Corporate Governance
Directors' Statement on Corporate Governance 2010
The following statement has been extracted from the Spirent Communications plc Annual Report 2010.
Compliance
The Board is committed to the highest standards of corporate governance and fully supports the principles laid down in the Combined Code on Corporate Governance published by the Financial Reporting Council in June 2008 (the “Code”) and in the UK Corporate Governance Code published by the Financial Reporting Council in June 2010 (the “New Code”). The Board is accountable to the Company’s shareholders for good governance and this Statement, together with the Report on directors’ remuneration on pages 45 to 52, describes how the principles of the Code were applied during the year under review and reports on the Company’s compliance with its provisions. Disclosures relating to significant shareholdings, voting rights, election and re-election of directors, amendment of the Company’s Articles of Association and the directors’ power to issue or buy back shares are included in the Report of the directors on pages 36 to 39. It is the Board’s view that the Company was fully compliant with the provisions of the Code throughout the period under review and with certain aspects of the New Code to the date of this Report.
The Board
As at 31 December 2010, the Board comprised a chairman, three independent non-executive directors and two executive directors. The Board operates within a framework of controls including a formal schedule of matters specifically reserved for its decision. There is a clear division of responsibility at the head of the Company: the Chairman (Alex Walker) being responsible for running the Board and the Chief Executive Officer (Bill Burns) being responsible for implementing strategy.
The Chairman and the non-executive directors contribute external expertise and experience in areas of importance to the Company such as strategic investments, corporate finance, general finance and corporate governance. They also contribute independent challenge and rigour to the Board’s deliberations, and assist in the development of the Company’s strategy, scrutiny of the performance of management in meeting agreed goals and targets and satisfying themselves of the integrity of the Company’s internal controls and risk management systems. The Board believes that all of the Directors devote sufficient time and attention as is necessary in order to perform their duties.
The independence of each director is reviewed on appointment and at least annually. The Board determined that the non-executive directors are each independent in character and judgement and within the definition of the Code. No individual or group of individuals dominates the Board’s decision making and the requirement of the Code that at least half of the Board (excluding the Chairman) should comprise independent non-executive directors is satisfied.
In October 2008, the Company adopted new Articles of Association permitting the Board to consider and, if it sees fit, to authorise situations where a director has an interest that conflicts, or may potentially conflict, with the interests of the Company (“Situational Conflicts”). The Board has a formal system in place for directors to declare Situational Conflicts and for these to be considered for authorisation by those directors who have no connection with the matter being considered. In deciding whether to authorise a Situational Conflict, the non-conflicted directors are required to act in the way they consider most likely to promote the success of the Company and they may impose limits or conditions when giving
authorisation, or subsequently, if they think this is appropriate. The Board considers the procedure to have continued to operate effectively during the year.
Details of other professional commitments of the Chairman and non-executive directors are provided in their biographies on page 35.
Ian Brindle became Senior Independent Non-Executive Director on 4 March 2010 following Alex Walker’s appointment as Chairman of the Company. The Senior Independent Non-Executive Director acts as a sounding board for the Chairman and an intermediary for the non-executive directors, if needed. Mr Brindle is available to meet shareholders upon request if they have concerns which contact through the normal channels of the Chairman or an executive director has failed to resolve, or for which such contact would be inappropriate.
It is Company policy to hold at least four Board meetings a year. During 2010, there were six Board meetings. The agenda is settled by the Chairman in advance of the meeting and papers are circulated to Board members ahead of the meeting. Minutes of meetings are circulated to all Board members and, subject to their agreement, approved at the following Board meeting.
The attendance of individual directors at Board meetings was as follows:
| |
Number of meetings held |
Number of meetings attended |
| Alex Walker (Chairman |
6 |
6 |
| Edward Bramson1 (retired 5 May 2010) |
2 |
0 |
| Bill Burns |
6 |
6 |
| Eric Hutchinson |
6 |
6 |
| Ian Brindle |
6 |
6 |
| Gerard Eastman1 (retired 5 May 2010) |
2 |
0 |
| Duncan Lewis |
6 |
6 |
| Tom Maxwell2 |
6 |
5 |
1 Both Mr Bramson and Mr Eastman were unable to attend the meetings held on 3 March 2010 and 5 May 2010 due to unavoidable diary conflicts.
2 Mr Maxwell was unable to attend the meeting held on 3 March 2010 due to an unavoidable diary conflict.
The Chairman is responsible for ensuring that the directors receive accurate, timely and clear information. They receive regular updates on business performance and receive presentations from the executive directors and other senior managers at Board meetings. In addition, regular site visits are arranged for non-executive directors during which briefings are arranged and the directors are free to discuss aspects of the business with employees at all levels. Under the direction of the Chairman, the Company Secretary ensures good
and timely information flows between the Board and its Committees and makes sure that Board procedures are complied with. The Company Secretary also updates and advises the Board on all regulatory and governance matters.
There is a policy whereby the non-executive directors and the Board Committees may take independent professional advice at the Company’s expense in order to fulfil their duties. All directors also have access to the advice and services of the Company Secretary, whose removal may only be effected with the approval of the Board.
