The Impacts and Opportunities of the New UK Corporate Governance Code

The impacts and opportunities of the new UK Corporate Governance Code

Focusing on long-term sustainable success www.jonesandpalmer.co.uk/governance www.jonesandpalmer.co.uk/governance

The revised UK Corporate Governance Code was released on CONTENTS 16 July 2018. The Code is applicable 6 Board leadership and company purpose to all companies with a premium 7 Code principles 8 Provisions of the Code listing, whether incorporated in the 10 Considerations for engaging reporting UK or elsewhere. The new Code 13 Frameworks for Purpose, Values and Culture applies to accounting periods 24 Section 1 - Examples beginning on or after 1 January 2019. 44 Divisions of responsibilities 45 Code principles 46 Provisions of the Code 48 Considerations for engaging reporting This comprehensive guide has been created to help anyone tasked with 49 Section 2 - Examples understanding the wider impact of the new UK Corporate Governance Code and provides considerations and examples of models and frameworks that can 50 Composition, succession and evalution be considered for reporting along with examples of approaches taken by other 51 Code principles companies. As well as containing a list of the required disclosures, it also gives 52 Provisions of the Code reporting considerations that, if applied, would give your stakeholders a fuller and 54 Considerations for engaging reporting more insightful picture of how the company is applying the principles of the UK 56 Section 3 - Examples Corporate Governance Code and its approach to governance. 64 Audit, risk and internal control For authors of the Strategic Report, we highlight the areas of disclosure and 65 Code principles considerations that will support coherent governance reporting throughout the 66 Provisions of the Code Annual Report. 68 Considerations for engaging reporting We hope that this guide provides a helpful tool to support your reporting projects. 69 Section 4 - Examples A PDF file of our Comprehensive Guide is available to access from 74 Remuneration www.jonesandpalmer.co.uk/governance 75 Code principles Alternatively, if you would like to explore how Jones and Palmer could support 76 Provisions of the Code your corporate reporting further please call 78 Considerations for engaging reporting Catherine Joyce or James Houston on 0121 236 9007 80 Section 5 - Examples or email: 82 Summary [email protected] [email protected]

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The key impacts Engaging with wider Emphasis on improved Defining your culture that the updated stakeholders dialogue with your A description of the culture of There is a new requirement to workforce the company and how it is monitored and assessed by demonstrate that the directors of A particular focus is given to the directors has to be included. UK Corporate the company are applying section engagement with the workforce. 172 of the Companies Act 2006. The directors have to implement This means that engagement a process for better workforce with wider stakeholder groups engagement. Governance Code than shareholders needs to be discussed. Actions and outcomes from this stakeholder engagement has on your should be discussed.

Annual Report Disclosing diversity Matching appropriate A number of disclosures around rewards to performance diversity are required, such as There are a number of changes how diversity is supporting the to the approach to remuneration, strategy of the company and how which will need to be reflected succession planning is ensuring a in the Remuneration Policy and diverse pipeline. Annual Report on Remuneration. These include a set of principles that need to be applied when constructing the remuneration policy, explanation of the strategic rationale behind the policy and whether it operated as intended.

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Code principles

The first section of the new A. A successful company is led by an effective and entrepreneurial board, whose role is to promote Board leadership Corporate Governance Code the long-term sustainable success of the company, is ‘Board leadership and 01 generating value for shareholders and contributing company purpose’. This is the to wider society. and company purpose section that differs most from B. The board should establish the company’s the 2016 report. It introduces purpose, values and strategy, and satisfy itself that a number of concepts that these and its culture are aligned. All directors must weren’t previously part act with integrity, lead by example and promote the of the Code – purpose, desired culture. culture, engagement with C. The board should ensure that the necessary the workforce, section 172 resources are in place for the company to meet its and the consideration of the objectives and measure performance against them. views of wider stakeholders. The board should also establish a framework of It is this section of the Code prudent and effective controls, which enable risk to “Culture is a valuable asset, be assessed and managed. that presents the most a source of competitive opportunity for improving D. In order for the company to meet its responsibilities the corporate governance in to shareholders and stakeholders, the board should advantage and vital for listed companies and also ensure effective engagement with, and encourage participation from, these parties. long-term value creation for improving the reporting on corporate governance by E. The board should ensure that workforce policies and protection.”* companies. and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.

FRC Corporate Culture and the Role of Boards

* Paraphrased from FRC document

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The Provisions of the Code give more detail on how boards should implement the high-level Principles. We have created a list of the disclosures outlined in the Provisions that should be included in the Annual Report.

Provisions of the Code

The board should assess the basis on which the company The board should understand the views of the company’s 1 5 Required Annual Report disclosures generates and preserves value over the long term. other key stakeholders and describe in the Annual It should describe in the Annual Report how opportunities Report how their interests and the matters set out in section • How opportunities for the future success of the and risks to the future success of the business have been 172 of the Companies Act 2006 have been considered in business have been considered and addressed considered and addressed, the sustainability of the company’s board discussions and decision-making. The board should (Provision 1) business model and how its governance contributes to the keep engagement mechanisms under review so that they • How risks to the future success of the business have delivery of its strategy. remain effective. For engagement with the workforce, one or a been considered and addressed (Provision 1) combination of the following methods should be used: The board should assess and monitor culture. Where it is 2 not satisfied that policy, practices or behaviour throughout • director appointed from the workforce • The sustainability of the company’s business model (Provision 1) the business are aligned with the company’s purpose, values • a formal workforce advisory panel and strategy, it should seek assurance that management has • a designated non-executive director • How the company’s governance contributes to the taken corrective action. The Annual Report should explain the delivery of its strategy (Provision 1) board’s activities and any action taken. In addition, it should If the board has not chosen one or more of these methods, include an explanation of the company’s approach to investing it should explain what alternative arrangements are in place • Explanation of the board’s activities and actions in and rewarding its workforce. and why it considers that they are effective. in relation to assessing and monitoring culture and addressing any misalignment of culture with In addition to formal general meetings, the chair should There should be a means for the workforce to raise 3 6 seek regular engagement with major shareholders concerns in confidence and – if they wish – anonymously. purpose, values and strategy (Provision 2) in order to understand their views on governance and The board should routinely review this and the reports arising • An explanation of the company’s approach to performance against the strategy. Committee chairs should from its operation. It should ensure that arrangements are in investing in and rewarding its workforce (Provision 2) seek engagement with shareholders on significant matters place for the proportionate and independent investigation of related to their areas of responsibility. The chair should ensure such matters and for follow-up action. • If 20 per cent or more of votes have been cast that the board as a whole has a clear understanding of the views against a board recommendation on a resolution, The board should take action to identify and of shareholders. 7 how this has affected board decisions and any manage conflicts of interest, including those actions suggested (Provision 4) When 20 per cent or more of votes have been cast resulting from significant shareholdings, and ensure that 4 against the board recommendation for a resolution, the the influence of third parties does not compromise or override • How the interests of the workforce and other key company should explain, when announcing voting results, independent judgement. stakeholders and section 172 of the Companies Act what actions it intends to take to consult shareholders in order Where directors have concerns about the operation 2006 have been considered in board discussions to understand the reasons behind the result. An update on the 8 of the board or the management of the company that and decision-making (Provision 5) views received from shareholders and actions taken should cannot be resolved, their concerns should be recorded in the be published no later than six months after the shareholder • If the board has not chosen one of the recommended board minutes. On resignation, a non-executive director should meeting. The board should then provide a final summary in the workforce engagement methods, an explanation provide a written statement to the chair, for circulation to Annual Report and, if applicable, in the explanatory notes to the board, if they have any such concerns. of the method used and the reasoning behind that resolutions at the next shareholder meeting, on what impact the choice (Provision 5) feedback has had on the decisions the board has taken and any actions or resolutions now proposed.

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Considerations for engaging reporting

Provision 1 – The board should assess the basis on which Sustainability of your business model Provision 2 – The board should assess and monitor culture. Provision 4 – When 20 per cent or more of votes the company generates and preserves value over the Where it is not satisfied that policy, practices or behaviour have been cast against the board recommendation for a Discussing how the company generates and preserves long term. It should describe in the Annual Report how throughout the business are aligned with the company’s resolution, the company should explain, when announcing value over the long term is clearly a key part of explaining opportunities and risks to the future success of the business purpose, values and strategy, it should seek assurance that voting results, what actions it intends to take to consult have been considered and addressed, the sustainability the sustainability of the company’s business model. management has taken corrective action. The Annual Report shareholders in order to understand the reasons behind of the company’s business model and how its governance However, consideration of the sustainability of the should explain the board’s activities and any action taken. In the result. An update on the views received from contributes to the delivery of its strategy. business model should consider the negative impacts of the addition, it should include an explanation of the company’s shareholders and actions taken should be published company on its external environment, such as impacts on the approach to investing in and rewarding its workforce. no later than six months after the shareholder meeting. Your opportunities and risks environment and the company’s stakeholders. The board should then provide a final summary in the The purpose, values, strategy and culture of the company Annual Report and, if applicable, in the explanatory notes to The Annual Report needs to include content on the business The sustainability of the business model will depend resolutions at the next shareholder meeting, on what impact opportunities and risks. Information on the company’s risks has should be clearly stated in the Annual Report within the same on how well positioned it is to compete in its markets. the feedback has had on the decisions the board has taken section, in order to demonstrate that they are aligned with been a required disclosure in the Annual Report for a long time, This can be demonstrated through discussion of the company’s and any actions or resolutions now proposed. each other. therefore, the requirement for the Annual Report to describe sustainable competitive advantages. A sustainable competitive how the risks to the future success of the business have been advantage is generated when a valuable asset or resource is It is unlikely that the purpose, values, strategy and The Annual Report should discuss how the company engaged considered and addressed is already being met by current rare and difficult to replicate. Business model reporting should culture of a company will be aligned with each other without with shareholders over the vote outcome, how the views standards of reporting. outline which assets and resources are critical to the business’ deliberate action by the board. Therefore, discussion of the received from shareholders affected board decision-making future success and the company’s view on how protected Opportunities are rarely explicitly discussed in the Annual process the board is using to create alignment between and any suggested actions. these are from competitors. For example, intellectual property Report. Within the conventional structure of Annual Reports, the purpose, values, strategy and culture should be included. at a pharmaceuticals company is critical to its competitive Ideally, the actions suggested in response to the vote outcome most natural place to include discussion of opportunities would As the board should set an example to the rest of the company positioning within its markets. It would therefore be important for should not just cover actions based on that one particular vote, be within information on the company’s markets. with its behaviours, it is critical that the board makes decisions a pharmaceuticals company to explain how it ensures but also actions that will prevent significant votes against the that are consistent with the purpose, values, strategy and culture This could be easily done through consideration of longer term that it continually generates new intellectual property resolution in the future. It may be that focused engagement on of the company. Explanation of the decision-making framework and emerging trends in the company’s operating environment in its Annual Report. that particular topic needs to continue regularly going forward and how the company will benefit from those trends. that the board uses to ensure that this is the case would be a to prevent a negative vote outcome again. How the board delivers strategy useful disclosure in the Annual Report. However, that would result in discussion of the A way of meeting this disclosure requirement would be to company’s opportunities and risks being separated in The Code requires the board to describe corrective include an overview of the discussions and decisions made the Annual Report. As risks and opportunities to a company are action if it believes that the culture of the company is not by the board and then show how they relate to the related, this does not seem satisfactory. aligned with the purpose, values and strategy of the company. company’s strategy. Beyond describing the desirable culture to support success, An alternative would be to discuss opportunities in order to deal with corrective action, it may require the culture and risks simultaneously. This could be done by disclosing to be explicitly translated into a code of conduct, which then can the material issues of the company – these are the issues that be used to measure and report on misalignment. will have the biggest impact on the company and matter most to the company’s stakeholders. Each material issue will have opportunities and risks associated with it.

EXAMPLES EXAMPLES

See how Mondi Group See how Centrica See how Coca-Cola HBC See how SSE plc has See how Severn Trent See how Rentokil plc has addressed plc has addressed has addressed Provision addressed Provision plc has addressed plc has addressed Provision 1 on page 24 Provision 1 on page 28 1 on page 30 1 on page 32 Provision 2 on page 36 Provision 2 on page 38

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Frameworks for Purpose, Values and Culture

Provision 5 – The board should understand the views of It would be useful to understand how the board determined Introduction the company’s other key stakeholders and describe in who the key stakeholders of the company are and what level In 2016 the FRC acknowledged through their Corporate This section of our guide will help to define what is meant the Annual Report how their interests and the matters set of engagement the company needs to have with each Culture and the Role of Board report that culture in business by ‘purpose’, explore the importance of a culture that supports out in section 172 of the Companies Act 2006 have been stakeholder group. considered in board discussions and decision-making. is an important ingredient in delivering long-term sustainable strategy, clarify the connection between values and culture The board should keep engagement mechanisms under There is a risk that reporting on stakeholder engagement is performance. Where there is a healthy culture, the systems, and look to highlight some meaningful models that will review so that they remain effective. For engagement treated solely as a compliance requirement and doesn’t procedures and overall functioning and mutual support of an help you to consider how effective reporting on culture and with the workforce, one or a combination of the following add value for these stakeholder groups or the company. organisation work effectively together. This builds integrity, culture alignment might be best achieved for the context of methods should be used: To prevent this, disclosures around this should not just discuss confidence, long-term success and ultimately trust. Changes to your organisation. the engagement. The Annual Report should include information Section One of the revised Code have been largely shaped by • a director appointed from the workforce Defining purpose on what topics and issues were discussed with stakeholders, the findings of this report and the subsequent responses to it. a formal workforce advisory panel The Oxford Dictionary defines purpose as “the reason for which • the actions carried out as a result of these discussions and how The Culture Report demonstrated the importance of aligning something is done or created or for which something exists”. a designated non-executive director those actions benefited the company. • company purpose, strategy and values in order to achieve The FRC Culture report defines purpose as “why the company If the board has not chosen one or more of these methods, The engagement with the workforce could be a way for long-term success. In order to establish an appropriate culture exists and what it is they do”. it should explain what alternative arrangements are in place employees to communicate whether they believe the purpose, a board must define the purpose, strategy and values of the and why it considers that they are effective. values, strategy and culture are aligned and give their opinion on company, and consider the type of behaviours it wishes to The City Values Forum and Tomorrow’s Company, in their guide how any misalignment could be addressed. promote in order to deliver its strategy. ‘Governing Culture: Risk and Opportunity?’, define purpose as “an expression of why the organisation exists, beyond financial While some Annual Reports allow readers to draw clear gain. It states the impact it wants to have on the lives of conclusions about how the firm’s culture is assessed, everyone it wishes to serve.” others contain relatively generic and simplistic statements about the entity’s culture. In 2017, Grant Thornton’s review of Simon Sinek, through his Golden Circle model articulated in his FTSE 350 companies found that, although there has been book ‘Start With Why’, offers an interesting insight into purpose. year-on-year improvement, there is more to be done to explain All companies and organisations on the planet know ‘What’ they how culture is integrated within a company. For instance, only do; everyone is easily able to describe the products or services 39 per cent provided a strong disclosure on company culture that a company sells. ‘Whats’ are easy to identify. and only 29 per cent of chief executives referred to it in their Most companies know ‘How’ they do what they do. Annual Report statement. Whether you call them a differentiating value proposition or Boards and senior management ultimately need to inform unique selling points, ‘Hows’ are often given to explain how stakeholders about whether they have the culture that they something is different or better. Not as obvious as ‘Whats’, many want. They need to know that their ‘tone from the top’ is think that these are the differentiating or motivating factors in reflected in a strong and consistent ‘echo from the bottom’. decision-making. Sinek explains it is false to assume that that is all that is required; there is one missing detail. So the challenge lies in explaining why the entity exists and who it is serving, and what the strategy is and therefore what type of values and subsequent behaviours support this strategy. Then, working more closely with the wider workforce to understand how close the actual behaviours (the company’s EXAMPLES culture) are to the stated desirable behaviours.

See how Persimmon plc has See how Fresnillo plc has addressed Provision 5 on addressed Provision 5 on page 40 page 42

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‘Why’ – Very few articulate ‘Why’ they do what they do, and To help address this challenge, Blueprint brought together Five principles of a purpose-driven business ‘Why’ is all about purpose, cause or belief. Why does your leading investors from a range of asset management company exist? When most organisations communicate they companies and came up with a shortlist of key questions Honest and fair with customers and suppliers do so from ‘What’ to ‘Why’, from tangible to intangible. which an investor can ask a chairman, CEO or other senior • Seeks to build lasting relationships with customers and suppliers • • executive to glean insight into the extent to which a company However, when an organisation articulates their ‘Why’ it • Deals honestly with customers, providing good and safe products and services • is being genuinely and effectively purpose-led: • makes it easier to engage with them. It also provides a greater • • Treats suppliers fairly, pays promptly what it owes and expects its suppliers to do the same • • explanation of the ambition, impact and stakeholder reach of the 1. In simple terms, what is the company in business to deliver • Openly shares its knowledge to enable customers and suppliers to make better informed choices organisation – its purpose. and for whom? How does that differentiate you?

A responsible and responsive employer 2. What does success look like and how do you measure and • Treats everyone with dignity and provides fair pay for all • • review it? • Enables and welcomes constructive dialogue about its behaviour in keeping true to its purpose 3. How does your pay policy link to long-term success? • Fosters innovation, leadership and personal accountability 4. How are your board discussions and agenda anchored to • • • Protects and nurtures all who work for it to ensure people also learn, contribute and thrive • your purpose? Can you give some examples of how your • • WHY purpose has changed your decisions? • A good citizen • 5. What positive and negative impacts does your company • Considers each person affected by its decisions as if he or she were a member of each decision-maker’s own community have on society? How are you maintaining your ‘licence HOW • Seeks and provides access to opportunities for less privileged people to operate’? WHAT • Makes a full and fair contribution to society by structuring its business and operators to pay promptly all taxes that are 6. How are your people? Can you give examples of how you properly due have responded to specific concerns? A guardian for future generations Simon Sinek’s Golden Circle from his book ‘Start with Why’ 7. Which external relationships are most important Honours its duty to protect the natural world and conserve finite resources How can investors identify to achieving your purpose (e.g. customer, supplier, • purpose-led companies? regulatory)? What key measures do you use to assess • Contributes knowledge and experience to promote better regulation for the benefit of society as a whole rather than the strength of these? protecting self interest The independent charity ‘A Blueprint for Better Business’, acting 8. [For chairs] How do you as a board know you are doing a • Invests in developing skills, knowledge and understanding in wider society to encourage informed citizenship as a catalyst to help businesses to be guided and inspired by a good job? purpose that benefits society, has created a blueprint for better Has a purpose which delivers long term business. Their concern is that the renewed focus on purpose The organisation has also set out ‘Blueprint’s Five Principles’ • Operates true to a purpose that serves society and respects the dignity of people, and so generates a fair return for as a way of picturing what a business with a purpose that carries a risk. They believe that the requirement for companies responsible investors to challenge themselves and change their behaviour could benefits wider society might look like. It assumes that those • Enables and welcomes public scrutiny of the alignment between stated purpose and actual sustainable performance be lost if it is translated into a communications and branding involved have both the clarity of a guiding purpose and also care about the quality of relationships internally and externally. exercise alone. If this was the case the language of purpose Blueprint’s Five Principles from ‘How can investors identify purpose-led companies?’ could be subverted with the end result being increased The Principles point to the need to assess not only how the cynicism and distrust and diminished long-term returns to company’s purpose guides decisions but also the motivation both investors and society. behind the way the company thinks about people and all those affected by its actions.

