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The Listing Rules require a company to include in its annual report and accounts a statement of how it has applied the principles set out in Section 1 of the Combined Code (the "Code") together with
an explanation to enable its shareholders to evaluate how the principles have been applied. The Listing Rules also require a company to include a statement as to whether or not it has complied throughout the accounting period with the Code
provisions set out in Section 1 of the Code. A company that has
not complied with the Code provisions, or complied with only some of the Code provisions or (in the case of provisions whose requirements are of a continuing nature) complied for only part
of an accounting period, must specify the Code provisions with which it has not complied, and (where relevant) for what part of
the period such non-compliance continued, and give reasons for such non-compliance.
The Code was revised in 2003 (the "new Code"). The new Code supersedes the Code for listed companies with reporting years beginning on or after 1 November 2003. However, the Company has already taken steps to ensure that it complies with the main and the supporting principles of the new Code and with its provisions.
Statement of compliance
The Board considers that it has complied with the Code throughout the year ended 31 December 2003. The Company regularly reviews and revises its procedures, as necessary, to take account of the requirements of the Code and of the new Code.
The Board
The Board meets on average six times a year and there is a formal schedule of matters and levels of authority which are delegated to the executive directors, all other matters and powers being reserved to the Board.
Throughout the year the Board comprised four non-executive directors and two executive directors. All the non-executive directors are considered to be independent. Gareth Rhys Williams was a director and the Chief executive throughout the year. Alastair Hewgill was the Finance director throughout the year. During 2003 all the directors attended all the Board meetings.
The directors bring independent judgement to bear on strategic matters, the performance of the Group, the adequacy of resources and standards of conduct. The roles of the Chairman (who is
non-executive) and of the Chief executive are separate and they each have a clear written division of responsibilities approved by
the Board. David Bell is the senior independent director and his biographical details are shown on page 19. Outside of Board meetings, the non-executive directors maintain regular contact with each other by telephone and usually meet prior to Board meetings. The same pattern of contact outside of Board meetings is planned to continue through 2004.
Directors, having notified the Chairman, are able to take independent professional advice at the Company's expense in furtherance of their duties. All new directors are given an extensive introduction to the Group, including meeting with senior executives and visiting the Group's principal operations both in the UK and overseas. All directors have access to the advice and services of the Group company secretary.
The papers supplied for consideration by the Board are provided on a timely basis and include budgets, strategy papers, reviews of the Group's financial position and operating performance and annual and interim reports and accounts. Further information is supplied from time to time as and when requested by the Board.
The Board has an Audit committee, a Remuneration committee
and a Nominations committee. Each committee has formal terms
of reference. The members of these committees are shown on
pages 18 and 19.
The terms of reference and the effectiveness of each committee have been reviewed and changes have been made in the light of
the new Code. Individual director performance evaluation has also taken place. In the case of the executive directors this evaluation takes place regularly throughout the year against achievement of specific objectives. Evaluation of the Chairman has been carried
out by the senior independent director. Evaluation of each of the other non-executive directors has been carried out by the
Chairman. Each evaluation has been carried out by using written questionnaires and has been discussed individually with each of
the relevant non-executive directors. Similar evaluations will take place each year in the future.
Audit committee
The members of the Audit committee and their biographical
details are shown on pages 18 and 19. The committee is chaired
by John Potter. Each member of the committee is required to be independent. The Company's external auditor is invited to attend meetings of the committee on a regular basis. During 2003 the committee met 3 times. One of those meetings was with the auditor, without the executive directors being present. This will continue in the future.
Duties of the committee:
Financial Reporting
Monitor the integrity of the financial statements of the Company, including its annual and interim reports, preliminary results' announcements and any other formal announcement relating to its financial performance, reviewing significant financial reporting issues and judgements which they contain.
Review the annual financial statements of the pension funds where not reviewed by the Board as a whole.
