In this section
Board complies with the Code
The Board recognises the importance of high standards of corporate governance and is committed to managing the Group’s affairs in accordance with the principles of good governance set out in section 1 of the Combined Code on Corporate Governance published in June 2008 by the Financial Reporting Council (‘the Code’). A copy of the Code is available from the FRC’s website.
In accordance with the Listing Rules, the Company is required to confirm whether it has complied with the relevant provisions of section 1 of the Code and to report on how it has applied the main principles of section 1 of the Code.
The Board has complied with the provisions of section 1 of the Code throughout the year ended 31 December 2010 and up to the date of this report. A summary of how the Company has applied the main principles of the Code is set out below.
The Board has noted the introduction of the UK Corporate Governance Code, which applies to accounting periods beginning on or after 29 June 2010, and will report on its compliance with this code next year.
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Directors
Changes to the Board
The Board currently comprises an executive chairman, three further executive directors and five non-executive directors. Simon Gulliford joined the Board as a non-executive director on 1March 2010 and Jon Walden served during the year as a non-executive director until the annual general meeting on 6 May 2010. All of the non-executive directors are considered by the Board to be independent and the Board’s structure, therefore, meets the requirements of the Code.
Adrian Martin is the senior independent director.
Executive chairman and chief executive have clear roles and responsibilities
The Board has a separate chairman and chief executive. John Morgan, as executive chairman, takes responsibility for the overall strategy of the Group and for leading the Board and ensuring
that it functions effectively whilst Paul Smith, as chief executive, is responsible for managing the business and critically assessing the Group’s strategy. The Board has set out and agreed a schedule that describes their individual roles and responsibilities.
The Board considers that the balance of relevant experience amongst its members enables it to exercise effective leadership and control of the Group. It also ensures that the decision making
process cannot be dominated by any individual or small group of individuals.
Procedures for managing conflicts of interest operating satisfactorily
The directors are aware of their duties under the Companies Act 2006 provisions relating to the management of conflicts of interest. The Company’s articles of association (‘the Articles’) were amended in 2008 to give the Board a general power to authorise potential conflicts of interest. In addition to the directors’ duty to seek Board approval for any new potentially conflicting situations or changes to existing interests, the register of potential conflicts is circulated for review by the Board on an annual basis. This process was carried out satisfactorily during the year.
John Morgan, Paul Whitmore, David Mulligan, Gill Barr and Geraldine Gallacher standing for election
The Articles require each director to submit himself or herself for election by shareholders at the first annual general meeting after his or her appointment and for re-election at every third
annual general meeting thereafter. John Morgan, Paul Whitmore, David Mulligan, Gill Barr and Geraldine Gallacher were all last appointed in 2008 and will submit themselves for re-election at the forthcoming annual general meeting. Their biographies are set out in Board of directors. The Board has considered the recommendation of the nominations committee on the composition of the Board. In particular, Gill Barr’s reappointment for a seventh year was subject to a particularly rigorous review, in accordance with the provisions of the Code relating to non-executive directors who serve for more than six years. It has also considered the formal performance evaluation described below of the Board’s performance and that of individual directors. Following such performance evaluation, the Board believes that the performance of the non-executive directors, Gill and Geraldine, continues to be effective and that they continue to show commitment to the role. In particular, Gill continues to contribute to Board discussion, drawing on her experience in retail and marketing, whilst Geraldine’s strength is her experience in executive development and people skills.
Description of Board activities
Ten scheduled meetings of the Board were held during the year. The key purposes of the scheduled meetings were to review all significant aspects of the Group’s activities, to supervise the
executive management, to review the overall system of internal control and risk management and to make decisions in relation to those matters that are specifically reserved to the Board. There is a formal schedule of these matters, which includes the approval of the Group’s strategic plans, annual budget, significant capital expenditure and investment proposals, major projects, acquisitions and disposals, internal control arrangements and annual and half year results. Other specific responsibilities are delegated to the Board committees described below and under the Group’s delegated authorities.
A formal agenda for each scheduled meeting is agreed with the chairman and is circulated in advance of the meeting to allow time for proper consideration, together with relevant papers including key strategic, operational and financial information.
Attendance of individual directors during 2010 at scheduled Board meetings and meetings of the remuneration, audit and nominations committees are set out below.
(1) Simon Gulliford attended all the Board and nominations committee meetings after his appointment.
(2) Jon Walden ceased to be a director on 6 May 2010.
