As Chairman I have taken a leading role in supporting the governance agenda and upholding good principles of corporate behaviour at Bodycote recognising that good governance serves to ensure that the business is run to achieve growth on a controlled and ongoing basis. There have been various changes during the year to the narrative and remuneration reporting regulations. The Board has reviewed and discussed the impact of these new regulations and has implemented them where appropriate. The important governance developments at Bodycote over the last year are detailed in Governance reporting below.
We have made a number of improvements in Board processes and will continue to do so in the coming year. During Q3 of 2014 we will update our review of the Group's strategy, capitalising on the work performed in September 2013.
The policy of the Board is to manage the affairs of the Company in accordance with the principles of corporate governance contained in the UK Corporate Governance Code by promoting wide discussions on topics to which Board members contribute and demonstrate mutual engagement. We strive to maintain best practice and continually seek to improve our practices for the benefit of our shareholders.
I also wish to invite all shareholders to attend the AGM, which will be held at our Macclesfield head office on the 29 April 2014. This event provides an excellent opportunity to meet the Executive and independent Non-Executive Directors.
|Key actions in 2013||Priorities for 2014|
- Implement actions from the 2012 external Board Evaluation
- Process recommendations from the 2013 strategy review
- Continued focus on management development and succession planning
- Board visits to meet the Swedish team and one of the US teams
- New Remuneration Committee Chairman appointed and smooth transition and handover completed
- Recruit a new independent director to chair the Audit Committee as of the 2015 AGM
- Continued emphasis on external Board training
- Board Succession Planning
Bodycote is a global business with operations in 26 countries and diversity is an integral part of how we do business. The Nomination Committee considers diversity when making appointments to the Board, taking into account relevant skills, experience, knowledge, personality, ethnicity and gender. Our prime responsibility, however, is the strength of the Board and our overriding aim in any new appointment must always be to select the best candidate. We have made progress in addressing the issue of Board gender and diversity by appointing Eva Lindqvist to the Board as a Non-Executive Director on 1 June 2012. We will further address this issue when we discuss Board Succession Planning in the coming year. The Board is kept deliberately small and currently comprises two Executive Directors and three Non-Executive Directors and a Non-Executive Chairman. We believe it is difficult to set targets or timescales for the percentage of women, or any other group, on our Board and do not propose to set a target for the percentage of women on our Board.
Female representation on our Board is currently 17% and at manager level it is 23%. We will increase female representation on the Board if appropriate candidates are available when Board vacancies arise. Females represent 17% of our total workforce.
The Corporate responsibility and sustainability section contains further details of the male and female representation within the Group, including Board representation.
Following 2012's external Board Evaluation, the Board agreed to undertake an internal evaluation in 2013.
To ensure that all aspects of good governance would be covered by the review the Company Secretary distributed to each member a tailored questionnaire. Questions were framed under the following seven headings:
- Remit and objectives;
- Composition, training and resources;
- Corporate governance / risk management;
- Stakeholder engagement;
- Board meetings and visits;
- Board procedures and administration; and
- Evaluation and effectiveness.
At a meeting of the Nominations Committee in October 2013, the directors assessed the conclusions reached and a number of recommendations are now in the process of being implemented. Additional emphasis will be placed on risk management and certain operational matters. The Board evaluation covered the activities of the main Board and each of its Committees.
As in previous years, the Chairman has assessed the performance of each Board member by conducting individual interviews and we can confirm that all directors continue to perform effectively and demonstrate commitment to their roles.
The overall conclusion is that the Board is performing well and high governance standards have been adopted. It was apparent that the Executive is strongly challenged when appropriate. The Board is satisfied with the Chairman's commitment and performance.
Arising from the exercise, the Board has concluded that its focus should remain on divisional growth strategies, technology development, risk and sustainability as well as continued training.
The Executive Directors Messrs S.C. Harris and D.F. Landless were also appraised in February 2014.
Led by the Senior Independent Non-Executive Director, the Directors have carried out an evaluation of the Chairman's performance in October 2013.
All new directors are subject to a tailored induction programme covering a diverse range of topics including trading assessment methods, investor relations, organisational and legal matters. The Board receives training via ad hoc presentations and papers from advisers and the Company Secretary. External periodic training on important topics takes place through the Deloitte Academy and during the year the directors received training on trends in financial reporting, corporate governance, remuneration reporting and cyber crime.
Succession planning ensures that appropriate senior leadership resources are in place to achieve Bodycote's strategic objectives. The plans are reviewed annually by the Nomination Committee.
The Board further develops its knowledge and gains greater visibility of executive talent and management succession by visiting the Group's sites and meeting with key talent and senior executives.
