About Us
Corporate Governance
COMPLIANCE
The Board is committed to the highest standards of corporate governance with the aim of continuing to enhance its effectiveness. The Annual Report is the principal means of reporting to shareholders on the Board’s governance policies. This section sets out how the main and supporting principles of good corporate governance contained in Section 1 of the Combined Code (June 2008 version) which apply to the Company, have been applied in practice.The Code is publicly available on the Financial Reporting Council website frcpublications.com or by telephoning 020 8247 1264.
The Company considers that it has complied with the provisions of the Code throughout the year.
The information required to be published by Rule 7.2.6R of the UK Listing Authority’s Disclosure and Transparency Rules is set out in the Directors’ Report on page 38 of the 2010 Pennon Group Annual Report.
THE BOARD AND ITS COMMITTEES
THE BOARD
The Directors, independence and responsibilities
The Board of Directors at the end of the year 2010/11 comprised the Chairman, three Executive Directors and three Non-executive Directors. All three Nonexecutive Directors are considered to be independent as none of the relationships or circumstances set out in paragraph A.3.1 of the Combined Code apply to them. They are also considered to have the appropriate skills, experience in their respective disciplines and personality to bring independent and objective judgement to the Board’s deliberations. Their biographies on pages 36 and 37 demonstrate a broad range of business and financial experience. Gerard Connell is the Senior Independent Non-executive Director. His duties include the annual evaluation of the performance of the Chairman, deputising for the Chairman when necessary and being available as an additional point of contact on the Board for shareholders. Gerard is also chairman of the Audit Committee and in accordance with the Combined Code’s principles relating to audit committee membership he has recent and relevant financial experience (as recently he was group finance director of Wincanton Plc). Martin Angle is also a member of the Audit Committee and he has relevant financial experience as set out in his biography on page 37. There is a clear division of responsibilities between the roles of Chairman and the Chief Executives of South West Water and Viridor as recorded in the descriptions of the roles approved by the Board. All Directors are subject to re-election when they have held office for three years but at the 2011 Annual General Meeting, regardless of whether the Director has held office for three years, each Director will stand for re-election reflecting the new provision in the updated Code.
All Directors are equally accountable for the proper stewardship of the Group’s affairs with the Non-executive Directors having a particular responsibility for ensuring that strategies proposed for the development of the business are critically reviewed. The Nonexecutive Directors also critically examine the operational and financial performance of the Group and fulfil a key role in corporate accountability through their membership of the Committees of the Board. In addition the Chairman holds meetings with the Non-executive Directors without the Executive Directors present, to discuss performance and strategic issues.
How the Board operates
In accordance with Group policies the Board has a schedule of matters reserved for its decision and delegates more detailed consideration of certain matters to Board Committees; to thesubsidiary boards of South West Water and Viridor; to the Executive Directors; and to the Group General Counsel & Company Secretary, as appropriate. The matters reserved to the Board include the approval of financial statements; acquisitions and disposals; major items of capital expenditure; authority levels for other expenditure; risk management; and approval of the strategic plan and annual operating budgets.
The Board operates by receiving written reports circulated in advance of its meetings from the Executive Directors and the Group General Counsel & Company Secretary on matters within their respective business areas in the Group. Under the guidance of the Chairman, all matters before the Board are discussed openly and presentations and advice are received frequently from other senior executives within the Group or from external advisers.
Directors have access to the advice and services of the Group General Counsel & Company Secretary and the Board has established a procedure whereby Directors, in order to fulfil their duties, may seek independent professional advice at the Company’s expense. The training needs of Directors are reviewed as part of the performance evaluation process.
Performance evaluation
The Board has internal procedures to evaluate the performance of the whole Board, each Committee, the Chairman, each individual Director and the Group General Counsel & Company Secretary. The evaluation procedure relating to the Board and its Committees was administered for the year by the Group General Counsel & Company Secretary. All participants’ views were sought on a range of questions which were specifically designed to ensure objective evaluation of performance. Responses were then summarised and evaluated by the Group General Counsel & Company Secretary for the Board and each Committee to consider and determine whether any changes should be madeto be more effective. Overall performance was considered to be satisfactory but a number of views expressed by Directors on the operation of the Board and certain Committees were considered with a view to further improving performance and governance.
The Chairman’s performance was evaluated separately by the Nonexecutive Directors, led by the Senior Independent Non-executive Director. The Chairman’s other significant commitments outside the Group have not changed during the year and the Board is satisfied that such commitments do not prejudice the Chairman’s performance in relation to his Group role.