Non-attendance by directors at committee meetings was due to illness or conflicting commitments and, in the latter case, was previously agreed with the chairman of the committee. Where
possible, papers were read in advance and comments passed to the chairman prior to the meeting.
Three of the scheduled board meetings in 2010 were held at offices of the Group’s divisional operations and were combined with site visits and presentations by divisional management. These meetings provided the non-executive directors with the opportunity to meet the senior managers in the divisions and to increase their knowledge and understanding of the Group’s operations and thus contribute more effectively to discussions of strategic and operational issues.
In addition to the scheduled meetings, the Board held a strategy day at which the strategy and direction of the Group were reviewed and debated.
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Training, development and advice is provided
Newly appointed directors receive a full induction, including a detailed information pack, visits to the Group’s operations and meetings with senior divisional management. Training on the role
and responsibilities of directors is offered on appointment and subsequently as necessary. The non-executive directors update their knowledge of and familiarity with the Group by regular visits to its operations. There are agreed procedures by which directors are able to take independent professional advice, at the expense of the Company, on matters relating to their duties. The directors also have access to the advice and services of the company secretary.
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Board evaluated its performance
The Board continues to find its internal process an effective method of evaluating the Board’s performance, and that of its committees. During the year, this process took the form of an internally developed assessment form, requiring each director to provide a rating and comments against a series of statements.Particular emphasis was given to matters highlighted as action points from last year’s evaluation process.
The statements relating to the Board as a whole involved consideration of a broad range of matters including:
- the structure and composition of the Board;
- the quality of information provided to the Board;
- the effectiveness of its meetings;
- the ability of the chairman to lead the Board;
- the ability of the Board to understand the significant risks facing the Group and to monitor corporate performance;
- the Group’s management of risk; and
- the allocation of time devoted to matters such as corporate governance, sustainability, business risk and succession issues.
In relation to the committees, the assessment form focused on the frequency and conduct of meetings, the quality of information provided to the committee and of reports from the committee to the Board and the extent to which the committees were fulfilling their terms of reference.
Evaluation of individual directors took the form of written feedback from the other directors, which was followed by one to one meetings between the chairman and each director and, in the case of the chairman’s evaluation, between himself and the senior independent director.
The responses to the assessment form and the written feedback were aggregated and circulated to the directors and discussed at a subsequent Board meeting, leading to a number of agreed actions for the forthcoming year.
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Board committees
The Board has established three committees: the audit, remuneration and nominations committees. Each committee has terms of reference, approved by the Board, setting out its authorities and responsibilities. Copies of the terms of reference are available on the Company’s website.
Audit committee
All committee members are independent non-executive directors. Adrian Martin took over as chair when Jon Walden retired at the annual general meeting in May 2010. Biographical details of each member of the committee are set out in Board of directors. The Board is satisfied that Adrian Martin, who is a fellow of the Institute of Chartered Accountants in England and Wales and formerly a partner in BDO Stoy Hayward, has the recent and relevant financial experience required to fulfill the role.
Responsibilities
- to ensure that the interests of shareholders are properly protected in relation to financial reporting and internal control;
- to monitor the integrity of the financial statements and related information of the Company and, where practicable, any formal announcements relating to the Company’s financial
performance, reviewing significant financial reporting judgments contained in them;
- to review the Company’s internal financial controls;
- to approve the appointment and replacement of the Group head of audit and assurance and to monitor and review the effectiveness of the Company’s internal audit function;
- to make recommendations to the Board regarding the appointment, reappointment and removal of the external auditors and to approve their remuneration and terms of engagement;
- to review and monitor the external auditors’ independence and objectivity and the effectiveness of the audit process;
- to apply the Board’s policy on the engagement of the external auditors to supply non-audit services with the objective of ensuring that the provision of such services does not impair their independence or objectivity; and
- to review the Company’s procedures for raising concerns.
Activities
The committee had three scheduled meetings during the year. The first took place prior to the announcement of the Company’s results for 2009 and approval of the annual report, the second
prior to the announcement of its half year results and the third before commencement of the audit for 2010. Senior representatives from the external auditors, the finance director and the Group head of audit and assurance were invited to attend each of these meetings. The committee also met privately with the external auditors and the Group head of audit and assurance.
