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 Board of Directors at the end of the year 2009/10 comprised the Chairman, three Executive Directors and three Non-executive Directors. All three of the Non-executive 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. Gerard Connell is the Senior Independent Non-executive Director. The biographies demonstrate a broad range of business and financial experience. 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.

The Directors on the Board during the year were as listed in the emoluments table on page 44 of the 2010 Annual Report (Directors’ Remuneration Report). The Board met in accordance with its schedule of meetings on twelve occasions. All Directors were present at each meeting with the exception of Martin Angle who was absent on one occasion. 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 the subsidiary boards of South West Water and Viridor; to the Executive Directors; and to the Group General Counsel & Company Secretary, as appropriate. Recognising this policy, 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 on occasions 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 on a regular basis.

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 for the year 2009/10. The participants’ 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 made to 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 improving performance and overall governance. Arising from the evaluation the Board agreed that it would be appropriate to review the Matters Reserved to the Board and the financial limits on delegations to Directors.

The Board also considered whether there was a need in the forthcoming year for an independent and externally facilitated performance review to be carried out and noted that the new UK Corporate Governance Code of the Financial Reporting Council which applies to financial years commencing on or after 29 June 2010 stated that evaluation of the Board should be externally facilitated at least every three years. The Board agreed to consider the options available for an externally facilitated evaluation later in the year.

The Chairman’s performance was evaluated separately by the Non-executive 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.

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 during the year holds meetings with the Non-executive Directors without the Executive Directors present, to discuss performance and strategic issues.

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. 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 below.

AUDIT COMMITTEE

The Audit Committee was chaired by Gerard Connell, who has current and relevant financial experience. The other members of the Committee were Martin Angle and Dinah Nichols. During the year the Committee met on five occasions and all members were present at each meeting with the exception of Martin Angle who was absent on one occasion. In discharging its Terms of Reference the Committee receives reports and meets regularly in particular to:

• monitor the integrity of the financial statements of the Group, including a review of significant reporting judgements, prior to approval by the Board;
  
• keep under review the effectiveness of the Group’s internal controls, including all material financial, operational and compliance controls and risk management systems;
  
• monitor and annually review the effectiveness of the Group’s internal audit function and approve the annual internal audit plan;
  
• review the findings of the internal audit function and review and monitor management’s responsiveness to such findings;
  
• oversee the relationship with the external auditors including their appointment; remuneration; re appointment; removal; the monitoring of their independence and objectivity particularly having regard to the supply of any non-audit services by the auditors; and
  
• receive internal control reports from the external auditors and meet with them in the absence of management at least once a year to discuss their remit and any issues arising from the audit.

In addition the Committee periodically reviews the arrangements for, and the effectiveness of, the Group’s ‘whistleblowing’ policies (details of which are set out on page 33 of the Business Review in the 2010 Annual Report).

The Committee pays particular attention to the independence and objectivity of the auditors having regard to the Auditing Practices Board’s Ethical Standards. Periodically a review of the provision of external audit services is undertaken in accordance with guidance issued by the Committee. The last review was undertaken in 2006 when the current auditors were appointed following the carrying out of a detailed competitive tender process. The Committee also has an established policy for the engagement of the auditors for non-audit work by the Group. This involves the Group Director of Finance setting out in a report to the Committee reasons for appointing the auditors for any material work and obtaining the approval of the Committee. Such appointment will only be granted if the Committee is satisfied that the auditors’ independence and objectivity are safeguarded. This is achieved by reviewing the appointment with the auditors as considered appropriate and receiving from the auditors at the year-end a letter setting out how the auditors believe their independence and objectivity have been maintained. The Company’s current auditors ensure 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 an independent 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 Auditing Practices Board Ethical Standards recognise that fee arrangements (both their nature and size) may give rise to a self interest threat regarding auditor independence. Where such circumstances arise there is a need to put in place appropriate safeguards. The auditors have confirmed to the Committee that they have complied with all relevant guidance 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; and
  
• no aspect of the audit engagement partner’s performance being assessed on the level of non-audit fees charged to the Company.