FURTHER READING

City Values Forum and Deloitte – ‘Management Tomorrow’s Company – information on culture – ‘Governing Culture: connecting the dots’ Risk and Opportunity’

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Using management information to manage culture Measured Supported by Any framework that is adopted still needs management The resulting analysis should include analysis of what 1 against appropriate the ﬁrm’s 8 information to drive it. Deloitte produced a document in April the indicators mean and should be able to answer the governance and target culture capabilities 2016 specifically for financial services firms facing the challenge following questions: of managing culture in the wake of excessive risk-taking by What is the target culture of the firm? Is it consistent with 1 some firms in the run-up to the financial crisis and a string of strategy and risk appetite? Are examples of the desirable, misconduct scandals. The document takes a practical approach developing and detrimental behaviours that map to the to the challenge of collecting meaningful management target culture well understood within the firm? Considers Objective information (MI) on culture and presents the following ‘Eight the pace of 2 wherever 7 What are the strengths and weaknesses of the firm’s cultural Principles for Culture Management Information.’ possible 2 culture against the target culture? change The framework offers some suggestions on how to articulate Are there particular business divisions, regions or grades/ what good behaviour looks like with a range of acceptable PRINCIPLES FOR 3 levels where cultural problems have been identified? behaviours. It also challenges boards to interpret each chosen CULTURE MI Has the root cause been identified and are there lessons indicator in the light of what it is trying to measure. For example, for other areas of the firm? Drawn from an increase in internal whistleblowing could be negative if trying 3 a range Tailored to the 6 of sources audience to assess conduct risk, but positive if trying to measure a cultural Where behaviours running contrary to the target culture willingness to speak up. Similarly, an increase in reported 4 have been identified in only a small percentage of the staff complaints may be negative if trying to assess customer within the firm, even if spread across business divisions, outcomes but positive if trying to measure staff willingness regions or grades/levels, has there been a focused effort to seek customer feedback proactively. to identify and address the root cause? Captures Contains evidence-based The report also promotes diverse and comprehensive data What is the status of the culture programme? For 4 information 5 5 on subcultures analysis and sources and gives practical examples of existing internal data example, the extent to which agreed actions have been recommendations and external sources. It recognises the need to understand implemented and the effect they have had. subcultures that can exist through national culture, business How does the firm compare to peers and market-leading line, market communities or by grade. For example, from a 6 companies in other industries? Are there any lessons that business line perspective, a fast-paced trading room might have can be learned? The Corporate Branding Perspective a different culture to bank branch staff who deal with vulnerable There is an inevitable link between the efforts involved in Whenever you encounter a successful corporate brand, you will customers. From a grade perspective, middle managers in many What are the recommended actions? 7 defining an organisation’s purpose, aligning culture with strategy find coherence between what the board want to accomplish cases may have a bigger influence on front-line staff behaviour What methods were used to collect the MI? Are there and the impact of this from a corporate branding perspective. in the future (strategic vision), what has already been known or than senior management. 8 any limitations in its collection and analysis? What are the Although this goes beyond the changes implemented by the believed by company employees (lodged in its culture) and what governance arrangements? FRC, it is worth considering how these activities interact with a its external stakeholders expect or desire from the company corporate brand framework. (their images of it). The basic principle of the Vision-Culture- The report then suggests an approach to how MI might Image (VCI) Alignment Model – that the greater the coherence be improved through IT to automate the collection and Whereas product brands lavish their attention on customers of vision, culture and images, the stronger the brand – is the provide better analytics with the goal of capturing emerging and consumers, corporate brands address all the company’s message brought to life in the book ‘Taking Brand Initiative – cultural trends. stakeholders including investors, suppliers, distributors, partners, How companies can align strategy, culture, and identity through governments and local, national, and international community corporate branding’ by Mary Jo Hatch and Majken Schultz. groups as well as employees.

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VCI alignment assessment tools B Technique Activities Involved Challenges

Survey stakeholders Compare reputation and market research on different Make sure the way you measure performance and stakeholder PURPOSE EXTERNAL (including members of stakeholder groups with regular surveys of employee perceptions matches the vision and identity for your brand. PURPOSE EXTERNAL VISION STAKEHOLDER VISION STAKEHOLDER STRATEGY IMAGES your organisation) perceptions of the company and confront any disparities. All too often inside and outside data are not comparable and/ STRATEGY IMAGES What does each group think of us as a company, what we or do not tap the uniqueness of your brand platform. ORGANISATIONAL ORGANISATIONAL stand for, what we deliver and to whom? IDENTITY IDENTITY Dialogue between Bring together a team of middle managers from the Different functions use different concepts – often referring middle managers from functions most essential to your corporate brand and let to the same ideas with different terms. Therefore, you must A C key business functions them diagnose any VCI gaps your company faces. Include develop a framework and a language that everyone can at a minimum representatives from the functions of use when talking about the corporate brand. Make sure

ORGANISATION ORGANISATION corporate marketing, corporate communication, all managers understand that no single function controls EMPLOYEE EMPLOYEE human resources, business development and sales. corporate branding; it is a shared responsibility requiring CULTURE CULTURE shared leadership.

Dialogue between Look for or invent opportunities to bring the people living Instead of talking about how others perceive your brand, brand managers and and experiencing your brand together in conversations invite them to meet your management team or take your The VCI Alignment Model - ‘Taking Brand Initiative’ by Mary Jo The VCI Alignment Model with gaps - ‘Taking Brand Initiative’ by stakeholders about what the brand means to them and how well it fulfils management team to visit them. Do not avoid criticism, but their expectations and desires. Find the stakeholders who be clear about how you will respond; promise no more than Hatch and Majken Schultz (2008) Mary Jo Hatch and Majken Schultz (2008) can make the biggest difference to your brand – your most you can deliver. Link these conversations to internal change enthusiastic supporters and critics. processes and to internal debate about strategic vision. As demonstrated in the diagram above, the strength of an Any misalignment causes gaps between vision culture and Create events and Locate the most critical events and routines that deliver The truth about your brand is often found in everyday details. organisation’s identity is made up of the strategic vision of the images. This model is supported by a series of questions that establish routines that your brand promise. Confront top management with the If you never experience these details yourself, how will leaders. Who do we want to be? And how will we be known? help to understand where any misalignment is occurring: connect stakeholders day-to-day realities of how your brand is executed in you know your brand? How will you influence it? Very often How closely this aligns with the organisational culture – who A To explore the Vision–Culture gap you should ask: to each other via ‘moments of truth’, both inside the company and across managers get distanced from stakeholder experiences we are? The subsequent impact that this has on the stakeholder your brand its boundaries. Learn how stakeholders experience your of the brand. Get them back in touch. 1. Are your vision and culture adequately differentiated images of the organisation – what is their image of us? brand, what makes them feel like they belong, and what from those of your competitors? makes them feel like they don’t. 2. Does your company’s vision inspire all its subcultures? 3. Does your company practise the values it promotes? The model goes on to develop some alignment assessment tools, see above. B To explore the Vision–Image gap you should ask: The approach of these tools overlap in their approach with the 1. Who are your stakeholders? other frameworks that we have introduced in that they also 2. Do you know what your stakeholders want from involve stakeholder feedback both internally and externally. your company? They recognise the importance of the middle managers who are 3. Are your vision and values attractive to and supported closer to the actual behaviour and opinions of employees and by your stakeholders? have an understanding of the different subcultures and their impact on the organisation. FURTHER READING C To explore the Image–Culture gap you should ask: 1. What images do stakeholders associate with your company? 2. In what ways do your employees and stakeholders interact? 3. Do your employees care about what customers think Mary Jo Hatch and Majken Schultz – about the company? ‘Taking Brand Initiative’

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An example for consideration It is for each organisation to determine the appropriate approach “Oversee the brand, valued behaviours and reputation of the to address the new requirements of the Code and subsequently Group. The Committee’s role will cover the review of: the best way to provide reporting to communicate progress. brand positioning, the Group’s culture, valued behaviours and Strategic report However, it is helpful to look for inspiration from existing examples the Group’s Conduct Management Framework, reputational risk Brand, Values and Conduct Committee of reporting that are already working towards this new framework management, the Group’s key sustainability priorities and its and we like the approach taken by Standard Chartered. approach to main government and regulatory relationships. (The Board Financial Crime Risk Committee will be responsible Standard Chartered have recognised the link between brand for considering reputational risk matters which arise in the “ We aim to demonstrate our reputation, values (the desired behaviour of the organisation) context of financial crime.) The Committee will have oversight leadership in sustainability and their culture (the way things actually get done) and have with continued progress on

of how the Group delivers against its brand promise to clients, REPORT DIRECTORS approached it by having a dedicated Brand, Values and all facets of Environmental, shareholders, regulators, employees, the communities in which Social and Governance Conduct Committee. the Group operates and other external stakeholders.” standards across the Group” Taken from their Brand, Values and Conduct Committee Terms Committee composition The area of most signiﬁcant progress was Sustainability. In March 2018, the Board agreed of Reference, the purpose of the Committee is to: a refreshed Sustainability Philosophy and strategy to support sustainable and responsible Scheduled meetings growth through our operations, client relationships and community programmes. We aim J M Whitbread (Chair) 4/4 to demonstrate our leadership in sustainability with continued progress on all facets of Environmental, Social and Governance standards across the Group. We have also refreshed Dr Han Seung-soo, KBE 3/4* our framework of Position Statements, making explicit the challenges and trade-offs we

C M Hodgson 4/4 need to consider, and taking a forward-leading position on fossil fuels that was generally review Capital and review Risk well received by our stakeholders. O P Bhatt 4/4 Dr N Okonjo-Iweala 4/4 Having paid particular attention to Culture in previous years, we received regular reports on how the Group’s Valued Behaviours are being embedded and the resulting outcomes. We * Dr Han Seung-soo was absent from the December spurred on the crystallisation of our desired culture and continued with our regular review of Committee meeting due to prior arranged business commitments the Group Culture Dashboard designed to help assess progress against this. To complement this view, we encouraged the development of a Group Conduct Dashboard; the intention Other attendees at Committee meetings in being to regularly review these two views of the business in conjunction. We gave input to 2018 included: Group Chairman; Group Chief a working demonstration of this new Dashboard and look forward to future reports on how Executive; Group Head, Human Resources, the this is used to highlight areas of attention and best practice at all levels within the Group. Group Head Corporate Affairs, Brand & Marketing and Compliance and the Group Company Secretary. We followed through on last year’s review of how the Group manages Reputational Risk, Dr B E Grote attended one of the Committee monitoring the fulﬁlment of recommendations in 2017 from Group Internal Audit, in particular

meetings in 2018 as part of his ongoing the development and implementation of a Reputation Risk Framework, which we now use Financial statements engagement programme. to assess how well this risk is managed by the Group. Details of the Committee members’ experience can The Committee continued to seek assurance more broadly from Group Internal Audit, where be found on pages 57 to 59. the approach to assessing culture continues to develop using a mix of quantitative and anecdotal evidence. We also considered the Speaking Up and Grievance reports prepared Main responsibilities of the Committee for the Audit Committee, as well as the My Voice employee engagement survey and results The Committee has responsibility for reviewing the from other tools to inform our assessment of performance and risk across our remit. Group’s brand, culture, valued behaviours and We discussed the progress on the Brand Refresh Campaign, the Group’s first major global conduct, as well as the processes by which the Group brand campaign since 2014, which saw a continuation of our Here for good brand promise. identifies and manages reputational risk, sustainability We reviewed the performance of the campaign against the agreed brand metrics and priorities and the approach to main government and considered how the Group plans to maximise the potential of its future marketing efforts. regulatory relationships. One of our Committee meetings in 2018 was held in India, which provided the opportunity The Committee reports to the Board on its key areas to engage with employees and partner organisations to obtain first hand insights on brand, Supplementary information of focus following each Committee meeting. culture and reputational matters at a local level. In addition, Committee members between The Committee has written terms of reference that them visited 11 other countries, furnished with a readout of the culture dashboard for that can be viewed at sc.com/termsofreference market, prompting rich dialogue with local management and stakeholders. Committee members also participated in the Group’s Community Engagement work, including the celebrations of the 15-year anniversary of Seeing is Believing (SiB), our global programme to tackle avoidable blindness and visual impairment, and the announcement that we surpassed our $100 million fundraising target for SiB and reached 176 million people from 2003 to 2018. With this SiB milestone achieved, the Committee endorsed the Group’ s new Community Engagement strategy that aims to tackle inequality and promote economic inclusion for disadvantaged young people in our markets. We continue to strive to raise the bar to ensure the Committee is adding value. Outside of Committee meetings we held discussions on external reviews of culture in the banking sector, on triangulation with other committees, and on our own ways of working to inform our plans for the year ahead.

Jasmine Whitbread Chair of the Brand, Values and Conduct Committee 83

22 23 www.jonesandpalmer.co.uk/governance www.jonesandpalmer.co.uk/governance

Provision 1 example – Mondi plc Value in the long term, opportunities and risk

The External Context section in the Mondi plc Annual Report discusses three key themes: Enhancing brand value, Digitalisation and interconnectivity, and Sustainability. The challenges and opportunities for each of these themes and how Mondi are responding to them are outlined.

14 External context 15 Opportunities and challenges in a rapidly changing world

We operate in a fast-paced world with diverse Mondi is well-positioned to proactively and complex issues impacting the planet, respond to three of the most relevant themes: Digitalisation and interconnectivity society and the way we do business. e Enhancing brand value Overview and challenges It is more important than ever that We have digitalisation projects underway Our success is built on our ability to anticipate e business improves transparency of global across a number of business areas to and respond to the challenges and opportunities Digitalisation and interconnectivity Accelerating technological innovation brings new opportunities for Mondi as well supply chains and new technologies can enhance customer satisfaction, drive

e Sustainability Overview we face today and in the future, partnering as our customers. For Mondi, it means help address risks related to human performance, optimise pricing and facilitate with others to find long-term solutions. going beyond the automation of repetitive, rights and environmental impacts of customer collaboration 24/7. supply chains. mechanical tasks. We are training our Operational efficiency initiatives include employees to maximise the effectiveness For our customers, digitalisation has brought further improved production process of automation so they can focus on opportunities to reach new and existing stability and product quality, reduced waste Enhancing brand value the roles that humans still do best – consumers far beyond the boundaries of and predictive maintenance. continuous improvement and innovation. bricks and mortar. However, growing online Digitalisation enables a greater level Overview and challenges Pre and post consumption, our Our range of shelf-ready packaging and Technology will make us effective, but it’s retail activity requires efficient primary and of traceability within our supply chain consumers and customers expect point-of-sale display solutions help our our people who make us smart. secondary packaging solutions to protect A rising middle class in emerging markets, with a focus on raw material sourcing, our packaging to be sustainably customers reduce handling costs while and track goods in transit, while optimising an ageing population in the developed Technology also supports transparency. especially fibre. Across our supply chain, disposable and made using minimum enhancing shelf attractiveness with packaging requirements and minimising world, urbanisation and evolving lifestyles With widespread use of the internet, we promote transparency through active materials – renewable and recyclable our high-quality and visually impactful waste. E-commerce is rapidly growing globally are changing the way brand mobile technology and social media, engagement with customers, consumers wherever possible. print solutions. and transforming the retail landscape. owners engage with their customers. society now has greater access to and the wider public about how we do With packaging for e-commerce expected Whether through traditional retail and Enhancing brand value also means a much wider range of information business. Using digital technology we Opportunities and how to grow at an annual growth rate of 11% in report Strategic distribution or growing e-commerce designing packaging that prioritises and the ability to use their collective are able to standardise and strengthen Europe and 14% globally1, it provides us with channels, brand owners are under we are responding functionality. For example, developing power to shape business and influence our social and environmental practices significant growth opportunities with the right increased pressure to differentiate We continue to invest for growth to tailored solutions that make brands more public policy. In the eyes of today’s through analysis, monitoring and in- packaging solutions. themselves from competitors. 2018 was enhance our product and service useful by adding convenience features to stakeholders, businesses are responsible depth reviews of activities within our a year in which bricks and mortar stores offering and we are leading the industry ensure that the packaging is easy to use, for managing their impact not only within supply chain. This enables us to address, and e-commerce came closer together, as in innovative design for EcoSolutions: easy to store and extends the product their own operations, but also across Opportunities and how manage and mitigate risks. smart brands recognised the consumer’s paper where possible, plastic when useful. shelf-life. This can include hassle-free their increasingly complex supply chains we are responding desire to interact with brands physically With our six specialised R&D centres and openings, reclosability features, multi- including our customers’ customers. The digital revolution is creating 1 Smithers Pira, The Future of e-commerce packaging to 2022 as well as virtually and increasingly to global reach, we develop partnerships barriers and on-the-go solutions. opportunities for us to scrutinise our personalise their offer. with our customers to create innovative production processes, supply chains, We also know how important it is for us to and appealing packaging designs that customer interfaces and employee In this interconnected world, packaging help our customers to stay competitive by portray our customers’ brand values engagement platforms to explore new ways has become the key link for the consumer simplifying their processes and reducing and differentiate them either on the store of working to better achieve our purpose. across multiple senses – sight, touch, costs, while still creating packaging that shelf or when their customers receive the sound and smell. For our customers, exceeds customer expectations. great packaging embodies brand values product at home. and offers a consumer experience which stands out from the crowd. Governance On or offline, packaging is the first Spotlight on packaging for premium brands Spotlight on e-commerce interaction the consumer has with a product, so it plays a critical role in the ® decision making process. We expect a Benetton shopping bags Mondi Vino Box Sprint lot from packaging. It needs to catch the eye, which for well-known brands means Premium brands like Benetton The digital era has transformed Speed of filling can also make a can enhance their customers’ the way we consume goods. difference to a busy e-commerce being immediately recognisable, and experience with luxurious, natural Mondi’s strong portfolio of business, so we developed Mondi for challenger brands it means stealing and sustainable shopping bags corrugated e-commerce solutions Vino Box® Sprint for online wine attention away from the familiar. When the made from Mondi’s speciality and MailerBAG, our paper-based merchants. It can safely ship up consumer first touches the packaging it kraft paper. Our ‘shoppingworld’ e-commerce bag, are made to six wine bottles and is 100% portfolio is built on consumer from renewable materials and recyclable. There is no additional needs to represent the brand’s quality trend insights, branding expertise protect goods in transit, giving assembly needed, it simply and value. In addition, it still has to protect and paper grades that combine our customers the possibility pops up from a flat pack with an the product through a ‘frustration free high functionality with outstanding to differentiate themselves integrated divider, instantly ready

printability. A shopping bag is more by enhancing the consumer to fill. The result is a saving of up to Financial statements packaging’ journey from manufacture than a useful transportation vehicle. experience. We also optimise 80% in assembly time compared to to consumption, whether it is fragile, It is part of the brand experience. packaging sizes to avoid wasteful standard wine packaging. awkwardly shaped, heavy or vulnerable. A superior product loses value in over packaging. a shabby bag. If retailers get this right, consumers reuse their bag as an accessory and an expression of their lifestyle – and thus become valuable brand ambassadors.

