The Board of Directors is committed to the highest standards of corporate governance and believes that such standards are critical to overall business integrity and performance.
This report explains how the Company applies the principles of the 2006 Combined Code on Corporate Governance (the Code).
The Directors consider that the Board effectively leads and controls the Group. The powers of the Directors are set out in the Company’s Articles of Association (Articles), which are available on the Company’s website. To accommodate recent changes in company law, the Company adopted a new set of Articles at the 2008 Annual General Meeting.
The Board has a schedule of matters specifically reserved for its approval, which is also available for inspection on the Company’s website. In particular, the Board is responsible for:
The Chairman and each Non-Executive Director has provided assurance to the Board that they remain fully committed to their respective roles and can dedicate the necessary amount of time to attend to the Company’s affairs.
| Board | Audit Committee | Remuneration Committee | Nominations Committee | Corporate Responsibility Committee | |
|---|---|---|---|---|---|
|
|||||
| Number of meetings | 12 | 4 | 5 | 3 | 4 |
| Roger Carr | 12 | 4 | 3 | ||
| Sam Laidlaw | 12 | 3 | 4 | ||
| Phil Bentley | 12 | 4 | |||
| Mark Hanafin (i) | 7 | ||||
| Nick Luff | 12 | ||||
| Jake Ulrich (ii) | 3 | ||||
| Helen Alexander | 11 | 4 | 5 | 2 | |
| Mary Francis | 12 | 4 | 5 | 3 | 4 |
| Andrew Mackenzie | 11 | 3 | 5 | 3 | 4 |
| Paul Rayner | 11 | 4 | 3 | 2 | |
| Paul Walsh | 7 | 3 | 2 | 1 | |
The Board holds regular scheduled meetings throughout the year. Unscheduled supplementary meetings also take place as and when necessary. During the year, the Company had nine scheduled meetings and three unscheduled supplementary meetings. A committee of the Board, set up solely to consider and approve technical aspects of the Company’s Rights Issue, met on three further occasions during the year.
The Board continually monitors the development of the Group’s strategy and one of its meetings is specifically devoted to this. Comprehensive papers are presented to, and discussed by, the Board during this review. During the year, the Board undertook a full review of the Group’s overall strategy with the assistance of an independent external consultant.
Details of attendance by Directors at Board and committee meetings during 2008 are set out in the table above.
Directors who were unable to attend specific Board or committee meetings reviewed the relevant briefing papers and provided their comments to the Chairman of the Board or committee, as appropriate.
The Board is made up of an appropriate balance of Executive and independent Non-Executive Directors. The roles of Chairman and Chief Executive are separate. This established division of responsibility is formalised in writing and has been approved by the Board.
The Non-Executive Directors play a key governance role and bring an external dimension to the Board’s deliberations through their range of knowledge, experience and insight from other sectors. As part of its annual review of corporate governance, the Board considered the independence of each Non-Executive Director (other than the Chairman) against the criteria specified in the Code and determined that each remained independent.
During the year the Non-Executive Directors, including the Chairman, met independently of management on a regular basis.
A formal, rigorous and transparent process is followed during the selection and subsequent appointment of new Directors to the Board. This process is described in the section on the Nominations Committee. On 14 July 2008, Mark Hanafin was appointed to the Board as Managing Director, Centrica Energy and Europe and he will be seeking reappointment as a Director of the Company at the 2009 Annual General Meeting (AGM). Mark Hanafin replaced Jake Ulrich, who resigned from the Board on 12 May 2008. On 26 February 2009, the Chairman announced a number of changes to the composition of the Board. Chris Weston, who is currently Managing Director of British Gas Services will be appointed to the Board on 1 July 2009 and will assume responsibility for the Company’s North American business following Deryk King’s retirement. Chris Weston will therefore seek reappointment to the Board at the 2010 Annual General Meeting. Phil Bentley will assume responsibility for the newly combined British Gas business and will remain a member of the Board. Paul Walsh, who has served as a Non-Executive Director since March 2003, will retire from the Board at the conclusion of the AGM. A search for a suitable replacement has commenced.
In accordance with the Companies Act 2006, the Board considered and authorised each Director’s reported actual and potential conflicts of interest during the year. Each Director abstained from approval of their own reported conflicts. The Board will continue to monitor and review potential conflicts of interest on a regular basis.
