Statement of compliance
The September 2012 edition of the UK Corporate Governance Code ('the Code'), a copy of which is available from the Financial Reporting Council's website (www.frc.org.uk), applied to the Company throughout the year ended 31 March 2014.
The board has carried out a detailed review of the provisions of the Code, having regard to the need to comply not just with the principles but also with the spirit of the Code and also keeping in mind guidance issued by the FRC, such as the FRC guidance to audit committees. A summary of how the Company has applied the main principles of the Code is set out below.
Save as referred to below, the board has complied with the provisions of the Code throughout the year ended 31 March 2014 and up to the date of this report.
The board did not comply in full with provision A.2.1 of the Code which requires the board to operate with a separate chairman and chief executive officer. From 1 April 2013 until 31 October 2013, John Dodds, who previously operated as non-executive chairman until 23 January 2013, was acting in the role of executive chairman. As explained in the previous year, this was a temporary arrangement designed to facilitate clear leadership until the appointment of a new chief executive officer. Ian Lawson was appointed as chief executive officer on 1 November 2013, restoring compliance with this provision.
Structure of the board
The Company is controlled through the board of directors which comprises four executive and four non-executive directors, all of whom are considered as independent. From 19 July 2014, the board will comprise four executive and five independent non-executive directors. The membership of the board is stated in the board of directors.
Ian Cochrane and Ian Lawson were appointed as executive directors on 5 June 2013 and 1 November 2013, respectively.
As described above, John Dodds reverted to his previous role as non-executive chairman from 1 November 2013, having served as executive chairman from 23 January 2013 to 31 October 2013.
Peter Emerson retired as an executive director on 5 June 2013.
Alun Griffiths was appointed as a non-executive director on 1 May 2014. Kevin Whiteman and Tony Osbaldiston have been appointed as non-executive directors from 19 July 2014. Keith Elliott and Toby Hayward will retire as non-executive directors with effect from 18 July 2014.
Ian Lawson has board level responsibility for corporate and social responsibility and employment matters; Ian Cochrane has board level responsibility for health and safety matters.
Role of the chairman, chief executive officer and senior independent director
Since 1 November 2013 the board has had a separate chairman and chief executive officer in line with the Code. The posts of chairman and chief executive officer are separate and their roles and responsibilities are clearly established, set out in writing and agreed by the board.
The chairman, John Dodds, is mainly responsible for managing the business of the board, evaluating its performance and setting the agenda for board meetings to ensure that adequate time is allocated to the discussion of all agenda items, facilitating the effective contribution of all directors. The chairman acts as an ambassador for the Company and provides effective communication between the board and its shareholders.
As the senior executive of the Company, Ian Lawson is responsible to the chairman and the board for directing and prioritising the profitable operation and development of the Group. The chief executive officer is responsible for the day-to-day management of the operational activities of the Group, assessing and implementing strategy and implementing the board's decisions.
The chief executive officer chairs an executive committee consisting of the members indicated in the executive committee section.This committee assists the main board by focusing on strategic and operational performance matters relating to the business and meets formally on a monthly basis. He also, together with the Group finance director and chief operating officer, holds quarterly meetings with each of the three divisional boards to review all operational issues and meets with an executive risk committee comprising himself, the Group finance director, chief operating officer and the Group legal director on a weekly basis on any key issues affecting the business.
In addition, he chairs a safety leadership team ('SLT') consisting of members across the organisation, which meets formally on a monthly basis.
Keith Elliott has acted as senior independent non-executive director and will continue to do so until the appointment of Kevin Whiteman on 19 July 2014. The role of the senior independent director is to provide a sounding board for the chairman and to serve as an alternative source of advice to the chairman for the other non-executive directors.
The senior independent director is available to shareholders if they request a meeting or have concerns, which contact through the normal channels has failed to resolve, or where such contact is inappropriate. He also leads the performance review of the chairman, taking into account the views of the executive directors.
All of the non-executive directors are considered by the board to be independent in character and judgement and no cross-directorships exist between any of the directors.
No director has any material interest in any contract of significance with the Group during the period under review. The directors have put in place procedures to ensure the board collectively, and the directors individually, comply with the disclosure requirements on conflicts of interest set out in the Companies Act 2006. The interests of the directors in the share capital of the Company and its subsidiary undertakings and their interests under the performance share plan and other share schemes are set out in the remuneration report.