The road map for Non-Executive refreshment was reviewed by the Nomination Committee at the December 2013 meeting.
As a number of our Non-Executive Directors have a tenure of 6 years or more, it is planned to refresh the Board gradually over the next three years.
In respect of the financial year 2013 Bodycote's obligation under the Disclosure and Transparency Rules is to prepare a corporate governance statement with reference to The UK Corporate Governance Code issued by the FRC in September 2012 (the 'Code').
In respect of the year ended 31 December 2013 Bodycote has complied with the provisions of the Code with the exception of provision E1.1. As in previous years, the Board has taken the view that generally it is the responsibility of the Chief Executive and the Finance Director to manage relationships with institutional investors. The Chairman also meets institutional investors to discuss overall strategy, governance and any concerns that shareholders may have. Only where these more usual channels of communication have failed would the Board expect the Senior Independent or other Non-Executive Directors to become involved, notwithstanding that the Code specifies attendance of the Senior Independent Non-Executive Director (SID) at meetings with major shareholders. During the year the SID contacted major shareholders and offered to facilitate meetings with them should they have any concerns they wished to discuss. To date, no meetings have been requested. Regular feedback by the Company's advisers on investor meetings and results presentations is circulated to all directors.
Apart from this distinct area, Bodycote was in compliance with the provisions of the Code throughout 2013.
Operation of the Code
Taken together with the Report of the Audit Committee, the Report of the Nomination Committee and the Board report on remuneration, this statement explains how Bodycote has applied the principles of good corporate governance set out in the 2012 Code.
The Board is responsible to shareholders for good corporate governance, setting the Company's strategic objectives, values and standards and ensuring the necessary resources are in place to achieve the objectives.
The Board met on nine occasions during 2013, including a specific meeting to review and update the Company's long-term strategy. The Board of Directors comprises six members, of whom four are Non-Executive Directors and two are Executive Directors, led by the Company's part-time Non-Executive Chairman, Mr. A.M. Thomson, who also chairs the Nomination Committee. The Chief Executive is Mr. S.C. Harris and the Senior Independent Non-Executive Director (SID) is Mr. J.A. Biles, who also chairs the Audit Committee.Ms E. Lindqvist is Chairman of the Remuneration Committee. Brief biographical details of all Directors are given in the Board of Directors. During the year the Board made regular visits to UK and overseas facilities. In particular sites in Austria and Liechtenstein were visited. Such events involved meetings with local management and the unit work force to better understand technical and operational performance in countries where Bodycote has a significant presence.
Matters reserved for the Board were reviewed during the year and updated broadly based on the guidance of the Institute of Chartered Secretaries and Administrators issued in July 2013. Certain defined powers and issues reserved for the Board to decide, are inter alia:
- Approval of financial statements and circulars;
- Capital projects, acquisitions and disposals;
- Annual budgets;
- Directors' appointments, service agreements, remuneration and succession planning;
- Policies for financial statements, treasury, safety, health and environment, donations;
- Committees' terms of reference;
- Board and committee chairmen and membership;
- Equity and bank financing;
- Internal control and risk management;
- Corporate governance;
- Key external and internal appointments; and
- Employee share incentives and pension arrangements.
In advance of Board meetings, directors are supplied with up-to-date information regarding the trading performance of each operating division and sub-division, the Group's overall financial position and its achievement against prior year, budgets and forecasts. They are also supplied with the latest available information on safety, health and environmental and risk management issues and details of the safety and health performance of the Group, and each division, in terms of severity and frequency rates for accidents at work. Senior management from across the Group and advisers attend some of the meetings to provide updates. The exposure to members of senior management from across the businesses helps enhance the Board's understanding of the business, the implementation of strategy and the changing dynamics of the markets in which we operate.
Where required, a director may seek independent professional advice, the cost of which is reimbursed by the Company. All directors have access to the Company Secretary and they may also address specific issues to the SID. In accordance with the Articles of Association, all newly appointed directors and any who have not stood for re-election at the two previous Annual General Meetings, if eligible, must submit themselves for re-election. However, this has been superseded by the directors' decision to stand for yearly re-election. Non-Executive Directors, including the Chairman, are appointed for fixed terms not exceeding three years from the date of first election by shareholders, after which the appointment may be extended by mutual agreement. A statement of the directors' responsibilities is set out in the Directors' responsibilities statement. The Board also operates three committees. These are the Nomination Committee, the Remuneration Committee and the Audit Committee.
In accordance with the recommendations of the Code, Board members serve for a period of six years which will only be extended in certain circumstances. If letters of appointment are extended beyond six years, the fixed term is reduced to one year.