Mondi Group Mondi Group Integrated report and financial statements 2018 Integrated report and financial statements 2018

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Provision 1 example – Mondi plc Value in the long term, opportunities and risk

16 External context 17

Sustainability

Demand for sustainable packaging and Much more rapid climate change Urban centres are estimated to generate EcoSolutions: paper where In the last decade, Mondi has reduced We are working with partners across paper solutions is fortunately here to stay. Dramatic changes due to climate change 80% of economic growth; the potential possible, plastic when useful the average weight of corrugated boxes our value chain to reinvent flexible plastic Consumers around the globe are increasingly exists to apply modern technologies and and paper bags, while increasing strength packaging so that it is fit for a circular are already occurring at a faster rate than Mondi is actively leading the future of a demanding packaging solutions that are infrastructure, promoting better use of and functionality. Mondi continues to economy. Mondi is one of the first Overview expected. Climate change will worsen sustainable packaging industry by showing sourced, produced and can be disposed of scarce resources3. seek new sustainable product innovation signatories of The New Plastics Economy the outlook for the availability of critical that contributing to a better world makes responsibly. The legitimacy of a compelling across both its paper and plastics business Global Commitment – committing to 100% resources such as food, water and energy. good business sense, driving innovation business model will be increasingly linked Access to sustainable fibre areas. We are actively working with of plastic-based packaging being reusable, The severity of existing weather patterns and change throughout the value chain. to the real value created for society as a our customers, suppliers and recycling recyclable or compostable; and 25% being is set to intensify in future, with wet areas Forests are core to the cultures and livelihoods We believe all packaging must be ‘fit for whole. Products manufactured within the companies to find innovative solutions that from recycled content (where it does not getting even more wet, and dry and arid of communities worldwide with some purpose’: paper where possible, plastic limits of the planet, and that enable society 3 improve the sustainability of packaging. compromise functionality or food health areas becoming more so . In recent years, 1.6 billion people relying on them for their when useful. We offer a range of high- to address its challenges, make clear social, 6 requirements) by 2025. the extremely dry summers in Europe have livelihoods . Deforestation and illegal logging performance paper-based, flexible plastic Flexible plastic packaging, when environmental and business sense, and led to water shortages that have impacted contribute to biodiversity loss and climate and hybrid packaging solutions. By taking manufactured, used and disposed of We believe our flexible packaging open up opportunities for brand growth on a businesses including packaging and change, negatively impacting on ecosystem a holistic view, we can develop packaging appropriately, delivers many benefits: from solutions can contribute towards global global scale. Below are the most important paper manufacturers. services, and encroaching on the livelihoods that considers the needs of each customer, resource efficiency (by reducing material sustainable plastics, based on circular sustainability themes that we see affecting our and human rights of people around the their products and the planet. usage and being less transport intense) to economy principles. business today and in future. The 2018 IPCC ‘Special Report on Global world. The last few decades have seen a reducing food waste by enabling correct Warming of 1.5°C’ states that limiting For many years Mondi has been making slowdown in net global deforestation, and in sized portions and extending shelf-life. Overview and challenges global warming to 1.5°C would require sustainable fibre-based and flexible plastic Strategic performance Europe forests are not declining. More forest report Strategic rapid, far-reaching and unprecedented However, we recognise the urgent need Page 28-35 The cost of unnecessary plastic areas are coming under protection and packaging for forward-thinking FMCG changes in all aspects of society, with clear to collaborate to make plastic packaging Business reviews more countries are actively improving forest brands, and working in collaboration 2018 saw unprecedented awareness about benefits to people and natural ecosystems. more circular and bring about the system Page 68-83 management. Despite this, only around 11% with sustainable materials suppliers the impact plastic has on our environment. Achieving this will require urgent and change required in order to achieve this. of global forests are certified7 and the shortage and recyclers. Around 25% of total plastics produced fundamental action, beyond business as of sustainable fibre on the market remains a worldwide are used for packaging, 95% usual. Businesses have a critical part to significant challenge. of plastic packaging’s material value is lost play – both in reducing emissions and after a first (sometimes short) use, and at providing solutions for mitigating and least 8 million tonnes of plastic leaks into the adapting to climate change. Opportunities and how oceans every year1. we are responding Governments are introducing new The need for resource efficiency We are convinced that growing responsibly legislation around single-use plastics and in a growing world and contributing to a better world is in the Spotlight on sustainable packaging by design plastic waste and, with China (previously Industrial growth since the mid-20th century best interest of all our stakeholders and the world’s largest importer of plastic has created wealth, development and our continued success as a business. waste in the world) no longer accepting economic growth, but it has also endangered We’re committed to continuing this journey perFORMing – the #1 natural, Recycled washing powder imports of certain types of plastic as of the crucial ecosystems that society relies on. and we constantly adjust our response brown formable paper solution packaging 2017, western countries are needing to The global population is growing at a rapid to the evolving sustainable development Governance deal with their plastic differently, leading pace, especially in urban areas. We know landscape through the framework of Newly patented Mondi perFORMing is a paper-based multilayer, Together with a recycling partner (APK AG) – who have developed a thermoformable packaging material that reduces plastic by up to 70% process called Newcycling® – Mondi has tested the suitability of recycled to even bolder targets and regulations. that we use the equivalent of 1.7 planets to our Growing Responsibly model, which explains how we approach sustainability by using coated Advantage Formable paper instead of plastic in trays polyethylene (PE) for multi-layer films by designing a new plastic packaging The EU Strategy for Plastics in the Circular provide resources and absorb waste, and for attractive cheese and cold meat packaging. This innovative solution, solution for washing powder that replaces up to 80% of the previously Economy states that all plastic packaging scientific evidence makes it clear that we are to create value for our business and for our which is also recyclable in some countries, shows the unique benefits of virgin PE layer with post-industrial waste. The result is a high-quality pushing our planet’s natural systems to the stakeholders. Among our 10 Action Areas being able to combine expertise from our Extrusion Coatings, Speciality packaging laminate that maintains the functionality requirements of our should be reusable or recyclable by 2030. Kraft Paper and Technical Films businesses. customer, reduces the demand for virgin fossil based PE and achieves a edge4. Demand for food, water and energy are ‘sustainable fibre’, ‘climate change’, As governments and consumers increase packaging solution containing up to 50% recycled materials. is set to grow substantially by 2030 (food ‘constrained resources and environmental their demand for sustainable plastics, big to rise by 35%, water by 40%, and energy impacts’, and ‘solutions that create value fast moving consumer goods (FMCG) by 50%)3. Tackling problems pertaining to for our customers’ – showing how we are and retailer brands are coming under one commodity will be linked to supply and responding to the themes set out above. the most scrutiny for the plastic they demand for the others. use in their products and packaging. Sustainability performance Page 48-63 Many of our biggest customers have already Economic development and production communicated ambitious targets and they patterns are also shifting to the east and are going to be relying on us to provide south, with overall trade volumes, disposable Online Sustainable development report Financial statements www.mondigroup.com/sd18 them with innovative high-quality sustainable income and consumption rising. The US, solutions from across our product portfolio. European, and Japanese share of global income is projected to fall from 56% today to 1 Ellen MacArthur Foundation Flexible plastic, which typically uses 2 Flexible Packaging Europe well under 50% by 20303. 5.3 billion people 3 National Intelligence Council: Global Trends 2030 70% less material than rigid plastic2 4 Footprint Network and WWF Living Planet , and are expected to make up the middle classes innovative plastic-paper combinations can Report 2018 by 2030, up from 3.6 billion people today5, 5 World Data Lab provide essential functionality that is critical 6 WWF with the middle classes in the developing to fulfil the purpose of the packaging (for 7 UNECE: Forest Products Annual Market Review 2016-2017 world poised to expand substantially. example preventing food waste).

Mondi Group Mondi Group Integrated report and financial statements 2018 Integrated report and financial statements 2018

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Provision 1 example – Centrica plc Value in the long term, opportunities and risk

The Our Strategy section in the Centrica Annual Report discusses how they defined their strategy based on the key trends in their markets. This shows how the opportunities and challenges of their markets have been responded to by the company.

Strategic Report Our Strategy In 2015 our Strategic Review was founded on an analysis of market trends and sources of growth, and the capabilities and efficiency necessary to pursue them profitably.

To deliver for the changing needs of our customers Strategic context Our divisions Strategic approach To deliver long-term shareholder We identified three fundamental trends In 2017, we reorganised the Group around the customer, creating To deliver the strategy we announced value through returns and growth which are changing the energy landscape: two new, customer-facing divisions: Centrica Consumer and in July 2015, we set ourselves a number decentralisation, shifting of power to the Centrica Business, which address global customer needs that of medium-term objectives to 2020 To be a trusted corporate citizen customer and digitisation. go beyond energy supply and target those areas where we and focus areas of long-term growth. To be an employer of choice have real competitive advantage. Alongside this, we refocused our Exploration & Production business. Our strategic objectives To be a 21st century energy • Customer-led growth and services company Centrica Consumer • Smaller and more focused Decentralisation E&P business Globally, as a result of the need to tackle Market trends: Customer needs: • £1.5 billion resource reallocation from climate change, we require lower carbon • Global demographic • Value for money E&P and Central Power Generation to and more efficient solutions. This is changes • Solutions not just products customer-facing businesses 2015/20 driving the energy system to become • Adoption of technology • Frictionless service • £1.25 billion p.a. efficiency programme decentralised with technologies such • Mobile first • Trusted brands delivery by the end of 2019 and a as renewable generation, batteries, • Self-service • Responsible use of data further £500 million p.a. beyond 2019 • Traditional competitive and demand response available and • Strong financial discipline within boundaries blurring viable, close to the customer. a clear framework • Growth of data and analytics • Adjusted operating cash flow Power to the customer growth of 3-5% p.a. Read more about Centrica Consumer on As a result of increased choice and Pages 20 to 23 and 28 to 31 alternatives, the customer is becoming Our focus areas for more powerful. Owning the relationship long-term growth with customers and satisfying their • Energy Supply needs is fundamental. Centrica Business • Services • Connected Home Digitisation Market trends: Customer needs: • Volumes per customer • Reduced cost and increased • Distributed Energy & Power Technological developments, both physical reducing productivity • Energy Marketing & Trading and digital, are accelerating the pace of • Margins under pressure • Supply security and resilience change. Capability in these areas is key • Gas becoming global • An expert partner to guide to keeping up with customers and their • Mega-trends impacting them through complexity Section 172 Directors’ Duties changing needs. energy sector • A trusted and credible counterpart The Directors continue to have regard to the • Electricity system • Not to be distracted from interests of the Company’s employees and becoming more local their main activity other stakeholders, including the impact of its activities on the community, environment and the Company’s reputation, when making Read more about Centrica Business on These trends demand decentralised Pages 24 to 26, 28 to 29 and 32 to 33 decisions. The Directors, acting fairly between propositions, customer intimacy and members, and acting in good faith, consider what is most likely to promote the success of service, agility and technology capability the Company for its members in the long term. as the customer becomes increasingly

powerful. That is why, at Centrica, Exploration & Production Read more about our Stakeholder our purpose is ‘to provide energy Engagement on Exploration & Production (E&P) is now more focused, providing diversity Pages 52 to 55 and services to satisfy the changing of cash flows and is a source of balance sheet strength. Following our needs of our customers’, and this is divestment programme, the formation of Spirit Energy, and conversion of Read more about Delivering our Responsible Business Ambitions on at the heart of our strategy. the Rough field to a producing asset, the E&P business is focused on Europe. Pages 56 to 65

Read more about how we manage Risks on Read more about Exploration & Production on Pages 41 to 51 Page 27 and pages 28 to 29 and 34 to 35 Read more about our Governance on Pages 66 to 112

14 Centrica plc Annual Report and Accounts 2018 Centrica plc Annual Report and Accounts 2018 Centrica plc Annual Report and Accounts 2018 15

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Provision 1 example – Coca Cola HBC plc The sustainability of a company’s business model

The Coca Cola HBC model follows the business model framework from integrated reporting. It includes key resources and relationships inputs, a high-level overview of the activities of the company, and the outcomes of the business model in terms of direct and indirect economic impacts. This business model discusses the non-financial value generated by the company.

14 COCA-COLA HBC 15 OUR BUSINESS MODEL SR

FS OUR BUSINESS SSR SI MODEL

Our business model is at the heart of everything we do. It supports our growth and defines the activities we engage in, the relationships we depend on and the outputs and outcomes we aim to achieve in order to create value for all of our stakeholders in the short, medium and long term.

1 Our resources and relationships 2 What we do 4 Value created

Human We are a bottling partner of The Coca-Cola Company Direct and indirect economic impacts Our 28,884 people bring talent and This means that we use the concentrates, or beverage bases from strong capabilities relevant to all aspects The Coca-Cola Company, to manufacture, package, merchandise, Contribution to local economies distribute, activate and sell the final branded products to our trade of our business, from community and Operating in 28 countries, we are an partners and consumers. customer relations to the innovative important contributor to local economies 28 thinking necessary to drive value growth and society. Our business has an impact Countries in Europe and Africa and efficiency. es dema C at nd oca either directly through our core operating re - c C activities or indirectly through the broader y o l value chain. We also contribute by investing Natural n Bottling a a H p in community programmes to address Water is the most important ingredient Trademark ownership Sales and distribution B m environmental and social issues. for nearly all of our products. Energy, C o Customer management

Concentrate supply d

sugar, aluminium and PET resin are also

In-outlet execution e

a Brand development Value for wider stakeholders l

critical inputs which we seek to source i

o Investment in production

Consumer marketing e Our business activities generate income

responsibly and use efficiently. C

facilities, equipment, r -

s for our employees, and revenue for suppliers €328m a

vehicles d

c Total taxes

o and contractors, improve our customers’

e Social and relationship n h profitability, and support public wellbeing

d Our social ‘licence to operate’ is due T and infrastructure. In 2018, our percentage to our reputation and the trust of key of satisfied key account customers was stakeholders. Our most valuable 81.3%, an improvement of 2.5pp. Total taxes stakeholder relationships are with were €328m, which makes a contribution The Coca-Cola Company, and our to local communities. people, customers, suppliers and partners as well as governments and regulators. Dividend and share value Through careful management of all inputs How we do it to our business, we also create profits which €447m Financial 3 benefit shareholders through dividend Net profit achieved in 2018* Our business activities require financial payments and the value of our shares. capital, which includes shareholders’ Sourcing sustainable Manufacturing equity, debt and reinvested cash. materials & packaging Socio-economic impact Coca-Cola HBC has only one class We measure our impact through the regular of shares; ordinary shares. We work with 32,000 Using concentrate from conduct of socio-economic impact studies 18 suppliers to procure the The Coca-Cola Company, Number of countries where we finest ingredients, raw and other ingredients, (SEIS) across our markets. Over the last conducted SEIS Intellectual materials, equipment we produce, package three years we have conducted SEIS in 18 Our intellectual property includes and services. and distribute products. of our countries. our packaging, product and cooler Direct and indirect employment innovations, and our operational excellence systems. As we evolve our Serving consumers Delivering to According to a survey conducted within the European Union, the Coca-Cola System 500,000 beverage portfolio, the importance of & communities our customers Direct and indirect jobs supported these types of innovation is increasing. supports more than 500,000 direct and We continue to innovate We manage customer indirect jobs across our value chain through our product portfolio relationships as well as the sourcing of ingredients, raw materials, Manufacturing to meet the changing promotions and displays equipment and services. In 2018, our total As a bottler, we require production consumer preferences at the point of sale. supplier spend was €3,237m, with 98% spent €3,237m and logistics assets that allow us to in the market. with local suppliers. Supplier spend manufacture, package and deliver our products to meet the demands Our values underpin how we work. * Net Profit and comparable net profit refer to net profit and comparable net profit of customers and consumers. Read more in our People section on pages 26-33 respectively after tax attributable to owners of the parent.

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Provision 1 example – SSE plc How the board’s governance contributes to the delivery of its strategy

The SSE report explains in detail how the board’s governance has supported the strategy of the company. The different activities required to set, oversee, resource and support the delivery of the strategy are outlined and linked to the strategic pillars and principal risks.