In accordance with the Code and the Company’s Articles, all Directors are subject to reappointment by shareholders at the first AGM following their appointment to the Board and thereafter are subject to reappointment every third year. Non-Executive Directors are initially appointed for a three-year term and, subject to review and reappointment by shareholders, can serve up to a maximum of three such terms. Upon the recommendation of the Nominations Committee, Mark Hanafin, Sam Laidlaw and Andrew Mackenzie will be proposed for reappointment at the 2009 AGM, each to serve a three-year term. The Code states that any length of service beyond six years for a Non-Executive Director should be subject to particularly rigorous review and should take into account the need for progressive refreshing of the Board. In view of this, Helen Alexander, who joined the Board in January 2003, is and will in future seek reappointment to the Board on an annual basis.
Full details of Directors’ service contracts, emoluments and share interests are set out in the Remuneration Report. Read the Directors’ biographies including their Board committee membership.
In accordance with the Articles, the Company has granted a deed of indemnity, to the extent permitted by law, to each Director and the General Counsel & Company Secretary. The Company also maintains directors’ and officers’ liability insurance for its Directors and officers.
The Board conducted a formal evaluation of its own performance and that of its committees and individual Directors. The evaluation was carried out with the assistance of an independent external facilitator, Egon Zehnder International, in respect of the year ended 31 December 2008.
The 2008 Board evaluation process followed up on the previous year’s effectiveness review and the Board considered whether sufficient improvements had been made on the identified issues. The 2008 Board evaluation focused on the following key themes: board structure, organisation and dynamics; efficiency and effectiveness; strategic review and debate; risk management and governance; review of specific decisions made in 2008; business performance; people; and key issues for 2009.
The facilitator carried out the evaluation process using a comprehensive questionnaire, which was considered and completed by each of the Directors and the General Counsel & Company Secretary. In addition to this, the Senior Independent Director chaired a meeting of the independent Non-Executive Directors in the absence of the Chairman to appraise the Chairman’s individual performance.
A consolidated report of the output from the evaluation exercise was prepared by the facilitator and this was presented to the Board for review and consideration.
The evaluation report concluded that the Board and its committees continue to operate effectively although a small number of actions and improvements were identified. In particular, the Board identified the following enhancements, which will be incorporated into the future Board programme to ensure that the operation of the Board and its committees continue to improve:
The Chief Executive’s performance is reviewed regularly by the Chairman and the Chief Executive reviews the performance of the other Executive Directors. In addition, the Remuneration Committee assesses the performance of the Executive Directors in connection with its determination of senior management remuneration levels as explained in the Remuneration Report.
The Board and its committees will continue to review critically their procedures, effectiveness and development throughout the year ahead.
All new Directors appointed to the Board receive a comprehensive induction briefing tailored to meet their individual needs. Ongoing development and training is provided to Directors at Board meetings and, where appropriate, committee meetings. During the year, Directors received regular updates and presentations on changes and developments to the business, and to the legislative and regulatory environments in which the Group operates.
In particular, the Board was briefed on the following key issues during 2008:
The Directors have full access to the advice and services of the General Counsel & Company Secretary. They also have the option to seek independent professional advice in respect of their duties at the Company’s expense.
The Board has delegated authority to its committees to carry out certain tasks as defined in each committee’s respective terms of reference. During the year, the Board conducted a comprehensive review of each of its committees’ terms of reference against best practice and approved revised terms. The written terms of reference for the Audit, Remuneration, Nominations, Corporate Responsibility, Executive and Disclosure Committees are available on the Company’s website and hard copies are available upon request.
All of the independent Non-Executive Directors are members of the Audit, Remuneration and Nominations Committees. The Board considers that this membership structure provides a consistency of membership within each of these principal committees and avoids undue reliance on particular members. Minutes of committee meetings are made available to all Directors on a timely basis and the chairmen of each of the Audit, Remuneration, Nominations and Corporate Responsibility Committees provide updates to the Board at subsequent Board meetings.
A chart setting out the Company’s Board and Executive Committee structure is set out below.
Details of each committee, including membership, are set out in the following committee reports:
The members of the Audit Committee are Paul Rayner (Chairman), Helen Alexander, Mary Francis, Andrew Mackenzie and Paul Walsh. In accordance with the Code, Paul Rayner is identified as having recent and relevant financial experience. The Board has determined that each member of the Committee is independent and that the membership meets the requirements of the Code.
The key function of the Audit Committee is to review the effectiveness of the Company’s financial reporting and internal control policies together with the procedures for the identification, assessment and reporting of risks. In accordance with its terms of reference, the Committee is authorised by the Board to:
During the year the Committee met on four occasions. At each of these scheduled meetings, the Committee met privately with the external auditors, and separately with the Head of Internal Audit.
