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Statement of Corporate Governance

UK Corporate Governance Code

The company remains committed to the highest standards of corporate governance for which the board is accountable.  The company has complied throughout the year with the main provisions of the UK Corporate Governance Code (the “Code”).  This statement, together with the directors’ remuneration report, describes how the company has applied the main principles of the Code.

The board

During the year the board comprised the non executive chairman, the chief executive, the executive finance director and two other non executive directors (including the chairman on appointment).  Under the company’s articles of association, all directors must offer themselves for re-election at least once every three years.  However, in accordance with developing best governance practice, this year all directors are retiring and seeking re-election.

The biographies of all the directors appear on page 19.

The roles of chairman and chief executive are held by separate directors with a clear division of responsibilities between them. The chairman has primary responsibility for leading the board and ensuring its effectiveness.  He sets the board’s agenda and ensures that all directors can make an effective contribution.  The chief executive has responsibility for all operational matters and the development and implementation of group strategy approved by the board.

The chairman and each non executive director were independent on appointment and the board considers each non executive director to be independent in accordance with the Code.

The board has appointed W Tame as senior independent non executive director who is available to shareholders if they have concerns which have not been resolved through the normal channels of chairman or chief executive.

The board meets regularly (at least nine times each year) and there is contact between meetings to progress the company’s business.  During the year attendance by directors at meetings of the board and the various committees is set out below.

Board Meetings Remuneration Audit
M J C Derbyshire 9 9 4 4 3 3
W Tame 9 8 4 4 3 3
RJ Rickman from 1 July 2012 7 7 2 2 2 2
C G Ross to 6 September 2012 4 4 2 2 1 1
CJ Malley from 1 July 2012 7 7 - - - -
R J Brooksbank 9 9 - - - -
I Williamson 9 9 - - - -

The board has a formal schedule of matters specifically reserved to it for decision (including the development of corporate strategy and the approval of annual budgets, major capital expenditure and potential acquisitions and disposals).  Briefing papers are distributed by the secretary to all directors in advance of board meetings.  All directors participate in a full induction process on joining the board and subsequently receive training and briefing as appropriate. The directors are authorised to obtain independent advice as required.

Conflicts of interest

Under the requirements of the Companies Act 2006 each director must seek authorisation before taking up any position that may conflict with the interests of the company.  The board has not identified any actual conflict of interest in relation to existing external appointments for each director which have been authorised by the board in accordance with its powers.  A register is maintained by the company secretary and reviewed on an annual basis.

Board evaluation

The board has been engaged throughout the year in succession planning.  As part of this process, an internal evaluation of its own performance and that of its three principal committees was undertaken.  In addition, an evaluation of the performance of individual directors was undertaken with assistance from external consultants.  The board will consider whether to use an external assessor for future annual evaluations.

The evaluation process identified that, with the company’s increasing focus on new technology, the board would benefit from the appointment of a new non executive director with knowledge and experience in developing technology businesses.

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Board committees

The board has three committees, Nomination, Remuneration and Audit all of which have terms of reference which deal specifically with their authorities and duties.  The terms of reference may be viewed on the company’s website.  All committee appointments are made by the board.  Only the committee chairmen and members of the committees are entitled to be present at committee meetings, but others may attend by invitation.

Nomination committee

The nomination committee comprises the non executive directors. The committee is chaired by the group chairman and is responsible for proposing candidates for appointment to the board, having regard to the balance and structure of the board.

In the last year the full committee has met twice to discuss succession planning and board performance.

As part of its role to review the composition of the board and plans for an orderly succession, the committee prepared a detailed candidate specification for a new non executive director.  An independent external search agency was selected to assist in producing a shortlist of potential candidates who were initially interviewed by the chairman and chief executive.  Final candidates were interviewed by the nomination committee who then recommended the appointment of RJ Rickman as a non executive director.

An executive search agency was also employed to interview and benchmark internal candidates to succeed I Williamson as chief executive.  The nomination committee assessed the results and then recommended the appointment of CJ Malley as an executive director, chief executive designate.  The committee then confirmed the appointment of CJ Malley as chief executive to replace I Williamson on his retirement on 27 March 2013.

Terms of reference for the Nomination Committee (PDF 8KB) >

Remuneration committee

The company has established a remuneration committee consisting entirely of independent non executive directors including the group chairman.  The remuneration committee met four times during the year and is now chaired by RJ Rickman. The committee recommends to the full board the company’s policy on executive director and executive management remuneration and continues to determine individual remuneration packages for executive directors.  The remuneration committee is authorised by the board to obtain independent professional advice if it considers this necessary.  The directors’ remuneration report on pages 30 to 34 sets out the group’s remuneration objectives and policy and includes full details of directors’ remuneration in accordance with the provisions of the Code.

A resolution will be proposed at the annual general meeting to approve the directors’ remuneration report.

Terms of reference for the Remuneration Committee (PDF 9KB) >

Audit committee

The audit committee comprises all the non executive directors including the group chairman and meets not less than three times annually.  The committee is chaired by W Tame who, as current finance director of Babcock International Group plc, has both recent and relevant financial experience. The committee provides a forum for discussions with the group’s external and internal auditors. Meetings are also attended, by invitation, by the chief executive and finance director.

The audit committee has terms of reference which follow closely the recommendations of the Code and include the following main roles and responsibilities:

  • To monitor the financial reporting process.
  • To review the effectiveness of the group’s internal financial controls, internal control and risk management systems and internal audit function.
  • To review the independence and effectiveness of the external auditor, including the provision of non-audit services.

