 PRINCIPLES OF GOOD GOVERNANCE International Power is committed to high standards of corporate governance. In line with the Rules of the UK Listing Authority, the following report explains how the Group has applied the 'Principles of Good Governance' and Code of Best Practice contained in the Combined Code and reports the Group's compliance with the provisions contained in the Code.
The Board met on seven occasions during the year. A balance between Executive and Non-Executive Directors underpinned the effectiveness of the Company's Board. In addition to the Non-Executive Chairman, the Board consists of three Executive Directors and three Non-Executive Directors. All of the Non-Executive Directors are consideredto be independent. In accordance with the Combined Code and theCompany's Articles of Association, all Directors submitthemselves for re-election at least every three years andnewly appointed Directors are subject to election byshareholders at the first opportunity after theirappointment. Newly appointed Directors receivecomprehensive briefing, and training where appropriate,on the Company and their roles, to ensure that theyare fully conversant with their responsibilities. The Board has responsibility for defining strategy, ensuringthe successful implementation of approved plans and forthe financial policies of the Group for which it maintains aschedule of all matters requiring specific Board approval.Throughout 2001 this included all strategy decisions andsignificant capital investment proposals. The Board receives information on capital expenditureprojects and investment proposals in advance of Boardmeetings, as well as management reports on theoperational and financial performance of the business.Financial performance is monitored on a monthly basisand the overall performance of the Group is reviewedagainst approved budgets. All of the Directors have access to the advice and servicesof the Company Secretary and have access to independentadvice should they so wish. The Company has established the following committees:the Audit Committee, the Remuneration andAppointments Committee and the Risk Committee. The Audit Committee (comprising the Chairman and all Non-Executive Directors) is responsible for monitoring the work of the internal audit function and its progress against the Group's annual internal audit plan, and also reviews reports from the external auditors. In addition to reviewing the Group's accounts, results announcements and accounting policies, the Committee monitors the effectiveness of internal control systems for the Board. The Chairman of the Audit Committee is Tony Isaac. The Remuneration and Appointments Committee (comprising the Chairman and all Non-Executive Directors) is responsible, on behalf of the Board, for monitoring the performance of the Executive Directors of the Company and making recommendations to the Board on remuneration, appointments and matters of management succession. The Chairman of the Remuneration and Appointments Committee is Dennis Hendrix. The Risk Committee (comprising the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer and senior managers) has responsibility, on behalf of the Board, for monitoring the effectiveness of the Group's risk management arrangements. The Committee is also responsible for monitoring health, safety and environmental performance in the Group. The Chairman of the Risk Committee is Philip Cox.
The Board is accountable to shareholders for theperformance and activities of the Group. International Power ensures that its Annual GeneralMeeting (AGM) provides shareholders with an opportunityto receive comprehensive information on all aspects of theGroup's business activities, and to question seniormanagement about business issues and prospects. All proxy votes are counted and the level of proxy voteslodged for each resolution is reported at the AGM. In linewith best practice, the Company aims to ensure that theNotice of the AGM and the Annual Report are sent toshareholders at least 20 working days before the AGM. International Power also runs, within the terms of the regulatory framework, frequent contact programmes with institutional investors, to discuss matters of strategy and financial performance. All results presentations and all Stock Exchange announcements are available to shareholders on the Company's website, www.ipplc.com, in the investor relations section.
The Board is mindful of its responsibility to present abalanced and understandable assessment of InternationalPower's financial position and prospects, in all reports,both to investors and regulatory authorities. The AnnualReport, interimand quarterly results are the principalmeans of achieving this objective. An explanation of the respective responsibilities of the Directors and auditors in connection with the financial statements is set out in Statement of Directors' responsibilities. The Directors set out in the Directors' report the basis for their view that the Group is a going concern.
Systems are in place to meet the requirements of theCombined Code and the Turnbull Guidance for the reviewof internal controls, including financial, operational andcompliance controls and risk management. The Board has responsibility for the Group's system of internal control and for monitoring its effectiveness. Any system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. The system can only provide reasonable, and not absolute, assurance against material financial misstatement or loss. The principal features of the Group's systems of internal control are:
The Board encourages a culture of integrity and openness. The Company has an organisational structure with clear lines of accountability and authority across its worldwide operations, supported by appropriate reporting procedures. Each of the regional businesses is accountable to the Chief Executive through the Chief Operating Officer and is managed within the strategic guidelines and delegated authorities adopted by the Board.
