specifically reserved for the board and its committees under their terms of reference or for shareholders in general meeting are delegated to the Group Chief Executive.
The board maintains overall control of the group’s affairs through a schedule of matters reserved for its decision. These include, but are not limited to, setting group strategy, approval of the business objectives and annual plan, acquisitions and disposals, authority limits for capital and other expenditure, material treasury matters, changes to capital structure and dividend policy, committee terms of reference, board composition, succession planning, health and safety, risk management, financial reporting and controls and corporate governance. The board is assisted by committees that it has established with written terms of reference, details of which are set out below.
During the year the board conducted an in house evaluation of its performance with no remedial actions arising. The board intends to review the way in which it conducts its in house evaluation procedures during 2012.
The directors bring strong judgement to the board’s deliberations and the size, diversity and balance of skills and experience of the board is considered appropriate for the requirements of the business. The board believes that all three non-executive directors are independent of management and free from any business or other relationship, including those relationships and circumstances referred to in provision A.3.1 of the Code that could materially interfere with the exercise of independent and objective judgement. In making this determination the board has considered whether each director is independent in character and judgement and whether there are relationships or circumstances which are likely to or could affect the director’s judgement. Mike O’Leary, who served as the Senior Independent Director throughout the year, is available to shareholders if they have concerns which are not resolved through the normal channels of the Chairman, Group Chief Executive or Group Finance Director, or for which such contact is inappropriate. The non-executive directors do not participate in any bonus, share option or pension scheme of the company. They are initially appointed for a three-year term and, subject to review and re-election, can serve up to a maximum of three such terms.
All directors are subject to election by shareholders at the first AGM following their appointment by the board. Under the articles of the company, each of the directors is required to retire by rotation at least once every three years. Details of the directors retiring and seeking re-election at an AGM are given to shareholders in the Directors’ Report and also in the Notice of AGM and the biographical details of the directors are shown on page 24.
Board information, induction, training and professional development
The board has a rolling agenda which is regularly updated in respect of specific topics that directors have requested for review at future meetings, including health, safety and environmental matters, finance and operational performance, risk management, business development initiatives, legal and regulatory developments and governance and best practice guidelines that affect the group. The board reviews the key activities of the business, receiving papers and presentations from senior executive management generally a week in advance of the meeting. The Company Secretary is responsible to the board in respect of board procedures and is available to individual directors. In conjunction with the Chairman, the Company Secretary ensures that information distributed to the board is sufficient, clear and accurate, that it is circulated in a timely manner and is appropriate to enable the board to discharge its duties. All directors are equally accountable for the proper stewardship of the group’s affairs, however the non-executive directors have a particular responsibility to ensure that the strategies proposed by the executive directors are fully discussed and critically examined.
The induction of newly appointed directors includes background information about the group, directors’ responsibilities, board meeting procedures, a number of other governance-related issues and procedures for dealing in company shares. A briefing on the general group strategy, including visits to group businesses, is provided by the Group Chief Executive. External training is arranged with suitable providers as appropriate and ongoing training is provided as and when necessary. Training and development in the year took various forms, including visits to group businesses and attendance at courses run by professional bodies on various commercial and regulatory matters. Directors receive regular updates appropriate to the business throughout the year aimed at developing and refreshing their knowledge and capabilities. All directors are considered to be suitably qualified, trained and experienced so as to be able to participate fully in the work of the board. To assist with the independent conduct of their function and if required in connection with their duties, a process is in place for the non-executive directors to obtain professional advice at the company’s expense.
Board meetings and attendance
The board usually meets nine times a year. During the year there are sufficient opportunities for the Chairman to meet with the non-executive directors without the executive directors being present should this be deemed appropriate. In addition, directors have contact between meetings and on occasions visit trading locations in order to maintain contact with the group’s business.
In addition to the board meetings above there were two meetings which approved the 2011 Interim and 2010 Annual Report and Accounts. These meetings are constituted by a committee of the board formed for that sole purpose comprising the Group Chief Executive and Group Finance Director having considered the views of the whole board beforehand.
Directors’ interests and indemnity arrangements
At no time during the year did any director hold a material interest in any contract of significance with the company or any of its subsidiary undertakings other than a third-party indemnity provision between each director and the company and service contracts between each executive director and the company. The company has purchased and maintained throughout the year directors’ and officers’ liability insurance in respect of itself and its directors. The directors also have the benefit of the indemnity provision contained in the company’s articles. These provisions, which are qualifying third-party indemnity provisions as defined by Section 236 of the Companies Act 2006, were in force throughout the year and are currently in force. Details of directors’ remuneration, service contracts and interests in the shares of the company are set out in the directors’ Remuneration Report.
