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The
Principles of Good Governance and Code of Best Practice (the “Combined
Code”) drafted by the Hampel Committee on corporate governance
was issued in June 1998 encompassing principles previously addressed
by the Cadbury and Greenbury Committees.
Section 1 of the Combined Code contains broad principles and further
detailed provisions covering four main issues which all companies
listed on the London Stock Exchange are expected to follow.
The directors consider that the Group has been in compliance throughout
the year with the code provisions set out in Section 1 of the Combined
Code issued by the Stock Exchange with the following exceptions:
(i) All directors were not subject to retirement by rotation until
new Articles of Association were adopted at the 2001 Annual General
Meeting.
(ii) Not all directors had service contracts of one year or less.
Mr M W C Martin, who retired as a director on 31 December 2001,
had a service agreement terminable on two years’ notice by
the employer. From that date, no director has had a service agreement
with the Company terminable on more than one year’s notice
by the employer. Directors’ service contracts are detailed
in Remuneration report.
Directors
The board comprised three executive and four non-executive directors
until Mr E G F Brown was appointed on 13 December 2001, increasing
to five the number of non-executive directors. When Mr M W C Martin
retired on 31 December 2001, the board comprised two executive and
five
non-executive directors. Dr K Bond, Mr K F Payne and Dr H Peipers
are considered by the board to be independent of management with
Dr K Bond as the senior independent director. There is an agreed
procedure for individual directors to obtain independent legal advice
and all directors have unrestricted access to the company secretary
and chairman.
There is a clear division of responsibilities between
Dr J M West as non-executive chairman and Mr T Dobson who, as chief
executive, is the director ultimately responsible for the running
of the Group’s business. The board meets regularly throughout
the year to monitor the Group’s performance and to take decisions
based upon a schedule of matters specifically reserved for its approval.
Board papers and other relevant information are supplied to the
board members in advance of the meetings to enable directors to
be properly briefed on topics to be discussed at these meetings.
The Nomination Committee is chaired by Dr J M West, the other members
during the year being Mr K F Payne and Mr T Dobson. This Committee
monitors the composition and balance of the board and recommends
to the board the appointment of new directors.
Directors’
remuneration
The Remuneration Committee is chaired by Dr K Bond, the other members
during the year being Mr K F Payne and Dr H Peipers, all of whom
are independent of management. This Committee is responsible for
agreeing with the board the framework and policy for the remuneration
of the Group’s executive management and for determining
the remuneration packages of the executive directors. The remuneration
for the non-executive directors is determined by the board.
Relations with shareholders
Where practicable throughout the year, with the exception of closed
periods, the Company meets with and makes presentations to institutional
investors. All directors of the Group are available to answer questions
at the Annual General Meeting which is considered to be the most
effective way of keeping private investors informed of the Group’s
progress. The notice of the Annual General Meeting, detailing all
proposed resolutions, will be posted to shareholders at least 20
working days prior to the meeting.
Accountability and audit
The Audit Committee is comprised of the non-executive directors
and is chaired by Mr K F Payne. This Committee meets at least twice
a year and the Company’s auditors are in attendance at these
meetings. The Committee assists the board in observing its responsibility
for ensuring that the Group’s financial systems provide accurate
and up to date information on its financial position and that the
Group’s published financial statements represent a true and
fair reflection of this position.
During the year, the committee considered the need for an internal
audit function. The Committee concluded that the nature of the business
risks and the effectiveness of existing controls were such that
an internal audit function was unlikely to add value.
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Internal
control
The board is ultimately responsible for the Group’s system
of internal control and for reviewing its effectiveness. However,
such a system is designed to manage, rather than eliminate, the
risk of failure to achieve business objectives, and can provide
only reasonable and not absolute assurance against material misstatement
or loss.
Following publication of guidance for directors on internal control
Internal Control: Guidance for directors on the Combined Code
(the Turnbull Guidance), the board confirms that there is an ongoing
process for identifying, evaluating and managing the significant
risks faced by the Group, that has been in place for the year under
review and up to the date of approval of the annual report and accounts,
and that this process is regularly reviewed by the board and accords
with the guidance.
The principal elements of the internal control framework are as
follows:
(a) Contract appraisal
A risk analysis covering technical, operational and
financial issues is performed as part of the bidding process. The
bidding of contracts is approved at the appropriate level. The performance
of contracts is monitored by each operating division on a weekly
basis.
(b) Budgeting and forecasting
There is a comprehensive budgeting system with an annual budget
approved by the directors. This budget includes monthly profit and
loss accounts, balance sheets and cash flows. Forecasts for the
full year are updated as considered necessary. In addition, detailed
quarterly forecasts are prepared for the two subsequent years.
(c) Financial reporting
Detailed monthly management accounts are prepared which compare
profit and loss accounts, balance sheets, cash flows and other information
with budget, and significant variances are investigated.
(d) Cash control
A rolling 12 week cash forecast is prepared each week to monitor
the Group’s short term cash positions and to control immediate
borrowing requirements.
(e) Investments and capital expenditure
All significant investment decisions, including capital expenditure,
are referred to the appropriate divisional or Group authority level.
On behalf of the board, the Audit Committee has reviewed the effectiveness
of the system of internal control. In particular, it has reviewed
and updated the process for identifying and evaluating the significant
risks affecting the business and the policies and procedures by
which these risks are managed.
Management are responsible for the identification and evaluation
of significant risks applicable to their areas of business together
with the design and operation of suitable internal controls. These
risks are assessed on a continual basis and may be associated with
a variety of internal or external sources including control breakdowns,
disruptions in information systems, markets and competition, natural
catastrophe and regulatory requirements.
A process of
control self-assessment and hierarchical reporting has been established
which provides for a documented and auditable trail of accountability.
These procedures are relevant across Group operations and provide
for successive assurances to be given at increasingly higher levels
of management and, finally, to the board.
Management report on their review of risks and how they are managed
to the Audit Committee. One of the roles of the Audit Committee
is to review, on behalf of the board, the key risks inherent in
the business and the system of control necessary to manage such
risks, and to present their findings to the board. The Audit Committee
reviews the assurance procedures, ensuring that an appropriate mix
of techniques is used to obtain the level of assurance required
by the board. The Audit Committee presents its findings to the board
twice yearly.
The chief executive reports to the board on significant changes
in the business and the external environment that affect significant
risks. The finance director provides the board with monthly financial
information that includes key performance and risk indicators.
Where areas for improvement are identified, the board considers
the recommendations made by the Audit Committee.
Directors’ responsibilities in relation to the
financial statements
Company law requires the directors to prepare financial statements
for each financial year which give a true and fair view of the state
of affairs of the Company and Group and of the profit or loss for
that period. In preparing those financial statements, the directors
are required to:
(a) select suitable accounting policies and then apply them consistently;
(b) make judgements and estimates that are reasonable and prudent;
(c) state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
financial statements, and
(d) prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company and Group
will continue in business.
The directors are responsible for keeping proper accounting records
which disclose with reasonable accuracy at any time the financial
position of the Company and to enable them to ensure that the financial
statements comply with the Companies Act 1985. They have general
responsibility for taking such steps as are reasonably open to them
to safeguard the assets of the Group and to prevent and detect fraud
and other irregularities.
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