Dealing with conflicts of interest
The Board has in place a procedure for the consideration and authorisation of conflicts or possible conflicts with the Company’s interests. This is in accordance with the Directors’ interests provisions of the Companies Act 2006 and the Company’s Articles of Association which grants to Directors authority to approve such conflicts subject to appropriate conditions.
Board committees
Group policies allocate the tasks of giving detailed consideration to specified matters, to monitoring executive actions and to assessing reward, to the Board Committees as set out in the remaining sections of this governance report and the Directors’ Remuneration Report on pages 45 and 46 of the Annual Report and Accounts 2011.
Board committees’ terms of reference
The Terms of Reference of the Audit, Remuneration, Nomination and Sustainability (formerly Corporate Responsibility) Committees are available upon request to the Group General Counsel & Company Secretary and are also set out on the Company’s website pennon-group.co.uk
AUDIT COMMITTEE
With the significant growth of Viridor over the last few years a particular focus during 2011 has been seeking to ensure that the business has the policies, systems and controls in place to manage a more complex and regionalised business across the UK, whilst maintaining performance and profit growth. The Committee was pleased to note that an additional non-executive director was appointed to the Viridor board together with two additional executive directors (responsible respectively for corporate responsibility and regulatory matters; and for operations), that there are plans in place for IT systems to be enhanced and upgraded; and that detailed independent reviews had been carried out into the systems and controls in place, including site selfassessment questionnaires to assist in reinforcing the consistent application of company policy at the local level.In South West Water the emphasis has been on continuing to systematically review and challenge both its risks and the controls mitigating those risks as recorded in a corporate risk register which was further enhanced in the year. The Committee was also pleased to note that the South West Water board had appointed a further nonexecutive director and therefore now has two independent non-executive directors in addition to the nonexecutive chairman.
We have also recognised the need to continue to ensure that our approach to risk is appropriate, particularly in the current challenging economic climate and having regard to the pressures faced by the Group. We have therefore refreshed our risk review process this year and in the coming months will be carrying out a full review of the process with external assistance, bearing in mind that it is over 10 years since the Group introduced detailed risk management policies and procedures in accordance with the Turnbull Recommendations.
As part of the Group’s risk review process we have assessed the key areas of sensitivity to the Group and these are set out on pages 24 to 27. This year we have concentrated on the high level key risks to the Group and have provided an indication of how the level of risk has changed over the past year.
As reported in previous Annual Reports we continue to monitor carefully the effectiveness of our external auditors as well as their independence, bearing in mind that it is recognised there is a need to use our auditors’ firm for non-audit services from time to time. We have full regard to the Auditing Practices Board’s Ethical Standards and note that the revisions to these standards (announced in December 2010) required no change to our existing procedures and safeguards as many of the recommendations had already been adopted as best practice.
Periodically a detailed review of the provision of external auditors is undertaken in accordance with best practice. The last such review was undertaken in 2006 when the current auditors were appointed following a comprehensive competitive tender process. In addition the auditors’ appointment is reviewed annually by the Committee. As part of this annual review the Committee considers the tenure, quality and fees of the auditors.
Our policy for the engagement of the auditors’ firm for non-audit work involves the Group Director of Finance setting out in a report to the Committee reasons for appointing the auditors’ firm for any material work and obtaining the approval of the Committee. We carefully review whether it is necessary for the auditors’ firm to carry out such work and we will only grant approval for their appointment if we are satisfied that the auditors’ independence and objectivity are fully safeguarded.
The Company’s auditors assist in this process by ensuring that the senior partner responsible for the external audit of the Group remains responsible for such audit for no more than five years and that there is a Quality Review Partner who is involved in planning the audit and in the reviewing of the final accounts of the Company including assessing any critical matters which may be identified in the audit. The auditors have also confirmed to the Committee that they have complied with all relevant guidance issued by the Auditing Practices Board and have implemented appropriate safeguards including:
- all non-audit related services, where necessary, being performed by personnel independent of the audit engagement team
- no work being undertaken that would require the auditors to act in a capacity as an advocate
- no aspect of the auditing engagement partner’s performance being assessed on the level of nonaudit fees charged to the Company
- the Committee Chairman meeting with the auditors’ Quality Review Partner periodically to discuss the scope and performance of their work.
The Committee also acknowledged that the absolute level of non-audit fees payable to the Company’s auditors is similar to the level of non-audit fees incurred by a number of other comparable companies within the FTSE 350.
Another area of particular importance to the Committee is the internal audit activities of the Group. The Group has a long standing and effective centralised internal audit function together with separate reviews undertaken within both South West Water and Viridor. A Group Internal Audit Plan is approved in September each year. It takes account of the activities to be undertaken by the external auditor and also the Group’s annual and regular interim risk management reviews. This approach seeks to ensure that there is an ongoing programme of internal and external audit reviews focused on key risk areas throughout the Group. The Group Audit Manager reports quarterly to the Committee on audit reviews undertaken and their findings.