The external auditor’s appointment is subject to regular review and the lead audit partner is rotated at least once every five years. The committee has established a policy covering the provision of non-audit services where justified on grounds of cost and related expertise and where not impacted by potential conflicts of interest.

The analysis of audit and non-audit fees for the year to 31 March 2013 is shown in note 3 to the accounts.  Non-audit fees of £17,000 were paid in respect of taxation services and are not considered by the committee to affect the independence or objectivity of the external auditor.

The committee has reviewed whistleblowing arrangements whereby employees can report concerns about financial irregularities, health and safety and environmental or legal matters.  A dedicated whistleblower email address has been set up, details of which are included in new employee induction material and advertised at operating sites.

The audit committee assists the board in observing its responsibility for ensuring that the group’s financial systems provide accurate information which is properly reflected in the published accounts.  It reviews half year and annual accounts before their submission to the board and reviews reports from the internal auditors and computer department.

Terms of reference for the Audit Committee (PDF 12KB) >

Certain operational and administrative matters are delegated by the board to the following executive committees:

Group executive committee

The group executive committee is chaired by the chief executive and comprises all the executive directors together with the group financial controller and selected managing directors from operating companies.  The committee meets each month and is responsible to the board for running the ongoing operations of the group’s businesses.

Finance, administration and risk management committee

The finance, administration and risk management committee is chaired by the finance director and comprises the secretary, group financial controller and group accountant.  The committee meets at least quarterly and is custodian of the group finance manual and is responsible for setting accounting and risk management policies and ensuring overall compliance with Turnbull guidance on internal controls.

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Relations with shareholders

The company recognises the importance of communication with its shareholders. Regular meetings are held between directors of the company and major institutional shareholders including presentations after the company’s preliminary announcements of the half year and full year results and discussions on performance and strategy.  Major shareholders have been advised that the chairman and the non executive directors are available for separate discussions if required.

The board uses the annual general meeting to communicate with private and institutional investors and welcomes their participation.  Shareholders have the opportunity to raise questions with the board during the meeting.  Directors also make themselves available before and after the annual general meeting to talk informally to shareholders, should they wish to do so.  The level of proxies received for each annual general meeting resolution is declared after the resolution has been dealt with on a show of hands providing no poll has been called for.  Details of the resolutions to be proposed at the annual general meeting on 6 September 2013 can be found in the notice of meeting on pages [86 to 89].

Accountability and audit

Directors' responsibilities

The directors are responsible for preparing the annual report and the group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare group and parent company financial statements for each financial year.  Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period.  In preparing each of the group and parent company financial statements, the directors are required to –

  • select suitable accounting policies and then apply them consistently;
  • make judgments and estimates that are reasonable and prudent;
  • for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;
  • for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and
  • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006.  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.

Under applicable law and regulations, the directors are also responsible for preparing a directors' report, directors' remuneration report and corporate governance statement that complies with that law and those regulations.  The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website.  Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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Internal control

The board confirms that it has established the procedures necessary to implement the guidance “Internal Control: Guidance for Directors on the [Combined Code ]” (the Turnbull Report).  These procedures provide for a continuous process for identifying, evaluating and managing the material business risks faced by the group.  This process has been in place throughout the year under review and up to the date of approval of the annual report and accounts.  The process has been reviewed by the board and is in accordance with the guidance given in the Turnbull Report.

For the year ended 31 March 2013, the board has reviewed the effectiveness of the group’s system of internal control and risk management, for which it retains overall responsibility.  Responsibility for operating the system is delegated to the group executive committee and responsibility for monitoring the system is delegated to the finance, administration and risk management committee.  The audit committee reviews the effectiveness of the group's internal control system, the scope of work undertaken by the internal auditors and its findings, the group's accounts and the scope of work undertaken by the external auditors.  Reviews are undertaken regularly and cover each accounting year and the period up to the date of approval of the accounts.

The internal control system is designed to manage rather than eliminate the risk of failure to achieve business objectives.  Although no system of internal control can provide absolute assurance against material misstatement or loss, the group's system is designed to provide reasonable assurance that problems are identified on a timely basis and dealt with appropriately.  The principal features of the group's internal control structures can be summarised as follows –

a) Matters reserved for the board

The board holds regular meetings and has a number of matters reserved for its approval, including major capital expenditure, treasury and dividend policy.  The board is responsible for overall group strategy and for approving all group budgets and plans.  Certain key areas are subject to regular reporting to the board including treasury operations, capital expenditure, corporate taxation and legal matters.  The audit committee assists the board in its duties regarding the group's financial statements and liaises with the external auditors.

b) Organisational structure

There is a clearly defined organisational structure with lines of responsibility and delegation of authority to divisional executive management.  Divisional responsibility is supplemented by a group finance manual which dictates policies and practices applicable across the group and includes accounting, purchasing, capital expenditure and codes of business conduct.  These are reviewed by the internal auditor and are reported to the audit committee.  This process forms part of the audit committee’s review of the effectiveness of the group’s system of internal control.

c) Financial control and reporting

There is a comprehensive group wide system of planning and budgeting with frequent reporting of results to each level of management as appropriate, including monthly reporting to the board.  Reviews involving executive directors and divisional executives include the annual identification and assessment of business and financial risks inherent in each division.

d) Internal auditor

Mazars LLP continues to provide the outsourced internal audit function.  The internal auditor monitors and reports on the system of internal control.  The internal auditor reports to the audit committee and works to an agreed programme.

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