The company also provides an indemnity for the benefit of each person who was a director of Headlam Group Pension Trustees Limited, which is a corporate trustee of the company’s occupational pension schemes, in respect of liabilities that may attach to them in their capacity as directors of that corporate trustee. These provisions, which are qualifying pension scheme indemnity provisions as defined in Section 235 of the Companies Act 2006, were in force throughout the year and are currently in force.
Directors’ conflicts of interest
Procedures are maintained by the board whereby potential conflicts of interests are reviewed regularly. These procedures have been designed so that the board may be reasonably assured that any potential situation where a director may have a direct or indirect interest which may conflict or may possibly conflict with the interests of the company are identified and where appropriate dealt with in accordance with the Companies Act 2006 and the company’s articles. The board has not had to deal with any conflict during the period.
Board committees
The board has established Audit, Remuneration and Nomination committees to oversee and debate important issues of policy and assist in attending to its responsibilities, each with terms of reference that each comply with the provisions of the Code and are available on written request from the Company Secretary at the registered office and are available on the company’s website. The roles of the Audit, Remuneration and Nomination committees, whose membership is comprised of the three independent non-executive directors, with the Group Chief Executive additionally serving on the Nomination committee, are set out below.
Audit committee
The Audit committee is comprised of the three non-executive directors and was chaired during the year by Dick Peters. The Company Secretary acts as secretary to the committee. Dick Peters is a chartered accountant with considerable financial and audit experience and is considered by the board to have recent and relevant financial experience.
The Audit committee is responsible for monitoring and reviewing:
- the group’s systems of internal control and the processes for monitoring and evaluating the risks facing the group on an ongoing basis
- updates from executive directors and senior executive management on key financial control matters
- the consistency of and any changes to the group’s accounting policies, the application of appropriate accounting standards and methods used to account for significant or unusual transactions
- the integrity of the interim and annual financial statements, including a review of the significant financial reporting judgements contained in them
- the potential impact on the financial statements of certain matters such as impairment of asset values and employee benefits
- the effectiveness of the external audit process
- the application of the board’s policy on non-audit work performed by the group’s external auditor together with the non-audit fees payable to the external auditor
- the external auditors’ plan for the audit of the group’s accounts, confirmation of auditor independence and of the individuals carrying out the audit, confirmation of the proposed audit fee, approving the audit terms of engagement and management’s response to any major external audit recommendations
- reports from the external auditor on the group’s systems of internal control, including a summary of and commentary on the business risks and internal control processes, and reporting to the board on the results of this review
- non-audit services and fees
- the appointment, re-appointment or dismissal of the external auditor
- the appropriateness of an internal audit function
- the group’s compliance with corporate governance principles
- arrangements by which staff may in confidence raise concerns about possible improprieties in matters of financial reporting and other matters
In addition, the fees and objectivity of the group’s auditor are considered by the committee. The committee recommends that shareholders re-appoint KPMG Audit Plc as the group’s auditor, in accordance with resolution 5 set out in the Notice of AGM, and authorises the directors to determine their remuneration, as set out in resolution 6.
The committee periodically reviews its terms of reference and its effectiveness and recommends to the board any changes required as a result of such review.
Whilst only members of the committee are entitled to be present at meetings, the auditor, Chairman, Group Chief Executive and Group Finance Director may attend meetings by invitation. In accordance with the Code the board has undertaken an assessment of the need for a group internal audit function. The board considers that the control systems and procedures undertaken by the group are adequately performed by management and therefore does not currently propose to introduce a group internal audit function but will keep the matter under review. However detailed monthly reviews are carried out by the Finance Director for Operations and Financial Controller. This process has over the years identified a number of risks where action plans have been developed to eliminate, minimise or mitigate these risks, (including the use of insurance where appropriate. The Finance Director for Operations reports to the Group Finance Director and has access to the Chairman of the committee. The committee members, all other directors and senior executive management have direct access to the external auditor throughout the year, to seek advice or raise any issues or concerns.
The committee has an agenda linked to events in the group’s financial calendar, normally meeting at least twice a year, including meetings before the annual and interim results announcements. The committee met three times in the year, members’ attendance record being given on page 33, during which it discharged its responsibilities as set out in its terms of reference and schedule of business for 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.