The Committee received regular comprehensive reports from the Head of Internal Audit, senior management and the external auditors, PricewaterhouseCoopers LLP. The Committee also requested clear objectives, timescale and achievement milestones against which performance could be clearly measured in respect of all ongoing issues.
The Committee considered a number of key issues during the year and in particular reviewed:
The Board has approved policies that restrict the types of non-audit work that can be undertaken by the external auditors and restrict the employment by the Group of former employees of the external auditors. The award of non-audit work, within categories that the external auditors are permitted to carry out under the Board-approved policies, is subject to pre-clearance by the Audit Committee if the fee exceeds specified thresholds. The Group’s policy to seek competitive tenders for all major consultancies and advisory projects is set out in note 7 to the Financial Statements. In addition, the Committee was provided with reports of all non-audit assignments awarded to the external auditors and, on a regular basis, a full breakdown of non-audit fees incurred during the year.
In accordance with International Standard on Auditing (UK & Ireland) 260 and Ethical Statement 1 issued by the Accounting Practices Board, and as a matter of best practice, the external auditors have confirmed their independence as auditors of the Company, in a letter addressed to the Directors.
A report detailing the composition, responsibilities and work carried out by the Remuneration Committee during the year, including an explanation of how it applies the principles of the Code in setting Executive Directors’ remuneration, is included within the Remuneration Report.
The members of the Nominations Committee are Roger Carr (Chairman), Helen Alexander, Mary Francis, Sam Laidlaw, Andrew Mackenzie, Paul Rayner and Paul Walsh. The Committee’s membership is comprised of a majority of independent Non-Executive Directors. The primary responsibilities of the Committee are to:
The Committee met on three occasions during the year and considered the proposed appointment of Mark Hanafin as Managing Director, Centrica Energy and Europe to replace Jake Ulrich, who resigned from the Board on 12 May 2008.
In making its appointment recommendations to the Board, the Committee reviews the overall balance of skills, knowledge and experience on the Board against current and future requirements of the Company and, as appropriate, draws up a list of required candidate attributes.
In addition to this appointment, the Committee considered:
The members of the Corporate Responsibility Committee are Mary Francis (Chairman), Phil Bentley, Deryk King, Sam Laidlaw, Andrew Mackenzie and Catherine May.
A report detailing the work carried out by the Corporate Responsibility Committee during the year is included within the Corporate Responsibility section.
The members of the Executive Committee are the Executive Directors and those key senior managers whose biographical details are set out in the Board of Directors and Executive team section. Sam Laidlaw is Chairman of the Committee.
The Committee is responsible for the day-to-day management of the Group’s operations within the limits set out in the Group’s delegation of authority, which was reviewed and approved by the Board during the year. The Committee also has a schedule of matters specifically reserved for its approval.
The Committee has delegated certain tasks to the following sub-committees:
During the year, the Committee conducted a thorough review of the terms of reference in respect of the Group Financial Risk Management, Health, Safety and Environment, and Investment Committees and approved revised terms.
The members of the Disclosure Committee are Sam Laidlaw (Chairman), Nick Luff and Grant Dawson.
The Committee met on a number of occasions during the year and is responsible for implementing and monitoring systems and controls in respect of the management and disclosure of inside information. The Committee is also responsible for ensuring that all regulatory announcements, shareholder circulars, prospectuses and other documents issued by the Company comply with any applicable legal or regulatory requirements.
The Board recognises the importance of maintaining an effective investor relations and communication programme as part of its ongoing relationship with the Company’s shareholders. The Board is proactive in obtaining an understanding of shareholder views on a number of key matters affecting the Group.
The Chief Executive and Group Finance Director held regular meetings with the Company’s major shareholders during the year. A key topic of discussion during the year was the Company’s Rights Issue, which was succesfully completed during December 2008, following approval at the Company’s General Meeting held on 21 November 2008.
The Chairman and the Senior Independent Director attended the meetings at which the annual and interim results were presented to major investors and analysts. The Chairman also met a number of major institutional shareholders during the year to gain a first-hand understanding of their concerns and key issues.
The Company’s AGM provides all shareholders with the opportunity to further develop their understanding of the Company and to ask questions of the full Board on the matters put to the meeting, including the Annual Report. At the AGM, the Chairman and the Chief Executive present a review of the Group’s business. A poll is conducted on each resolution at all Company General Meetings. All shareholders also have the opportunity to cast their votes in respect of proposed resolutions by proxy, either electronically or by post.
Mary Francis, the Senior Independent Director, is available to shareholders if they have concerns that contact through the normal channels has either failed to resolve or is deemed inappropriate.
