This extract from the Halma p.l.c. 2010 Annual Report & Accounts has not been updated since publication in June 2010.
Corporate governance is about behaviour and this section of the report deals with how the Board and its committees discharge their duties and how we apply the principles of good governance in the Combined Code on Corporate Governance which is appended to the Listing Rules of the Financial Services Authority and for which the Board is accountable to shareholders. Governance is complex, so the Board is committed to the shared endeavour of maintaining high standards of corporate governance to ensure the Board sends consistent messages on values and behaviours. The policy of the Board is to manage the affairs of the Company in accordance with the principles of corporate governance contained in the Combined Code not by merely following regimented rules, but by the promotion of wide discussion on topics to which Board members properly contribute, demonstrating mutual engagement amongst the participants. In the spirit of ‘comply or explain’, the Board has again this year reaffirmed its decision to retain a Board composition that differs from the Combined Code principles.
I continue to be pleased with the progress Halma has made to ensure best practice is maintained and we continually seek to improve our practices for the benefit of our shareholders.
Succession planning
I have always maintained that a key part of my role involves ensuring that the right people are doing the right jobs within the Group and that there is a sufficient cadre of individuals being nurtured throughout the Group to enable effective succession planning. In fact, additional emphasis is being placed on our succession planning practices over the coming year to demonstrate the importance we place on developing talent in house. Reviews of management capabilities and potential are performedon a routine basis and I am satisfied that sufficient resource within the Group exists and continues to be developed through programmes such as the Halma Executive Development Programme which itself evolves to meet the changing needs of the Group. Where a need for improvement to management resources is identified, the necessary attention is provided to ensure full strength is attained as soon as practicable.
Board appointments
There has been no change to the composition of the Board since our last report.
Our Board composition is discussed further below (see 'Application of the principles of good governance') since it is a deviation from the Combined Code in that half of the Board, excluding myself, is not made up of independent non-executive Directors. However, given the growth of the Group, the Board now feels that the addition of a further non-executive Director would be appropriate and is taking steps to do so.
Board committees
Our committees are a valuable part of the Company’s corporate governance structure. The workload of the committees is far more than the table of scheduled meetings would indicate as ad hoc meetings and communications between meetings frequently require considerable amounts of time. As with the Board’s composition, I am equally comfortable that the composition of all of our committees remains appropriate.
Board performance
The Board evaluates its performance and that of the Remuneration, Audit and Nomination Committees at least annually with each Committee also evaluating its own performance. Each year, we consult the Board to determine whether an external facilitator would enhance our process. To date, we have concluded that the current, open climate that the Board enjoys ensures a full and frank discussion of all matters, so an external facilitator is unnecessary. For 2009/10 the evaluation commenced with an updated self-assessment questionnaire, the results of which were compiled by the Company Secretary and discussed by the Board at the February 2010 Board and Committee meetings. The Board also met in February 2010, separate from any scheduled meeting, for a general discussion on Board effectiveness followed by a meeting of the executive Directors with the Chairman, the executive Directors with the Senior Independent Director, a meeting of the Chairman and non-executive Directors, and then a meeting of the non-executive Directors without the Chairman present. The outcomes of these meetings were then fed back to individuals by the Chairman, Senior Independent Director or Chief Executive, as appropriate. Overall, our process confirms that the blend of behaviours and skills around the Halma Board table are well suited to the task and consistent with Group values. With a Board that is free to openly express concerns comes more considered outcomes emphasising collective responsibility, transparency, clarity and sustainable conduct.
Shareholder communication
I would like to encourage all shareholders to find the time to attend our AGM on 29 July 2010. It is an excellent opportunity to meet the Board, the Executive Board and a selection of the CEOs from our operating companies.
Geoff Unwin
Chairman
22 June 2010
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Compliance with the Code of best practice
Throughout the financial year, the Company complied with the Code provisions set out in Section 1 of the 2008 FRC Combined Code except in respect of provision A.3.2 which involves the composition of the Board and the number of members who are independent non-executive Directors.
The Board reaffirmed its decision to maintain the current composition of the Board as a Chairman, three independent nonexecutive Directors and four executive Directors; this composition subsisted for the full financial year. To date, the Board adjudged this composition as the most appropriate structure for the Company providing valuable direct knowledge of operations and effective challenge surrounding the issues facing the Group. However, the Board has recently determined that the Group would now benefit from the appointment of a further non-executive Director and is taking steps to do so.
Application of the principles of good governance
The Company has applied the principles set out in section 1 of the Code, including both the Main Principles and supporting principles, by complying with the Code as reported above.
