The Directors present their report on the affairs of the Group together with the audited accounts for the year ended 31 March 2007.
Principal activity and Business Review
The principal activity of the Group is the distribution of electronic, electrical and industrial and commercial supplies and services, through its 27 operating companies and its distributors. Significant events during the year are detailed in the Chairman’s statement, the Group Chief Executive’s review, and the Business Review. The Business Review is incorporated in this report by reference.
Results and dividends
Results for the year are set out in the income statement. An analysis of revenue, profit and net assets by activity is shown in note 2 of the Group Accounts (PDF 334kb). The Directors recommend a final dividend of 12.6p per ordinary share, to be paid, if approved, on 27 July 2007 which, together with the interim dividend of 5.8p per share paid in January, amounts to a total dividend of 18.4p for the year (2006: 18.4p).
Corporate Governance
In respect of the year ended 31 March 2007, the Company has been subject to the provisions of the Combined Code on Corporate Governance published in July 2003 and revised in June 2006 (the ‘Combined Code’). Section 1 of the Combined Code establishes 17 main principles and 26 supporting principles of good governance in four areas: Directors; Remuneration of Directors; Accountability and Audit; and Relations with Shareholders. The following three sections explain how these principles were applied. A detailed report on Directors’ Remuneration can be found here.
Directors and Directors’ Independence
The Board comprises the Chairman, who is part-time, two Executive Directors and four independent Non-Executive Directors, one of whom will retire at the AGM in 2007. The Board is collectively responsible for the performance of the Company. The Board has carefully considered the guidance criteria on independence of Non-Executive Directors under the Combined Code. In the opinion of the Board, all the continuing Non-Executive Directors bring independence of judgement and character to the Board and to the committees on which they sit, and are independent of management and free from any business or other relationships which could interfere with the exercise of their judgement. The Board considered that the Chairman also met the independence criteria on his appointment on 9 October 2006.
Biographical details of the Directors at the date of this report are set out here, together with details of their membership of Board Committees. Brief details of the Chairman, the Group Chief Executive and the Senior Independent Director are set out here.
Directors’ interests in the shares of the Company are shown here and within the Remuneration Report.
The Board has a formal schedule of matters reserved for its approval. It is responsible for the overall Group strategy and the approval and review of major investment proposals. The Board discusses and agrees strategic plans, reviews forecasts and evaluates Group and subsidiary performance. Other day-to-day operational decisions are delegated by the Board to the Group Executive Committee.
Directors are encouraged to update their skills, knowledge and familiarity with the Group by attending external seminars and briefings, through participation at meetings and through visits to operating units, both in the UK and overseas, as well as by receiving presentations from senior management. Directors are given access to independent professional advice at the Group’s expense, if they deem it necessary in order for them to carry out their responsibilities. This is in addition to the access that every Director has to the Company Secretary. The Company has continued to secure appropriate insurance cover for its Directors.
Retirement by rotation and new appointment
Mr Temple wishes to retire at the forthcoming Annual General Meeting and will not be seeking re-election.
On 9 October 2006, Mr Lawson retired as Chairman and was replaced by Mr Mamsch. Mr Mamsch therefore stands for formal election at the forthcoming Annual General Meeting.
Dr Atkinson and Mr Mason will retire by rotation at the forthcoming Annual General Meeting in accordance with the Company’s Articles of Association and, being eligible, offer themselves for re-election. Dr Atkinson does not have a service contract. Mr Mason has a one year rolling contract.
Following formal performance evaluation, the Chairman confirms that the performance of Dr Atkinson as Non-Executive Director continues to be effective and that he demonstrates commitment to the role. On the expiry of Dr Atkinson’s second, three year term as a Non-Executive Director his performance was subject to a particularly rigorous review by the Board.
Board committees
The Board has a number of standing committees consisting of certain Directors, and in the case of the Treasury Committee, certain senior managers, to which specific responsibilities have been delegated and for which written terms of reference have been agreed. These terms of reference are available for inspection on the Company’s website. Membership of the various Committees, including the Chairman of each Committee, is shown here and here. The Board formally receives minutes of meetings of all its committees and can request presentations or reports on areas of concern.
THE GROUP EXECUTIVE COMMITTEE consists of the Executive Directors and certain senior managers with Operating Company and Process responsibilities. The Committee meets at least monthly and manages the day-to-day activities of the Group. The Board has delegated the following responsibilities to the Group Executive Committee: the development and recommendation of strategic plans for consideration by the Board; the monitoring of the operating and financial results against plans and forecasts; and the development of risk management and control procedures.
