In accordance with the provisions of the Combined Code on Corporate Governance which was published in June 2008 by the Financial Reporting Council and best practice the following items are available to download:
the appointment letters of the non-executive directors.
This compliance statement is produced in relation to the Combined Code on Corporate Governance (‘the Code’) which was published in June 2008 by the Financial Reporting Council.
Statement of compliance
The Company considers that it has complied throughout the financial year ended 31 December 2010 with the provisions set out in Section 1 of the Code.
Application of the Code
The main principles of Section 1 of the Code were applied as follows:
The Board
Operation of the Board
The activities of the Company are controlled by the Board which, during 2010, comprised two executive directors and six non-executive directors until 28 June 2010 when Mr G R Menzies resigned and the number of non-executive directors was reduced to five. The roles of Chairman and Chief Executive are clearly divided between Mr P S Wood who heads the Board in his capacity as non-executive Chairman and Mr A M Whitfield who has responsibility for the running of the Company’s business as Chief Executive. The non-executive directors all have wide business and boardroom experience gained in a broad range of business sectors.
The Board has reserved to itself a schedule of matters which includes setting long-term objectives for the Group and the strategies to be employed in achieving them, setting policies in the areas of safety, health and the environment, recruitment and employment, risk management and treasury and, subject to materiality thresholds, decisions on the raising of capital, financial commitments, capital expenditure, acquisitions and disposals and the prosecution, defence and settlement of litigation.
During 2010 the Board held six scheduled meetings to review current and projected performance and to determine strategic issues and 9 meetings in connection with the acquisition of PolymerLatex and the associated rights issue. The directors receive in advance full information on all matters to be discussed at Board meetings as well as a detailed review of performance prepared by the Chief Executive. The Board has established Audit, Nomination and Remuneration committees which are discussed below.
In addition arrangements are made each year for the Board to visit up to two of the Group’s operational sites and meet local management. Ad hoc site visits are facilitated for individual non-executive directors on request.
The Board has delegated to the Chief Executive responsibility for the development and preparation of the business plan for the Group and the annual Group budget for recommendation to the Board. As the senior executive director, the Chief Executive is responsible for all aspects of day-to-day operational control of the Group and execution of the Group strategy. The Chief Executive has established and chairs an Executive Committee (whose other members are the divisional Chief Executives, the Finance Director, the Deputy Finance Director, the Company Secretary and the Director of Group Human Resources) to assist him in the performance of his duties and which meets once a month. The Chairman receives the minutes of the Executive Committee and all directors receive a monthly trading summary and commentary from the Finance Director and an update report from the Chief Executive.
Board membership and balance
The Chairman, Chief Executive and senior independent director are identified on page 22. The Chairmen and members of the Audit, Nomination and Remuneration Committees are identified below. The Board considers Dr A A Dobbie and Mr J K Maiden to be independent in accordance with the provisions of the Code. Mr G R Menzies was considered to be independent up until his resignation.
During 2010 the Company was in compliance with the requirements of Code provision A.3.2 for ‘smaller’ companies to have at least two independent non-executive directors. Following the re-entry of the Company into the FTSE 250 index on 14 September 2010 the Board is seeking two additional independent non-executive directors in order to achieve a balance of at least half the Board (excluding the Chairman) comprising independent non-executive directors.
The Board held a total of 15 meetings in 2010. In addition the Chairman held one separate meeting with the non-executive directors without the executive directors being present to appraise the performance of the executive management. The non-executive directors also met once without the Chairman to appraise his performance.
The table below shows the number of meetings of the Board, Audit, Remuneration and Nomination Committees held during the year and the number of meetings attended by each director. Where a director is unable to attend a Board or Committee meeting his views on agenda items are canvassed in advance of the meeting and incorporated into the discussions.
Induction and training
Induction arrangements are in place in order to ensure new directors receive a full formal and tailored induction on appointment. The skills and knowledge of Board members are updated by briefings provided by the Company’s internal resources and materials and seminars offered by external advisers.
Performance evaluation
Performance evaluations of the Board, its committees and its directors were carried out in the last year by the following internal processes:
- an assessment of the performance of individual non-executive directors is carried out by the Chairman through a rolling programme of one-to-one discussions using performance evaluation questions as the centrepiece for those discussions. Every non-executive director is assessed in this way once a year;
- the performance of the executive directors was reviewed in August 2010 at a meeting of the non-executive directors chaired by the Chairman;
- a meeting of the non-executive directors (in the absence of the Chairman) chaired by the senior independent director was held in November 2010 to evaluate the performance of the Chairman, taking into account the views of the executive directors; and
- the Board and its Committees carry out an annual self-assessment of performance led by the Chairman and the Chairman of each committee respectively. The results of assessment questionnaires completed by those Chairmen were reviewed by the relevant committees and the Board and were shared with and discussed by the Board as a whole at its meeting in November 2010.
Non-executive directors are appointed for three-year terms. Those non-executive directors who have served longer than nine years on the Board are subject to annual re-election by shareholders with other directors subject to re-election at least every three years.
