Corporate Governance Report

The Board has delegated authority to its committees to carry out certain tasks as defined in each committee’s respective terms of reference. The Board reviews each committee’s terms of reference against best practice and approves revised terms on a regular basis. 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 the next Board meeting.

A chart setting out the Company’s Board and Executive Committee structure is set out below.

Govenance structure

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 and Andrew Mackenzie. Paul Walsh was also a member up until his retirement from the Board in May 2009. 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:

• monitor the integrity and audit of the Company’s financial statements and any formal announcements relating to the Company’s financial performance, including a review of the significant financial reporting judgements contained within them;
• review the Company’s internal financial controls, internal control and risk management systems;
• monitor and review the effectiveness of the Company’s internal audit function;
• establish and oversee the Company’s relationship with the external auditors, including monitoring their independent status; and
• establish and oversee appropriate whistleblowing and fraud prevention arrangements within the Company.

During the year the Committee met on four occasions. At each of these meetings, the Committee met privately with the external auditors, and separately with the Head of Audit and Risk (who is responsible for internal audit).

The Committee received regular comprehensive reports from the Head of Audit and Risk, 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:

• considerations in respect of reporting during the difficult economic conditions throughout the year;
• governance structures, in particular the links between the Group’s Audit Committee and Business Unit level governance bodies;
• information technology general controls;
• succession planning and senior appointments within the Audit and Risk functions;
• review of remediation plans and lessons learned from internal control issues identified in the businesses in the Netherlands and Texas; and
• ongoing compliance with the Undertakings in respect of Centrica Storage Limited and compliance reporting in general.

The Committee members also participated in a training session during the year facilitated by Deloitte regarding current internal and external audit matters.

PricewaterhouseCoopers LLP have been the external auditor of the Group since the demerger of Centrica in 1997. Under its terms of reference, the Audit Committee makes recommendations through the Board to the shareholders to consider at the AGM, or at any time during the year, on the appointment, reappointment and removal of the external auditor. There are no contractual obligations restricting the Group’s choice of external auditor. Accordingly, following consideration, the Audit Committee has recommended to the Board that a resolution to reappoint PricewaterhouseCoopers LLP be proposed at the AGM and the Board has accepted and endorsed this recommendation.

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 13 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 Standards 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 and Paul Rayner. Paul Walsh was also a member up until the time he retired from the Board in May 2009. The Committee’s membership is comprised of a majority of independent Non-Executive Directors. The primary responsibilities of the Committee are to:

• make appropriate recommendations to the Board for the appointment of replacement or additional Directors;
• devise and consider succession planning arrangements for Directors and other senior executives; and
• regularly review the structure, size and composition of the Board and make recommendations to the Board with regard to any proposed changes.

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.

The Committee met on three occasions during the year and considered the proposed appointment of Chris Weston, Managing Director, North America, who joined the Board in July 2009. In addition to this appointment, the Committee considered:

• the reappointment of Directors retiring by rotation at the 2009 AGM;
• Board and senior management succession planning and in particular the ongoing search for a replacement in respect of Paul Walsh; and
• changes in Phil Bentley’s responsibilities, as announced in February 2009.

The members of the Corporate Responsibility Committee are Mary Francis (Chairman), Phil Bentley, Sam Laidlaw, Andrew Mackenzie, Catherine May and Chris Weston.

A report detailing the work carried out by the Corporate Responsibility Committee during the year is included within the Corporate Responsibility Review.

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 regulatory announcements, shareholder circulars, prospectuses and other documents issued by the Company comply with any applicable legal or regulatory requirements.