The Group is controlled and directed by a Board consisting of a Chairman, four executive Directors and three other non-executive Directors. Click here for their biographies. The Board considers the Chairman and each of the non-executive Directors to be independent. In assessing independence, the Board considers that the Chairman and non-executive Directors are independent of management and free from business and other relationships which could interfere with the exercise of independent judgment now and in the future. The Board believes that any shareholdings of the Chairman and non-executive Directors serve to align their interests with those of all shareholders. Richard Stone is acknowledged as the Senior Independent Director. Upon appointment and at regular intervals, all Directors are offered appropriate training. Each Director is subject to re-election at least every three years. The Chairman confirms that both Richard Stone and Stephen Pettit, who are standing for re-election, continue to be effective and demonstrate commitment to their roles. Richard Stone is standing for re-election as the Board has a policy of requiring non-executive Directors who have served on the Board for nine years or more to stand for annual re-election by shareholders. Richard Stone has indicated his willingness to continue as a Director whilst succession planning is advanced and the Board believes that his continuing appointment provides a good balance of experience amongst the non-executive Directors and has accepted that his independence is not compromised by this extension of his term of office.
The Directors retain responsibility for the formulation of corporate strategy, investment decisions, and treasury and risk management policies. There is a formal schedule of matters reserved for the Board’s decision and the Board meets at least six times each year with further ad hoc meetings as required. Directors are issued an agenda and comprehensive board papers in the week preceding each Board meeting. All Directors have access to the advice and services of the Company Secretary as well as there being an agreed procedure for obtaining independent professional advice.
Engagement with management
The Directors have a programmed schedule of meetings and visits with the Executive Board, Group companies and Development Programmes to ensure that they are able to engage with management and employees at all levels. Such contact, especially between the non-executive Directors and Group employees, is where much value is added and supports the messages from the Executive team.
Committees of the Board
Halma has six committees of the Board: the Remuneration Committee, the Audit Committee, the Nomination Committee, the Share Plans Committee, the Bank Guarantees and Facilities Committee and the Acquisitions and Disposals Committee.
Each of these committees has terms of reference approved by the Board, copies of which are available below or on request from the Company Secretary.
View the Remuneration Committee's Terms of Reference in PDF format (33KB, opens in a new window)
View the Audit Committee's Terms of Reference in PDF format (46KB, opens in a new window)
View the Nomination Committee's Terms of Reference in PDF format (39KB, opens in a new window)
View the Share Plans Committee's Terms of Reference in PDF format (16KB, opens in a new window)
View the Bank Guarantees and Facilities Committee's Terms of Reference in PDF format (16KB, opens in a new window)
View the Acquisitions and Disposals Committee's Terms of Reference in PDF format (18KB, opens in a new window)
Board meeting attendance
During the year attendance by Directors at Board and Committee meetings was as follows:
| Geoff Unwin |
6 of 6 |
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| Andrew Williams |
6 of 6 |
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| Kevin Thompson |
6 of 6 |
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| Neil Quinn |
6 of 6 |
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| Richard Stone |
6 of 6 |
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| Stephen Pettit |
6 of 6 |
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| Jane Aikman |
6 of 6 |
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| Adam Meyers |
6 of 6 |
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Internal control
The Board has overall responsibility to the shareholders for the Group’s system of internal control, and responsibility for reviewing its effectiveness has been delegated to the Audit Committee. Whilst not providing absolute assurance against material misstatements or loss, this system is designed to identify and manage those risks that could adversely impact the achievement of the Group’s objectives. The principal risks are detailed on pages 40 and 41 of the Halma 2010 Annual Report & Accounts.
Following publication by the Turnbull Committee of the guidance for directors on internal control (‘Internal Control: Guidance for Directors on the Combined Code’), the Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, that this has been in place for the year under review and up to the date of approval of the Annual report and accounts. This process has been reviewed by the Board and the Group accords with the Turnbull guidance.
The Group’s external auditors, Deloitte LLP, have audited the financial statements and have reviewed the internal financial control systems to the extent they consider necessary to support their audit report.
The Board meets regularly throughout the year and has adopted a schedule of matters which are required to be brought to it for decision. This procedure is intended to ensure that the Directors maintain full and effective control over all significant strategic, financial and organisational issues.
Group risk is mitigated by means of an operating structure which spreads the Group’s activities across a number of autonomous subsidiary companies. Each of these companies operates with a high-quality board of directors including a finance executive.
Group companies operate under a system of controls which includes but is not limited to:
- a defined organisational structure with an appropriate delegation of authority to operational management which ensures appropriate segregation of key duties;
- the identification and appraisal of risks both formally, through the annual process of preparing business plans and budgets, through an annual detailed risk assessment carried out at local level and informally through close monitoring of operations;
- a comprehensive financial reporting system, developed in terms of speed and coverage during the last financial year, within which actual and forecast results are compared with approved budgets and the previous year’s figures on a monthly basis and reviewed at both local and Group level;
- an investment evaluation procedure to ensure an appropriate level of approval for all capital expenditure and other capitalised costs;
- self-certification by operating company management of compliance and control issues; and
- a prescribed robust structure under which it is appropriate to adopt means of electronic communication and to conduct e-commerce.