The areas of the business of the Group which received audit attention over the past year included for example – Group taxation, treasury and pensions processes and administration; South West Water payment processes, credit management and debt collection, payroll and related HR procedures, leakage management and IT security and network administration; and Viridor PFI approval processes, resource management including recyclate trading and foreign exchange management, WEEE recycling, power generation sales, landfill site practices and procedures and IS security and network administration.
We have considered a range of matters during the year in accordance with our established calendar of business and Terms of Reference including in particular:
- reviewing the accounting policies and reporting judgements adopted by the Group in preparing its financial statements. We were satisfied that they were appropriate to provide a fair assessment of the financial performance of the Group
- agreeing the external auditors’ strategy for carrying out the audit during the past financial year
- carrying out a review of the Half Year Report with the external auditors
- considering a report from the external auditors on the review of the financial year-end and meeting them in the absence of management to discuss their remit and any issues arising from the audit, including management’s treatment of significant judgements which the auditors had confirmed (following discussion with management) were considered to be satisfactory.
- considering an internal control report from the external auditors which reviewed the co-ordination of activities with the Group’s internal audit function
- keeping under review the effectiveness of the Group’s internal controls, including all material financial, operational and compliance controls and risk management systems
- monitoring and reviewing the effectiveness of the Group’s internal audit function and approving the annual internal audit plan
- reviewing the findings of the internal audit function and reviewing and monitoring management’s responsiveness to such findings
- overseeing the relationship with the external auditors including their appointment, remuneration, re-appointment and the monitoring of their independence and objectivity particularly having regard to the supply of any nonaudit services by the auditors’ firm
- reviewing the level of audit and non-audit fees paid.
REMUNERATION COMMITTEE
The Committee’s Terms of Reference
include:
- advising the Board on the framework of executive remuneration for the Group
- determining the remuneration and terms of engagement of the Chairman, the Executive Directors and Senior Management of the Group.
No Director or any other attendee participates in any discussion on, or determination of, his or her own remuneration.
During the 2010/11 the Committee received advice or services which materially assisted the Committee in the consideration of remuneration matters from Ken Harvey, Chairman of the Company, and from the following advisors who were appointed directly by the Committee:
- Ken Woodier, Group General Counsel & Company Secretary, on remuneration and share scheme matters. He also provides legal advice and company secretarial services to the Company
- Deloitte LLP, auditing and remuneration consultants, on calculating the Company’s total shareholder return compared with two comparator groups for the Company’s Performance & Co-investment Plan. Deloitte also provide financial and tax advice to the Company
- Aon Hewitt Limited (formerly Hewitt Associates Limited), pensions and remuneration consultants, on providing advice on pension benefits. Aon Hewitt also provide actuarial and investment advice to the Company and to the Trustees of the Group’s pension schemes.
NOMINATION COMMITTEE
The Nomination Committee meets as and when required to select and recommend to the Board suitable candidates for appointment as executive and non-executive directors to the Board and as executive directors to the Viridor and South West Water boards, determine the nomination process and review succession plans. It is the practice of the Committee, led by the Chairman, to appoint an external search consultancy to assist in any Board appointments.
During 2010/11 the Committee considered the annual performance evaluation results for the Committee, reviewed succession planning for the Group and considered and approved the appointment of two new executive directors to the Viridor board.
SUSTAINABILITY COMMITTEE (FORMERLY CORPORATE RESPONSIBILITY COMMITTEE)
The Sustainability Committee’s duties, in the context of the requirement for companies to conduct their business in a responsible manner (including in relation to environmental, social and governance (ESG) matters), are to review the strategies, policies, management, initiatives, targets and performance of the Pennon Group of companies in the areas of occupational health and safety and security; environment; workplace policies; non-financial regulatory compliance and the role of the Group in society.During 2010/11 the Committee considered a wide range of matters in accordance with its Terms of Reference including:
- the 2010/11 Corporate Responsibility Report and the associated Verifier’s Report
- the South West Water and Viridor Corporate Responsibility Reports
- health and safety and security plans and performance
- the Verifier’s recommendations for the next Corporate Responsibility Report
- progress against the corporate responsibility targets for 2010/11
- the corporate responsibility targets for 2011/12
- the annual review of Group policies
- a Group plan for community support.
COMMITTEES’ TERMS OF REFERENCE
The Terms of Reference of the Audit, Remuneration, Nomination and Corporate Responsibility Committees can be accessed by clicking on the links below.