Shareholder communications
Dialogue with institutional investors is conducted on a regular basis by the Chief Executive and the Finance Director and meetings take place following the announcement of interim and full year results and at other times according to circumstances.
The Board has adopted a set of shareholder communication principles in order to ensure that Board members develop an understanding of the views of the Group’s major shareholders. These principles require the Chairman to be present with the Chief Executive and the Finance Director at sufficient shareholder presentations and meetings that he fully understands the issues and concerns of major shareholders. The Chief Executive reports on shareholder relations at each Board meeting. Communications with shareholders relating to corporate governance matters are conducted by the Chairman with the assistance of the Chairmen of the Audit, Nomination and Remuneration Committees. Written reports on all meetings between non-executive directors and institutional shareholders and their representative bodies are presented to the Board at the first opportunity following such meetings as is all correspondence with them.
The Board seeks to encourage participation of all shareholders, and in particular private investors, at the Company’s Annual General Meeting and endeavours to ensure all Board members are in attendance. In particular, the Chairmen of the Remuneration, Audit and Nomination Committees are available to answer questions.
The Company makes use of its website www.yulecatto.com to communicate with its shareholders where it publishes interim and full year results, Company announcements, share price and corporate governance and other investor information.
Board committees
The Board has formally established Audit, Nomination and Remuneration Committees each with their own terms of reference which set out their respective roles and the authority delegated to them by the Board. Copies of the terms of reference are available upon request from the Company Secretary and can also be downloaded from the Company’s website.
Audit Committee
During 2010 the Audit Committee comprised Mr J K Maiden (Chairman), Dr A A Dobbie and Mr G R Menzies until 28 June 2010 when Mr Menzies resigned from the Board following which the Committee comprised Mr Maiden and Dr Dobbie. Mr Maiden is considered by the Board to have ‘recent and relevant financial experience’ for the purposes of Provision C.3.1 of the Code due to his current financial position outside the Group. The Committee has established a detailed remit regarding the application of financial reporting and internal control principles, which covers:
- monitoring the integrity of the financial statements of the Group and any formal announcements relating to the Group’s financial performance and reviewing significant financial reporting judgements contained therein;
- reviewing the Group’s internal financial controls and the Group’s internal control and risk management systems.
The Finance Director and senior members of his department attend meetings of the Committee as part of the review of the Group’s interim and final statements prior to their submission to the Board. The Committee meets periodically with the Company’s auditors to discuss the adequacy of the Group’s financial management, internal controls and information systems. The Committee’s remit also includes the review of the terms of engagement, effectiveness, independence and objectivity of the auditors (including the extent of non-audit services and fees payable to the auditors) which is carried out and discussed with the auditors on a periodic basis. With regard to seeking to ensure the independence and objectivity of the auditors, the Audit Committee’s policy is to avoid the auditors providing services in areas which may create or be perceived to create a conflict of interest. Accordingly, other than in circumstances where time constraints render it impractical or assignments are of a minor nature, the auditors are not invited to tender or propose for services of the following nature: corporate finance, legal, information technology and systems, recruitment or remuneration, accounting, internal audit or control, acquisition due diligence, valuations or appraisals, actuarial or general business consulting. In addition the auditors have been requested not to provide services to executive directors or senior executives. Non-executive directors are required to disclose any relationship they have with the auditors.
The Group does not have an internal audit function. The Committee has reviewed this during the year and has concluded that there are in place appropriate procedures for assuring the integrity and effectiveness of the Group’s governance, risk management and control processes. The Board has accepted this recommendation.
The current auditors were first appointed in 2002 and their appointment was reviewed by the Committee in 2009. Details of audit and non-audit fees paid to them in 2010 are set out in note 6 on page 49. Non-audit fees principally relate to miscellaneous services rendered in connection with the pending acquisition of PolymerLatex which were not considered to give rise to any conflict of interest. The Board accepts the Committee’s recommendation that the current auditors be proposed for reappointment at the forthcoming Annual General Meeting.
The Committee met formally 3 times during 2010 principally to discharge its duties in connection with the 2009 report and financial statements, the 2010 interim financial statements and the scope and planning of the audit of the 2010 report and financial statements. In addition the Chairman of the Committee had regular dialogue with the auditors during the course of the year. As well as complying with the terms of its remit during the year the Committee carried out a review of its content.
Nomination Committee
During 2010 the Nomination Committee comprised Mr P S Wood (Chairman), Dr A A Dobbie, Mr J K Maiden, Mr G R Menzies and Mr A M Whitfield. On 28 June 2010 Mr Menzies resigned from the Committee and the Board. The Committee is responsible for: the regular review of the structure, size and composition of the Board and the making of recommendations with regard to any changes; leading the process for Board appointments and nominating candidates for non-executive positions; and considering succession planning.
The Committee is leading the process seeking two additional independent non-executive directors referred to above. The Nomination Committee held 3 meetings during 2010.
Remuneration Committee
All matters relating to the Remuneration Committee and remuneration are covered in the Remuneration Report, setout on pages 30 to 33.
