Statement of compliance with the UK Corporate Governance Code
The Board of Directors are committed to high standards of corporate governance, and are accountable to shareholders for the Group’s performance in this area. This statement describes how the Group is applying the relevant principles of governance, as set out in the UK Corporate Governance Code (‘the Code’) which is available on the website of the Financial Reporting Council (‘FRC’).
The Company is a smaller company for the purposes of the Code and in consequence certain provisions of the Code either do not apply to the Company or may be judged to be disproportionate or less relevant in its case.
The Board considers that throughout 2018, Avon complied with the Code, save that the Senior Independent Director does not attend meetings with the major shareholders to listen to their views (which is explained further below).
This statement will address the main subject areas of the Code, namely leadership, effectiveness, accountability and relations with shareholders.
The Board currently comprises two Executive Directors and three Non-Executive Directors (including the Chairman). The biographical details of individual Directors are set out on pages 62 and 63. The Board considers all of the current Non-Executive Directors to be independent in judgement and character, and considered David Evans to be independent on his appointment as Chairman.
The special position and role of the Chairman under the Code is recognised by the Board and a written statement of the division of responsibilities of the Chairman and Chief Executive Officer has been agreed. The Chairman is responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its role.
The Chief Executive Officer manages the Group and has the prime role, with the assistance of the Board, of developing and implementing business strategy.
One of the roles of the Non-Executive Directors, under the leadership of the Chairman, is to undertake detailed examination and discussion of strategies proposed by the Executive Directors, so as to ensure that decisions are in the best long-term interests of shareholders and take proper account of the interests of the Group’s other stakeholders. The Chairman ensures that meetings of Non-Executive Directors without the Executive Directors are held.
Rules concerning the appointment and replacement of Directors of the Company are contained in the Articles of Association.
Amendments to the Articles must be approved by a special resolution of shareholders. Under the Articles, all Directors are subject to election by shareholders at the first Annual General Meeting (AGM) following their appointment, and to re-election thereafter at intervals of no more than three years. In line with best practice reflected in the Code, however, all current Directors will be standing for reappointment at the forthcoming AGM to be held on 30 January 2020.
The Non-Executive Directors are appointed by the Board on terms which allow for termination on three months’ notice. Copies of Executive Directors’ service contracts and terms and conditions of appointment for Non-Executive Directors are available for inspection at the Registered Office
The Chairman ensures, through the Company Secretary, that the Board agenda and all relevant information is provided to the Board sufficiently in advance of meetings and that adequate time is available for discussion of all agenda items, in particular strategic issues. The Chief Executive Officer and the Company Secretary discuss the agenda ahead of every meeting. At meetings, the Chairman ensures that all Directors are able to make an effective contribution and every Director is encouraged to participate and provide opinions on each agenda item. The Chairman always seeks to achieve unanimous decisions of the Board following due discussion of agenda items.
The Non-Executive Directors fully review the Group’s operational performance and the Board as a whole has, with a view to reinforcing its oversight and control, reserved a list of powers solely to itself which are not to be delegated to management.
This list includes appropriate strategic, financial, organisational and compliance issues, including the approval of high level announcements, circulars, the Annual Report and Accounts and certain strategic and management issues.
Examples of strategic and management issues include the following:
- Approval of the annual operating budget and the three year strategic plan.
- The extension of the Group’s activities into new business and their geographic areas (or their cessation).
- Changes to the corporate or capital structure.
- Financial issues, including changes in accounting policy, the approval of dividends, bank facilities and guarantees.
- Changes to the constitution of the Board.
- The approval of significant contracts, for example the acquisition or disposal of assets worth more than £1,000,000 or the exposure of the Company or the Group to a risk greater than £1,000,000.
- The approval of unbudgeted capital expenditure exceeding £250,000.
- The approval of quotations and sale contracts where the sales commission payable to an intermediary exceeds 10% of the net invoice price.
- Consideration and approval of all proposed acquisitions and mergers.
Each Director has full and timely access to all relevant information and the Board meets regularly with appropriate contact between meetings. All Directors receive a tailored induction to the Group from the Company Secretary on joining the Board. When appointed, Non Executive Directors are made aware of and acknowledge their ability to meet the time commitments necessary to fulfil their Board and Committee duties. Procedures are in place, which have been agreed by the Board, for Directors, where necessary in the furtherance of their duties, to take independent professional advice at the Company’s expense and all Directors have access to the Company Secretary.
The Company Secretary is responsible to the Board for ensuring that all Board procedures and governance requirements are complied with. The removal of the Company Secretary is a decision for the Board as a whole.
Of particular importance in a governance context are the three committees of the Board, namely the Remuneration Committee, the Nomination Committee and the Audit Committee. Each Committee operates under clear terms of reference, copies of which are available on our website. Detail of the operation of each Committee is provided within the relevant Committee report.