DIRECTORS’ REPORT – CORPORATE GOVERNANCE

Board meetings and activity in 2018/19 continued

SSE’S STRATEGY SETTING AND OVERSEEING

STRATEGIC PILLAR #1 DELIVERY OF STRATEGY Link to Link to strategic Link to Group strategic Link to Group pillar Principal Risk What was reviewed and considered? pillar Principal Risk What was reviewed and considered? Focusing COMPANY PURPOSE Reconsideration of SSE’s COMPANY PURPOSE Reconsideration of SSE’s Reviewed the definition of SSE’s core purpose, in light of the Company’s long-termReviewed strategic the definition focus and of the SSE’s core purpose, in light of the Company’s long-term strategic focus and the core purpose core purpose widely recognised stakeholder interest for increased clarity, at a time when thewidely role ofrecognised business instakeholder society interest for increased clarity, at a time when the role of business in society on the core … is under significant scrutiny. A re-defined purpose was agreed: to provide the isenergy under neededsignificant today scrutiny. while A re-defined purpose was agreed: to provide the energy needed today while building a better world of energy for tomorrow. building a better world of energy for tomorrow. … by maintaining safe and efficient Large capital Reviewed the progress of projects in construction and developmentLarge capital including Beatrice,Reviewed Seagreen, the progress Doggerbank of projects in construction and development including Beatrice, Seagreen, Doggerbank operation of low-carbon and flexible SSE RENEWABLES The development of SSE’sSSE RENEWABLES The development of SSE’s projects quality and Viking*, considering: delivery against plan; project financingprojects and quality consents; projectand Viking*, risks; ownership considering: delivery against plan; project financing and consents; project risks; ownership thermal assets. offshore wind portfolio offshore wind portfolio structure; and CfD qualification and governance to support effective compliancestructure; and with all regulatory CfD qualificationrequirements. and governance to support effective compliance with all regulatory requirements. * Viking wind farm is eligible to compete in Allocation Round 3 as “remote island wind”. * Viking wind farm is eligible to compete in Allocation Round 3 as “remote island wind”. Opportunities within SSE’s OpportunitiesEnergy within infra- SSE’s Considered opportunities for realisation of asset value Energythrough partnerships infra- whichConsidered would opportunities benefit from thefor realisation of asset value through partnerships which would benefit from the STRATEGIC PILLAR #2 onshore wind portfolio onshore windstructure portfolio failure existing strengths and expertise of each party. structure failure existing strengths and expertise of each party. Large capital Received updates on initial findings of the team assessingLarge renewables capital opportunitiesReceived in updatesother geographies. on initial findings of the team assessing renewables opportunities in other geographies. Developing, projects quality projects quality Financial Agreed to sell a stake in Stronelairg and Dunmaglass windFinancial farms and to returnAgreed value toto shareholderssell a stake in andStronelairg and Dunmaglass wind farms and to return value to shareholders and operating liabilities reduce net debt through a discretionary share buybackliabilities programme. reduce net debt through a discretionary share buyback programme. and owning … THERMAL Investment in complementaryTHERMAL Investment Energyin complementary infra- Considered the electricity mix and role of industry leadingEnergy technologies infra- in deliveringConsidered new-build the electricity flexible mix and role of industry leading technologies in delivering new-build flexible flexible thermal generation and flexible thermalstructure generation failure andgeneration, and security of supply in a low-carbon energystructure system. failure generation, and security of supply in a low-carbon energy system. … applying world-class skills and review of the generation mix review of theEnergy generation infra- mix Worked with CCGT supplier Siemens and agreed to investEnergy in the infra- development Worked of a next with generation CCGT supplier high- Siemens and agreed to invest in the development of a next generation high- experience to the low-carbon structure failure efficiency CCGT at Keadby 2, following appraisal of thestructure strategic failure context, rationale,efficiency project CCGT economics, at Keadby 2, following appraisal of the strategic context, rationale, project economics, infrastructure needed now and market analysis and associated risks. market analysis and associated risks. in the future. Large capital Reviewed the progress of existing projects including FerrybridgeLarge capital Multifuel 2. Reviewed the progress of existing projects including Ferrybridge Multifuel 2. projects quality projects quality Energy infra- Agreed the closure of Fiddlers Ferry Unit 1 following assessmentEnergy infra- of the marketAgreed conditions, the closure challenging of Fiddlers plant Ferry Unit 1 following assessment of the market conditions, challenging plant STRATEGIC PILLAR #3 structure failure economics, transmission entry capacity position and thestructure long-term failure policy outlookeconomics, for coal transmission generation; entry and capacity position and the long-term policy outlook for coal generation; and considered how to communicate to employees and other stakeholders. considered how to communicate to employees and other stakeholders. Creating REGULATED NETWORKS The reliable operation ofREGULATED SSE’s NETWORKS The reliableLarge operation capital of SSE’sReviewed the project plan and progress surrounding theLarge final capital stages of construction,Reviewed commissioning the project plan and and progress surrounding the final stages of construction, commissioning and economically regulated electricity economicallyprojects regulated quality electricityelectrification of the Caithness-Moray transmission link,projects considering: quality project electrificationcomplexity; delivery of the againstCaithness-Moray transmission link, considering: project complexity; delivery against value … BUSINESSES networks and delivery ofBUSINESSES leading networks and delivery of leadingtimelines and budget; sub-contractor performance and safety; key risks; regulatortimelines engagement; and budget; and sub-contractor the performance and safety; key risks; regulator engagement; and the customer service through a customer service through a role of the asset in deployment of renewable energy to the electricity system.role of the asset in deployment of renewable energy to the electricity system. … through disciplined investment programme of capital investment programmeEnergy of capital infra- investmentGranted approval of project funding to support modernisationEnergy infra- of existing criticalGranted national approval infrastructure of project and funding to support modernisation of existing critical national infrastructure and and transactions that contribute structure failure increase generation connection capacity. structure failure increase generation connection capacity. to its primary financial objective. Energy infra- Confirmed the opportunities for future growth in line withEnergy the infra- needs cases forConfirmed transmission the linksopportunities to for future growth in line with the needs cases for transmission links to structure failure Orkney, Shetland and the Western Isles, and the need forstructure continued failure stakeholderOrkney, engagement Shetland surroundingand the Western Isles, and the need for continued stakeholder engagement surrounding these proposals. these proposals. STRATEGIC PILLAR #4 Large capital Reviewed performance and delivery within DistributionLarge under capital the incentive basedReviewed framework, performance considering and delivery within Distribution under the incentive based framework, considering projects quality key metrics and improvement projects within customerprojects service quality and connections.key metrics and improvement projects within customer service and connections. Being Politics, regulation Received updates on the progress of capability studiesPolitics, and collaborative regulation sector-leadingReceived updates Distribution on the System progress of capability studies and collaborative sector-leading Distribution System sustainable … and compliance Operator projects. and compliance Operator projects. INFRASTRUCTURE AND Providing infrastructure INFRASTRUCTURE AND Providing infrastructureDevelopment Approved strategic divestments which would result in Developmentrealisation of business potential,Approved whilststrategic safeguarding divestments which would result in realisation of business potential, whilst safeguarding … by pursuing targets aligned to four and assets within SSE Enterprise and assets withinand change SSE Enterprisecustomer and employee interests, including the plannedand disposal change of SSE Watercustomer and the andsale of a employee stake in interests, including the planned disposal of SSE Water and the sale of a stake in UN Sustainable Development Goals. RELATED SERVICES with the best platform forRELATED success SERVICES with the best platform for successSSE Telecoms. SSE Telecoms. Considering the future of ConsideringAll the principal future risks of See Significant Developments on pages 88 to 92 . All principal risks See Significant Developments on pages 88 to 92 . SSE Energy Services SSE Energy Services INVESTMENTS Returns and performanceINVESTMENTS of Returns andEnergy performance infra- of Reviewed the role of E&P asset investment within SSE’sEnergy business infra- portfolio andReviewed the preliminary the role findings of E&P asset investment within SSE’s business portfolio and the preliminary findings non-core investments and assets non-core investmentsstructure failure and assetsof the gas discovery within the Glendronach prospect.structure failure of the gas discovery within the Glendronach prospect. PERFORMANCE Operational performancePERFORMANCE OperationalDevelopment performance Reviewed the performance of each business at every BoardDevelopment meeting and considered:Reviewed key the strategic performance of each business at every Board meeting and considered: key strategic of SSE’s businesses of SSE’s businessesand change opportunities and challenges, regulatory, policy and marketand change developments, stakeholderopportunities considerations and challenges, regulatory, policy and market developments, stakeholder considerations and material business outcomes. and material business outcomes. SUSTAINABILITY Strategy centred on sustainabilitySUSTAINABILITY Strategy centredSafety andon sustainabilitythe Approved the plan and priorities to further SSE’s sustainabilitySafety impacts and the and continueApproved delivery the of planresponsible and priorities to further SSE’s sustainability impacts and continue delivery of responsible environment operations including: endorsing a letter of commitment toenvironment the UN Global Compact;operations agreeing including: a new carbon endorsing a letter of commitment to the UN Global Compact; agreeing a new carbon intensity ambition; approving SSE’s Modern Slavery Statement; and adopting fourintensity UN Sustainable ambition; Development approving SSE’s Modern Slavery Statement; and adopting four UN Sustainable Development Goals underpinned by specific targets for delivery by 2030, which will in part, guideGoals future underpinned executive remuneration.by specific targets for delivery by 2030, which will in part, guide future executive remuneration.

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32 33 www.jonesandpalmer.co.uk/governance www.jonesandpalmer.co.uk/governance

Provision 1 example – SSE plc How the board’s governance contributes to the delivery of its strategy

DIRECTORS’ REPORT – CORPORATE GOVERNANCE

Board meetings and activity in 2018/19 continued The ‘One Henry Boot’ Project

BUILT FROM THE RESOURCING AND SUPPORTING GROUND UP

In last year’s report we introduced the ‘One Henry Link to Link to Boot’ Project. It was initiated to capture our THE DELIVERY OF STRATEGY culture, which we refer to as ‘The Henry Boot Way’; strategic Link to Group strategic Link to Group and to focus on three of its core elements: Our pillar Principal Risk What was reviewed and considered? pillar Principal Risk What was reviewed and considered? Purpose, Our Vision and Our Values. To ensure this project was authentic to Henry Boot we asked for volunteers from across our Group of companies, People and Culture/ Provided continued focus to SHE performance and culturePeople through and Culture/ a standing Provided review andcontinued discussion focus of: to SHE performance and culture through a standing review and discussion of: who we then divided into three individual Working SAFETY, HEALTH AND SHE performance and initiativesSAFETY, HEALTH AND SHE performance and initiatives Groups. It was a truly collaborative effort from everyone involved and by the end of June 2017, the Safety and the SHE KPIs; the impact of initiatives such as updated safetySafety language and the and communications;SHE KPIs; the SSE’s impact 50by20 of initiatives such as updated safety language and communications; SSE’s 50by20 first phase of the project was completed. ENVIRONMENT (SHE) ENVIRONMENT (SHE) Environment strategy and mental health awareness training; and feedbackEnvironment from the SHEACstrategy and Board and sitemental visits. health awareness training; and feedback from the SHEAC and Board site visits. We are currently on phase 2, which we have split into three separate stages: launch, adoption and embedding. It is very important to us that we do justice to the work undertaken, and that we ensure that the outputs from phase 1 are Politics, Regulation Monitored Brexit and the work of SSE’s dedicated projectPolitics, team Regulation surrounding identifiedMonitored risks, Brexit mitigating and the work of SSE’s dedicated project team surrounding identified risks, mitigating adopted throughout our business. To enable this to happen, EXTERNAL ENVIRONMENT Reviewing and understandingEXTERNAL ENVIRONMENT Reviewing and understanding 12 ambassadors were nominated to help champion the ‘One Henry Boot’ Project and therefore embed ‘The Henry Boot Way’ JOHN SUTCLIFFE and Compliance actions, contingency plans and practical preparations andincluding Compliance in respect of:actions, people; contingency volatility in financial plans and practical preparations including in respect of: people; volatility in financial into everything we do. Phase 1 also helped us appreciate the the operating context the operating context Chief Executive Officer Our Risk Framework supports importance of bringing everyone together to share feedback and how powerful this can be in helping continuous improvement and energy markets; supply chain and operational disruption; and the impactand on applicableenergy markets; EU legislation. supply chain and operational disruption; and the impact on applicable EU legislation. in the business. As a result we formed a further eight Working Groups in phase 2 who were each given a specific important the strategic development subject to debate and then put forward recommendations for Politics, Regulation Considered possible and actual political interventions Politics,covering: Regulation the control ofConsidered electricity networkspossible and and actual political interventions covering: the control of electricity networks and Watch the video explaining our culture and the improvements. ‘One Henry Boot’ Project on our corporate website This is only the start of the journey for us. This whole process and process, through a robust and Compliance continuing assessments of strategies to safeguard the andinterests Compliance of shareholders,continuing customers assessments and other of strategies to safeguard the interests of shareholders, customers and other experience has not been about reinvention, it has been about capturing what makes this business successful and recognising that our people remain vital to achieving this. ‘The Henry Boot assessment of the challenges stakeholders; capping the cost of energy for GB domestic customers; the GBstakeholders; capacity mechanism capping the cost of energy for GB domestic customers; the GB capacity mechanism Way’ will continue to be a crucial element of our business as I believe it will enable and empower our people and help us to be standstill period; development of the CfD auction rules; and carbon price support.standstill period; development of the CfD auction rules; and carbon price support. successful in the future. presented by the markets Timeline Politics, Regulation Reviewed regulatory policy and proposals leading to thePolitics, next priceRegulation control phaseReviewed under regulatory RIIO-2; the policy and proposals leading to the next price control phase under RIIO-2; the in which we operate, and AUGUST 2016 FEBRUARY 2017 FEBRUARY – AUGUST 2017 and Compliance potential for more active network management with theand transition Compliance to DSO; andpotential Ofgem’s for views more surrounding active network management with the transition to DSO; and Ofgem’s views surroundingPerception Launch of ‘One Henry Defined the implementation of audit Boot’ Project ‘The Henry Boot Way’ competition in transmission. competition in transmission. appropriate controls. Commodity Prices Monitored trends and movements within wholesale energyCommodity markets Pricesand assessedMonitored the resultant trends impact and movements and within wholesale energy markets and assessed the resultant impact and Ensuring that decision-makers exposure on short-, medium- and long-term strategy. exposure on short-, medium- and long-term strategy. 14 Henry Boot PLC Annual Report and Financial Statements for the year ended 31 December 2017

Henry Boot AR2017.indd 14 4/4/2018 8:23:17 PM have access to relevant risk FINANCE Maintaining financial disciplineFINANCE to MaintainingFinancial financial Liabilities disciplineApproved to the Group budget, reviewing key assumptions,Financial inputs Liabilities and risks, andApproved monitored the performance Group budget, reviewing key assumptions, inputs and risks, and monitored performance 25654 4 April 2018 8:20 PM Proof 15 information is essential to support sustainable delivery of support sustainable delivery ofand variance in results. and variance in results. strategy and financial objectives strategy and financial objectives the delivery of our strategy.” Financial Liabilities Considered the Group funding position and financing Financialrequirements Liabilities with inputConsidered from the Audit the Group Committee, funding position and financing requirements with input from the Audit Committee, reviewing the cost of capital and required rate of return, approving the issuancereviewing of: a nine the year cost Green of capital Bond and required rate of return, approving the issuance of: a nine year Green Bond Peter Lynas and two year floating rate note; and the refinancing and conversion of existingand Revolving two year Credit floating Facilities rate note; to and the refinancing and conversion of existing Revolving Credit Facilities to Sustainability Chair of the Audit Committee link to sustainability criteria. link to sustainability criteria. continued