Keith Elliott has continued in his role as senior independent non-executive director to date and until the appointment of Kevin Whiteman on 19 July 2014, notwithstanding that he had served as a director for 15 years. He has also continued with his chairmanship of the remuneration committee and will continue to do so until his retirement on 18 July 2014.
The board recognises that whilst Keith and Toby were technically non-independent due in Keith's case to his length of tenure and in Toby's case his having previously served as chairman, their concurrent tenure, representing the average period for which they served on the board contemporaneously with the executive directors, was significantly reduced following the resignation of Tom Haughey and the retirement of Peter Emerson in 2013. Furthermore, the board believes that they have continued to act independently and recognises their high levels of commitment and effective contribution to the board's decision making process.
Directors to stand for election
The Company's articles of association require the directors to offer themselves for re-election at least once every three years. Notwithstanding this, and in accordance with the recommendations of the Code, the Company has decided that all of the directors will now retire at each AGM and may offer themselves for re-election by shareholders. Accordingly, all of the existing directors whose biographies are set out in the board of directors section will be standing for re-election at the 2014 AGM.
The board is satisfied that the performance of all of the remaining non-executive directors continues to be effective and that they continue to show commitment to their respective roles. Non-executive directors are not appointed for a fixed term. The terms and conditions of appointment of non-executive directors will be available for inspection at the AGM.
Operation of the board
The role of the board is to set the strategic direction of the Group, to review all significant aspects of the Group's activities, to oversee the executive management and to review the overall system of internal control and risk management. The board has a formal schedule of matters reserved for it. It is responsible for overall Group strategy, acquisition and divestment policy, approval of major capital expenditure projects and consideration of significant financing matters. It monitors the exposure to key business risks including environmental and health and safety issues. It reviews the strategic direction of individual trading subsidiaries, codes of conduct, annual budgets, progress towards achievement of those budgets, significant capital expenditure programmes and the annual and half year results.
The board also considers employee issues and key appointments. It also ensures that all directors receive appropriate training on appointment and then subsequently as appropriate. Other specific responsibilities are delegated to the board's committees described below.
The chairman, together with the Company secretary, ensures that the directors receive clear information on all relevant matters in a timely manner. Board papers are circulated sufﬁciently in advance of meetings for them to be thoroughly digested to ensure clarity of informed debate. The board papers contain the chief executive officer's written report, the Group finance director's and chief operating officer's written reports, high level papers on each business area, key metrics and speciﬁc papers relating to agenda items. The board papers are accompanied by a management information pack containing detailed ﬁnancial and other supporting information. The board receives occasional ad hoc papers on matters of particular relevance or importance. The board also receives presentations from various business units.
The directors' attendance record at the scheduled board meetings and board committee meetings for the year ended 31 March 2014 is shown in the table below. For board and board committee meetings, attendance is expressed as the number of meetings that each director attended out of the number that they were eligible to attend. In addition to those scheduled meetings, ad hoc meetings were also arranged to deal with matters between scheduled meetings as appropriate.
Non-attendance by directors at meetings was due to either conflicting commitments previously agreed or illness. Board meetings are held at various locations in London, the Group's head office in Dalton, North Yorkshire and at the offices of the Group's other operating subsidiaries to provide non-executive directors the opportunity to increase their knowledge and understanding of the Group's operations.
|Audit committee||Remuneration committee||Nomination committee|
Note: Ian Lawson, Ian Cochrane and John Dodds attended all required meetings during their tenure as executive directors.
The board considers that the balance of relevant experience amongst the various board members enables the board 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.
The Code attaches importance to boards having processes for individual and collective performance evaluation. The performance of individual directors is evaluated annually in conjunction with the remuneration review.
The chairman meets with the non-executive directors at least annually to review their performance and the senior independent director leads an evaluation process of the performance of the chairman taking into account the views of the executives. A formal evaluation of board effectiveness was conducted during the year. Details of significant changes to the composition of the board are set out above.
Appropriate training and briefing is provided to all directors on appointment to the board, taking into account their individual qualifications and experience. This is supplemented with visits to the Group's operations and meetings with senior divisional management to develop the directors' understanding of the business.
Training and updating in relation to the business of the Group and the legal and regulatory responsibilities of directors was provided throughout the year by a variety of means to board members including presentations by executives, visits to business operations and circulation of brieﬁng materials. Individual directors are also expected to take responsibility for identifying their training needs and to ensure they are adequately informed about the Group and their responsibilities as a director.