THE AUDIT COMMITTEE consists of all the Non-Executive Directors and meets at least three times a year and more frequently if required. The Committee reviews the major risks facing the business, assists the Board in its duties regarding financial accounts and continually reviews the operation of internal financial controls with the internal operational audit team and, where applicable, external auditors. It also reviews the scope and results of the audit with the external auditors and the results of the work of the internal operational audit team. The Committee is also responsible for reviewing the arrangements whereby staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. Further details of the role of the Committee are set out here.
THE TREASURY COMMITTEE consists of the Group Chief Executive, the Group Finance Director, the Group Treasurer, the Group Controller, the Company Secretary and the Group Tax Manager and sets detailed treasury policy for the Group within guidelines established by the Board. The Committee meets quarterly.
THE REMUNERATION COMMITTEE consists of all the Non-Executive Directors and meets as required but not less than twice per year and is responsible for all aspects of the remuneration of Executive Directors and senior managers. Details of the remuneration policy and of the remuneration of each Director are set out in the Remuneration Report.
THE NOMINATION COMMITTEE consists of the Chairman and all the Non-Executive Directors. The Committee meets as required and recommends to the Board candidates for appointment as Executive and Non-Executive Directors of the Company. The Committee periodically assesses what new skills, knowledge and experience are required on the Board and if appropriate, recommends a candidate profile which is then used to brief Recruitment Consultants appointed by the Committee to undertake the selection process. Initial meetings are held with prospective candidates and a shortlist of individuals is selected to meet with the Chairman, other Nomination Committee members and the Executive Directors. The Nomination Committee then meets and decides which candidate, if any, will be recommended to join the Board. This process was used for the appointment of Mr Mamsch as Chairman.
Board Evaluation
During the year the Chairman has held meetings with the Non-Executive Directors, without the Executives present. In addition, the Board has carried out a formal evaluation of its own performance. A detailed questionnaire was issued to Board members for the purpose of assessing overall Board performance. The responses to the questionnaire were collated independently by the Company Secretary, who discussed them in depth with the Chairman. The Chairman subsequently prepared a report on the results of the questionnaire for Board consideration. The Board discussed the report and agreed necessary follow up actions.
Board Attendance
Board and Committee Meetings
The following table sets out the number of meetings of the Board and its Committees during the year and individual attendance by the relevant members at these meetings:
| Scheduled Board Meetings |
Audit Committee Meetings |
Remuneration Committee Meetings |
Nomination Committee Meetings |
|
|---|---|---|---|---|
| Number of meetings held during the year | 9 | 4 | 5 | 4 |
| Chairman – R A Lawson (1) | 5 | – | – | – |
| Chairman – H Mamsch (2) | 6 | – | – | – |
| Executive Directors | ||||
| I Mason | 9 | – | – | – |
| S Boddie | 9 | – | – | – |
| Non-Executive Directors | ||||
| K Abbott (3) | 2 | 2 | 2 | 2 |
| L Atkinson (5) | 8 | 2 | 5 | 4 |
| T G Barker (6) | 9 | 4 | 2 | 4 |
| K Hamill | 7 | 3 | 3 | 3 |
| F D Lennertz (4) | 3 | – | 3 | 2 |
| N J Temple | 9 | 4 | 5 | 4 |
- (1)
- Mr Lawson ceased to be Chairman on 9 October 2006.
- (2)
- Mr Mamsch was appointed to the Board on 1 September 2006.
- (3)
- Mr Abbott ceased to be a Director on 13 July 2006.
- (4)
- Dr Lennertz ceased to be a Director on 14 July 2006.
- (5)
- Dr Atkinson was appointed to the Audit Committee on 14 July 2006.
- (6)
- Mr Barker was appointed to the Remuneration Committee on 14 July 2006.
Chairman, Group Chief Executive and Senior Independent Director
The roles of Chairman and Group Chief Executive are held by different individuals. The division of responsibilities between the Chairman and Group Chief Executive has been clearly established; their responsibilities are set out in writing and have been agreed by the Board.
The Chairman is responsible for leadership of the Board and for organising the business of the Board, ensuring its effectiveness and setting its agenda. The Chairman has no involvement in the day to day business of the Company. The Chairman facilitates the effective contribution of the Non-Executive Directors, and ensures Directors receive accurate, timely and clear information. He is also responsible for effective communication between the Board and shareholders.
The Group Chief Executive has direct charge of the Company on a day to day basis and is accountable to the Board for the financial and operational performance of the Group, and the determination of the strategy and the achievement of its objectives.