Keller is known and respected for its high standards Protecting our environment Financial Liabilities Reviewed the long-term financial outlook to provide contextFinancial for Liabilities Board-level strategicReviewed decisions the long-term and financial outlook to provide context for Board-level strategic decisions and of honesty, fairness and integrity in our relations with We respect and protect the environment, and minimise employees, customers, suppliers, competitors and our impact on it – so we safeguard the future. the community. discussions. discussions. Standing up for what’s right Our Code of Business Conduct sets out: We always speak up when we believe our ways of working are being undermined – so we uphold our ways of working – Clear and common standards of behaviour that make together. Financial Liabilities Received updates on the discussions held with rating agenciesFinancial andLiabilities their decisionReceived to downgrade updates on SSE’s the discussions held with rating agencies and their decision to downgrade SSE’s it clear what’s expected by everyone who works in and with Keller Our Code of Business Conduct – continuous – A framework to guide decision-making when situations improvement credit rating by one notch, noting the continued relative strength within the sector.credit rating by one notch, noting the continued relative strength within the sector. aren’t clear-cut In 2016, we set out our high standards and guidance on how – A positive culture that keeps us successful and ensures we work in a simple Keller Code of Business Conduct. we operate in a way we can all be proud of – A public statement of our commitment to high standards During 2017, we completed online and face to face training Financial Liabilities Considered outlook and guidance surrounding expectedFinancial out-turns Liabilities and earnings,Considered confirming outlook an interim and guidance surrounding expected out-turns and earnings, confirming an interim that tells others they can rely on our integrity. on our ways of working across our businesses and INVESTORS Engaging with investors andINVESTORS Engaging with investors and established a network of Ethics and Compliance Officers To support the Code, we have ten group policies covering: who work in our business units alongside management, dividend of 29.3p per share and recommended full year dividend of 97.5p perdividend share. of 29.3p per share and recommended full year dividend of 97.5p per share. ultimately reporting into the Company Secretary. Keller’s remunerating their investment remunerating their investment – Health, Safety and Well-being externally facilitated whistleblowing hotline has been in – Sustainability place since 2015 and employees can access the hotline by – Human Resources post, website, email and telephone. Reports of potential Politics, Regulation Reviewed and approved shareholder communicationsPolitics, for release Regulation to the market, Reviewed including and but approved not limited shareholder communications for release to the market, including but not limited Conduct Business of Code – Competition Compliance breaches of our Code made to our ECOs or through the – Procurement hotline are reported quarterly to the Audit Committee. – Anti-Bribery and Anti-Fraud and Compliance to: the 2017/18 Annual Report and full-year financial statements;and Compliance the interim financialto: the 2017/18 statements Annual for Reportthe and full-year financial statements; the interim financial statements for the – Share Dealing All matters were investigated internally and action taken – Information Management where the complaint has been found to be substantiated. – Quality & Continuous Improvement six months to 30 September 2018; the 12 September 2018 trading statement;six and months the materials to 30 September to support 2018; the 12 September 2018 trading statement; and the materials to support– Whistleblowing. We place a high priority on the review and refresh of our efforts each year to ensure that we mitigate risk and support The Code of Business Conduct and our 10 group policies our employees to do business the right way. In 2018, we are SSE’s 2018 financial results and strategic focus on its low-carbon core and complementarySSE’s 2018 financial businesses. results and strategic focus on its low-carbon core and complementary businesses. can be found on our group website at: www.keller.com/ focused on further embedding awareness of our Anti- how-we-do-it/code-of-business-conduct.aspx bribery and Anti-fraud Policy, Competition Compliance Policy and our supply chain management procedures Our ways of working through a programme of targeted training for all employees. Politics, Regulation Monitored share price performance and reviewed feedbackPolitics, from Regulation investors, SSE’sMonitored brokers share and analysts.price performance and reviewed feedback from investors, SSE’s brokers and analysts. Keeping everyone healthy and safe We monitor the effectiveness of training through assessments We believe no one should be harmed as a result of any work undertaken by our ECOs and PwC, our internal auditors. we do – so everyone stays safe and well. and Compliance and Compliance Modern slavery Supporting employees’ rights and diversity The group’s modern slavery and human trafficking We value, support and protect the rights and dignity of the statement can be found on our website. We continue to individual and the diversity of our people – so we are all work to improve our policies and procedures to ensure Politics, Regulation Reviewed and approved the matters to be covered at thePolitics, 2018 Regulation AGM and the 2018Reviewed General and Meeting, approved the matters to be covered at the 2018 AGM and the 2018 General Meeting, treated with respect. slavery and human trafficking is not taking place anywhere in our supply chains. Work is ongoing to introduce or improve Maintaining ethical and honest behaviour controls through our Legal, HR and Procurement functions, and Compliance including the issuance of a shareholder Circular in respectand Complianceof the proposed SSEincluding Energy theServices issuance transaction. of a shareholder Circular in respect of the proposed SSE Energy Services transaction.We are always honest, act with integrity and comply with the bringing greater oversight of our local employment law – so everyone trusts us. practises, and standardised purchasing and invoicing processes across a greater proportion of our procurement Staying free from bribery and corruption activities. In 2018 we will continue this work and we will also Politics, Regulation Following regular updates on the work of the NominationPolitics, Committee Regulation and uponFollowing final recommendation, regular updates on the work of the Nomination Committee and upon final recommendation, We always make sure we are free from bribery and gather data on our progress so far and measure the impact RESPONSIBLE Implementing appropriateRESPONSIBLE Implementing appropriate corruption – so people know our decisions are made for the of our training and awareness activities. right reasons. and Compliance approved: the appointment of Melanie Smith; the re-appointmentand Compliance of Richard approved:Gillingwater, the Crawford appointment Gillies of Melanie Smith; the re-appointment of Richard Gillingwater, Crawford Gillies Data protection and GDPR governance, monitoring governance, monitoring Keeping our communications open and responsible Sound data protection and privacy practices are vital for GOVERNANCE GOVERNANCE We communicate openly, honestly, clearly and responsibly. Keller. The implementation of the EU General Data compliance and managing risk compliance and managing riskand Helen Mahy for a further period of three years; changes to Board Committeeand Helen membership Mahy for to a support further period of three years; changes to Board Committee membership to support Protection Regulations (‘GDPR’) planned for May 2018 is Delivering excellent customer service and working with our therefore a critical project for us. We are working hard to suppliers to ensure our standards are adhered to ensure that we are ready, and our customers can be ready ongoing effectiveness and continuity of experience; declared actual and potentialongoing conflicts effectiveness of interest; and continuity of experience; declared actual and potential conflicts of interest; We work to meet our customers’ needs and exceed their too. We have established a Data Governance Project Team expectations – so they work with us again and again. We and Committee to oversee our response to GDPR. Subject ensure we build constructive relationships with our suppliers to specific local data laws, GDPR will be the standard against the continuing independence of all non-Executive Directors; and the establishmentthe continuing and membership independence of all non-Executive Directors; and the establishment and membership and they understand our ways of working and the standards which we assess all of our future data protection activities. of a Board-level Energy Markets Risk Committee. of a Board-level Energy Markets Risk Committee. we operate by. Working within the community We act responsibly and respectfully towards the Politics, Regulation Participated in the three-yearly external evaluation andPolitics, agreed Regulationactions following Participated a review inof thefindings. three-yearly external evaluation and agreed actions following a review of findings. communities we work in – because we are a part of them. and Compliance See pages 98 to 99 . and Compliance See pages 98 to 99 . 38 Keller Group plc Annual Report and Accounts 2017 Politics, Regulation Reviewed comprehensive updates on the impact of thePolitics, 2018 UK Regulation Corporate GovernanceReviewed comprehensive Code and updates on the impact of the 2018 UK Corporate Governance Code and and Compliance following consideration of the changes introduced, agreedand Compliance holistic action plansfollowing to address consideration compliance of the changes introduced, agreed holistic action plans to address compliance and alternative governance arrangements where appropriate. See pages 86 toand 87 alternative . governance arrangements where appropriate. See pages 86 to 87 . Politics, Regulation Reviewed and approved the governance documents whichPolitics, comprise Regulation SSE’s BoardReviewed Charter, and including: approved thethe governance documents which comprise SSE’s Board Charter, including: the and Compliance Schedule of Matters Reserved for the Board; the termsand of reference Compliance for each ofSchedule the Board of MattersCommittees; Reserved SSE’s for the Board; the terms of reference for each of the Board Committees; SSE’s 24 Group-level policies; selected roles and responsibilities within the Board; and24 Group-level the Board Inclusion policies; andselected roles and responsibilities within the Board; and the Board Inclusion and Diversity policy. Diversity policy.

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34 35 www.jonesandpalmer.co.uk/governance www.jonesandpalmer.co.uk/governance

Provision 2 example – Severn Trent plc The board should assess and monitor culture

This example from Severn Trent’s Annual Report outlines how the company is developing its culture. It includes a table of metrics that they are initially considering as a way to monitor and assess the culture of the company. The infographic outlines the different activities that the company is using to reinforce their culture.

Strategic report Governance > Governance Group financial statements Company financial statements Leadership and Effectiveness Other information Leadership and Effectiveness The Board in action Reinforcing our culture

The Board in action The Board will also consider the Group’s These policies codify how to identify carbon and energy strategies and sector and deal with suspected wrongdoing, The Board sets the strategy, oversees legitimacy, with discussion on key fraud or malpractice; how to ensure Severn Trent’s values support Doing the Right Thing and drives delivery of the Group’s strategy its delivery and maintains the highest priority areas. that the highest standards of safety are standards of governance which are maintained; and how to apply good ethics integral to its delivery. The Board also Our Company purpose and culture and sound judgment. We put our We are We act with We protect our We are inspired ensures that, in making its decisions, customers passionate integrity environment to create an these create sustainable, long- The Board is responsible for establishing During the year, the Board has focused first about awesome term value for the mutual benefit of Severn Trent’s purpose, vision and on deepening its understanding of the what we do company stakeholders. In order for the Group strategy, and satisfying itself that its Group’s culture even further, through a to manage risk effectively, the Board culture is aligned. Our purpose – to dedicated company purpose and culture monitors financial performance serve our communities and build a session in January 2019. lasting water legacy – reflects ‘why’ we and reporting and also ensures that The session was centred on the results do what we do. Our strategy provides appropriate and effective succession of the all employee survey ‘QUEST’ us with ‘what’ we do. But the ‘how’ we planning arrangements and and other relevant data. The Board deliver our purpose and strategy is what remuneration policies are in place. considered the positive and more Educating our people, supporting and guiding them to demonstrate differentiates us and sets us apart and challenging aspects revealed by the positive behaviours in all they do Page 72 details the main topics that is driven by our culture, values survey and discussed the Company’s discussed by the Board during the year. and behaviours. approach to addressing areas of Doing the Right Thing has These policies are the To support understanding of Board Strategy Days To support the creation of long-term employee focus, such as health and supporting policies that apply strategic link between our our policies and standards, value for the mutual benefit of our safety and gender neutral facilities at to everyone who works for vision and how we manage there is programme of In addition to formal meetings at shareholders, employees, customers operational sites. Severn Trent. our day-to-day business, targeted training, including which strategic matters are regularly and communities, we recognise the and are underpinned by e-learning modules and The Board routinely interacts with considered, in June 2018 the Board importance of building and promoting specific company standards practical training sessions. employees as part of their site visit held a dedicated strategy meeting a culture of integrity and openness, and procedures. programme. Details of site visits held with the Executive Committee to focus where inclusion and diversity is during the year can be found on page 80. Read more on PR19. This has been a matter of valued. Assessment of companies’ Direct interactions with employees, Page 95 significant focus for the Board during organisational culture can sometimes specifically in relation to culture, allows the year. The day focused on the Group’s be hard to interpret and, as such, we’re the Board to understand first-hand the People Strategy, including culture, working with other companies to develop key issues identified by our workforce, talent acquisition, talent development, a new cultural index. This will allow and provides an opportunity to feedback talent management and organisational stakeholders to make comparisons Review mechanisms to further support and assess our culture specific insights to them. performance. The Strategy Day also against reliable data points, with clear covered the potential for artificial external benchmarks and give greater The findings from the culture session Our workforce can raise Reports from the respective Dedicated culture discussions intelligence, data analytics and robotic visibility on companies’ progress. are being used to inform future areas concerns at work through Chairs are provided to the are included at our Employee process automation to improve The initial measures we are considering of focus for the Board moving forward. their line manager, senior Board at the outset of every Forum, hosted by the efficiency and performance across the are set out in the table below. As part of this activity the Board satisfied management and through our meeting, with any serious Company and attended by the business – driving quality improvements itself that the Group’s policies, practices At the heart of Severn Trent’s culture is confidential and independent allegations being directly Chairman, Non-Executive and minimising the need for manual and behaviour throughout the business intervention. The Board was immersed a closely held set of values – Doing the whistleblowing helpline, reported to the Board. Directors and Executive are wholly aligned with Severn Trent’s ‘Safecall’. All investigations Directors. This regular Forum in Strategy Day topics through use of real Right Thing. These values embody the Our annual employee purpose, vision and strategy. are carried out independently is attended by numerous examples and simulation to demonstrate principles by which the Group operate, engagement survey, ‘QUEST’, with findings being reported employee representatives, current and planned interventions. and provide a consistent framework for provides data in a clear directly to the Audit and Unions and other stakeholders For 2019, a portion of the strategy responsible business practices. and comprehensive form, Corporate Responsibility to enable the views meeting will focus on AMP7 delivery identifying what’s going well Committees. The Audit throughout the organisation plans, following Severn Trent Water’s and where we can improve Committee monitors and to be considered at Board plan for the five years from 2020 being across the Group. QUEST is reviews the effectiveness of level. Individual Directors fast-tracked by Ofwat. conducted by an independent the Group’s whistleblowing provide feedback at the research company to ensure arrangements annually Board meetings following the results are anonymous Cultural Index and provides feedback to Forum attendance. and the results are reported to the Board. Topic Measures Benchmark the Board. Engagement • Glassdoor Rating • Glassdoor • Engagement score • Versus UK Average Fairness • Gender Pay Gap • Median Versus UK Average (ONS) • CEO Pay Ratio • Versus UK Average • Ethnicity Pay Ratios • TBC when Government standard disclosed Wellbeing • Days lost to mental health issues • Mind – Workplace Wellbeing Index Feedback to the Board to deepen its understanding of the Group’s culture • Employee turnover • CIPD Inclusion • Gender representation at senior levels • Hampton-Alexander Ranking Our established reporting mechanisms for company purpose and culture are essential tools in the • Social Mobility • Social Mobility Index Board’s oversight of cultural matters. All feedback received deepens the Board’s understanding • Ethnic Diversity • BITC Diversity Index of the Group’s culture and Board feedback is used to inform future areas of focus and ensure that Skills • Training Days • CIPD local plans are consistent with feedback received. • Levy Spend • UK Government

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36 37 www.jonesandpalmer.co.uk/governance www.jonesandpalmer.co.uk/governance

Provision 2 example – Rentokil plc The board should assess and monitor culture

Rentokil’s Annual Report defines the culture of the company through its mission, values and culture characteristics. The metrics that the company is using to measure its culture are outlined in a table and case studies for the different culture characteristics are given.

Strategic Report Corporate Governance Financial Statements Additional Information 53 54

Corporate responsibility Corporate responsibility Workplace culture

Our culture is characterised as customer focused, commercial, diverse, down to earth and innovative. Our culture in action We have highly engaged colleagues, willing to go the extra mile, and a drive within the business to keep improving whether through learning and development, the roll-out of innovations or the introduction of Our culture model on the previous page features five core characteristics, which industry-leading digital tools. are how we define and measure our Our model workplace culture. These are customer focus, commercial, diverse, down to Our mission earth and innovative. On this page we What we’re Protecting People. Enhancing Lives. provide examples of our culture in action here to do from around the Rentokil Initial world.

Our values Service Relationships Teamwork Customer focused Commercial The core things We are passionate about delivering We value long-lasting relationships Our business is all about great that underpin excellent customer service to with our colleagues and customers teamwork – getting it right, for In 2018 our team in Belgium was asked Retaining more colleagues doesn’t everything we do every customer our colleagues and customers to treat bed bugs at a hotel in Antwerp, just mean we provide better service; which was also part of a large national it also reduces our costs through less account in France. Working together, recruitment, training and time to become both teams made sure that the job went fully productive. smoothly with 125 rooms heat treated, In 2018 our business in North America without compromising safety. launched a Certified Field Trainer The Rentokil team worked in shifts for programme that pairs new colleagues three days and nights, and an electrical with designated Certified Field Trainers power station was installed to supply in their branch for the first six weeks of 32 heat canons and fans. The customer their employment, to help them learn Our culture Customer focused Commercial Diverse Down to earth Innovative was delighted that they could remain on-the-job skills. open during the treatment and have What it’s Firstly, we’re a We employ smart We want our We don’t like big We use the latest Short-term (0-6 month) Sales their rooms quickly back in operation. actually like to service company. people who help workforce to egos. People who advancements to retention in North America improved work with and We strive to meet the Company grow reflect the diverse succeed with us are build an innovation by 9.9 percentage points in 2018. at Rentokil our customers’ profitably by making customers we friendly, comfortable pipeline that sets Initial needs and our good decisions serve. We value in their own skin, us apart from the people go the extra that benefit our everyone’s talents straightforward, competition. We mile to do so. We customers. We and abilities and constantly seeking embrace digital work hard to support constantly seek out strive to attract, to improve, technologies that our customers and new opportunities recruit and retain the with ideas and help create new each other. When for growth and best people from experiences and products and make  Read more things go wrong, ways to work more the widest possible acknowledge the us more efficient. on page 54 we put them right. effectively. pool of talent. contribution of others.

Our measures World-class service Measuring our culture How we make company We measure our workplace culture through external and internal KPIs, sure our culture – Customer service but we have also created a measurement tool – mapping our colleague is working – Net Promoter Score engagement survey questions to each of the five pillars in order to – Customer retention create a score out of 100 that can be tracked over time. In the 2017 Diverse Down to earth Innovative – External reviews survey (the last one conducted), Diverse and Customer Focus were (e.g. Trustpilot) the strongest cultural elements. This will be measured again in 2019. Rentokil Initial is a diverse organisation Being recognised and thanked is a big Key to the development of our innovation operating in 75 countries with multiple part of our culture. Branch Managers pipeline and the Company’s culture of cultures, languages and customs. 33% of use our G+ social media communities to innovation is the Power Centre. Opened World-class Employer the Board are female, while direct reports provide an instant ‘well done’ or ‘great in late 2017 the Centre has had a of Choice Regions dimensions Customer Down of the Executive Leadership Team now job’, while every region has awards particularly successful first 12 months YVC 2017 scores focused Commercial Diverse to earth Innovative comprises 30% women (up from 27% where we recognise colleagues for with 1,700 colleagues and customers – Your Voice Counts in 2017 and 24% in 2016). Across the excellent customer feedback such as visiting, including service colleagues (YVC) survey, Asia 90 87 88 85 88 Company there is a strong focus on our First Class Awards in the Pacific and from the Netherlands, the Latin American Culture Index Europe 70 67 76 67 68 future talent with the graduate scheme President’s Club in North America. management team, and an increasing – Employer of Choice comprising of over 50% females. number of existing and prospective (retention, diversity) North America 80 74 82 73 72 Increasingly, colleagues past and customers. The new Lumnia insect light – Compliance In 2018 we introduced a ‘Women in present can give feedback on our traps are a great example of this pipeline training, Speak Up Pacific 75 73 82 69 74 Pest Control’ initiative in Australia culture on websites such as Glassdoor. of innovations with over 60,000 sales – External reviews which brought together our female As at 31 December 2018 Rentokil Initial’s UK & RoW 78 73 80 70 78 to date. One supermarket chain in (e.g. Glassdoor) technicians to agree steps to make a UK Glassdoor score for Culture and Singapore ordered 450 units which were career in pest control more attractive Values was 4 out of 5, well ahead of the installed by colleagues over one month. to women and to support recruitment. average of 3.2 out of 5 (of the 800,000 The customer will save approximately companies on the site). Rentokil Initial was ranked in the Top £9,000 per year in reduced energy costs. 200 companies globally for gender equality by Equileap in 2018.

Rentokil Initial plc Annual Report 2018 Rentokil Initial plc Annual Report 2018

38 39 www.jonesandpalmer.co.uk/governance www.jonesandpalmer.co.uk/governance

Provision 5 example – Persimmon plc The board should understand the views of the company’s other key stakeholders

Persimmon’s Annual Report outlines the different stakeholders of the company, how Persimmon engage with those stakeholders, the insights they have gained from that engagement and how they are responding to the needs of those stakeholders. The stakeholder engagement activities are also linked to strategic objectives of the company.