Board appointments and induction
The Board has in place a procedure for the appointment of new directors to the Board which complies with the Code. On appointment to the Board and its Committees all directors receive an induction tailored to their individual requirements. New directors are briefed on their legal and other duties and obligations as directors of a UK listed company. Visits to different facilities and meetings with senior management are organised, as appropriate, to assist the new director in developing an understanding of how the Group operates and the key issues that it faces.
The Company’s Articles of Association require all directors to seek election by shareholders at the first annual general meeting following their appointment and that all directors retire and seek re-election at least every three years. However, in accordance with the New Code, which replaces the existing Code for accounting periods beginning on or after 29 June 2010, the Board has agreed that all directors will stand for re-election at the 2011 AGM.
The Board recognises that some shareholders have expressed concern that annual re-election of directors could encourage them to take a short term view. The Board is confident, however, that, as more fully explained in the Report on directors’ remuneration on pages 45 to 52, the Company’s remuneration policies encourage a performance based culture which reinforces behaviour that will lead to the continued long term development of the business and align executive directors’ interests with those of shareholders.
Performance evaluation
Performance evaluation of the Board and its Committees was carried out during the year by each director completing questionnaires and the results being collated and analysed by the Company Secretary who prepared a report for Board discussion. The Board discussion concluded that the Board and its Committees operated well and were effective.
The Chairman communicates regularly with the non-executive directors and this contact provides an ongoing opportunity to assess performance and to discuss the performance of the executive directors or any other matters. The Chairman has concluded that during the year under review the commitment and application of the continuing non-executive directors was of a high standard including each having sufficient time to attend all Board and appropriate Committee meetings and to discharge their responsibilities effectively.
The Senior Independent Non-Executive Director met with the independent non-executive directors on 3 November 2010, in the absence of the Chairman, to assess the Chairman’s effectiveness. The independent non-executive directors were of the opinion that Mr Walker gave sufficient time to his role as Chairman of the Company and was effective in that role during the year under review.
The Board is actively considering the provisions under the New Code relating to the use of external facilitators in the performance evaluation process and how best to develop the review process.
Board Committees
Certain of the matters specifically reserved for the Board’s decision have been delegated to three Committees with clearly defined terms of reference which, together with the composition of each Committee, are reviewed annually. The terms of reference for the Audit, Nomination and Remuneration Committees can be found on the Company’s website at www.spirent.com.
Audit Committee
The Audit Committee comprises Ian Brindle (Chairman), Duncan Lewis and Tom Maxwell. Mr Lewis joined the Committee on 4 March 2010 following Alex Walker’s appointment as Chairman of the Company. All of the Committee members are independent nonexecutive directors, making the composition of the Committee compliant with the Code. The Code also requires that the Audit Committee includes at least one member who has recent, significant and relevant financial experience. The Board considers that both Ian Brindle and Tom Maxwell provide such experience.
The attendance of individual directors at Audit Committee meetings was as follows:
| |
Number of meetings held |
Number of meetings attended |
| Ian Brindle (Committee Chairman) |
3 |
3 |
| Duncan Lewis |
2 |
2 |
| Tom Maxwell1 |
3 |
2 |
| Alex Walker (until appointment as Chairman) |
1 |
1 |
1 Mr Maxwell was unable to attend the meeting held on 3 March 2010 due to an unavoidable diary conflict.
The Board has overall responsibility for the system of internal controls, including risk management, and has delegated certain of these responsibilities to the Audit Committee.
At each meeting the Company’s external auditors, the Chief Executive Officer, the Chief Financial Officer, the Group Vice President Finance, the Head of Financial Reporting and the Company Secretary, who is Secretary to the Committee, were in attendance. The Chairman also attends by invitation from the Committee Chairman. In addition, the Committee meets with the Company’s external auditors without management being present. The minutes of Committee meetings are available to all directors.
During the year the Committee has monitored and reviewed risk management and internal control, reviewed the interim and full year financial statements, key accounting policies, the auditors’ report on the interim review and year end audit and management’s responses to the issues raised. The internal audit programme and the external audit strategy and scope for 2010 were also agreed and approved. Further details of internal control and process are set out on page 44. Regular reports on tax, treasury and health and safety are presented. Further details of the Group’s Ethics Policy and health and safety performance are contained in the Corporate social responsibility statement on pages 30 to 33. The Chairman of the Committee reports any significant findings or identified weaknesses to the Board. The Audit Committee has adopted a policy in relation to the provision of non-audit services by the external auditor to ensure that the provision of such services does not impair the external auditors’ independence or objectivity. Under this policy, certain non-audit services are precluded. The policy is reviewed and financial limits for non-audit services are set on an annual basis. The Committee considers that notwithstanding the non-audit services provided during the year, Ernst & Young’s objectivity as external auditors was not impaired. Prior to recommending their reappointment as external auditors, the Committee considered Ernst & Young’s performance, resource, quality control procedures, policy on rotating its audit partners (audit partners rotate every five years), independence and objectivity. The Committee also considered the risk of Ernst & Young withdrawing from the audit market. There are no contractual obligations that restrict the Company’s current choice of external auditor.