Internal Controls and Risk Management Systems
Keep under review the effectiveness of the Company's internal controls and risk management systems; and review and approve the statements to be included in the annual report concerning internal controls and risk management.
Whistleblowing
Review the Company's arrangements for its employees to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters. The committee ensures that these arrangements allow proportionate and independent investigation
of such matters and appropriate follow up action.
Internal Audit
The Company does not have an internal audit function. However,
the need for such a function is regularly reviewed and considered by the committee. (Refer to the final paragraph of Internal Control and Risk Management).
External Audit
Consider and make recommendations to the Board, to be put to shareholders for approval at the annual general meeting, in relation to the appointment, re-appointment and removal of the Company's external auditor. The committee oversees the selection process for a new auditor and, if an auditor resigns, the committee is required to investigate the issues leading to this and decide whether any action is required.
Oversee the relationship with the external auditor including, but not limited to:
approval of its remuneration, whether fees for audit or non audit services and that the level of fees is appropriate to enable an adequate audit to be conducted;
approval of its terms of engagement, including any engagement letter issued at the start of each audit and the
scope of the audit;
assessing annually its independence and objectivity taking into account relevant professional and regulatory requirements and the relationship with the auditor as a whole, including the provision of any non audit services;
satisfying itself that there are no relationships (such as family, employment, investment, financial or business) between the auditor and the Company (other than in the ordinary course
of business);
agreeing with the Board a policy on the employment of former employees of the Company's auditor, then monitoring the implementation of this policy;
monitoring the auditor's compliance with relevant ethical and professional guidance on the rotation of audit partners, the level of fees paid by the Company compared to the overall fee income of the firm, office and partner and other related requirements;
assessing annually its qualifications, expertise and
resources and the effectiveness of the audit process which
shall include a report from the external auditor on its own
internal quality procedures;
meeting regularly with the external auditor, including at the planning stage before the audit and after the audit at the reporting stage. The committee meets the external auditor at least once a year, without executive directors being present, to discuss their remit and any issues arising from the audit;
reviewing and approving the annual audit plan and ensuring that it is consistent with the scope of the audit engagement;
reviewing the findings of the audit with the external auditor. This includes but is not limited to the following;
- a discussion of any major issues that arose during the audit,
- any accounting and audit judgements, and
- levels of errors identified during the audit.
reviewing the effectiveness of the audit and reviewing any representation letter requested by the external auditor before it is signed by management;
reviewing the management letter and management's response to the auditor's findings and recommendations;
developing and implementing a policy on the supply of non audit services by the external auditor, taking into account any relevant ethical guidance on the matter.
Reporting Responsibilities
The committee chairman reports to the Board on its
proceedings after each meeting on all matters within its duties and responsibilities.
The committee makes whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed.
Other Matters
The committee has access to sufficient resources in order to carry out its duties, including access to the company secretary for assistance as required;
The committee members are provided with training as and when required, both in the form of an induction programme for new members and on an ongoing basis for all members;
The committee may oversee any investigation of activities which are within its terms of reference and act as a court of the last resort; and
At least once a year, review its own performance, constitution
and terms of reference to ensure it is operating at maximum effectiveness and recommend any changes it considers necessary to the Board for approval.
Authority
The committee is authorised to seek any information it requires
from any employee of the Company in order to perform its duties and to obtain, at the Company's expense, outside legal or other professional advice on any matter within its terms of reference. It is also authorised to call any employee to be questioned at a meeting of the committee as and when required.
Remuneration committee
The members of the Remuneration committee and their biographical details are set out on pages 18 and 19. The committee is chaired by David Bell. During 2003, the committee met three times. The Report of the Remuneration committee is set out on pages 23 to 29.