Non-executive directors are continually updated on the Group's business, its markets, social responsibility matters, changes to the legal and governance environment and other changes impacting the Group. During the year, the directors received updates on various best practice, regulatory and legislative developments, including changes to the UK Corporate Governance Code and directors' remuneration reporting requirements.
All directors have access to the advice and services of the Group legal director and Company secretary who ensures that board processes are followed and good corporate governance standards are maintained. Any director who considers it necessary or appropriate may take independent, professional advice in furtherance of their duties at the Company's expense. No directors sought such advice in the year.
The board is conﬁdent that all its members have the knowledge, ability and experience to perform the functions required of a director of a listed company.
Relations with shareholders
The Company encourages two-way communication with both its institutional and private investors and attempts to respond quickly to all queries received verbally or in writing.
The executive directors undertake a programme of regular communication with institutional shareholders and with analysts covering the Group's activities, its performance and strategy. John Dodds, Ian Lawson and Alan Dunsmore attended several meetings with institutional shareholders, private investors and analysts during the year, at the time of the announcements of the Group's annual and half year results, during visits to the Group's head office in North Yorkshire and on an ad hoc basis as required. In addition, a capital markets event took place on 25 April attended by approximately 30 analysts and investors. Feedback from those meetings is reported to the board, including the non-executive directors.
Direct discussions took place during the year between shareholders' representatives and Keith Elliott with particular reference to the directors' remuneration report.
The board has sought to use the AGM to communicate with private investors and encourages their participation. The notice of the AGM, detailing all proposed resolutions, is posted to shareholders at least 20 workings days before the meeting.
The board has established three standing committees, all of which operate within defined terms of reference, which are available from the Company secretary by request and will be available for inspection at the AGM.
The committees established are the audit committee, the remuneration committee and the nominations committee. Trading companies are managed by separate boards of directors. Any matters of a material nature concerning the trading companies are reported to the board on a monthly basis.
The audit committee comprises the non-executive directors. At 31 March 2014, the committee members were Toby Hayward, John Dodds, Chris Holt and Keith Elliott. Toby Hayward has served as chairman of the committee throughout the year. Effective subsequent to the year-end, Alun Griffiths and Kevin Whiteman were appointed as members of the committee and Tony Osbaldiston was appointed chairman of the committee; Keith Elliott and Toby Hayward resigned as committee members. The committee members have been selected to provide the wide range of financial and commercial expertise necessary to fulfil the committee's duties; Toby Hayward, Chris Holt and Tony Osbaldiston are chartered accountants.
On invitation, the chief executive officer, Group finance director, other executive directors, executive committee members, senior management and the internal and external auditors attend meetings to assist the committee fulfil its duties.
Meetings are held at least three times per annum and additional meetings may be requested by the auditor. The committee met on three occasions during the year with full attendance by all members except for Chris Holt who was unable to attend one meeting.
View the audit committee report.
The remuneration committee comprises the non-executive directors and is chaired by Keith Elliott. Subsequent to the year-end, Alun Griffiths was appointed chairman of the committee following Keith Elliott's resignation.
This committee, which meets at least twice per year, is responsible for making recommendations to the board concerning the compensation of senior executives. It also determines, within the agreed terms of reference, the specific remuneration packages for each of the executive directors and the chairman, as well as the level and structure of remuneration for senior management. New Bridge Street (NBS) (an AON Hewitt Company) are appointed as the Group's remuneration consultants. NBS are a member of the Remuneration Consultants Group and comply with its code of conduct. NBS has no other connection with the Company.
The committee met on four occasions during the year with full attendance.
Shareholders are required to approve all new long-term incentive plans and significant changes to existing plans. Further details of these plans, as well as the activities undertaken by the committee during the year, can be found in our remuneration policy and implementation of policy for 2013/2014 sections.
The nominations committee comprises the non-executive directors and is chaired by John Dodds. Whilst John was acting as executive chairman it was chaired by Chris Holt.
The principal task of the committee is to deal with key appointments to the board, and related employment matters. The committee is responsible for proposing candidates for appointment to the board, having regard to the balance and structure of the board, and meets as and when required.
The committee met on four occasions during the year with full attendance.
In 2013/14, the committee's work programme entailed recommending to the board the appointment of a new chief executive officer, in place of Tom Haughey who resigned in January 2013, and three new non-executive directors, two of whom will replace Toby Hayward and Keith Elliott.