The committee has independent access to the external auditor who has direct access to the Chairman of the committee outside formal committee meetings and at each meeting there is an opportunity for the external auditor to discuss matters with the committee without any executive management being present. The Audit committee has the specific task of keeping under review the nature and extent of non-audit services provided by the external auditor in order to ensure that objectivity and independence are maintained. The committee seeks to balance the benefits of continuity of audit personnel and the need to ensure independence through a change of audit personnel by agreeing with the auditor staff rotation policies. Whilst KPMG have been an external auditor to the group since 1992, there is a procedure in place for the audit partner to change not more than every five years, so maintaining objectivity and independence without the need to change firm, the last such change taking place during 2011. The external auditor has in place processes to ensure its independence is maintained including safeguards to ensure that, where it does provide non-audit services, its independence is not compromised. It has written to the Audit committee confirming that, in its opinion, it is independent.
When appointing advisers for non-audit work, the group considers the value for money, experience and objectivity required and in this respect it has used Deloitte to conduct non-audit tax work. The committee recognises that there are occasions when it is advantageous to use the external auditor to undertake non-audit services, when they are best placed to do so. The policy states that non-audit fees paid to the principal external auditor should not exceed 250% of the audit fee, except in the case of significant events. The Chairman of the committee is required to authorise non-audit work above a pre-agreed threshold. A breakdown of 2010 and 2011 audit and non-audit fees is provided in note 3 to the Financial Statements. The non-audit services provided by the external auditor in 2011, predominantly in respect of iXBRL mapping, P11D software, advice in respect of VAT and corporate tax services to the group’s Continental European businesses amounting to £45,000 was below the pre-agreed threshold.
The committee has concluded, as a result of its work during the year, that it has acted in accordance with its terms of reference and has ensured, as far as possible by enquiry of them, the independence of the external auditors. The Chairman of the committee will be available at the AGM to answer any questions on the work of the committee. The terms of reference of the committee are available on request from the Company Secretary at the registered office and are available on the company’s website.
Remuneration committee
The Remuneration committee is comprised of the three non-executive directors and was chaired during the year by Mike O’Leary. It establishes, on behalf of the board, the remuneration policy generally, approves specific arrangements for the Chairman and the executive directors and reviews and comments upon the proposed arrangements for senior executive management so as to ensure consistency within the overall remuneration policy and group strategy. Further information on the activities of the committee is given in the directors’ Remuneration Report on pages 38 to 48 which should be read in conjunction with this report. The directors’ Remuneration Report also describes how the principles of the Code are applied in respect of remuneration matters and includes a statement on the company’s policy on directors’ and senior executive managers’ remuneration, benefits, share scheme entitlements and pension arrangements. During the period no director was, and procedures are in place to ensure that no director is, involved in deciding or determining their own remuneration. A resolution to approve the Remuneration Report will be proposed at the AGM.
Nominations committee
The Nominations committee is comprised of the three non-executive directors and the Group Chief Executive and was chaired during the year by Mike O’Leary. The terms of reference of the committee are available on request to the Company Secretary at the registered office and are available on the company’s website.
The committee leads the process for identifying, and makes recommendations to the board on, 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 and Chairmanship of the Audit and Remuneration committees. It keeps under review 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 when required and met once in the year, as reflected in the attendance record during 2011 given on page 33. Only members of the committee are entitled to be present at meetings but others may be invited by the committee to attend. The board has agreed the procedures to be followed by the Nominations committee in making appointments to the various positions on the board and as Company Secretary. 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 executive search consultants, where appropriate. No director is involved in any decisions regarding their appointment.
The committee ensures that newly appointed directors receive a full induction and when considering the re-appointment of directors ensures that the board has an appropriate balance of skills, knowledge and experience. Items discussed by the committee during the year to enable it to discharge its duties in accordance with its terms of reference included the proposals to re-elect Steve Wilson and Mike O’Leary under the retirement by rotation provisions.
The committee, in conjunction with the board, receives updates from the Group Chief Executive on succession and development planning for senior positions within the group. Changes to directors’ commitments are reported to the committee as they arise and are considered on their individual merits. There were no significant changes to any of the directors’ external commitments during the year. Appointments to the committee are made by the board.
Communication with shareholders
The company places considerable importance on communication with shareholders. When reporting to shareholders, the board aims to present a balanced and understandable assessment of the group’s financial position and prospects, reporting four times a year when its half year and full year results are announced, and an interim and an annual report is issued to shareholders, and through interim management statements typically released in May and November. Further information regarding business developments is available to investors on the group’s website www.headlam.com.
The company has an ongoing programme of dialogue and meetings between the executive directors and institutional investors and analysts which cover strategy, trading and market conditions. Contact with the major shareholders is principally maintained by the Group Chief Executive and Group Finance Director. During the year a number of meetings were held at certain of our businesses with the aim of providing shareholders with increased exposure to our operations and management. The Chairman ensures that the views of shareholders are communicated to the board as a whole.