Mr Temple as the Senior Independent Director is responsible for chairing the meeting of Non-Executive Directors for the purpose of evaluating the Chairman’s performance and to provide a communication channel for shareholders if required. Mr Barker will replace Mr Temple as Senior Independent Director on Mr Temple’s retirement following the Annual General Meeting.
Directors’ Interests in Shares
The beneficial interests of the Directors in the shares of the Company are set out in the table below. The Directors have no non-beneficial interests.
| 31 March 2007 or date ceased to be a Director | 31 March 2006 or date on which became a Director | |
|---|---|---|
| K Abbott (a) | 10,000 | 10,000 |
| L Atkinson | 2,260 | 2,260 |
| T G Barker | 15,000 | 11,000 |
| S Boddie | 25,000 | Nil |
| K Hamill | 5,183 | 5,183 |
| R A Lawson (c) | 403,374 | 403,374 |
| F D Lennertz (b) | 8,034 | 8,034 |
| H Mamsch(d) | 10,000 | Nil |
| I Mason | 62,349 | 37,349 |
| N J Temple | 10,040 | 10,040 |
Notes
- (a)
- Mr Abbott ceased to be a Director on 13 July 2006.
- (b)
- Dr Lennertz ceased to be a Director on 14 July 2006.
- (c)
- Mr Lawson ceased to be a Director on 9 October 2006.
- (d)
- Mr Mamsch became a Director on 1 September 2006.
As at 31 March 2007 the Electrocomponents Employee Trust (the ‘EET’) held 308,417 shares. As Executive Directors are potential beneficiaries of the EET they are treated for company law purposes as being interested in the shares held in the EET.
Directors’ interests in Incentive Plans and Share Options are disclosed here.
Up to 30 April 2007 there have been no changes in the Directors’ interests or rights to subscribe for shares.
Relations with Shareholders
Executive Directors and senior executives have frequent discussions with institutional shareholders on a range of issues affecting the Group’s performance, which include meetings following the announcement of the annual and interim results. The Group Chief Executive, Group Finance Director and Chairman meet with major shareholders to discuss performance, strategy and governance, and the Non-Executive Directors are available for discussions with shareholders if required. The Group Finance Director reports to the Board on meetings with shareholders.
Shareholders have been given the opportunity to meet with the Chairman and other Board Directors at last year’s Annual General Meeting. The Senior Independent Director is available to attend meetings with major shareholders at their request.
The Chairman also held meetings with a representative group of shareholders in November 2006 shortly after the interim results to obtain their views on strategy and performance, the results of which were communicated to and discussed by the Board.
The Company seeks to ensure that all Directors, including the Chairmen of the relevant Board Committees and Senior Independent Director, are available to answer questions at the Annual General Meeting.
The Company also has a website (www.electrocomponents.com) which contains up-to-date information on Group activities.
Accountability and Audit
In its financial reporting to shareholders and other interested parties, by means of annual and interim results and periodic statements, the Board aims to present a balanced and easily understandable assessment of the Group’s position and prospects.
Internal Control
The Group has an established and on-going process of risk management and internal control which has continued throughout the year under review and up to the date of approval of the Annual Report and Accounts. The Board is responsible for the effectiveness of the Group’s system of internal control, which has been designed and implemented to meet the particular requirements of the Group and the risks to which it is exposed.
In accordance with the requirements of the Combined Code and the recommendations of the Turnbull Review Group on internal control, the Directors have reviewed the effectiveness of the system of internal control. The Audit Committee receives regular reports on the performance of the system of internal control, and on its effectiveness in managing the material risks and in identifying control failings or weaknesses. The Board then formally receives the minutes of each Audit Committee meeting.
The Audit Committee dedicates one meeting a year to the review of the risk management and internal control system with the minutes of the review being formally reported to the Board. Together with the provision of regular updates to the Board on material risk issues, these allow the Board to make the assessment on the systems of internal control for the purposes of making its public statement.
During the period under review, no significant changes to the material risks to which the Group is exposed were identified, and no control failings or weaknesses were identified that resulted in unforeseen material losses. The internal control system can provide reasonable but not absolute assurance against material misstatement or loss.
Internal Financial Controls
Internal financial controls represent the systems employed by the Directors to enable them to discharge their responsibilities for financial matters. Those responsibilities are noted here. The main financial control elements are described below.
Clear terms of reference set out the duties of the Board and its Committees, with delegation of operating responsibility through the Group Executive Committee to management in all locations. Operating company controls are detailed in Group Finance and Group Treasury manuals that specify the controls necessary in identified areas of financial risk. Smaller Group companies are supported by Group, regional and process specialists in key areas.