In seeking suitable candidates for these vacancies, Korn/Ferry International, an external executive search agency, was engaged. Korn/Ferry has no other connection with the Company. The nominations committee considered a list of potential candidates and the balance of skills, knowledge, independence, diversity (including gender) and experience on the board to ensure that a suitable balance was maintained.
Ian Lawson was appointed as chief executive officer in November 2013. Ian's wealth of plc board experience and understanding of the construction market were factors in the board's decision.
The committee also recommended to the board the appointments as non-executive directors of Alun Griffiths on 1 May 2014 and Kevin Whiteman and Tony Osbaldiston with effect from 19 July 2014. Their other significant commitments were disclosed to the board before their appointments. The board was and continues to be satisfied that they would allocate sufficient time to the Company to discharge their responsibilities effectively.
The committee was also unanimous in appointing Ian Cochrane, formerly managing director of Severfield (NI) Limited, to the board as chief operating officer in June 2013.
We recognise the importance of diversity in board effectiveness and remain committed to ensuring that appointments are ultimately made on merit and against agreed selection criteria.
We support the Davies report's aspiration to promote greater female representation on listed company boards. The Group, however, does not believe in the concept of gender quotas, our preferred approach being much more directed at merit, experience and skill.
In the sectors in which the Group operates female representation at a senior level is rare and as at 31 March 2014, the board had no female directors. As and when board appointments arise, and where practicable, we will look to follow the procedures recommended by the Davies report and by the Code to maintain a balanced board. No suitable female candidates were identified, for example, as part of the recent recruitment exercise for new non-executive directors.
The board also recognises that gender diversity below board level remains an issue, particularly in management and technical roles within the construction industry.
The nominations committee ensures the continued effectiveness of the board through appropriate succession planning. The board from 19 July 2014 onwards will consist of nine directors, only four of whom have been directors of the Company for more than 13 months. More work will be done in the next 12 months to formalise the process of ongoing succession planning.
The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. An ongoing process has been established for identifying, evaluating and managing the significant risks faced by the Group. A Group assurance map is used to co-ordinate the various assurance providers within the Group.
During the year, there was significant investment in, and assessment of, the Group's risk management process resulting in improved risk management understanding, assessment and reporting. The process was underpinned by risk identification workshops, facilitated by an independent risk management consultant, which were attended by senior management, the executive committee and the board.
Senior management from all key disciplines and businesses within the Group are involved in the process of risk assessment in order to identify and assess Group objectives, key issues and controls. Further reviews are performed to identify those risks relevant to the Group as a whole. This assessment encompassed all aspects of risk, including operational, compliance, financial and strategic.
Identified risk events, their causes and possible consequences are recorded in risk registers. Their likelihood and potential business impact and the control systems that are in place to manage them are analysed and, if required, additional actions are developed and put in place to mitigate or eliminate unwanted exposures. Individuals are allocated responsibility for evaluating and managing these risks within an agreed timetable.
The Group establishes its risk appetite through use of delegated authorities so that matters considered higher risk require the approval of senior management or the board. These include, but are not limited to, tender pricing, bid submissions, approval of contract variations and final account settlements, capital requirements, procurement, and certain legal and strategic matters.
Ongoing risk management and assurance is provided through various monitoring reviews and reporting mechanisms, including the executive risk committee (chaired by Ian Lawson) which convenes on a weekly basis and has the primary responsibility to identify, monitor and control significant risks to an acceptable level throughout the Group. The committee receives information on relevant risk matters from a variety of sources on a regular basis.
Subsidiary company meetings consider and report on risk on a monthly basis as part of the monthly business review process. This process is followed to ensure that, as far as possible, the controls and safeguards are being operated in line with established procedures and standards.
On a quarterly basis, the significant risks identified by the Group's businesses are discussed in detail with each management team. The outcome of these discussions is collated and reported to the executive committee. The risk registers of each business are updated and, together with a consolidated Group risk register compiled by the executive committee, are reported to the audit committee twice yearly, to ensure that adequate information in relation to risk managenages riskent matters is available to the board and to allow board members the opportunity to challenge and review the risks identified.
The audit committee undertakes an annual review of the appropriateness of the risk management processes to ensure that they are sufficiently robust to meet the needs of the Group.
Details of the Group's principal risks, together with the controls and procedures in place to mitigate the risks, can be found in the how the business manages risk section.
The board is responsible for the preparation of the annual report and the financial statements to ensure that the annual report taken as a whole is fair, balanced and understandable.