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DIRECTORS’ REPORT – OUR STAKEHOLDERS HOW WE ENGAGE WITH OUR STAKEHOLDERS Our strategy strives to maintain strong relationships with all our key stakeholders ensuring a long term sustainable business model that provides good quality homes for our customers. Strategic report CUSTOMERS EMPLOYEES COMMUNITIES SUPPLIERS GOVERNMENT, REGULATORS SHAREHOLDERS AND INDUSTRY BODIES How we listen How we listen How we listen How we listen How we listen How we listen • Through our teams of Sales Advisors • Through local management teams and • By consultation throughout the • Tendering process • Participate in industry meetings • Our Annual General Meeting and on site management teams who meetings planning and development process • Centralised procurement department with Ministers • Comprehensive individual institutional are all available throughout the home • Regular, informal dinners with Board to more accurately identify the needs working closely with major suppliers • Meetings with local authority shareholder meetings and specific buying process of the local community members and local management teams • Local operating businesses’ buying and planning departments consultations • Regular contact with all of our customers • Regional Board meetings and site visits • Feedback from local people through technical teams engaging with local • Representation on Home Builders • Shareholder roadshows through new home demonstrations, courtesy our pre-launch marketing campaigns • Feedback from our HQ employee newsletter suppliers and subcontractors Federation national committees • Feedback from the Company’s brokers calls and a one month home inspection • Our regional offices employ local people • Feedback from employees to the • Member of Homes for Scotland • Feedback from the market’s • Following purchase, through our dedicated who are aware of community needs Gender Diversity Panel • Regular dialogue with Health and analyst community Governance customer care teams • Newly established Safety Concerns line • Going forward, through our Employee Safety Executive • Participation in a National New Homes Engagement Panel feedback • Collaboration with the many local charities • Actively engaging with the Home Building survey run by the Home Builders Federation and support groups that the Persimmon • Exit interviews Skills Partnership Charitable Foundation supports through the Community Champions and Building Futures programmes

What they tell us What they tell us What they tell us What they tell us What they tell us What they tell us • Regular communication throughout • Employees would like more training to • Provide attractive developments with • Collaboration for mutual benefit – continuity • Government policy is targeting an increase in • Preference for a diverse Board composition the home buying process, particularly further their careers high amenity value and visibility of future work flow is very the rate of construction of new homes • Remuneration must be appropriate, regarding the timing of the crucial • Career development and opportunity • Invest in local infrastructure to improve important • Government policy is supporting an increase performance related and linked “move in” date is important is important to all our employees community environments • Work together to improve product in the overall output from the industry to strategy Financial statements Financial • Customers would like our customer care • Attract more women to the industry • Be positive and responsive to the views sustainability • National planning policy requires local • Preference for a sustainable dividend teams to be available at times more and support their career development of local people • Increased cost pressure from high demand authorities to address the housing needs of through the cycle convenient to them • Introduce a flexible working policy • Support local charities and community and weak Sterling their local communities through a plan led • 79% of our customers would recommend to support employees to balance their groups in the areas in which we build • Appropriate arrangements are being made system of land release and development and Persimmon to a friend wider responsibilities to address the risks to supply associated supports the delivery of local infrastructure • Customers consider reliable fast with the UK’s exit from the EU and amenities for new developments which broadband connection to be important address the needs of local communities • A safe and healthy environment is a top What we are doing What we are doing What we are doing What we are doing priority for all workers, visitors and customers • Communicating with each customer at key • Investing in our Training Department • Invested in highly skilled land, planning • Ongoing meetings with suppliers to discuss on all development sites stages, including finalising their moving in date • Further developing our site and design teams who have the improved product and packaging design What we are doing What we are doing • Investing in technology that will improve management training knowledge and experience to deliver • Maintain dialogue regarding the prevention sites which provide the range, choice and • Working hard to increase output in areas • Careful analysis of Board skills before information Other communication between our regional • Improving co-ordination of our training strategy of Modern Slavery offices, our customer care departments availability of homes that meet local of high demand each appointment • Training and mentoring of employees to • Engage with suppliers to provide them with and our customers communities’ needs • Engaging with government departments • Continued regular communication support the development of their careers certainty of volume and revenues • Continuing to increase resources devoted • Continuing our Community Champions directly, and working with the Home with shareholders • Formally identifying our talented people to • Work with suppliers to mitigate to customer care, including providing campaign, launched Building Futures and Builders Federation, to explain industry • The Remuneration Committee has carefully help them develop their career path cost increases increased training to our operatives working with Team GB opportunities and challenges considered future remuneration • Work with suppliers to ensure all goods and • Introduced a more formal flexible working • Maintaining a skilled health and • Improving the flexibility and convenience of services delivered are verified promptly and • Capital Return Plan payments modelled to policy for office based employees safety department the customer care service provided to our all terms and conditions are fulfilled be sustainable through the housing cycle customers • Introducing a programme of school with additional returns as appropriate engagement to encourage young females • Included customer care performance in into the business bonus and incentive criteria for our senior Link to strategic objectives Link to strategic objectives Link to strategic objectives operational management • Established an Employee Engagement Securing quality and availability Building quality homes Optimising working capital Panel to secure further engagement with of materials for our customers; and returns • Established FibreNest, the Group’s full fibre employees Maintaining a diverse, to the home broadband service skilled workforce; Link to strategic objectives Link to strategic objectives Link to strategic objectives Providing a sustainable supply of high quality land; and Building quality homes Maintaining a diverse, Supporting sustainable communities Securing quality and availability for our customers skilled workforce. of materials

Persimmon Plc | Annual Report | December 2018 Persimmon Plc | Annual Report | December 2018

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Provision 5 example – Fresnillo plc The board should understand the views of the company’s other key stakeholders

Fresnillo’s Annual Report outlines the engagement strategy of the company, the issues that matter to those stakeholders and how Fresnillo is addressing those issues.

22 Fresnillo plc Annual Report and Accounts 2018 Fresnillo plc Annual Report and Accounts 2018 23

STRATEGIC REPORT STRATEGIC REPORT CORPORATE GOVERNANCE BUILDING FINANCIAL STATEMENTS

RELATIONSHIPS WITH EMPLOYEES LOCAL COMMUNITIES EMPLOYEES GOVERNMENT LOCAL COMMUNITIESCONTRACTORS GOVERNMENT CONTRACTORS KEY STAKEHOLDERS AND UNIONS AND CIVIL SOCIETY AND UNIONS AND REGULATORS AND CIVIL SOCIETYAND SUPPLIERS SHAREHOLDERSAND REGULATORS AND SUPPLIERS SHAREHOLDERS ENGAGEMENT STRATEGY ENGAGEMENT STRATEGY We rely on strong relationships • Engage union representatives • Meet regularly with key stakeholders • Engage union• representatives Engagement with federal• authoritiesMeet regularly • withEngage key stakeholders contractors with the ‘I Care, • • OrganiseEngagement conference with federal calls authorities • Engage contractors with the ‘I Care, • Organise conference calls with our key stakeholders in order constructively on collective to understand and discuss their constructively onand collective regulators on regulatoryto issues understand andWe discuss Care’ theirprogramme to embed andand roadshows. regulators on regulatory issues We Care’ programme to embed and roadshows. to gain trust and social acceptance bargaining and health & safety issues. concerns. bargaining and healththrough & safety trade issues. unions such asconcerns. safety in our culture. • Attendthrough investment trade unions forums such as safety in our culture. • Attend investment forums for our operations, to maintain our • Conduct social, ethical and • Conduct Social Impact Assessments • Conduct social, ethicalCAMIMEX and and sustainability• Conduct Social• ImpactEngage Assessments contractors to certify andCAMIMEX conferences. and sustainability • Engage contractors to certify and conferences. workplace surveys to identify issues to identify potential negative impacts workplace surveysassociations to identify issuessuch as CESPEDES.to identify potentialtheir negative safety and impacts environmental • Annualassociations General such Meeting. as CESPEDES. their safety and environmental • Annual General Meeting. licence to operate and to create that matter to employees. and perception studies to capture that matter to •employees. Direct engagement with federal,and perception studiesmanagement to capture systems and participate • Direct engagement with federal, management systems and participate shared value. To this end, we • Operate Health & Safety programmes the expectations of communities. • Operate Health &state Safety and programmes local authorities regardingthe expectations inof government communities. certifications. state and local authorities regarding in government certifications. engage with the communities in each business unit to foster direct • Operate grievance mechanisms in each business miningunit to foster rights, direct environmental • Operate grievance mechanisms mining rights, environmental where we operate, as well as with dialogue between employees and to address the concerns of dialogue betweenpermitting, employees etc. and in the regionsto address the concerns of permitting, etc. in the regions unions, contractors, partners and management. communities. management. where we operate. communities. where we operate. suppliers. We also work closely • Operate the ‘Fresnillo plays fair’ • Consult indigenous communities • Operate the ‘Fresnillo plays fair’ • Consult indigenous communities with government and regulators whistleblowing line. on new projects. whistleblowing line. on new projects. and ensure open communications with investors. ISSUES THAT MATTER TO OUR STAKEHOLDERS ISSUES THAT MATTER TO OUR STAKEHOLDERS

Find out more about the outcomes of our • Remuneration. • Their values and traditions. • Remuneration.• Water stewardship. • Their values and• traditions.Working conditions. • • OperatingWater stewardship. and Financial • Working conditions. • Operating and Financial engagement initiatives in our Social and • Working conditions. • Employment and procurement • Working conditions.• Mineral waste and hazardous• Employment and• Labour procurement rights. • performance.Mineral waste and hazardous • Labour rights. performance. Sustainability Review on pages 66-84. • Labour rights. opportunities. • Labour rights. materials management. opportunities.• Human rights. • Growthmaterials strategy. management. • Human rights. • Growth strategy. • Human rights. • Public infrastructure and services. • Human rights.• Cyanide Management. • Public infrastructure• Health and & services. Safety. • • CAPEXCyanide projects. Management. • Health & Safety. • CAPEX projects. • Health & Safety. • Land acquisitions and resettlements. • Health & Safety.• Climate Change. • Land acquisitions• Security. and resettlements. • Climate Change. • Security. • Security. • Transparency regarding lobbying • Security. • Labour rights. • Transparency regarding lobbying • Labour rights. government payments. • Human rights. government payments. • Human rights. • Managing cyanide, mineral waste • Health & Safety. • Managing cyanide, mineral waste • Health & Safety. and hazardous materials. and hazardous materials. • Water stewardship. • Water stewardship. • Soil pollution. • Soil pollution. • Climate change. • Climate change.

HOW WE ADDRESS THESE ISSUES HOW WE ADDRESS THESE ISSUES • Competitive remuneration, training • Ensuring that priority is given to local • Competitive remuneration,• Conduct Environmental training •Impact Ensuring that priority• Uphold is given our labour, to local Health & Safety • • StringentConduct viability Environmental criteria for Impact • Uphold our labour, Health & Safety • Stringent viability criteria for and development opportunities to employment and procurement. and developmentAssessments opportunities to to identify potentialemployment andand procurement. Environmental procedures. developmentAssessments projects, to identify including potential and Environmental procedures. development projects, including retain our talent. • Strengthening regional supply chains retain our talent. impacts and mitigation strategies.• Strengthening• regional Carry supplyout due chains diligence procedures ratesimpacts of return, and mitigation to ensure strategies.adaptability • Carry out due diligence procedures rates of return, to ensure adaptability • Uphold our labour standards and through participation in mining clusters • Uphold our labour• Foster standards energy and efficiency andthrough supply participationto verify in mining the ethical clusters profile of new • acrossFoster price energy cycles. efficiency and supply to verify the ethical profile of new across price cycles. respect human rights to ensure a in Zacatecas, Sonora and Chihuahua. respect human rightsfrom torenewable ensure a sources. in Zacatecas, Sonoracontractors. and Chihuahua. • Targetedfrom renewable investment sources. and disciplined contractors. • Targeted investment and disciplined positive work environment. • Working with community leaders to positive work environment.• Observe Responsible Water• Working with community• Provide technical leaders to support to help • cashObserve management. Responsible Water • Provide technical support to help cash management. • Operate a Health and Safety engage municipalities on projects • Operate a Healthstewardship and Safety to secure access,engage the municipalitiescontractors on projects comply with the Self- stewardship to secure access, the contractors comply with the Self- management system based on with the Mining Fund. management systemefficient based use on of resources, pollutionwith the Mining Fund.Management Safety programme. efficient use of resources, pollution Management Safety programme. best practices to ensure a safe • Managing community investment best practices to protection,ensure a safe and cooperation• Managing with community• Monitor investment security, maintaining clear protection, and cooperation with • Monitor security, maintaining clear and healthy workplace. portfolio in alliance with NGOs. and healthy workplace.communities. portfolio in alliancecommunications with NGOs. with contractors. communities. communications with contractors. • Train employees to embed ethics • Following best practices for land • Train employees• Manageto embed our ethics mineral and• hazardous Following best practices for land • Manage our mineral and hazardous and safety in our culture. acquisition, resettlements and and safety in our wasteculture. facilities responsibly. acquisition, resettlements and waste facilities responsibly. • Monitor security situations, maintaining indigenous consultations. • Monitor security• situations,Manage cyanide maintaining in compliance indigenous consultations. • Manage cyanide in compliance clear internal communications and • Disclosing our government relations clear internal communicationswith the International and Cyanide• Disclosing our government relations with the International Cyanide close relations with authorities at & lobbying activities and our close relations withManagement authorities at Institute (ICMI).& lobbying activities and our Management Institute (ICMI). federal, state and local levels. government payments. federal, state and• Participatelocal levels. in the Health, Safetygovernment payments. • Participate in the Health, Safety and Environmental certifications and Environmental certifications of the Mexican authorities. of the Mexican authorities.

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Code principles

The second section of F. The chair leads the board and is responsible for Division of the new UK Corporate its overall effectiveness in directing the company. They should demonstrate objective judgement Governance Code is ‘Division 02 throughout their tenure and promote a culture of responsibilities’. of openness and debate. In addition, the chair responsibilities This section has few new facilitates constructive board relations and the additions from the previous effective contribution of all non-executive directors, Code and only one addition to and ensures that directors receive accurate, timely and clear information. the required disclosures in the Annual Report. G. The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities “The chair should between the leadership of the board and the executive leadership of the company’s business.

promote a culture of H. Non-executive directors should have sufficient time to meet their board responsibilities. openness and debate.” They should provide constructive challenge and strategic guidance, offer specialist advice and hold management to account.

I. The board, supported by the company secretary, FRC should ensure that it has the policies, processes, information, time and resources it needs in order to The 2018 UK Corporate function effectively and efficiently. Governance Code

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Provisions of the Code

The chair should be independent on appointment At least half the board, excluding the chair, should be non- When making new appointments, the board 9 11 15 Required Annual Report disclosures when assessed against the circumstances set out in executive directors whom the board considers to should take into account other demands on directors’ Provision 10. The roles of chair and chief executive should not be independent. time. Prior to appointment, significant commitments should • Identification of each non-executive be exercised by the same individual. A chief executive should be disclosed with an indication of the time involved. director considered independent The board should appoint one of the independent not become chair of the same company. If, exceptionally, 12 Additional external appointments should not be undertaken (Provision 10) non-executive directors to be the senior independent this is proposed by the board, major shareholders should be without prior approval of the board, with the reasons for director to provide a sounding board for the chair and serve as • Number of meetings of the board and its consulted ahead of appointment. The board should set out its permitting significant appointments explained in the Annual an intermediary for the other directors and shareholders. Led committees, and individual attendance by reasons to all shareholders at the time of the appointment and Report. Full-time executive directors should not take on more by the senior independent director, the non-executive directors directors (Provision 14) also publish these on the company website. than one non-executive directorship in a FTSE 100 company or should meet without the chair present at least annually to other significant appointment. The board should identify in the Annual Report each appraise the chair’s performance, and on other occasions • Reasons for approval of external 10 non-executive director it considers to be independent. as necessary. All directors should have access to the advice of the appointments by the board (Provision 15) 16 Circumstances which are likely to impair, or could appear company secretary, who is responsible for advising the Non-executive directors have a prime role in appointing to impair, a non-executive director’s independence include, 13 board on all governance matters. Both the appointment and and removing executive directors. Non-executive but are not limited to, whether a director: removal of the company secretary should be a matter for the directors should scrutinise and hold to account the performance whole board. • is or has been an employee of the company or group within of management and individual executive directors against the last five years; agreed performance objectives. The chair should hold meetings with the non-executive directors without the executive • has, or has had within the last three years, a material business directors present. relationship with the company, either directly or as a partner, shareholder, director or senior employee of a body that has The responsibilities of the chair, chief executive, senior 14 such a relationship with the company; independent director, board and committees should be clear, set out in writing, agreed by the board and made publicly • has received or receives additional remuneration from the available. The Annual Report should set out the number of company apart from a director’s fee, participates in the meetings of the board and its committees, and the individual company’s share option or a performance-related pay attendance by directors. scheme, or is a member of the company’s pension scheme;

• has close family ties with any of the company’s advisers, directors or senior employees;

• holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;

• represents a significant shareholder; or

• has served on the board for more than nine years from the date of their first appointment.

Where any of these or other relevant circumstances apply, and the board nonetheless considers that the non-executive director is independent, a clear explanation should be provided.

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Considerations for engaging reporting Provision 14 example – Antofagasta plc The responsibilities of the board and committees should be clear

This example shows a clear and engaging way of outlining the composition of the board, the various roles on the board and the responsibilities of those roles. It clearly shows which of the non-executive directors are considered to be independent and which are not.