The main purpose of the meetings was to review the scope and results of the audit and the effectiveness of the external audit process, to monitor the integrity of the annual and half year financial statements and to discuss with the external auditors their overall work plan for the forthcoming audit. In addition, at each meeting the committee reviewed reports from the Group head of audit and assurance on the results of reviews carried out by the internal audit team. Further details of the internal audit function are set out under internal controls below.
The chairman of the audit committee reports to the full Board on matters of significance arising at meetings of the committee.
External auditors
Monitoring the independence and objectivity of the external auditors
To fulfil its obligations, the committee reviewed the external auditors’ presentation of their policies and safeguards to ensure their continued independence within the meaning of all
regulatory and professional requirements and to ensure that the objectivity of the audit engagement partner and audit staff had not been impaired. This included details of changes in external audit executives in the audit plan in accordance with the external auditors’ policy on rotating audit executives. Those policies and safeguards, together with the Company’s own policy on engaging the external auditors for non-audit work, enabled the committee to confirm that it was satisfied with Deloitte LLP’s continued independence and objectivity.
Assessing the effectiveness of the external auditors
As part of its responsibility for assessing the effectiveness of the external audit, the committee discussed the external audit plan at the audit committee meeting held in November. At the meeting
prior to the announcement of the preliminary results, it reviewed the external auditors’ fulfilment of the agreed audit plan and any major issues highlighted as part of the external audit.
Reviewing the use of the external auditors for non-audit work
The Company’s policy on the engagement of the external auditors for non-audit related services provides that, where the fees for such services would exceed either an absolute limit or a specified proportion of the audit fee, they should be referred to the committee for approval. Where fees fall below the threshold, they have to be approved by the finance director. No non-audit services to the Company provided by Deloitte LLP in 2010 required the approval of the committee. The fees for non-audit services during the year are set out in note 2 to the consolidated financial statements. These represented approximately 9% of the audit fee and comprised taxation services to joint ventures. The committee has reviewed the nature of the work and level of fees for these services and concluded that this has not affected Deloitte LLP’s objectivity or independence.
Reappointment of external auditors
The committee considers the reappointment of the external auditor each year and makes a recommendation to the Board. The committee has satisfied itself that Deloitte LLP, the external auditors, remains independent and effective. The committee has recommended to the Board that Deloitte LLP be reappointed.
External call line introduced for raising concerns
The committee also reviewed the Group’s raising concerns policy containing arrangements by which employees may, in confidence, raise concerns about possible wrongdoing in the workplace, unethical behaviour or other matters of concern. Following recommendations made by the committee, during the year the Company introduced an external call line provider and a new process for investigating and following up calls in order to improve the effectiveness of these arrangements and to encourage employees with concerns to bring them to the attention of the Group. The committee reviews a summary of the calls received at each meeting, although any significant matter arising from a call would be brought to the attention of the committee without delay.
Remuneration committee
Responsibilities
- to set all elements of remuneration and any compensation payments for executive directors and the executive chairman;
- to monitor the structure and level of remuneration for divisional managing directors;
- to ensure that the requirements for disclosure of directors’ remuneration are fulfilled; and
- to select remuneration consultants to advise the committee.
Activities
The activities of the committee during the year are set out in the separate remuneration report.
Nominations committee
Responsibilities
- to review the structure, size and composition of the Board;
- to make recommendations to the Board for any changes considered necessary;
- to approve the description of the role and capabilities required for a particular appointment; and
- to ensure suitable candidates are identified and recommended for appointment to the Board.
Activities
The committee recommended to the Board that Simon Gulliford be appointed as an additional non-executive director. This followed an introduction to the Company through a personal recommendation and a careful review of Simon’s skills and experience as well as several interviews and meetings with the committee and the executive directors.
The nominations committee also met formally during the year to review the structure, size and composition of the Board. Its recommendation to the Board was that, following the changes to the Board at the end of 2009 and during 2010, no further changes were required at this time.
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Company welcomes regular dialogue with all its shareholders
The executive directors undertake a programme of regular communication with institutional shareholders and with analysts covering the Company’s activities. In particular, presentations are made to institutional investors and analysts following the announcements of the preliminary and half year results. Written feedback from these meetings and presentations is distributed to all members of the Board. The senior independent director meets from time to time with major shareholders and the other non-executive directors are also available to meet with them to listen to their views.
The Company encourages all shareholders to use the annual general meeting as an opportunity for effective communication with the Company. All of the directors attended the annual general meeting held in 2010. Details of proxy votes submitted for each resolution at general meetings, including proxy directions to withhold votes, are published on the Company’s website.