The members of the Committees comprise the Chairman and all the Non-Executive Directors. The Company Secretary advises and acts as a secretary to the Committees.
The Non-Executive Directors continue to regard the Chairman as adding significant value to the deliberations of the Audit Committee and his membership is ratified by Provision C.3.1. of the Code, which permits listed companies outside the FTSE 350 to allow the Chairman to sit on the Audit Committee where he or she was considered independent on appointment as Chairman. Pim Vervaat is Chairman of the Audit Committee. The Board is satisfied that Mr Vervaat has recent relevant financial experience and his profile appears here.
David Evans is Chairman of the Nomination Committee but, in accordance with the Committee’s terms of reference, is not permitted to chair meetings when the Committee is dealing with matters relating to the Board Chair’s position.
Chloe Ponsonby is Chair of the Remuneration Committee. The Remuneration Committee’s principal responsibilities are to decide on remuneration policy on behalf of the Board and to determine remuneration packages and other terms and conditions of employment, including appropriate performance related benefits for the Executive Directors and other senior executives. The Remuneration Committee also has regard to the remuneration of the wider workforce.
All Committee and Board meetings held in the year were quorate. Directors’ attendance during the year ended 30 September 2019 was as follows:
* Attended by invitation
The Board continually strives to improve its effectiveness and conducts an annual review of its performance and that of its Committees and the individual Directors to enhance overall Board effectiveness. The 2019 Board evaluation process was conducted internally using questionnaires and interviews, led by the Chairman and facilitated by the Company Secretary. The questionnaire completed by all Board members and the Company Secretary was structured to provide Directors with the opportunity to express views on a variety of topics including: Board remit and responsibilities, skills and dynamics of the Board, meetings and content, group strategy, internal control and risk management, decision making and communication.
A detailed discussion of the findings from the performance evaluation were reviewed at the September Board meeting. Overall the results of the evaluation concluded that the Board, its Committees and individual Directors performed effectively during 2019, both individually and as a collective unit. The following areas have been identified by the Board as areas of focus for 2020 and beyond: succession planning, successful induction of new Non-Executive Directors and increasing board engagement with the wider workforce.
Led by the Senior Independent Director, Pim Vervaat, the Chairman’s assessment was also carried out using a questionnaire completed by all Directors. The results were discussed at the September meeting and the conclusion was that the Board was satisfied with the Chairman’s commitment and performance.
The Board has an established framework of internal controls covering both financial and non-financial controls. In addition, there is an ongoing process for identifying, evaluating and managing significant business risks faced by the Group. This process was in place throughout the 2019 financial year and accords with the FRC’s Guidance for Directors on Internal Control.
The Code requires that Directors review the effectiveness of the Group’s system of internal controls on a continuing basis. The scope of this review covers all controls including financial, operational and compliance controls, as well as risk management. The Audit Committee has responsibility to review, monitor and make policy recommendations to the Board upon all such matters.
The Board, through the Audit Committee, keeps this system under continuous review and formally considers its content and its effectiveness on an annual basis. Such a system can provide only reasonable, and not absolute, assurance against material misstatements or losses. The section on internal control in the Audit Committee Report on pages 69 to 72 and the following paragraphs describe relevant key procedures within the Group’s systems of internal control and the process by which the Directors have reviewed their effectiveness.
Systems exist throughout the Group which provide for the creation of three year plans and annual budgets; monthly reports enable the Board to compare performance against budget and to take action where appropriate.
Procedures are in place to identify all major business risks and to evaluate their potential impact on the Group. These risks are described within the Strategic Report on pages 46 to 51 of the annual report.
Risk is managed by the Group Executive team during the year, led by the Company Secretary and the Deputy Chief Financial Officer. The Group Executive team sets its key priorities for successfully managing the Group’s businesses. This process inherently addresses risk and the Company Secretary leads an exercise that ensures the known risks to the businesses, together with any newly identified and emerging risks, are assessed and analysed effectively and that the priorities eliminate, minimise, control or transfer risk (or the effect thereof) as appropriate. There is also a review of the continuing effectiveness of other aspects of the control environment by the Group and Divisional Executive teams to ensure these controls are mitigating risk to the fullest extent in practice.
The Board carried out quarterly reviews of the key risks facing the Group and risk management activities undertaken during the year, following the quarterly reviews conducted by the Group Executive management team.
The Board also carried out an annual review of the major business risks affecting the Group, including macro risks. In the year under review, the risk assessments carried out both at business level and at Board level continued to be reviewed and strengthened.
There is a clearly defined delegation of authority from the Board to the business units, with appropriate reporting lines to individual Executive Directors. There are procedures for the authorisation of capital expenditure and investment, together with procedures for post-completion appraisal.