Provision 14 – The responsibilities of the chair, chief Provision 15 – When making new appointments, the board executive, senior independent director, board and should take into account other demands on directors’ time. committees should be clear, set out in writing, agreed by Prior to appointment, significant commitments should be ROLES IN THE BOARDROOM the board and made publicly available. The Annual Report disclosed with an indication of the time involved. should set out the number of meetings of the board and its Additional external appointments should not be undertaken committees, and the individual attendance by directors. without prior approval of the board, with the reasons for ROLES IN THE permitting significant appointments explained in the Annual The composition of the board and the responsibilities of the Report. Full-time executive directors should not take on more BOARDROOM various roles on the board can be shown in an engaging way. than one non-executive directorship in a FTSE 100 company or other significant appointment. GOVERNANCE It would be more transparent to stakeholders if the general CHAIRMAN INDEPENDENT NON-EXECUTIVE CEO policy on external appointments for board members was DIRECTORS JEAN-PAUL LUKSIC IVÁN ARRIAGADA1 disclosed in the Annual Report. It would explain, generally Leads the Board and ensures its TIM BAKER Leads the implementation of the effectiveness in all aspects of its duties. JORGE BANDE Group’s strategy set by the Board. speaking, under what circumstances the board would approve − Promotes the highest standards VIVIANNE BLANLOT − Manages the overall operations and of integrity, probity and corporate FRANCISCA CASTRO resources of the Group. an external appointment and when would they refuse it. OLLIE OLIVEIRA governance. − Leads the Executive Committee and This would allow for shareholders to voice their opinions on − Sets the agenda for Board meetings Ensure that no individual or small ensures its effectiveness in all aspects in consultation with other Directors, group of individuals can dominate the of its duties. whether they agree with the policy or not, in advance of it being Board’s decision-making. members of senior management, and − Provides information to the Board implemented with individual directors. the Company Secretary. − Meet the independence criteria set out and participates in Board discussion − Chairs meetings and ensures that there in the UK Corporate Governance Code. regarding day-to-day activities is adequate time for discussion of all − No connection with the Group or of the Group. agenda items, focusing on strategic, any other Director which could rather than routine, issues. be perceived to compromise − Promotes a culture of openness independence. and debate within the Board by − Provide a range of outside perspectives facilitating the effective contribution to the Group and encourage robust of all Directors. debate with, and challenge of, the − Oversees Director development, Group’s executive management. induction and performance reviews. − Leads relations with shareholders. SENIOR INDEPENDENT DIRECTOR NON-EXECUTIVE DIRECTORS EXECUTIVE COMMITTEE MEMBERS

OLLIE OLIVEIRA JUAN CLARO + See pages 102 and 103 Provides a sounding board for the WILLIAM HAYES Present proposals, recommendations Chairman and supports the Chairman RAMÓN JARA and information to the Board within their in the delivery of his objectives ANDRÓNICO LUKSIC C areas of responsibility. as required. GONZALO MENÉNDEZ − Support the CEO in the implementation − Where necessary, acts as an Provide a range of outside of the Group’s strategy set by the Board. intermediary between the Chairman perspectives to the Group and and the other members of the Board encourage robust debate with, and or the CEO. challenge of, the Group’s executive COMPANY SECRETARY − Acts as an additional point of contact management. JULIAN ANDERSON for shareholders, focusing on the − The Board does not consider these Ensures that Directors have access Group’s governance and strategy, and Directors to be independent because to the advice and services they need gives shareholders an alternative they do not meet one or more of the to perform their roles effectively. means of raising concerns other than independence criteria set out in the UK with the Chairman or senior Corporate Governance Code.2 − Provides a conduit for Board and Committee communications and management. − Ensure that no individual or small group provides a link between the Board of individuals can dominate the Board’s and management. decision-making. − Supports the Board in applying the Code and complying with listing obligations. 1. The Group’s CEO, Iván Arriagada, is not a director. This is consistent with practice in Chile where local law prohibits CEOs of public companies from being directors of those companies. Despite this, interaction between the Board and executive management is as you would expect between Non-Executive Directors and management in a typical UK-listed company. The CEO and CFO are invited to attend all Board meetings, the CEO is also invited to attend all Board Committee meetings and there is regular formal and informal dialogue between management and the Board. The Board considers that there are considerable benefits associated with having a Board comprising exclusively Non-Executive Directors. Not only does it provide a broad range of perspectives, but also encourages robust debate with, and independent oversight of, the Group’s executive management. 2. Ramón Jara provides advisory services to the Group. Andrónico Luksic C is the brother of Jean-Paul Luksic, the Chairman of the Company, and is Chairman of Quiñenco SA and Chairman or Director of Quiñenco’s other listed subsidiaries. Jean-Paul Luksic and Gonzalo Menéndez are also Non-Executive Directors of Quiñenco and some of its listed subsidiaries. Like Antofagasta plc, Quiñenco is controlled by a foundation in which members of the Luksic family are interested. Gonzalo Menéndez, Ramón Jara, Juan Claro and William Hayes have served on the Board for more than nine years from the date of their first election.

antofagasta.co.uk 101

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Code principles

The third section of the new J. Appointments to the board should be subject Composition, succession UK Corporate Governance to a formal, rigorous and transparent procedure, and an effective succession plan should be Code is ‘Composition, maintained for board and senior management. 03 succession and evaluation’. Both appointments and succession plans should and evaluation This section has moved on be based on merit and objective criteria and, within in several ways from the this context, should promote diversity of gender, 2016 Code. There is more social and ethnic backgrounds, cognitive and personal strengths. consideration given to how the individual directors K. The board and its committees should have a contribute to the long-term combination of skills, experience and knowledge. success of the company and Consideration should be given to the length of service of the board as a whole and membership more disclosure is required regularly refreshed. around diversity and board evaluations. L. Annual evaluation of the board should consider “Diversity in the its composition, diversity and how effectively members work together to achieve objectives. boardroom can have Individual evaluation should demonstrate whether a positive effect on each director continues to contribute effectively. the quality of decision- making by reducing the risk of group think.”

FRC Guidance on Board Effectiveness

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Provisions of the Code

The board should establish a nomination committee There should be a formal and rigorous annual evaluation 17 21 Required Annual Report disclosures to lead the process for appointments, ensure plans are of the performance of the board, its committees, the chair in place for orderly succession to both the board and senior and individual directors. The chair should consider having a • Identification of the external search management positions, and oversee the development of a regular externally facilitated board evaluation. In FTSE 350 consultancy used for appointment of chair diverse pipeline for succession. A majority of members of the companies this should happen at least every three years. and non-executive directors and whether it committee should be independent non-executive directors. The external evaluator should be identified in the Annual Report has any other connection with the company The chair of the board should not chair the committee when it is and a statement made about any other connection it has with or directors (Provision 20) dealing with the appointment of their successor. the company or individual directors. • Identification of the external board evaluation All directors should be subject to annual re-election. The chair should act on the results of the evaluation by 18 22 facilitator and whether it has any other The board should set out in the papers accompanying the recognising the strengths and addressing any weaknesses connection with the company or directors resolutions to elect each director the specific reasons why their of the board. Each director should engage with the process (Provision 21) contribution is, and continues to be, important to the company’s and take appropriate action when development needs have long-term sustainable success. been identified. • How the board evaluation was conducted, the nature and extent of an external evaluator’s The chair should not remain in post beyond nine years The Annual Report should describe the work of the 19 23 from the date of their first appointment to the board. nomination committee, including: contact with the board and individual To facilitate effective succession planning and the development • the process used in relation to appointments, its approach directors, detailing the outcomes, actions of a diverse board, this period can be extended for a limited to succession planning and how both support developing a taken and how it has influenced or will time, particularly in those cases where the chair was an existing diverse pipeline; influence board composition (Provision 23) non-executive director on appointment. A clear explanation • how the board evaluation has been conducted, the nature and • The process for appointments, approach to should be provided. extent of an external evaluator’s contact with the board and succession planning and how both support individual directors, the outcomes and actions taken, and how Open advertising and/or an external search consultancy developing a diverse pipeline (Provision 23) 20 it has influenced or will influence board composition; should generally be used for the appointment of the chair and non-executive directors. If an external search consultancy is • the policy on diversity and inclusion, its objectives and • The policy on diversity and inclusion, its engaged it should be identified in the Annual Report alongside linkage to company strategy, how it has been implemented objectives and linkage to company strategy, a statement about any other connection it has with the company and progress on achieving the objectives; and how it has been implemented and progress or individual directors. • the gender balance of those in the senior management and on achieving the objectives (Provision 23) their direct reports. • The gender balance of those in the senior management and their direct reports (Provision 23)

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Considerations for engaging reporting

Provision 18 – All directors should be subject to annual Provision 23 – The Annual Report should describe the Board evaluation re-election. The board should set out in the papers work of the nomination committee, including: In the 2016 Code, the only disclosure required on the board accompanying the resolutions to elect each director the • the process used in relation to appointments, its evaluation was the explanation of the process of the board specific reasons why their contribution is, and continues to be, approach to succession planning and how both support evaluation. This disclosure has been greatly expanded upon in important to the company’s long-term sustainable success. developing a diverse pipeline; the new Code. Companies now have to disclose the outcomes • how the board evaluation has been conducted, the and actions taken from the board evaluation and commentary While this provision does not include any requirements for nature and extent of an external evaluator’s contact with on how it has influenced or will influence the composition of the disclosure within the Annual Report, the explanation why each the board and individual directors, the outcomes and board. The strongest reporting on board evaluations involves not director’s contribution is important to the company’s long-term actions taken, and how it has influenced or will influence just commenting on the outcomes and actions out of the most sustainable success is information that would be very useful in board composition; recent board evaluation, but noting what the required actions the Annual Report. • the policy on diversity and inclusion, its objectives and from previous board evaluations were and the progress made In the Annual Report, before individual directors are discussed, linkage to company strategy, how it has been implemented against them. it would be beneficial to explain the skills and experience that and progress on achieving the objectives; and Policy on diversity are generally required in the directors of the board and why they • the gender balance of those in the senior management In the previous Code, a company was given the choice on are required for long-term success of the company. This would and their direct reports. whether they had a policy on diversity or not. The wording of this allow stakeholders to assess whether the composition of the Code makes it clear that a policy on diversity is now expected. board is correct and the rationale for requiring the various skills Process used for board appointments and experience on the board. Frequently, the process used for appointments to the board is only described in detail in the Annual Report when an appointment to the board has happened within the relevant financial year. However, it would be beneficial to include an explanation of the general approach used in the process of appointments and then demonstrate how it has been applied in a particular instance.

EXAMPLES

See how SSE plc has See how Centrica plc has See how Lloyds Banking See how Experian plc has See how Taylor Wimpey addressed Provision 18 addressed Provision 23 Group plc has addressed addressed Provision 23 plc has addressed on page 56 on page 57 Provision 23 on page 58 on page 60 Provision 23 on page 62

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Provision 18 example – SSE plc Provision 23 example – Centrica plc All directors should be subject to annual re-election The Annual Report should describe the work of the nomination committee

Provision 18 requires that the papers accompanying the AGM resolutions outline the reason why each of the directors’ contribution This example from Centrica’s Annual Report shows the board evaluation process, the outcomes from that process, and the action is important to the long-term success of the company. This example from SSE’s Annual Report outlines the key priority areas for the plan agreed for next year to improve the board’s effectiveness. business, the skills and experience that the directors need to have to govern the company effectively, and the specific directors that have those skills and experience.

Board Evaluation

Evaluation of the Board and its Committees The Board recognises that it continually needs to monitor and improve its performance. The performance and effectiveness of the Board and its Committees is subject to formal review through the annual evaluation process. In accordance with the 2016 Code, Centrica’s annual evaluation of Board effectiveness is facilitated by an independent third-party at least once every three years. SUPPORTING SSE’S As we reported last year, for 2017/18 an independent third party evaluation was conducted by Independent Audit (IA). The process that was followed for this review and the conclusions of this evaluation, are set out below.

LONG-TERM SUCCESS 2017/18 Performance Action plan agreed Evaluation Process evaluation outcomes for 2018/19 SSE’s long-term success is founded upon a clear vision, purpose and supporting strategy, which considers the views and needs of its many stakeholders. As areas set by the Board, the Directors require breadth of knowledge and complementary skills, in order to confirm that agreed priorities and objectives remain appropriate and can be delivered in a sustainable way. The alignment and balance of Stage 1: Each Director and the The 2017/18 performance Review the Board meeting experience within the Board is assessed annually through the Board evaluation process, and the findings from 2018/19 which confirm Group General Counsel & review highlighted the programme to ensure that the the ongoing effectiveness of the Board are set out on pages 98 to 99 . Related considerations surrounding Board composition, Company Secretary completed strength in the composition Board’s attention is focused which take account of these findings, are matters delegated to the Nomination Committee, and further details of how the Committee a detailed online questionnaire and the diverse experience on the most material issues  produced by IA facing the Group approaches this work can be found on pages 100 to 103 . and expertise of the Board, which has undergone Set out below is confirmation of how the Nomination Committee, and Board, judge that the current attributes and balance of Responsibility: Chairman and experience brought by the Directors continue to support SSE, and promote responsible governance of the Company, its strategy and significant change in recent Group General Counsel operations. Whilst each Board Director has a solid understanding of, and valuable contribution to make to all of the identified priority Stage 2: IA conducted a review of years to enable it to support & Company Secretary areas set out below, this analysis seeks to demonstrate how the complementary and specific skills and experience of each independent Board and Committee papers Centrica’s strategic direction. non-Executive Director, support differing aspects of Board considerations. In discussing the findings of the review, the Board Review and enhance Board considered its performance Helping SSE be a leading energy Skills required Board members Stage 3: Interviews were held with papers and presentations to Company in a low-carbon world each member of the Board and generally and concluded that promote high quality input, debate, certain members of the Executive SSE’s businesses operate in a dynamic, and at times Understanding of the energy sector, commodity Sue Bruce the Board and its Committees support and challenge at Board Committee including the complex, political, regulatory and competitive markets, capital markets, policy context relating to Tony Cocker continued to discharge their meetings Group General Counsel environment, with each individual business having energy and the environment, and utilities regulation. Helen Mahy duties and responsibilities & Company Secretary unique challenges. Reading these external trends effectively. Responsibility: Chairman and is crucial for making strategic choices which Group General Counsel create value. A number of opportunities for & Company Secretary improvement in the way the SSE has well-defined strategic priorities which are Experience in strategy development and Sue Bruce Stage 4: IA attended and Board operates were also observed meetings of the Board founded upon developing, operating and owning implementation, large capital project management, Tony Cocker identified and these are set and Committees in February 2018 Review the use of operational energy and related infrastructure and services, and commercial insight including supply chain and Crawford Gillies out under the action plan in a low-carbon world. operations. Peter Lynas Key Performance Indicators in Melanie Smith agreed for 2018/19. Board reports to enhance the level and clarity of insight provided to the Board SSE is committed to creating value for Financial literacy including corporate finance, Tony Cocker Stage 5: The results of Stages 1 shareholders and providing a stable return appraisal of project economics and funding, Crawford Gillies to 4 were collated and analysed by on investment through sustainable financing, corporate transactions and partnering experience, Peter Lynas IA and a report was prepared Responsibility: suitable corporate transactions and the pursuit and insight into global capital markets. Helen Mahy and discussed with the Chairman Group Chief Financial Officer of appropriate growth opportunities. Melanie Smith

SSE is focused on responsible and ethical Consumer and commercial knowledge, Sue Bruce Consider whether further operations, and being a Company that people understanding of investor markets, experience Crawford Gillies Stage 6: The results were discussion on business want to work for and with, and invest in. of meaningful stakeholder engagement and Peter Lynas presented and discussed by the performance should understanding of the social contract. Melanie Smith Board at its meeting in March 2018. An action plan, listing areas be incorporated into future of focus from the 2017/18 Board agendas SSE’s diverse portfolio of operations, including Recognition of the conditions required to ensure safe Sue Bruce the delivery of large scale projects, rely on working and a positive business culture generally, Tony Cocker evaluation, was agreed Responsibility: the dedication and skill of its employees, experience of leading large organisations, and Helen Mahy Group Chief Financial Officer and the support of many contractors, all of acknowledgement of the responsibilities to, and Melanie Smith whom are based within in a wide range of areas of importance to the broader workforce. working environments. Chairman’s performance Individual performance The Senior Independent Director, Stephen Hester, conducted The Chairman held performance meetings with each Director SSE is a premium listed company with a group Sound understanding of exemplary governance Crawford Gillies the evaluation of the Chairman’s performance through a series to discuss their individual contribution and performance over the company structure and is committed to the practices, awareness of the relevant legislative and Peter Lynas of individual discussions with Directors and Senior Executives. year and their training and development needs. Following these highest standards of governance and compliance. regulatory framework, emerging trends in stakeholder Helen Mahy Stephen then discussed the feedback and areas of development meetings, the Chairman confirmed that each Director continued engagement and experience in risk management. with the Chairman. to make an effective contribution to the Board and the Company.

Centrica plc Annual Report and Accounts 2018 Centrica plc Annual Report and Accounts 2018 77 SSE plc Annual Report 2019 77

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Provision 23 example – Lloyds Banking Group plc The Annual Report should describe the work of the nomination committee

The Lloyds Banking Group Annual Report first outlines the process and outcomes for this year’s board evaluation, and then discusses the progress made since last year’s board evaluation. This allows for understanding of how the evaluation of the board has impacted the company.

62 Lloyds Banking Group Annual Report and Accounts 2018

Corporate governance report continued

Lloyds Banking Group Annual Report and Accounts 2018 63 How our Board works This is a well functioning Board underpinned by Assessing our effectiveness a shared purpose, strong team dynamics and robust processes.2 Strategic report Board evaluation If Directors have concerns about the Company or a proposed action Progress against the 2017 internal Board effectiveness evaluation which cannot be resolved, it is recorded in the Board minutes. Also How the Board performs and is evaluated During the year, work focused particularly on Board papers and presentations. A summary of the Board’s progress against the actions arising from on resignation, Non-Executive Directors are encouraged to provide a In accordance with the three-year cycle, the 2018 effectiveness the 2017 evaluation are set out below. written statement of any concerns to the Chairman, for circulation to review was facilitated externally by Egon Zehnder1, an external Recommendations from the 2017 evaluation Actions taken during 2018 the Board. No such concerns were raised in 2018 and up to the date of board evaluation specialist, between August 2018 and January 2019. this report. Reduction in volume of Board papers. A review of the schedule of Board and Committee meetings took The annual effectiveness review, which is facilitated externally at Board More concise reports, highlighting important place, and a number of meetings have been removed after being least once every three years, provides an opportunity to consider papers and considered unnecessary. presentations points and avoiding unnecessary volume ways of identifying greater efficiencies, maximising strengths and External evaluation process and repetition. Instructions have been given to all those who produce Board papers highlighting areas of further development. The effectiveness review was to the Board Financial results Fewer and shorter presentations. to avoid repetition between presentations and briefing papers. commissioned by the Board, assisted by the Company Secretary and Stage 1 – August 2018 Bespoke training has also been provided by the Company Secretary. overseen by the Nomination and Governance Committee. Details of this Initial meetings with the Chairman took place to build on the In order to allow more time for discussion, challenge and debate, effectiveness review are provided below. existing questionnaire and establish a discussion guide. Analysis certain items of the agenda at Board meetings had no presentations The Board conducted internal effectiveness reviews in 2016 and 2017. of the existing skills matrix was undertaken. This enabled Egon although the responsible executives were available at the meeting These were led by the Chairman of the Board, and included a review Zehnder to understand the Board’s purpose and scope out the to respond to queries from the Board. of effectiveness of the Board, its Committees and individual Directors effectiveness review. Enhanced video conferencing facilities have been installed in various with the support of the Nomination and Governance Committee. Group locations to improve the quality of remote participation in Stage 2 – September to November 2018 Performance evaluation of the Chairman is carried out by the Non- meetings when attendance in person is not possible. Executive Directors, led by the Senior Independent Director, taking into Questionnaires were sent to the Directors ahead of the one-to-one Governance account the views of the Executive Directors. Increased feedback from stakeholders other The Group’s brokers attended the Board meeting in April to provide interviews with each Director. Egon Zehnder also attended the Stakeholder than regulators and customers, including investor feedback on the results and strategy announcements. November Board meeting. This enabled Egon Zehnder to witness feedback shareholders and bondholders. 2018 evaluation of the Board’s performance and evaluate the Board’s processes and behaviours. The bi-annual presentation to the Board on reputation contained The 2018 effectiveness review sought the Directors’ views on a range of information on shareholder sentiment and was attended by the topics including: strategy; planning and performance; risk and control; Stage 3 – January 2019 Group Director of Investor Relations. Board composition and size; balance of skills and experience; diversity; Findings were reviewed with the Company Secretary. The summary A governance lunch was held in November with key institutional culture and dynamics; the Board’s calendar and agenda; the quality and shareholders. This was hosted by the Chairman and the Chairmen of findings were then shared and discussed with the Chairman and timeliness of information; and support for Directors and Committees. the Board Committees, and feedback was reported to the Board. feedback on each of the Committees was shared with the relevant The effectiveness review findings focus on both evaluation of principal Committees. The final summary was presented to the Board As part of the monthly report to the Board, the CFO now reports

effectiveness of the Board as a whole, and of the individual Directors. in January at a meeting facilitated by Egon Zehnder. Feedback on on the Bank of England’s ‘minimum requirements for own funds Risk management individual Directors is shared with the Chairman. and eligible liabilities’ and will continue to highlight significant developments related to the Group’s debt funding.