Remuneration Committee
The Remuneration Committee comprises Tom Maxwell (Chairman), Ian Brindle and Duncan Lewis. Mr Maxwell joined the Committee as Chairman on 4 March 2010 following Alex Walker’s appointment as Chairman of the Company. All members of the Committee are independent non-executive directors, making it compliant with the Code in terms of independent non-executive directors.
Further details about the Remuneration Committee are included in the Report on directors’ remuneration on pages 45 to 52.
Nomination Committee
The Nomination Committee comprises Alex Walker (Chairman), Ian Brindle, Duncan Lewis and Tom Maxwell and meets at least once each year. The Company Secretary is Secretary to the Committee. The attendance of individual directors at Nomination Committee meetings was as follows:
| |
Number of meetings held |
number of meetings attended |
| Alex Walker (Committee Chairman) |
1 |
1 |
| Edward Bramson1 (retired 5 May 2010) |
1 |
0 |
| Ian Brindle |
1 |
1 |
| Gerard Eastman1 (retired 5 May 2010) |
1 |
0 |
| Duncan Lewis |
1 |
1 |
| Tom Maxwell1 |
1 |
0 |
1 Mr Bramson, Mr Eastman and Mr Maxwell were unable to attend the meeting held on 3 March 2010 due to unavoidable diary conflicts.
The Nomination Committee is responsible for reviewing the composition and structure of the Board and for identifying and recommending candidates for executive and non-executive positions, based on the required role and capabilities which have been specified for the appointment. Executive search consultants are used by the Nomination Committee to assist this process as appropriate. As all of the Committee members are independent non-executive directors, the composition of the Committee is compliant with the terms of the Code.
Relations with shareholders
The Board supports the use of the Annual General Meeting as a means of communicating with both private and institutional investors and encourages their participation. The Company is ready, where practicable, to enter into a dialogue with shareholders, through analyst briefings and investor presentations, all of which are made available on the Company’s website at www.spirent.com. Senior executives meet regularly with institutional and major shareholders to facilitate stakeholders’ understanding of the Company and its objectives and to receive feedback which is then reported to the Board.
In November 2010 the Company held an investor day which was attended by institutional investors, potential investors and analysts at which there was an opportunity to meet members of the Board and senior management.
The Chairman of the Remuneration Committee, Tom Maxwell, consulted with the 20 largest shareholders in December 2010 concerning remuneration policy. Feedback from shareholders obtained during these meetings was then shared with the Remuneration Committee and given due consideration.
All of the Company’s communications with shareholders are conducted in line with our environmental approach. We hold the majority of our events via webcast and conference calls and we encourage all of our investors to receive communications electronically where possible.
Pensions governance
The Group’s principal pension and retirement schemes are in the UK and the US. Scheme funds are held separately from those of the Group and are administered by trustees (which include employees and independent bodies). The schemes do not lend money or lease any assets to the Group.
Internal control
The Board has overall responsibility for the Group’s system of internal control. The Board, assisted by the Audit Committee, has reviewed the effectiveness of this system and this review did not reveal any significant issues or weaknesses. The Board confirms that this process was in place throughout the year under review and up to the date of approval of these financial statements. The primary aim is to operate a system which is appropriate to the business and which can, over time, increase shareholder value whilst safeguarding the Group’s assets. 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.
Process
Day to day responsibility for effective internal control and risk monitoring rests with senior management at business unit level. The Board and the Audit Committee continue to agree that currently there is no need for a dedicated internal control department. Responsibility for internal control rests with the Group Vice President Finance and the North America Vice President Finance. Both of these senior finance managers are independent of any business unit and play a key role in providing an objective view and continuing assessment of the effectiveness of the internal control systems throughout the Group. The Group consists of a limited number of entities which can comfortably be covered by the two senior finance managers. As stated above, the Group Vice President Finance attends all Audit Committee meetings to give an update on any internal control issues arising and any outstanding remedial actions.
The Group’s system of risk management comprises an integrated risk management strategy of regular self-assessment of all business units. Significant risks are regularly reviewed by the Audit Committee and by the Board.
Management and specialists within the finance department are responsible for ensuring the appropriate maintenance of financial records and processes that ensure all financial information is relevant, reliable, in accordance with the applicable laws and regulations, and distributed both internally and externally in a timely manner. A review of the consolidation and financial statements is completed by management to ensure that the financial position and results of the Group are appropriately reflected. All financial information published by the Group is subject to the approval of the Audit Committee.
In addition to this process, the following key elements are critical to the overall internal control environment:
- an organisational structure with clear operating procedures, defined lines of responsibility and delegated levels of authority;
- an ethics policy (which has been approved by the Board), which sets standards of professionalism and integrity for all employees and operations. The Ethics Policy also includes “whistleblowing” procedures whereby employees may report, in confidence, suspected wrongdoings;
- a comprehensive strategic planning, financial control and budgeting system which is properly documented and regularly reviewed; and
- a disciplined acquisitions and divestments due diligence process and post acquisition integration programme.