Internal controls are in existence which provide reasonable assurance of the maintenance of proper accounting records and the reliability of financial information used within the business or for publication.
The Group finance department manages the financial reporting process to ensure that there is appropriate control and review of the financial information including the production of the consolidated annual accounts. Group Finance is supported by the operational finance managers throughout the Group, who have the responsibility and accountability for providing information in keeping with the policies, procedures and internal best practices as documented in the internal control manual.
The Board has issued a Code of Conduct which reinforces the importance of a robust internal control framework throughout the Group. The Board recognises that an open and honest culture is key to understanding concerns within the business and to uncovering and investigating any potential wrongdoing. The Code of Conduct sets out the procedure whereby individuals may raise concerns in matters of financial reporting or any other matter of concern with management or directly with the Chairman of the Audit Committee, or anonymously through our ‘Speak Up’ process, to ensure independent investigation and appropriate follow up action. The Code of Conduct is reviewed annually.
Although the Board itself retains the ultimate power and authority in relation to decision making, the Audit Committee meets at least three times a year with management and external auditors to review specific accounting, reporting and financial control matters. This Committee also reviews the interim, preliminary and annual statements and has primary responsibility for making a recommendation on the appointment, reappointment and removal of external auditors.
The Directors regard regular communications with shareholders as extremely important. All members of the Board receive copies of analysts’ reports of which the Company is made aware and receive an investor relations report from the Chief Financial Officer at every Board meeting.
The Board reports formally to its shareholders in a number of ways, including regulatory news announcements or press releases in response to events or routine reporting obligations, a detailed Annual Report and Accounts and, at the half year, an interim report.
Regular dialogue takes place with institutional shareholders, including presentations after the Company’s preliminary announcements of the half and full year results. The Board receives comments from analyst meetings and shareholder meetings after both interim and final results and at other times during the year.
Shareholders have the opportunity to ask questions at the AGM and also have the opportunity to leave written questions with the Company Secretary for the response of the Directors. The Directors also make themselves available after the AGM to talk informally to shareholders, should they wish to do so, and respond throughout the year to any correspondence from individual shareholders.
At the AGM on 30 January 2020, the Board will be following the recommendations in the Code regarding the constructive use of Annual General Meetings; as usual, the agenda will include a presentation by the Chief Executive Officer on aspects of the Group’s business and an opportunity for shareholders to ask questions. The level of proxies received for each AGM resolution is declared after the resolution has been dealt with on a show of hands, providing no poll has been called for.
The Board has no plans to introduce poll voting on all business at general meetings as a substitute for using proxy votes, as this is not a requirement of the Code.
The Non-Executive Directors, having considered the Code with regard to relations with shareholders, are of the view that it is most appropriate for the shareholders to have regular dialogue with the Executive Directors. The results of all dialogue with shareholders are communicated to the Board and reviewed by all Non-Executive Directors. However, should shareholders have concerns, which they feel cannot be resolved through normal shareholder meetings, the Chairman, Senior Independent Non- Executive Director and the remaining Non-Executive Director may be contacted through the Company Secretary.
Disclosures in respect of the DTR requirements under DTR 7.2.6 are given in the Directors’ Report on pages 90 to 93 and have been included by reference.
After making appropriate enquiries, the Directors have, at the time of approving the financial statements, formed a judgement that there is a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.
This conclusion is based on a review of the resources available to the Group, taking account of the Group’s financial projections together with available cash and committed borrowing facilities.
In reaching this conclusion, the Board has considered the magnitude of potential impacts resulting from uncertain future events or changes in conditions, the likelihood of their occurrence and the likely effectiveness of mitigating actions that the Directors would consider undertaking.
The Directors have assessed the viability of the Group over a three-year period to September 2022, taking account of the Group’s current position and the potential impact of the principal risks documented in the Strategic Report. Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to September 2022.
In making this statement, the Directors have considered the resilience of the Group, taking account of its current position, the principal risks facing the business in severe but reasonable scenarios, and the effectiveness of any mitigating actions.
This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period. In making their assessment, the Directors have taken account of the Group’s strong net cash position and the increase during the year of the Group’s revolving credit facility which covers the three year lookout period. During the year the Group has complied with all covenant requirements attached to its financing facilities.
The Directors consider the three-year lookout period to be the most appropriate as this aligns with the Group’s own strategic planning period. The Group has developed an annual business planning process, which comprises a Strategic Plan, a financial forecast for the current year and a financial projection for the forthcoming three years. This plan is reviewed each year by the Board as part of its strategy setting process. Once approved by the Board, the plan provides a basis for setting all detailed financial budgets and strategic actions that are subsequently used by the Board to monitor performance. The forecast performance outlook is also used by the Remuneration Committee to establish the targets for both the annual and longer term incentive schemes.