Duties of the committee:
determining and agreeing with the Board the framework or
broad policy for the remuneration of the Company's Chairman,
the executive directors, the Company secretary and such other
members of the executive management as it is designated to
consider. The remuneration of the non- executive directors shall
be a matter for the Board. No director or manager shall be
involved in any decisions as to their own remuneration;
in determining such policy, take into account all factors which it deems necessary. The objective of such policy shall be to ensure that members of the executive management of the Company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner,
rewarded for their individual contributions to the success of
the Company;
reviewing the ongoing appropriateness and relevance of the remuneration policy;
approving the design of, and determine targets for, any performance related pay schemes operated by the Company and approve the total annual payments made under such schemes;
reviewing the design of all share incentive plans for approval by the Board and shareholders. For any such plans, determine each year whether awards will be made, and if so, the overall amount of such awards, the individual awards to executive directors and other senior executives and the performance targets to be used;
determining the policy for, and scope of, pension arrangements for each executive director and other senior executives;
ensuring that contractual terms on termination, and any payments made, are fair to the individual, and the Company,
that failure is not rewarded and that the duty to mitigate loss is fully recognised;
within the terms of the agreed policy and in consultation with the Chairman and/or Chief executive as appropriate, determining the total individual remuneration package of each executive director and other senior executives including bonuses, incentive payments and share options or other share awards;
in determining such packages and arrangements, give due regard to any relevant legal requirements, the provisions and recommendations in the Code, the new Code and the UK Listing
Authority's Listing Rules and associated guidance;
reviewing and noting annually the remuneration trends across the Company or Group;
overseeing any major changes in employee benefits structures throughout the Company or Group;
agreeing the policy for authorising claims for expenses from the Chief executive and Chairman;
ensuring that all provisions regarding disclosure of remuneration including pensions, as set out in the Directors' Remuneration Report Regulations 2002, the Code and the new Code are
fulfilled; and
be exclusively responsible for establishing the selection criteria, selecting, appointing and setting the terms of reference for any remuneration consultants who advise the committee: and to obtain reliable, up-to-date information about remuneration in other companies. The committee shall have full authority to commission any reports or surveys that it deems necessary to help it fulfil its obligations.
Reporting Responsibilities
The committee chairman reports formally to the Board on its proceedings after each meeting on all matters within its duties and responsibilities.
The committee makes whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed.
Other Responsibilities
The committee, at least once a year, reviews its own performance, constitution and terms of reference to ensure it
is operating at maximum effectiveness and recommend any changes it considers necessary to the Board for approval.
Authority
The committee is authorised by the Board to seek any information it requires from any employee of the Company in order to perform its duties. The committee is also authorised by the Board, in connection with the committee's duties, to obtain, at the Company's expense, any outside legal or other professional advice.
Nominations committee
The members of the Nominations committee and their biographical details are set out on pages 18 and 19. The committee is chaired by Will Wyatt. The committee is delegated authority by the Board to deal with succession planning and making recommendations to the Board on all new Board appointments. During 2003, the committee met formally on one occasion.
Duties of the committee:
regularly review the structure, size and composition (including the skills, knowledge and experience) required of the Board in the future compared to its current position and make recommendations to the Board with regard to any changes;
give full consideration to succession planning for directors and other senior executives, taking into account the challenges and opportunities facing the company, and the skills and expertise needed on the Board in the future;
be responsible for identifying and nominating for the approval
of the Board, candidates to fill board vacancies as and when they arise;
before appointment is made by the Board, evaluate the balance of skills, knowledge and experience on the Board, and, in the light of this evaluation prepare a description of the role and capabilities required for a particular appointment. In identifying suitable candidates the committee:
uses open advertising or the services of external advisers to facilitate the search;
considers candidates from a wide range of backgrounds; and
considers candidates on merit and against objective criteria, taking care that appointees have enough time available to devote to the position;
keep under review the leadership needs of the Company,
both executive and non-executive, with a view to ensuring
the continued ability of the Company to compete effectively in
the marketplace;
keep up to date and fully informed about strategic issues and commercial changes affecting the company and the market in which it operates;
review annually the time required from non-executive directors. Performance evaluation should be used to assess whether the non-executive directors are spending enough time to fulfil their duties; and
ensure that on appointment to the Board, non-executive
directors receive a formal letter of appointment setting out
clearly what is expected of them in terms of time commitment, committee service and involvement outside board meetings.