The processes which the Board has applied in reviewing the effectiveness of the Group’s system of internal control are summarised below.
- Operating companies carry out a detailed, relevant risk assessment each year and identify mitigating actions in place or proposed for each significant risk. A risk register is compiled from this information, against which action is monitored through to resolution. Group management also compile a summary of significant Group risks, documenting existing or planned actions to mitigate, manage or avoid the risk.
- Each month the board of each operating company meets, discusses and reports on its operating performance, its opportunities, the risks facing it and the resultant actions. The relevant Divisional Chief Executive chairs this meeting. Divisional Chief Executives meet regularly with the Chief Executive and Finance Director and report progress to the Executive Board.
- ‘Warning signs’ are reported to Group and divisional management. These are designed to provide an early warning of potential risks and to direct appropriate action where necessary. These metrics have been revised to recognise the additional risks of an uncertain economic climate.
- The Chief Executive submits a report to each Halma p.l.c. Board meeting which includes financial information, the main features of Group operations and an analysis of the significant risks facing the Group at that time.
- Cyclical and risk-based internal control visits are carried out by internal audit personnel or senior finance staff resulting in actions fed back to each company and followed up by Divisional Finance Directors and Divisional Chief Executives. Visit reports are coded in terms of risk and a summary of all such visits reported to the Audit Committee regularly with any significantcontrol failings being reported directly to the Audit Committee; senior finance staff also conduct financial reviews at eachoperating company prior to publication of half-year and year-end figures. A programme of IT audits is also carried out and reported on.
- The Chief Executive and Finance Director report to the Audit Committee on all aspects of internal control for its review. The Board receives the papers and minutes of the Audit Committee meetings and uses these as a basis for its annual review of internal control.
During the year, actions to strengthen the control environment continue to be taken centrally by Group management. The duties and responsibilities of subsidiary management are continually refreshed as well as documented in a manual circulated to all subsidiary managing directors. The dedicated resources established to identify and investigate potential acquisitions and to ensure a rapid and successful integration following acquisition remain in place, and the scope of the Group’s IT policies and the programme of compliance audits are regularly reviewed to ensure they are sufficient to address current risks. Over recent months we have been refreshing our processes to ensure that appropriate tax accounting arrangements are maintained in particular to enable continued compliance with local tax requirements.
As noted above, a programme of internal control visits is conducted. The internal audit function has independently operated since 2004, reporting on the outcome of these visits to the Audit Committee. In 2008/09, a dedicated Internal Audit manager was added to support the function. During each year we implement further improvements to our Internal Audit activities as the result of benchmarking activities and continue to target further revisions for the coming year to enhance our processes.
Going concern
The Group’s business activities, together with the main trends and factors likely to affect its future development, performance and position, and the financial position of the Group, its cash flows, liquidity position and borrowing facilities, are set out in the Business Review. In addition, note 26 to the financial statements in the Annual Report and Accounts includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to currency and liquidity risks.
The Group has considerable financial resources (including a £165m five-year revolving credit facility) together with contracts with a diverse range of customers and suppliers across different geographic areas and industries. No one customer accounts for more than 3% of Group turnover. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.
After making enquiries and after conducting a formal review of the Group’s financial resources, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.
Investor relations
In regular meetings with shareholders and analysts the Chief Executive and Finance Director communicate the Group’s strategy and results, disclosing such information as is permitted within the guidelines of the Listing Rules. Such meetings ensure that institutional shareholders representing over 50% of the Company’s issued share capital meet or hold discussions with the Company on a regular basis. Major shareholders are also offered the opportunity to meet the Chairman and/or Senior Independent Director.
All shareholders are encouraged to attend the annual general meeting, and major shareholders are also invited to briefings following the half-year and annual results. The content of presentations to shareholders and analysts at results announcements and all announcements are available on the Group website, www.halma.com.
The Group website also contains electronic versions of the latest Annual Report and Accounts, Half-Year Reports, biographical information on key Directors and Officers, share price information, and full subsidiary company contact details as well as hotlinks to their own websites. The website also features the facility to request e-mail alerts relating to announcements made by the Group and contains information in Chinese, French, German and Spanish as well as English.
Click here for the Financial calendar.
Auditor independence
The Audit Committee has responsibility for reviewing auditor independence and objectivity annually. During 2003/04, the Committee set down the ‘Policy on Auditor Independence and Services provided by the External Auditor’. This policy states that the Group will only use the appointed external auditor for non-audit services in cases where these services do not conflict with the auditor’s independence. The policy also sets a fee level per project of £100,000 above which non-audit services are subject to a tendering process. The above fee levels for non-audit services regarding the external auditors are also subject to an annual cap equal to the audit fee.
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