The annual report is drafted by executive management with reviews undertaken by third-party advisers as required. Additional steps have been built into the reporting timetable to ensure that directors are given sufficient time to review, consider and comment on the annual report. Our external auditor reviews the narrative sections of the annual report to identify any material inconsistencies between their knowledge acquired during the audit and the directors' 'fair, balanced and understandable' statement and whether the annual report appropriately discloses those matters that they have communicated to the audit committee. A substantially final draft is reviewed by the audit committee prior to consideration by the board.
The board formally acknowledges its overall responsibility for reviewing the effectiveness of internal control. It believes that senior management within the Group's operating businesses should also contribute in a substantial way and this has been built into the process.
There are inherent limitations in any system of internal control and, accordingly, even the most effective system can provide only reasonable, and not absolute, assurance against material misstatement or loss. The system is designed to manage rather than eliminate the risk of failure to achieve the Group's objectives.
The system of internal control, which includes financial, operational and compliance controls, is based on a process of identifying, evaluating and managing risks. This process has been in place for the full financial year and up to the date of the approval of these financial statements and is regularly reviewed by the board. The process is subject to continuous improvement and has been enhanced as the Group has implemented greater formality and standardisation, which allows for better oversight by the board. This process is in accordance with the guidance provided by the Turnbull report.
The key features of the Group's system of internal control are as follows:
Financial reporting system
The Group operates a comprehensive budgeting and forecasting system. Budgets and forecasts include income statements (including detailed contract-by-contract information), cash flow statements and balance sheets. Risks are identified and appraised throughout the annual process of preparing budgets. The annual budget and quarterly forecasts are approved by the board.
A formal quarterly review of each business's year-end forecast, business performance, risk and internal control matters is carried out by the directors of each division with the chief executive officer, Group finance director and chief operating officer in attendance.
Detailed management accounts are prepared for each business and the Group on a monthly basis which, as a matter of routine, compare actual results with budget and the latest forecast. Material variances from budget and forecast are thoroughly investigated. A detailed monthly Group management information pack is prepared which covers the performance of each business and contains detailed consolidated results and other financial information for the Group as a whole. This information pack is subsequently presented to the executive committee and the board.
Standard financial control procedures operate throughout the Group to ensure the integrity of the Group's financial statements.
Project management procedures
Project risk is managed throughout the life of a contract from the tender stage to completion. The Group has taken steps to implement stronger contracting processes and disciplines during the year.
Individual tenders for projects are subject to detailed review with approvals required at relevant levels and at various stages from commencement of the tender process through to contract award. Tenders above a certain value and those involving an unusually high degree of technical or commercial risk must be approved at a senior level within the Group.
Robust procedures exist to manage the ongoing risks associated with contracts. Regular monthly contract reviews to assess contract performance, covering both financial and operational issues, form an integral part of contract forecasting procedures.
The Group operates an established management structure, with clearly defined levels of responsibility and a clear system of delegated authorities. 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.
All significant investment decisions, including capital expenditure, are referred to the board, the executive directors or senior management, depending on the value and/or nature of the proposed investment. Capital expenditure requests are supported by detailed investment appraisals.
Cash and working capital management
Cash flow forecasts are regularly prepared to ensure that the Group has adequate funds and resources for the foreseeable future and is in compliance with banking covenants. Each business reports its cash position daily. Actual cash performance is compared to forecast on a weekly basis.
During the course of the year, KPMG was engaged as an outsourced internal audit and assurance provider to deliver specific expertise, experience and resource. The scope of the internal audit work focuses on critical business financial processes and other areas of perceived high business risk. KPMG's findings are reported to the executive and audit committees on a regular basis.
Health and safety
Safety, health and environmental issues and risks are continually monitored at all sites and are reviewed on a monthly basis by senior management and the board.
The Group has a well-developed health and safety management system for the internal and external control of health and safety risks which is managed by the Group SHE director. This includes the use of risk management systems for the identiﬁcation, mitigation and reporting of health and safety management information.
The Group operates a comprehensive 'whistleblowing' policy. Accordingly, staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The audit committee reviews adherence with this policy on an ongoing basis.
Information included in the directors' report
Certain information that fulfils the requirements of the corporate governance statement can be found in the directors' report in the sections headed 'significant shareholdings', 'share capital', 'amendment of articles of association', 'appointment and replacement of directors' and 'powers of the directors' and is incorporated into this corporate governance section by reference.