The Committee also makes recommendations to the Board concerning:
formulating plans for succession for both executive and
non- executive directors and in particular for the key roles of Chairman and Chief executive;
suitable candidates for the role of senior independent director;
membership of the Audit and of the Remuneration committees, in consultation with the chairmen of those committees;
the re-appointment of any non-executive director at the conclusion of their specified term of office having given due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required;
the continuation (or not) in service of any director who has reached the age of 70;
the re-election by shareholders of any director under the 'retirement by rotation' provisions in the Company's articles of association having due regard to their performance and ability to continue to contribute to the Board in the light of the knowledge, skills and experience required;
any matters relating to the continuation in office of any director at any time including the suspension or termination of service of an executive director as an employee of the Company subject to the provisions of the law and their service contract; and
the appointment of any director to executive or other office other than to the positions of chairman and chief executive, the recommendation for which would be considered at a meeting of the full Board.
Reporting Responsibilities
The committee chairman reports formally to the Board on its proceedings after each meeting on all matters within its duties and responsibilities.
The committee makes whatever recommendations to the Board it deems appropriate on any area within its remit where action or improvement is needed.
Other
The committee, at least once a year, reviews its own performance, constitution and terms of reference to ensure it is operating at maximum effectiveness and recommends any changes it considers necessary to the Board for approval.
Authority
The committee is authorised by the Board to seek any information it requires from any employee of the Company in order to perform its duties. The committee is also authorised by the Board, in connection with the committee's duties, to obtain, at the Company's expense, any outside legal or other professional advice.
Appointments and re-elections to the Board
The Chairman and the other non-executive directors are appointed for an initial period of three years which, with the approval of the Nominations committee and the Board, would normally be
extended for a further three years. In exceptional circumstances, appointments of non-executive directors may be extended beyond six years, with the approval of the Nominations committee and the Board, if it is in the interests of the Group to do so.
Under the Company's articles of association, each director is required to be re-elected at the third annual general meeting following that at which he or she was last elected or re-elected.
A new non-executive director, Nigel Moore, was appointed on
1 March 2004. Mr Moore has also been appointed as a member
of the Audit committee and it is intended that he will take over the chairmanship of that committee in September. Mr Moore will be proposed for election at the 2004 annual general meeting.
Alison Carnwath, the Chairman, and David Bell, the senior independent director, both of whom are non-executive, have now served for eight years and seven years, respectively. They have significant business experience and detailed knowledge of the Group and have been asked, and have agreed, to continue in their current roles for a further period. However, as referred to in the Chairman's statement, a search process is taking place for a successor to the Chairman with a view to making an appointment during 2004.
Relations with shareholders
The Board recognises the importance of maintaining regular contact with its shareholders to ensure that its businesses, strategy and remuneration policies are understood and that any concerns are addressed in a constructive way. The Board communicates with its shareholders through a combination of public announcements through the Stock Exchange, analyst briefings and press interviews at the time of the announcements of the interim and the full year results and, when appropriate, at other times in the year. The executive directors also meet with investors from time to time during the year. The annual general meeting offers a further opportunity for the directors to meet with shareholders.
At meetings of shareholders, the level of proxy votes received, together with the numbers of votes in favour, against and abstaining, is announced after each resolution has been dealt with on a show of hands. Separate resolutions are proposed for each issue upon which shareholders are asked to vote.
The Company has complied with the requirement set out in the Code in respect of shareholders' meetings to send the notice of annual general meeting and related papers at least 20 working days before the meeting. It will continue to comply with the requirement.