Control procedures have been established in each of the Company's operations to safeguard the Group's assets from loss or misuse and to ensure appropriate authorisation and recording of financial transactions. Risk management procedures are in place for the Company's operations, including its energy marketing and trading activities, which are overseen by the Global Risk Manager. The Group treasury function operates under defined policies and the Treasury Committee, chaired by the Chief Financial Officer, monitors its activities. All acquisition and development decisions are subject to disciplined investment appraisal processes.
Corporate plan Executive management submits an annual corporate plan to the Board for approval. The plan for each business unit is the quantified assessment of its planned operating and financial performance for the next financial year, together with strategic reviews of the following four years. Group Management review the plans with each operational team. The individual plans are based on key economic and financial assumptions and incorporate an assessment of the risks and sensitivities underlying the projections. Performance monitoring Monthly performance and financial reports are produced for each business unit, with comparisons to budget. Reports are consolidated for overall review by executive management, together with forecasts for the profit and loss account and cash flow. Detailed reports are presented to the Board on a regular basis. Performance review Each business unit is subject to a performance review with Group Management regularly during the year. Actual results are compared to budget and to financial forecasts. Key operational and financial metrics are reviewed together with the risk profile and business environment of the reporting unit. Investment projects These are subject to formal review and authorisation procedures with designated levels of authority. Major projects are subject to Board review and approval.
There is a continuous process for identifying, evaluatingand managing the key risks faced by the Company.Activities are co-ordinated by the Risk Committee, whichhas responsibility for ensuring the adequacy of systems foridentifying and assessing significant risks, that appropriatecontrol systems and other mitigating actions are in place,and that residual exposures are consistent with theCompany's strategy and objectives. Assessments areconducted for all material entities. As part of the annual business planning process, the keyrisks associated with achievement of principal objectives areidentified and their impact quantified. During the year,significant changes in the risk profile are highlightedthrough the business performance reports. The principalrisks are reviewed by the Risk Committee, which providesregular reports to the Board. For each of the businesses that operate in traded energy markets, local risk committees have been established to oversee the management of the market, operational and credit risks arising from the marketing and trading activities. These committees are chaired by the Global Risk Manager and comprise Executive Directors and senior managers.
The principal objective of the Group's energy marketingand trading operations is to maximise the return fromselling the physical output of its plants. The Group hedges its physical generating capacity byselling forward its output, and purchasing its input, asand when commercially appropriate and within approvedcontrol limits. This is accomplished through a rangeof physical off-take and supply arrangements. Our limitedproprietary trading operations use a range of financialand physical products. Energy market risk on our asset and proprietary portfoliosis measured using value at risk and other methodologies.Value at risk provides a fair estimate of the net lossesor gains which could be recognised on our portfoliosover a certain period and given a certain probability; it doesnot provide an indication of actual results. It is routinelychecked for accuracy against actual movements in theportfolio value. In addition to using value at risk measures, we perform scenario analyses to estimate the economic impact of sudden market movements on the value of our portfolios. This supplements the value at risk methodology and captures additional market risks.
The Board reviews the effectiveness of established internal controls through the Audit Committee, which receives reports from management, the Risk Committee, the Group's internal audit function and the external auditors on the systems of internal control and risk management arrangements. Internal audit reviews the effectiveness of internal controls and risk management through a work programme based on the Company's objectives and risk profile. Findings are reported to operational and executive management, with periodic reporting to the Audit Committee. Annual self-certification statements of compliance with procedures are provided by business unit managers. These statements give assurance that controls are in operation and confirm that programmes are in place to address any weaknesses in internal control. The certification process embraces all areas of material risk. The internal audit function reviews the statements and reports any significant issues to the Audit Committee.
At this stage of the Company's development, the Boardbelieves that the Chief Executive Officer's fixed three-yearservice contract is appropriate, given his experience andknowledge of the market in which the Group operates.His remuneration is paid entirely in shares as described inthe Remuneration report. The service contracts for theother Executive Directors reverted to a 12-month noticeon 2 October 2001. In all other respects, the Company has complied with theprovisions of the Combined Code throughout the periodof the review. We have considered the ABI guidelines on corporate social responsibility, which were issued in October 2001. It is our intention to seek to comply with them in our 2002 Annual Report. 
| 