The Group Chief Executive and Group Finance Director have met with the company’s brokers during the year to ensure they are aware of the current views of major shareholders and of any material issues they may have. These reports include summaries on the market’s reaction to results announcements and the subsequent meetings between management and investors. External brokers’ reports on the company are circulated to all directors. Whilst the Senior Independent Director and the other non-executive directors are invited to attend presentations to analysts and institutional shareholders, in particular the annual and interim results presentations, they did not attend any meetings with shareholders in the year.
Risk management and internal controls
The Code requires that the directors review the effectiveness of the group’s system of internal control. The board recognises that the management of risk through the application of a consistent process is key to ensuring a robust system of internal control, the principle risks and uncertainties facing the company including some of those identified in the Director’s Report. This however is not an exhaustive list and there may be other risks that have not been considered or that the board consider now are insignificant or immaterial in nature, but that may arise and have a larger effect than originally expected.
Directors are required by the Code to review and report annually to shareholders on the effectiveness of the company’s systems of internal control, which includes financial, operational and compliance controls and risk management. The board has responsibility for establishing and maintaining the group’s systems of internal control and for reviewing its effectiveness whilst management is responsible for the implementation of internal control systems. The internal control provisions of the Code continue to be applied by the board through a continuous process for identifying, evaluating and managing the significant risks the group faces.
The group’s risk management processes seek to ensure sustainable development throughout the conduct of its business in a way which satisfies its customers, maintains proper relationships with suppliers and contractors, mitigate losses from unforeseen causes, provides a safe and healthy workplace, develops environmentally aware processes, minimises the cost and consumption of increasingly scarce resources, reduces waste and maintains a positive relationship with the communities in which it operates. The systems are designed to meet the group’s particular needs and to manage rather than eliminate risks, by their nature, providing reasonable and not absolute assurance against material misstatement or loss. The measures taken, including physical controls, segregation of duties and reviews by management, are considered by the board to provide sufficient and objective assurance.
The board maintained its process of hierarchical reporting and review during the year in order to evaluate the effectiveness of the group’s systems of financial and non-financial controls. A comprehensive series of operating and financial control procedures applying to all businesses has been developed and the group finance team performs monthly reviews to verify that the businesses are complying with the prescribed operating and financial control procedures. Additionally, the board reviews risk management arrangements and the Audit committee receives reports from the external auditor on matters identified in the course of its statutory audit work.
These procedures provide a documented and auditable trail of accountability, the results of which are periodically reviewed for completeness and accuracy. These procedures allow for successive assurances to be given at increasingly higher levels of management through to the board. Planned corrective actions are monitored for timely completion. The board has not identified any failings or weaknesses, or been advised of any, which it has determined to be significant during the course of its review of the system of internal control. There were in addition no changes in the group’s internal controls or financial reporting that have materially affected, or are reasonably likely to affect, the group’s systems of internal control.
A comprehensive planning system includes detailed reviews at all subsidiaries and formal reviews and approval of annual plans by the board. Actual performance is measured on a monthly basis against plan and prior year, including a detailed explanation of significant variances. Revenue, gross margin and cash flow, are reported on a daily basis against plan and prior year. The control procedures operated by the group are designed to ensure complete and accurate accounting for financial transactions and to limit the potential exposure to fraud. Guidelines for capital expenditure and investment appraisal include annual plans, detailed appraisal and review procedures, authority levels and due diligence requirements when businesses are acquired, the acquisition or disposal of a business requiring formal board approval.
These detailed reviews are an important aspect of management reporting in the identification of new and emerging risks. An ongoing process of risk management and internal control in accordance with the Code has been in place for the financial year under review and up to the date of this report, the careful management of risk considered to be a key activity in delivering business opportunities. The ethos of the group, delegation of responsibility and other control procedures together with accounting policies and procedures are communicated through the group and employment handbook, supported by the group’s anti bribery policy communicated during the year. The integrity and competence of personnel is assessed during the recruitment process and monitored throughout employment.
The group promotes a high standard of health and safety management at all levels supported by training programmes at operating businesses. Group health and safety rules are monitored and audited to promote a high level of awareness and commitment, with individual businesses assessed on a periodic basis. Remedial solutions are implemented where necessary, action plans and progress being monitored and reported.
The Corporate Governance report and the Audit committee report contained within have been approved by the board and are signed on its behalf by
Geoff Duggan
Company Secretary
9 March 2012