Internal control and risk management
The Board is responsible for the Group's system of internal control to safeguard shareholders' investment and the company's assets (Code principle D.2). As part of its responsibility, the Board reviews the effectiveness of its internal controls. The Group has systems and procedures for internal control that are designed to provide reasonable control over the activities of the Group and to enable the Board to fulfil its legal responsibility for the keeping of proper accounting records, safeguarding the assets of the Group and detecting fraud and other irregularities. However, it is recognised that it is in the nature of any business that business and commercial risks must be taken and that for a business to succeed, enterprise, initiative and the motivation of employees are key elements that must not be unduly stifled. It is not the intention of the Group to avoid all commercial risks and commercial judgements will have to be made in the course of the management of the business.
Since its implementation of the recommendations of the Cadbury Committee Code of Best Practice through the guidance published by the Working Group on Internal Control in December 1994, the Board has adopted a risk-based approach to establishing the system of internal control. The application of Code principle D.2 and the process followed by the Board in reviewing the effectiveness of the system of internal control during the year (Code provision D.2.1) is as follows:
operating company management is charged with the
ongoing responsibility for identifying risks facing each of the businesses and for putting in place procedures to monitor and manage risks.
the responsibilities of the chief executive officer and chief financial officer at each operating unit to manage risks within their businesses are periodically reinforced by Group executive management.
major commercial, technological and financial risks are formally assessed during the annual long-term business planning process around mid-year. These plans and the attendant risks are reviewed by the Board.
large capital projects, product development projects and acquisitions require Board approval.
the process by which the Board reviews the effectiveness of internal control has been agreed by the Board and documented. This involves bi-annual reviews by the Board, of the major business risks of the Group together with the controls in place to manage those risks as reported to the Board by the chief executives of each division. In addition, at the end of each year, businesses formally review, in detail, all of their business risks and their internal controls, including finance, cash, IT, sales, purchasing and logistics. They then prepare statements that describe the extent of their compliance with control objectives. These statements are approved by the chief executive officer and chief financial officer of each operating unit and submitted to Group executive management for review. Any significant matters arising from this review are formally reported to the Board by the Finance director. The risk and control identification and
certification process is monitored and periodically reviewed by group financial management.
The Board has established a control framework within which the Group operates. This contains the following key elements:
- organisational structure with clearly defined lines of responsibility, delegation of authority and reporting requirements.
- defined expenditure authorisation levels.
- on-site and telephone conferencing operations reviews covering all aspects of each business are conducted by Group executive management on a regular basis throughout the year.
- comprehensive system of financial reporting. The annual budget and long term plan of each operating company are reviewed in detail and approved by the executive directors. The Board approves the overall Group's budget and plans. Monthly actual results are reported against prior year and monthly budgets. Forecasts are revised where necessary but formally at least once every quarter. Any significant changes and adverse variances are questioned by the Group executive directors and remedial action is taken where appropriate. Group tax and treasury is co-ordinated centrally. There is weekly cash and treasury reporting to Group financial management and periodic reporting to the Board on the Group's tax and treasury position.
The Board considers that it has fully complied during the year and up to the date of approval of the annual report and accounts with the Code provision D.2.1 as set out in the Guidance for Directors on the Combined Code, published by the Internal Control Working Party of the Institute of Chartered Accountants in England and Wales.
The Group does not have an internal audit function. However, the need for such a function is regularly reviewed (Code provision D.2.2). The current conclusion of the Board is that an internal audit function is not required given the scale, diversity and complexity of the Group's activities. Where required, third party audit consultants, independent from the companies' external auditors, are used on specific assignments. The Company believes it can access professional 'internal audit' support in the relevant country more effectively than by having an internal department. Two such outsourced audits took place in 2003.
Going concern
The directors have made appropriate enquiries and consider that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the directors continue to adopt the going concern basis in preparing the accounts.
Statement of directors' responsibilities
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 of the Group and of the profit or loss for that period. In preparing those financial statements, the directors are required to:
select suitable accounting policies and then apply
them consistently;
make judgements and estimates that are reasonable
and prudent;
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company and the 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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