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Internal controls
The Board acknowledges that it has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The internal control system is designed to manage rather than eliminate the risk of failure to achieve certain business objectives due to circumstances which may reasonably be foreseen. It can only provide reasonable, but not absolute, assurance against material misstatement or loss. The system of internal control, which includes financial, operational and compliance controls, is based on a process of identifying, evaluating and managing risks. It accords with the guidance in
the Turnbull Report and was in place for the year under review and up to the date of approval of this report.
The key features of the Group’s system of internal control are as follows:
Group structure
The Group’s operating structure comprises four operating divisions and one specialist unit, each with its own management board which is given authority and responsibility for managing its
division or unit within a framework of overarching Group policies, reporting lines and detailed delegated authorities, which ensure that decisions and approvals are made at the appropriate level. Whilst responsibility for managing each division is delegated to the individual management team as far as practicable, responsibility for certain of the Group’s key functions, including treasury, internal audit, pensions and insurance, is retained at Morgan Sindall Group plc level.
Robust financial reporting system
The Board recognises that an essential part of the responsibility for running a business is the effective safeguarding of assets, the proper recognition of liabilities and the accurate reporting
of profits. The Group has a comprehensive budgeting and forecasting system in place which is regularly reviewed and updated, together with a management reporting system established in each division for monthly reporting to the Board. In addition, the internal audit plan for the year includes specific financial reviews to validate the integrity of the divisions’ management accounts.
Scrutiny of investment and capital expenditure
There are detailed procedures and defined levels of authority in relation to corporate transactions, investment, capital expenditure, significant cost commitments and asset disposals with approvals required from the Board, the executive directors or divisional boards, depending on the value and/or nature of the investment or contract.
Detailed review of tenders and project selection
Individual tenders or projects are subject to detailed review with approvals required at relevant levels and at various stages from commencement of the bidding process through to contract award. As part of this process, the financial standing of both clients and key subcontractors is assessed.
Robust contract controls
Robust procedures exist to manage the ongoing risks associated with contracts with monthly reviews at an appropriate level of each contract’s performance covering both financial and operational issues.
Continual monitoring of working capital
The Group continually monitors current and forecast cash and working capital balances through a regime of daily and monthly reporting.
Health, safety and environmental issues
The Group has well established safety systems including site visits and regular training and updates. Monthly monitoring and reporting to the Board includes a report on the Group’s performance in relation to health and safety matters and environmental compliance. Further details are included under Sustainability.
Risk management
The Board has reserved to itself specific responsibility for the formulation of the risk management strategy of the Group. A formal process is in place through which the Group identifies the significant risks attached to its strategy and objectives, confirms the control strategy for each risk, identifies the root cause and appropriate treatment for each, including the relevant internal controls and actions required. Internal control and risk management systems are embedded in the operations of the divisions. A consolidated report of each of the divisional risk reviews, together with risks identified at Group level, are compiled in a Group risk register, which is updated and reviewed by the Board twice yearly. The principal risks identified as facing the Group are highlighted in the business review (see key risks). In addition to the standing risk register review process, the Board devotes time during some of the scheduled Board meetings to considering the commercial issues which at the time represent the greatest risks to the achievement of the Group’s objectives and the mitigating actions in place to address these risks.
Internal audit
The Group head of audit and assurance is responsible for managing the internal audit function, overseeing the divisional heads of internal audit and assisting with risk management practices. Internal audit and assurance work carried out during the year included operational, project and financial reviews across the key business units within the Group. The results of these reviews were recorded in audit reports and presented to the audit committee. The status of agreed management actions to address identified operational weaknesses is actively tracked until implementation.
The Group head of audit and assurance reports to the Board monthly on a range of performance metrics including the current status of agreed audit actions and progress against the annual audit plan.
The internal audit process is supplemented by a rolling programme of peer group reviews within the divisions, which assist in the professional development of the individual staff concerned whilst, at the same time, providing a mechanism for the cross-fertilisation of ideas and best practice throughout the divisions. These reviews are overseen by the divisional heads of internal audit and tracking of agreed management actions is included within the overall internal audit process.
Board review of effectiveness of internal controls
The Board has conducted a review of the effectiveness of the system of internal controls for the year ended 31 December 2010 and for the period to the date of this report. The process included a formal review conducted by the Board of the Group risk register, referred to under Risk management above, as well as a review of the results of internal audit work and the overall effectiveness of the process.