Financial reporting systems are comprehensive and include weekly, monthly and annual reporting cycles. Monthly management accounts are prepared by all operating companies and Group-wide processes. These contain forecasts of the current financial year which are updated four times per year and are compared against the previous forecast, the budget and prior year actuals. Variances are reviewed by the Group Executive Committee and by the Board. Specific reporting systems cover treasury operations, major investment projects and legal and insurance activities, which are reviewed by the Board and its Committees on a regular basis.
The Group has a team of internal operational auditors which has an annually agreed audit programme approved by the Audit Committee. The team reports regularly to the Audit Committee on the results of audits performed and reviews self-certification internal control questionnaires completed by operating management.
The Board and the Audit Committee have reviewed the effectiveness of the Group’s system of internal control and internal financial control during the period covered by this report.
Audit Independence
The Audit Committee and Board put great emphasis on the objectivity of the Company’s auditors KPMG Audit Plc (‘KPMG’) in their reporting to shareholders.
The Audit Committee met four times during the year ended 31 March 2007 and the Group Audit Engagement Director from KPMG was present at three of these meetings to ensure full and open communication. In addition to the members of the Committee, it is normal for the following to receive the Committee papers and attend meetings:
1. the Chairman of the Company
2. the Group Chief Executive of the Company
3. the Group Finance Director and Group Controller
4. the Head of Internal Audit
5. the Company Secretary
Their attendance is at the invitation of the Committee Chairman only and does not restrict the Audit Committee’s independent decision making.
The overall performance of the auditors is reviewed annually by the Audit Committee, taking into account the views of management, and this is reported to senior members of KPMG. This forms part of KPMG’s own system of quality control. The Audit Committee also has discussions with the external auditors, without management being present, on the adequacy of controls and on any significant area where management judgement has been applied.
The scope of the year’s audit is discussed in advance by the Audit Committee. Audit fees are reviewed by the Audit Committee after discussions between the Operating Companies and the local KPMG offices and a review by Group management and are then recommended to the Board for approval. Professional rules require rotation of the Group Audit Engagement Director. This took place in July 2004 when the current Director was appointed, replacing the previous Director who had held the post for five years.
The annual appointment of our auditors by the shareholders at the Annual General Meeting is a fundamental safeguard, but beyond this, controls have been in place for some years to ensure that additional work performed by the auditors is appropriate and subject to proper review.
With respect to non-audit assignments undertaken by KPMG the Company has developed a policy to ensure that the provision of such services does not impair the external auditor’s independence or objectivity.
The policy is as follows:
- When considering the use of the external auditors to undertake non-audit work, the Group Finance Director should at all times give consideration to the provisions of the Smith Report with regard to the preservation of independence.
- The external auditors must certify to the Company that they are acting independently.
- In providing a non-audit service, the external auditors should not (as summarised in the Smith Report):
— audit their own work;
— make management decisions for the Company;
— create a mutuality of interest; or
— find themselves in the role of advocate for the Company.
- Before commissioning such work, the Audit Committee or the Group Finance Director as appropriate must ensure that the external auditors are satisfied that there is no issue as regards independence.
- The Group Finance Director has authority to commission the external auditors to undertake non-audit work where there is a specific project with a cost that is not expected to exceed £50,000. This work has to be reported to the Audit Committee at its next meeting. If the cost is expected to exceed £50,000, the agreement of the Audit Committee is required before the work is commissioned. In either case, other potential providers are adequately considered.
- The Group Finance Director monitors all work done by the external auditors or other providers of accountancy services anywhere in the Group in excess of £10,000.
Going Concern
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.
Financial Instruments
For information on the Company’s use of financial instruments, see note 21 (PDF 334kb) to the annual report and accounts.
Compliance with the Combined Code
During the year ended 31 March 2007, the Directors consider that the Company complied with the provisions set out in Section 1 of the Combined Code, except that the current Senior Independent Director has not attended meetings with major shareholders having not been requested to do so and there was no evaluation of the Chairman. The Chairman was appointed on 9 October 2006 and therefore the Directors determined that he would be evaluated later during 2007.
Payment to Suppliers
The Group agrees terms and conditions for its business transactions with suppliers. Payment is then made according to these terms, subject to the supplier fulfilling its obligations. The Company has no trade creditors. Supplier payment days for the continuing operations of the Group outstanding at 31 March 2007 represent 43 days (2006: 43 days) of average purchases.