In order that necessary actions can be taken promptly, a Finance Sub-Committee, comprising the Chairman (or failing him any other Non-Executive Director), the Chief Executive and the Finance Director operates between the dates of scheduled Board meetings and is authorised to make decisions, within limits defined by the Board, in respect of certain finance, treasury, tax or investment matters.
Independence of Non-Executive Directors
The Board considers that Messrs J.A. Biles, Dr K. Rajagopal and Ms E. Lindqvist are all independent for the purposes of the Code. The Chairman was considered independent upon appointment.
Attendance of directors at regular scheduled meetings of the Board and its Committees is shown in the table below:
All directors attended the maximum number of Audit, Remuneration and Nomination Committee meetings that they were scheduled to attend. In addition, where not a member, Messrs Thomson, Harris and Landless attended by invitation the whole or part of some of the meetings of the Audit, Nomination and Remuneration Committees.
Proposals for re-election
The Board decided, in line with the Code, that all directors will retire annually and, other than in the case of any director who has decided to stand down from the Board, will offer themselves for re-election at the Annual General Meeting. Accordingly Messrs A.M. Thomson, S.C. Harris, D.F. Landless, J.A. Biles, Dr K. Rajagopal and Ms E. Lindqvist will stand for re-election at the 2014 AGM. The Board recommends to shareholders that they re-elect or elect all the directors. In accordance with the recommendations of the Code, Board members will serve for a period of six years which may be extended in certain circumstances.
The performance of each director was evaluated as indicated above and the Board confirms in respect of each that their performance continues to be effective and that each continues to demonstrate commitment to his or her respective role.
Internal control and risk management
The Board is responsible for the Group's system of internal control and for reviewing its effectiveness. Such a 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. The Board has applied Principle C.2 of the Code by establishing a continuous process for identifying, evaluating and managing the Group's significant risks, including risks arising out of Bodycote's corporate and social engagement. The Board continuously and regularly reviews the process, which has been in place from the start of 2000 to the date of approval of this report and which is in accordance with Internal Control: Guidance for directors on the Combined Code published in September 1999 and with revised guidance on internal control published October 2005. The Board's monitoring covers all controls, including financial, operational and compliance controls and risk management systems. It is based principally on reviewing reports from management and from internal audit to consider whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. The Audit Committee assists the Board in discharging these review responsibilities.
The Group prepares a comprehensive annual budget which is closely monitored and updated quarterly. The Group's authority matrix clearly sets out authority limits for those with delegated responsibility and specifies what can only be decided with central approval.
Internal Audit monitors the Group's internal financial control system and its reviews are conducted on the basis of plans approved by the Audit Committee, to which Internal Audit reports are submitted on a regular basis.
Every Bodycote site provides assurance on specified financial and non-financial controls through a control self assessment process. The results are validated by Internal Audit through spot checks and are reported to the Audit Committee. In addition the President and the Vice President of Finance of each Division sign a Letter of Representation annually.
During 2013, in compliance with provision C.2.1, management performed a specific assessment for the purpose of this Annual Report. Management's assessment, which has been reviewed by the Audit Committee and the Board, included a review of the Group's key strategic and operational risks, which is summarised from work performed by the Head of Risk and the Group's Risk Committee to identify risks (by means of workshops, interviews, investigations and by reviewing departmental or divisional risk registers). The risks identified were assessed using conventional impact and likelihood scoring (both before and after mitigating actions), and further assessment, monitoring and review work was carried out in 2013. The Group's risk management framework is progressively being embedded throughout the Group. The principal risks and uncertainties affecting the Group are shown within Principal risks and uncertainties. No significant previously unidentified risks were uncovered as part of this process, and the necessary actions have been or are being taken to remedy any significant failings or weaknesses identified as part of the reviews.
The Chief Executive and Finance Director regularly talk with and meet institutional investors, both individually and collectively, and this has enabled institutional investors to increase their understanding of the Group's strategy. The business of the Annual General Meeting comprises a review of the Group's operations for the benefit of shareholders attending. In addition, internet users are able to view up-to-date news on the Group and its share price via the Bodycote website at www.bodycote.com. Users of the website can access recent announcements and copies of results presentations and can enrol to hear live presentations. On a regular basis, Bodycote's financial advisers, corporate brokers and financial public relations consultants provide the directors with opinion surveys from analysts and investing institutions following visits and meetings with the Chief Executive and Finance Director. The Chairman and SID are available to discuss any issues not resolved by the Chief Executive and Finance Director. On specific issues, such as the introduction of long-term incentive and share matching schemes in 2006 and changes thereto in 2009, 2010 and 2013, the Company has sought and will continue to seek the views of leading investors.
By order of the Board:
27 February 2014
Tytherington Business Park