Audit Commitee
Remuneration Commitee
Nomination Commitee
Sustainability Commitee
INTERNAL CONTROL
Wider aspects of internal control
The Board is responsible for maintaining the Group’s system of internal control to safeguard shareholders’ investment and the Group’s assets and for reviewing its effectiveness. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group that has been in place throughout the financial year 2010/11 and up to the date of the approval of this Annual Report and Accounts.
The Board confirms that it continues to apply procedures in accordance with the Combined Code and the ‘Guidance on Internal Control’ (The Turnbull Guidance) which suggests means of applying the internal control part of the Code. As part of these procedures the Board has a Group Risk Management Policy (GRMP) which provides for the identification of key risks in relation to the achievement of the business objectives of the Group, monitoring of such risks and annual evaluation of the overall process, as described in more detail below. The GRMP is applied by all business units within the Group in accordance with an annual timetable.
Risk identification
A full risk and control assessment is undertaken annually by the management of each business to identify financial and non-financial risks which are then regularly updated. Each business compiles (as part of regular management reports) an enhancedand focused assessment of key risks against corporate objectives. The Board at each meeting receives from the Executive Directors details of any new high-level risks identified and how they are to be managed, together with details of any changes to existing risks and their management. The subsidiary boards of South West Water and Viridor also receive at each meeting similar reports in respect of their own areas of responsibility. All Executive Directors and senior managers are required to certify on an annual basis that they have effective controls in place to manage risks and to operate in compliance with legislation and Group procedures. All of these processes serve to ensure that a culture of effective control and risk management is embedded within the organisation and that the Group is in a position to react appropriately to new risks as they arise. Details of key risks affecting the Group are set out in the Business review on pages 24 to 27 of the Annual Report and Accounts 2011.
Internal control framework
The Group also has a well established internal control framework which is operated and which applies in relation to the process for preparing the Group’s consolidated accounts. This framework comprises:
- a clearly defined structure which delegates an appropriate level of authority, responsibility and accountability, including responsibility for internal financial control, to management of operating units
- a comprehensive budgeting and reporting function with an annual budget approved by the Board of Directors, which also monitors the financial reporting process, monthly results and updated forecasts for the year against budget
- documented financial control procedures. Managers of operating units are required to confirm annually that they have adequate financial controls in operation and to report all material areas of financial risk. Compliance with procedures is reviewed and tested by the Company’s internal audit function
- an investment appraisal process for evaluating proposals for all major capital expenditure and acquisitions, with defined levels of approval and a system for monitoring the progress of capital projects
- a post-investment evaluation process for major capital expenditure and acquisitions to assess the success of the project and learn any lessons to be applied to future projects.
An evaluation of the effectiveness of overall internal control compliance by the Group is undertaken in respect of each financial year (and subsequently up to the date of this report) to assist the Audit Committee in considering the Group internal audit plan for the forthcoming financial year and also the Business review for the Annual Report. The Group General Counsel & Company Secretary initially carries out the evaluation with Directors and Senior Management for consideration by the Audit Committee and subsequently for final evaluation by the Board.
In addition the Audit Committee regularly reviews the operation and effectiveness of the internal control framework and annually reviews the scope of work, authority and resources of the Company’s internal audit function. The Committee reports and makes recommendations to the Board on such reviews. For 2010/11 and up to the date of the approval of the Annual Report and Accounts, both the Audit Committee and the Board were satisfied with the effectiveness of the GRMP and the internal control framework and their operation within the Group.
Further information on the internal control review is set out on page 39 of the Annual Report and Accounts 2011 in relation to the Audit Committee.
Going concern
The Directors consider, after making appropriate enquiries, that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.
DIRECTORS’ RESPONSIBILITIES STATEMENT
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. 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 the Company and of the profit or loss of the Group for the year.
In preparing these financial statements the Directors are required to:
- select suitable accounting policies and then apply them consistently
- make judgements and accounting estimates which are reasonable and prudent
- state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements.
The Directors confirm that they have complied with the above requirements in preparing the financial statements.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, article 4 of the International Accounting Standards (IAS) Regulation. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Each of the Directors, whose names and functions are listed on pages 36 and 37 of the Annual Report and Accounts 2011, confirms that, to the best of their knowledge:
a) the financial statements, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and of the Company and
b) the Directors’ report contained on pages 1 to 33 includes a fair review of the development and performance of the business and position of the Company and the Group, together with a description of the principal risks and uncertainties they face.
The Directors are responsible for the maintenance and integrity of the Company’s website pennon-group.co.uk Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.