Accountability
An explanation of the directors’ responsibility for preparing the financial statements, their report that the business is a going concern, a responsibility statement and their statement as to disclosure of information to the auditors are set out on pages 34 and 24 respectively. Statements by the auditors about their reporting responsibilities are set out on pages 35 and 73 respectively. A report on the approach to internal control is set out below. The directors endeavour to make the annual report and financial statements as informative and understandable as possible.
Internal control
The Board of Directors has ultimate responsibility for the Group’s system of internal control and sets appropriate policies to ensure that the Code requirements on internal control are met.
The system of internal control deployed within the Group is designed to reduce the risks of failure to meet business objectives, but these risks cannot be eliminated. The internal control system adopted can therefore only provide reasonable, not absolute, assurance about meeting such business objectives or against material mis-statement or loss.
A process for identifying, evaluating and managing significant business risks faced by the Group has been in place since 2000. This has since been built upon so as to embed further the process into the businesses and to enhance the usefulness of the relevant processes and information, and has been operated throughout 2010 and up to the date of approval of the annual report and accounts, and accords with the Turnbull Guidance.
The system is applied at all material subsidiaries, and a ‘bottom up’ risk profile is created by evaluating the information at business, divisional and Group level. Individual directors within Yule Catto’s businesses identify and assess key risks associated within their area of responsibility based on formal management information and interaction with colleagues, customers, suppliers and other parties.
The individual submissions are consolidated, reviewed and agreed at a board meeting of the subsidiary. A business risk report is prepared that is closely linked to business strategy and takes account of key internal and external factors. Risks are prioritised using a common risk matrix, which forms the basis of a single corporate risk report that is reviewed and discussed by the Yule Catto Audit Committee.
The individual business risk reports are formally reviewed at a board meeting of the subsidiary every six months, out of which a revised report is submitted which identifies changes in the risk environment.
The process was last reviewed by the Yule Catto Board of Directors in March 2010.
The nature of the risks identified as a result of this process during the year primarily relate to matters of an operational and financial nature and the most significant of those which faced the Group in 2010 are reviewed in the reports of the Chairman, Chief Executive, Group Finance Director and the Directors’ Report.
Risks associated with safety, health and the environment are, by the nature of the Group’s business, always of the utmost concern and the Corporate Social Responsibility report on pages 14 to 21 reviews the Group’s performance in this connection in 2010.
The processes which are used by the Board either directly or, where appropriate, through the Audit Committee to review the effectiveness of the internal control and risk management systems (including in relation to the financial reporting process and the process for preparing consolidated accounts) include the following:
- a review of the external audit work plan;
- consideration of reports from management and external parties, including the auditors, on the system of internal financial control and any material control weaknesses;
- a quarterly review of safety, health and environmental performance;
- discussion with management of the actions taken on any possible problem areas for the business identified by Board members or in the audit report; and
- consideration of a consolidated risk management report setting out the main conclusions from the internal control process.
In addition, the Board:
- receives copies of the minutes from all Audit Committee meetings;
- considers the role of the Group insurance programme;
- receives regular written and oral reports from management on all aspects of production, operations, financial and risk management matters; and
- in compliance with Provision C.2.1 of the Combined Code the Board regularly reviews and approves the effectiveness of the Group’s system of internal controls.
Environmental, social and governance matters
In January 2007 the Association of British Insurers (‘ABI’) published a revised version of its guidelines on responsible investment disclosure. These guidelines require statements on the extent to which environmental, social and governance matters are taken into account by the Board and identified, assessed, managed and monitored, particularly in relation to the risks and opportunities they present to the value of the Company.
The Company is a member of the FTSE4Good Index.
Environmental matters
The maintenance of high standards of environmental (together with health and safety) protection is central to the Company’s business. A separate statement on safety, health and environmental (‘SHE’) matters has been a feature of the annual report for a number of years. The Corporate Social Responsibility report statement on pages 14 to 21 incorporates the ABI guidelines and includes a report on the initiatives the Company has adopted regarding sustainable development.
Social and ethical matters
The Board takes account of social and ethical matters as part of its review of internal control which, by virtue of its approach to risk identification, covers areas which encompass social and ethical matters.
The Board is conscious of its responsibility to the communities in which the Group’s businesses operate and is supportive of local initiatives by management.
The Board is also aware of the reputational risk associated with social and ethical issues and has a Group-wide code of business conduct on corruption and anti-competitive activities, which is available on the Company’s website and upon request from the Company Secretary. The purpose of this code is to ensure that the Group’s employees have a clear understanding of the principles that are important in these areas when conducting the Group’s business. The application of the code is explained to senior management at regular intervals and they are charged with its communication throughout their businesses supported by internal and external training. A compliance procedure was initiated in 2007 involving annual certification by the senior management of each operating company and since 2009 a procedure for maintaining a register of, and where appropriate gaining prior approval for, gifts, entertainment and corporate hospitality has been instituted. A report is made to the Audit Committee annually on the code and the Company’s whistleblowing procedure.
Governance
The Board’s approach to governance, training of directors and identification and assessment of risk is set out above.