Employment Policies
The Group values highly the commitment of its employees and has maintained its practice of communicating business developments to them wherever practicable. Regular staff appraisals and consultations take place with individuals and the employees’ representatives. The Group remains supportive of the employment and advancement of disabled persons and complies with the Core International Labour Organisation Conventions and prohibits the employment of underage or forced labour.
Capital Gains Tax
For Capital Gains Tax purposes the valuation of the Company’s 10p ordinary shares at 31 March 1982 was 40p.
Substantial Shareholders
As at 20 May 2007 the following interests in shares had been notified to the Company:
| Number of Shares |
Percentage held |
|
|---|---|---|
| Silchester International Investors Limited | 69,085,874 | 15.87% |
| Franklin Templeton Investments | 38,647,085 | 8.88% |
| Prudential plc group of companies (M&G) | 29,668,573 | 6.81% |
| UBS AG | 29,079,714 | 6.68% |
| Sprucegrove Investment Management Ltd | 28,268,337 | 6.49% |
| Oppenheimer Funds Inc. and Baring Asset Management Ltd | 18,325,922 | 4.21% |
| Millgate Capital Inc. | 15,900,000 | 3.65% |
| Legal & General Group plc | 14,966,617 | 3.43% |
| Barclays plc | 13,937,895 | 3.20% |
Share capital
Full details of share options and shares issued under the terms of the Company’s share schemes can be found in note 7 of the Group Accounts (PDF 334kb).
Political and Charitable Contributions
The Group made no political contributions during the year. Charitable contributions within the UK amounted to £10,283 (2006: £15,408) and outside the UK amounted to £14,449 (2006: £11,077).
Disclosure of Information to Auditors
The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and each Director has taken all the steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.
Annual General Meeting
The Notice of the Annual General Meeting, which will be held at 12:00 noon on Friday 13 July 2007 at the Company’s premises, The International Management Centre, 8050 Oxford Business Park North, Oxford, OX4 2HW, is set out here (PDF 48kb).
In addition to conducting the ordinary business, the following special business will be considered:
ELECTRONIC COMMUNICATION: The Companies Act 2006 has introduced new provisions (which came into effect on 20 January 2007) dealing with company communications to shareholders and facilitating communications in electronic form and by means of a website.
These shareholder electronic communications provisions are intended to make it easier for UK companies to communicate with their shareholders. In particular, they enable the Company, subject to certain conditions, to treat its shareholders as having deemed to agree to communication by means of a website. In order to effect these provisions, in addition to the passing of this resolution, the Company must also write to shareholders to request them individually to agree that the Company can communicate with them by way of its website. In the event that a shareholder does not respond with an objection to this request within 28 days from the date of request, the shareholder will be deemed to have agreed to receive notices, documents or information from the Company by means of a website. The Company plans to send such a request to its shareholders prior to the publication of its 2008 Annual Report.
Any shareholder may indicate a wish to continue to receive printed documents at any time and any agreement to receive documents or information electronically or by means of a website can be revoked at any time. Every shareholder who has agreed to receive communications by website will be notified when a document is available on the Company’s website.
RENEWAL OF DIRECTORS’ AUTHORITY FOR THE PURCHASE BY THE COMPANY OF ITS OWN SHARES: At the 2006 AGM, shareholders gave the Company renewed authority to make market purchases of up to approximately 10% at that time of the Company’s issued ordinary share capital. As at the date of this report, the Company has made no such purchases under this authority. Nevertheless, the Directors believe it advisable to seek renewal of this authority at each AGM.
This resolution is proposed as a special resolution and will authorise market purchases of up to 43,532,000 ordinary shares (being approximately 10% of the issued share capital as at 21 May 2007). The Directors will only exercise this authority when satisfied it is in the best interests of shareholders and that any purchase will have a beneficial impact on earnings per share, having first considered other investment opportunities open to the Company. As at 21 May 2007, a maximum of 23,246,237 shares would be required to satisfy all outstanding options to subscribe for equity shares and conditional awards of shares. This represents 5.34% of the issued share capital. If this resolution is passed and the full authority to buy back shares were used, then shares required for such purposes would represent 5.93% of the issued share capital.
Listed companies are now permitted, subject to certain restrictions, to hold their own shares which they purchase in Treasury for resale or transfer at a later date, rather than being obliged to cancel them. If the Company were to purchase any of its own shares pursuant to the authority referred to above, it would consider holding them as treasury stock provided that the number does not at any time exceed 10% of the Company’s issued share capital. This would provide the Company with additional flexibility in the management of its capital base. As at 21 May 2007, the Company held no ordinary shares in Treasury.
By order of the Board
Mr Haslegrave
Group Counsel & Company Secretary
30 May 2007