Taking account of the above the Committee acknowledges that on occasion it is necessary to appoint the auditors to perform non-audit work in view of their specialist knowledge of such matters as the financial modelling of Private Finance Initiative (PFI) projects. There is a limited number of other professional services firms with appropriate PFI project knowledge and they are often engaged by other parties to the projects. They would therefore be unable to act for the Company due to conflicts of interest. This has been a particular issue for the Committee and the Company over the last year because it has been considered appropriate to engage the auditors on a number of waste PFIs for the reasons stated above. In addition as reported last year, the auditors provided non-audit financial advice in connection with the Greater Manchester waste PFI which reached financial close in April 2009. The fees due for successful completion of circa £1.2 million are included in Note 7 to the financial statements on page 74 of the 2010 Annual Report. The auditors are also being considered for other non-audit work during 2010/11.

The Committee has been keeping the balance between audit and non-audit work under close review and continues to ensure that it is satisfied the auditors’ independence and objectivity are safeguarded before granting permission for non-audit work to be undertaken.

The Executive Directors, South West Water and Viridor Finance Directors, the Group Financial Controller, the Group Internal Auditor and the external auditors attend meetings of the Committee by invitation. Provision is made for both the external and internal auditors to have the right of direct access to the Committee, and in particular the Committee Chairman, without the presence of any Executive Director or other Senior Management.

REMUNERATION COMMITTEE

The Remuneration Committee was chaired by Martin Angle during the year and also comprised Gerard Connell and Dinah Nichols. The Committee met on seven occasions during the year. All members were present at each meeting. The Committee is responsible for determining the Group’s remuneration policy, remuneration and terms of engagement of the Chairman and the remuneration and terms of employment of the Executive Directors and Senior Management of the Group. Members of the Remuneration Committee do not participate in decisions concerning their own remuneration. The Directors’ Remuneration Report, which also provides more information on the activities of the Remuneration Committee, appears on pages 41 to 48 of the 2010 Annual Report.

NOMINATION COMMITTEE

The Nomination Committee was chaired by Ken Harvey and also comprised Martin Angle, Gerard Connell and Dinah Nichols. It meets as and when required to select and recommend to the Board suitable candidates for appointment as Executive and Non-executive Directors, 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 the year it met on three occasions to consider the annual performance evaluation results for the Committee, to review succession planning for the Group and to consider an Executive Director’s appointment in an advisory role to an external body. All members were present at each meeting.

CORPORATE RESPONSIBILITY COMMITTEE

The Corporate Responsibility Committee was chaired by Dinah Nichols and also comprised Martin Angle, Gerard Connell and the Chief Executives of South West Water and Viridor. It met on five occasions during the year at which all members were present. The 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; corporate policies; nonfinancial regulatory compliance and the role of the Group in society.

In reporting on corporate responsibility, the Company has sought to comply with the Association of British Insurers’ Guidelines on Responsible Investment Disclosure. The Business Review on pages 2 to 37 of the 2010 Annual Report contains the Group’s 2010 Annual Corporate Responsibility Report which includes ESG matters.

COMMITTEES’ TERMS OF REFERENCE

The Terms of Reference of the Audit, Remuneration, Nomination and Corporate Responsibility Committees can be accessed under the "Board Committees" section of this website and by clicking on the links below.

Audit Commitee
Remuneration Commitee
Nomination Commitee
Corporate Responsibility 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 2009/10 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 formalised risk management policy which provides for the identification of key risks in relation to the achievement of the business objectives of the Group. This policy 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 nonfinancial risks and is continuously updated. Each business compiles (as part of its regular management reports) an enhanced and focussed 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.

INTERNAL CONTROL FRAMEWORK

As well as the risk management policy and procedures of the Group there is an 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; and
  
• 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.

INTERNAL CONTROL REVIEW

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 2009/10 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 risk management policy and the internal control framework and their operation within the Group.

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 (IFRS) as adopted by the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the
Group and the Company and of their profits and cash flows 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 estimates which are reasonable and prudent
  
• state that the financial statements comply with IFRS as adopted by the European Union.

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and the Company and to 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.

RELATIONS WITH SHAREHOLDERS

The Board encourages the participation of shareholders at the Annual General Meeting and complies with the provisions of the Combined Code in respect of relations with shareholders.

A regular dialogue with the Company’s institutional shareholders is maintained through a comprehensive investor relations programme. During the year meetings with institutional shareholders were held and attended by the Group Director of Finance and the Company’s Investor Relations Manager. On certain occasions the Chairman, the Chief Executive of South West Water and
the Chief Executive of Viridor also attended. The Group Director of Finance reports to the Board regularly on major shareholders’ views about the Company.