Formal reports of investor feedback are presented to the Board at each Board meeting.
Centrica’s website contains up-to-date information for shareholders and other interested parties including share price information, news releases, speeches from the AGM, presentations to the investment community and a section on shareholder services. The Company’s Annual Report and Annual Review are also published on the website and these are available to shareholders from the date of publication.
Throughout the year ended 31 December 2008, the Company fully complied with the provisions set out in Section 1 of the Code with the exception of provision A.4.3 which currently states that no individual should be appointed to a second chairmanship of a FTSE 100 company. In July 2008, the Chairman of the Company was appointed as chairman of Cadbury plc following its demerger from Cadbury Schweppes plc. The Board believes that the Chairman’s commitment and contribution to the Company will not suffer as a consequence of this appointment. This provision has been removed from the new 2008 Combined Code, which the Company will report against in 2010.
The Board regards the identification and assessment of risks, together with the mitigating internal controls, to be fundamental to achieving the Group’s strategic objectives. It either directly or through its committees, sets objectives, performance targets and policies for management of key risks facing the Group. The Board has overall responsibility for the Group’s system of internal control and risk management which is designed to manage rather than eliminate the risk of failure to achieve the objectives and can provide only reasonable, and not absolute, assurance against material misstatement or loss.
Across the Group, each business has a Risk Management Committee that seeks to identify, assess and advise on the management of risks. These assessments are reported to the Group Risk Management Committee to develop the Company’s overall risk profile including those risks that might affect the Company at Group level. Where significant risks have been identified, a control infrastructure has been established to ensure day-to-day monitoring and management of risks. The Centrica Executive Committee reviews the risks identified by the Group Risk Management Committee at its monthly meetings to assure itself that the significant risks facing the Group are being managed appropriately. Centrica Storage Limited, which is subject to undertakings given to the Secretary of State for Business, Enterprise and Regulatory Reform, operates separately but to the same standards of internal control and risk management as the rest of the Group. The processes of newly-acquired companies are integrated with those of the Group.
At each of its four meetings in 2008, the Audit Committee received a Group Risk Report providing an assessment of the key risks facing the Company including the adequacy of the associated controls. Details of the principal risks and uncertainties. In addition, the Audit Committee is provided with the results of internal audit reviews conducted by the internal audit function according to a plan approved by the Committee. These reports, supplemented by management presentations, enable the Audit Committee to track a number of issues, monitor performance against objectives and ensure that necessary actions are taken to remedy any significant failings or weaknesses identified from those reports. The Chairman of the Audit Committee reported the issues discussed and conclusions reached at the following Board meeting.
A process of hierarchical self-certification has been established throughout the Group whereby the effectiveness of internal controls and compliance with Group business principles and policies, are assessed. In 2008 the self-certification process was completed at half year and full year ends. The results of the annual process, together with the conclusions of the internal reviews by Internal Audit, informs the annual assessment performed by the Audit Committee.
The Board, with the advice of the Audit Committee, has reviewed the effectiveness of the system of internal control, for the period from 1 January 2008 to the date of this report, and is satisfied that the Group complies with the Turnbull Guidance. The Board will continue routinely to challenge management in order to ensure that the system of internal control is constantly improving.
After making enquiries, the Board has a reasonable expectation that the parent Company and the Group as a whole has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Board continues to adopt the going concern basis in preparing the Financial Statements. Further details of the Group’s liquidity position and going concern review are provided in note 4 of the Financial Statements.
The Directors are responsible for preparing, in respect of each financial year, the Annual Report and Group Financial Statements. They are also responsible for ensuring that the Financial Statements give a true and fair view and that they have been properly prepared in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union.
The Group Financial Statements have been prepared in accordance with the Companies Act 1985 and IFRS pursuant to Article 4 of the IAS Regulations. The parent Company Financial Statements have been prepared in accordance with the Companies Act 1985 and United Kingdom Generally Accepted Accounting Practice. The Directors’ Report and the Remuneration Report have been prepared in accordance with the Companies Act 1985 and the UK Listing Authority Listing Rules.
In preparing the Financial Statements the Directors are required to:
The Directors confirm that they have complied with the above requirements in preparing the Financial Statements. The Directors also confirm that the Directors’ Report contained within the Annual Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the Financial Statements and the Directors’ Remuneration Report comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Each of the Directors who held office at the date of approval of this Directors’ Report confirm that: so far as they are aware, there is no relevant audit information of which the Company’s auditors are unaware; and they have taken all steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.
The Company has not entered into an auditor liability limitation agreement with its auditors during the year.