Terms of Reference to be reviewed and The Terms of Reference were reviewed, and considered by the Responsible updated to avoid duplication of effort in Nomination and Governance Committee in April, and approved by Business areas covered by other Committees. the Board in November. Highlights from the 2018 review Committee The evaluation concluded that the performance of the Board, its Committees, the Chairman and each of the Directors continues to be effective. Terms of All Directors demonstrated commitment to their roles. Reference The key findings and areas for consideration include the following:

Major change management; finance; These areas of experience will continue to be considered. Financial statements Non- Findings Areas for consideration accounting and data experience to be Amanda Mackenzie, appointed in October 2018 has a substantial Executive considered for future recruitment of Purpose of creating the conditions for sound Despite strong engagement in strategy the Board agenda is Director amount of experience in respect of change management. Purpose and Directors. governance and renewed stakeholder perceived to be still overly rooted in regulatory compliance and risk Recruitment Strategy confidence has been well executed mitigation. Looking ahead, there is an opportunity for the Board to through tight controls and disciplined become more outwardly-focused. risk management; The strategy is clear and the Directors are aligned on strategic priorities. Professional development and training programme at a glance

Controls and governance are very strong; Further streamlining of meeting papers and agendas to enable In addition to the existing methods of training for the Directors, the Board agreed in 2017 that the Non-Executive Directors should be provided with informationOther Processes more expansive discussion; a mandatory training programme. This was trialled by members of the Nomination and Governance Committee and has since been rolled out to the Committees are broadly well chaired; rest of the Directors. The increase in the number of Directors attending aligned The 2018 strategy review process was hailed Training modules were identified from a list of the topics used by Group colleagues, and following discussions between Group Secretariat, Risk and Board meetings may require different disciplines in the conduct as a great success in allowing for wide- Group Learning, the following themes were identified as being the most relevant for Non-Executive Directors: ranging and free-flowing debate. of meetings; Anti-Bribery Large attendance of Committee meetings could inhibit debate. Competition Law The Chairman: Consideration as to whether there is scope for bringing further Information Security People – has focused on building an independently- technology know-how to the Board in due course; Whistleblowing minded, diverse Board, and has laid the Non-Executive Directors would like to offer greater support to the foundations for an open Board culture; Chairman by leveraging their unique skills and experience more Senior Manager and Certification Regime (SMCR) has also been included as an additional theme for all Non-Executive Directors. – invests considerable one-on-one time with fully. Non-Executive Directors, which provides Delivery of training a platform for timely, two-way feedback, The training is delivered via an online training platform on the Group’s intranet. The Directors can access this at any time, and once the training is and helps the new Non-Executive Directors completed, it is recorded on the system to provide a full audit trail. The Directors have completed the modules for 2018. build confidence and a sense of belonging. Board Directors are committed and suitably inquisitive. They come well-prepared to meetings and show a healthy balance of supporting management and asking pertinent questions.

1 At the time of the 2018 review Egon Zehnder provided certain Board and senior management level services from time to time, including in respect of succession planning as detailed on page 67, otherwise Egon Zehnder has no other connection with the Group. 2 2018 Board Effectiveness Review.

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Provision 23 example – Experian plc The Annual Report should describe the work of the nomination committee

This spread from the Experian Annual Report outlines the process used in appointments, with the use of an infographic, and gives details of the board performance review.

Experian plc Experian plc Code principle: Effectiveness Annual Report 2019 75 76 Governance Code principle: Effectiveness

Nomination and Corporate Governance Committee report continued

Examples of ways that the Board monitors culture Process for Board appointments Board effectiveness Progress against the focus areas highlighted in the FY18 review Who What When making Board appointments, the The Code specifies that the Board should Area Focus Progress The Board – Receives a report from the Chief Executive Officer before every scheduled Committee reviews and approves an outline undertake a formal and rigorous annual Board The Nomination and Corporate – A new non-executive director (NED) Board meeting, which contains a culture update. brief and role specification, and appoints a evaluation of its own performance and that of structure Governance Committee will continue was appointed, and a comprehensive its committees and individual directors, and and composition to review Board structure, size and induction was provided (see page 78). – Receives updates on the results of employee surveys. search agent for the assignment. We disclose composition, ensuring critical skills the name of the search agent and any other that the Board should also be evaluated by an The Nomination and Corporate – Annually reviews the Group’s Code of Conduct. This explains our and experience are appropriately connection they have with Experian in our next external agent at least once every three years. Governance Committee: approach to professional and ethical standards, and ensures that Annual Report. This year was Year 3 of our Board’s three-year refreshed. Areas for consideration Experian’s employees know exactly what’s expected from them in review cycle, which is illustrated below. In line should include: diversity; serving – Considered three NED re- The Committee meets the search agent to helping Experian live up to those standards. All employees must with this cycle, this year’s Board evaluation executive experience; geographic appointments and a planned discuss the specification and the search, undertake annual training. was conducted internally. Our last external representation; other identified NED retirement. then the agent prepares an initial longlist of evaluation was conducted by Condign Board Board skills and experience gaps; – This year’s Board evaluation specifically asked about culture. Board candidates. The Committee defines a shortlist – Considered the Chairman’s Consulting in 2017. ongoing succession planning for members were positive about the Board’s role in monitoring culture, succession in detail, initiated the and holds interviews. Ultimately, the Committee scheduled director retirements over noting the benefit of informal as well as formal meetings with search process, approved the role makes a recommendation to the Board for In December 2018, Board members received the coming years; and the optimal management and of visits to the business. specification, received regular its consideration. Following Board approval, an online questionnaire about the Board’s size of the Board. the appointment is announced in line with performance in several areas. These included: Chairman-search updates and Board members – Visiting overseas locations enables the Board to spend time with the requirements of the FCA’s Listing Rules. Governance Board composition and expertise; Board reviewed lists of potential candidates. employees of varying seniority and assess culture in a local context. In due course, a tailored induction programme dynamics; time management, agenda, agenda – Reviewed Board structure, size and See more on page 78 is developed for the new director. papers; strategic oversight; competition; composition in detail in January 2019, operational oversight, risk management We engaged Russell Reynolds as the specialist considering recent and upcoming and internal control; culture; executive Audit Committee – Attitudes to regulators and Internal Audit can give an indication of culture. search firm involved with the recruitment of a Board changes. remuneration and technical development. The Committee (and the Board) receives relevant updates at every new Chairman during the year. This firm also The results of the evaluation, including Board – Considerations in all cases included meeting. Management is transparent and responsive to challenge. provides other executive search services to members’ comments in each area, were those listed under ‘Focus’. the Group. – Twice a year, the Committee reviews calls made to the Confidential presented to the Board at its January 2019 Helpline. meeting and it considered and discussed the Information As noted in the Audit Committee The Audit Committee: security risk report, and in light of external events in results. In addition, the Board evaluated its – Discussed proposed reporting Remuneration – Reviews the new ‘Overview of employee pay’ paper, designed to provide reporting and 2018, the Audit Committee Chairman performance against the areas of focus it had developments with an external Committee an overview of pay structures at Experian and their alignment with our governance commissioned a review of information agreed as part of the previous year’s evaluation. cyber security expert and reviewed purpose, values and strategy. This allows the Committee to ensure that security risk reporting and oversight a commissioned report. relevant policies and practices are consistent with Experian’s values. The Board concluded that it operates effectively during the year. Work will continue to and also noted that its understanding of the further align reporting with risks and – Considered and agreed the – It is intended that the Committee Chairman meets with the Experian competitive landscape through reporting had ensure that an appropriate and clear recommendations of the external People Forum in the UK every year, allowing him to assess culture. further improved in the period. The specific reporting framework (that identifies expert, including the adoption of an – Reviews our UK gender pay gap disclosures every year, on behalf of outputs of the Board discussions are listed and adjusts for evolving risks) is external cyber security reference the Board. on this page and page 77. They include both embedded, to support the Board as framework (alongside existing the agreed focus areas for the coming year it assesses cyber security risk and maturity scoring). Nomination and – Received an update this year from the external partner who supports and progress against the previous year’s the business’s response. Corporate Governance Experian’s talent development programmes. This meeting provided an focus areas. – Monitored the evolution of the Committee external view of Experian’s culture. enhanced reporting at each meeting. Directors proposed for re-election at the – Receives an update during the year from the Global Talent and 2019 AGM met the Chairman to discuss their Corporate The Nomination and Corporate – The Nomination and Corporate Engagement Director, which this year included details of strategic performance and training requirements. governance Governance Committee has spent a lot Governance Committee received priorities and progress, workforce challenges by region, progress on The Deputy Chairman and Senior Independent developments of time this year considering various and considered a briefing from the talent acquisition, the Experian Ambition Programme, people survey Director evaluated the Chairman, taking into corporate governance developments Company Secretary on the new results, future workforce needs, inclusive culture, diversity and inclusion account input from the Chief Executive Officer that have the potential to impact the UK Corporate Governance Code. and FY20 key priorities. Group. The Committee (and the Board) and the other directors. A performance – The Committee reviewed and agreed will maintain its focus on these evaluation discussion was included on the a series of recommendations for developments, making any necessary agendas of principal Board committee implementation of the new Code. meetings in FY19, supported by an analysis changes in relation to the new Code. of how each committee was performing – The Remuneration Committee against the key duties and responsibilities considered remuneration-specific recommendations. Process for Board appointments in its terms of reference. – The Board and its principal Board evaluation process committees will consider required Step 1 Step 2 Step 3 Step 4 Step 5 changes in readiness for the new Code (for example, updating terms of Year 1 – FY17 Year 2 – FY18 Year 3 – FY19 reference and letters of appointment). Committee reviews The agent prepares The Committee The Committee makes Following Board and approves an an initial longlist of then considers a a recommendation approval, the Evaluation by Internal review against Questionnaire based outline brief and role candidates shortlist and we to the Board for appointment is external facilitator detailed Year 1 review internal evaluation specification and hold interviews its consideration announced in appoints a search line with the agent for the requirements of the assignment FCA’s Listing Rules

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Provision 23 example – Taylor Wimpey plc The Annual Report should describe the work of the nomination committee

Taylor Wimpey give a detailed description of their diversity policy and progress against it in their Annual Report. The table explains the objectives of their diversity policy, how this is being implemented in the organisation and progress made. This covers a lot of the required disclosures on diversity policy in the new Code.

94 95 Nomination Committee report continued Directors’ report: governance

Progress of our diversity policy Diversity policy Strategy Progress The Company’s plans and progress in implementing its diversity policy, benchmarked against appropriate targets, are set out below. Progress is We believe that everyone should We will ensure that all managers In 2018, we recruited 197 site apprentices, 53 management apprentices and 27 graduates. involved in recruitment and selection measured and monitored by the Nomination Committee and the Board. The Company is also committed to ensuring that our people are free from any have the right to equal access During 2018, we updated the diversity and inclusion data we hold on our employees to employment and, when in our receive training that incorporates in the system. This was always an activity planned 18 months into the delivery of our direct or indirect discrimination, harassment, bullying or any other form of victimisation. Our grievance and harassment policies ensure that any reported the areas of diversity and incidents are investigated. In addition, our whistleblowing policy encourages employees to speak up, including through an independent ‘Safecall’ employ, to equal pay and access Diversity and Inclusion action plan, as we continue to raise awareness, and embed a promoting equality. more diverse and inclusive culture. telephone facility, against any inappropriate practices or behaviour and we regularly publicise the policy to all staff and workers on site. to training and career development. We will extend our recruitment We continued to partner with a number of specific diversity partners in 2018 with sources in order to attract a more Diversity policy Strategy Progress the objective of driving the attraction and development of a more diverse and diverse range of applicants. representative workforce. Taylor Wimpey operates in diverse We will examine our culture and Our Working Party, the Taylor Wimpey UK Diversity & Inclusivity Committee (the The Company’s new strategy was launched during 2018 with clear objectives around communities. We believe that practices to determine what further ‘Committee’), has been expanded to fully incorporate our previous BAME Working Diversity and Inclusion. This initial launch included open sessions chaired by Pete embracing this diversity will enable actions can be taken to improve Group. This means we now have full representation across all of our UK Divisions, with diversity and inclusion within every regional business having a link to the Committee via their nominated champions. Redfern (and other main Board members) with groups of employees representing all us to succeed through a workforce areas of the business. These sessions were designed to allow all voices to be heard Taylor Wimpey. that is inclusive, creative and The Committee meets every quarter with clear objectives and action plans now in and then influence how we achieve our strategic goals. place for 2019 which will focus on achieving our Diversity and Inclusion agenda. Our innovative. Diversity covers many Diversity and Inclusion is also discussed as part of the talent and succession reviews strategy and associated workstreams are designed to move us forward as a diverse aspects. We have defined diversity which are completed by all business units twice a year. These reviews are cascaded and inclusive employer with particular emphasis on gender and BAME this year. to mean that we actively embrace upwards, culminating in business-wide reviews by the Divisional Chairs with the Chief the business and local The three key objectives stated within TW’s Diversity and Inclusion Strategy are; Executive and Group HR Director. communities in which we operate – 21st Century Leadership In 2018 a full review of all Taylor Wimpey procedures, policies and website began. and will strive to reflect their – Employer of Choice This will be viewed through a Diversity and Inclusion ‘lens’. This review will be richness and character to include – Expand our Reach completed during 2019. such aspects as gender, race, During 2018 we engaged with The Disability Forum with a view to raising awareness disability and religion but also of the challenges facing people with disabilities. This will also result in audits of all We are committed to ensuring We will encourage our people to A specific focus of the Company’s whistleblowing campaign is on diversity, business units with a view to creating action plans and allowing us to become that our people are free from any speak out and report any direct or encouraging employees to speak up against any inappropriate practices or behaviour. diversity of thought, background indirect discrimination, harassment and experience. ‘Disability Confident’. direct or indirect discrimination, Our grievance policy ensures that any reports of harassment or bullying are harassment or bullying. We will or bullying. We will act promptly in investigated and acted upon. The committee has also engaged with the EY Foundation. EY Foundation’s aim is to addressing any inappropriate not tolerate any behaviour that reduce the barriers that young people from all backgrounds face when trying to find behaviour or practice. employment. detracts from this. The Chair of the Committee and the Head of Human Resource Strategy continue to drive the Diversity and Inclusion agenda and will provide updates on progress on our We acknowledge that we must Diversity will be promoted Diversity is a core message within our strategy; a main item at our Executive and plans and specific initiatives to our Divisional Chairs, Divisional Managing Directors and from the highest level and we will Regional Management meetings; and is a standing agenda item at GMT meetings. Managing Directors. This ensures strong two way communication and strengthens the continue to promote diversity in ensure that our people understand commitment to Diversity and Inclusion from the leaders of our business. order to create an organisation that In order to support each employee to maximise their performance and achieve their attracts, supports and promotes the benefits of having a diverse and own personal goals we have designed a Cultural Principles framework where we inclusive workforce. Managing diversity is about valuing We will identify people management We are proud of our involvement with the Leonard Cheshire Disability Change 100 the broadest range of talent. describe the behaviours and attitudes we believe are required for effective performance in order to deliver our vision, mission and values. Encouraging and embracing diversity everyone as an individual – valuing practices that assist a diverse programme which we are committed to continuing to support. Establishing an organisational is an integral part of our philosophy. people as our employees, workforce to achieve their full potential. In 2018 we increased the number of people employed with a disability to 43, culture with diversity as a core value The Careers section of our website includes a dedicated Diversity and Inclusion section customers and clients. People We will use our Community compared to 24 in 2017. We were also very proud when one of our Change 100 will enable individuals to reach their highlighting our focus on this area. have different needs, values and Engagement Programme to interns successfully applied for our Graduate programme and commenced on the full potential and provide the best During 2018 the ‘Proud’ campaign was launched and completed across all of the UK beliefs. Our people management heighten awareness of personal programme in September 2018. service to our customers. businesses. This involved creating videos of employees and their stories which made interaction and valuing individuals. We have continued to promote our ‘Employer of Choice’ and diversity agenda through practice demands that employees proud to work for Taylor Wimpey. Feedback on the campaign was We will increase the opportunities numerous publications and recently participated in the Annual Diversity Awards that employment propositions are both incredibly positive and created the basis for an Engagement Strategy for use both for young people to join the were sponsored by The Bank of Scotland, Glasgow Herald, and Genalytics. At the consistently fair but also flexible internally and externally which will identify the benefits of a career within Taylor Wimpey Company and will promote award ceremony our West Scotland regional business was nominated for the Diversity and inclusive in ways that assist as well as our success and desire to improve as a diverse and inclusive employer. continuous personal development. Star Performer and Recruitment of Talent and the Youth Employment awards. They our people while supporting our went on to win the Diversity Star Performer award. We have built on the success of the female talent forum. Regular Female Talent business needs and objectives. dinners and events were held throughout 2018 with measurable benefits identified. Taylor Wimpey are also documented in the ‘Hampton-Alexander Review’ an independent review body which aims to increase the number of women on UK boards. We published our updated gender pay gap data on 4 March 2019 and it can be viewed on our website at www.taylorwimpey.co.uk We are recognised as a top ten performer amongst the FTSE100 employers for the Taylor Wimpey plc Annual Report and Accounts 2018 number of females on boards. During 2018 we continued with the roll out of the Young Persons Forums across our business units. These forums ensure that our young people are fully engaged with the business, creating strong networks that will bring huge benefits to both the individuals and wider business. This ensures that young people have a strong voice within Taylor Wimpey. The principles and benefits of Flexible Working were continually promoted during 2018. This created some fantastic success stories around the business. We now intend to further endorse this initiative which should be accessible for all, and will be launching our Agile Working Campaign in the coming months. The Committee is planning to launch a Career Returners programme so that we can harness the skills and talent of females and males who have been out of work for an extended period but are now ready to return to the work environment. Taylor Wimpey plc Annual Report and Accounts 2018

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Code principles

The fourth section of the new M. The board should establish formal and UK Corporate Governance transparent policies and procedures to ensure the independence and effectiveness of internal and Code is Audit, risk and internal 04Audit, risk and external audit functions and satisfy itself on the control. This section has very integrity of financial and narrative statements. similar content to the previous N. The board should present a fair, balanced and internal control Code. The only change to understandable assessment of the company’s the required disclosures position and prospects. in the Annual Report is the requirement to talk about O. The board should establish procedures to manage risk, oversee the internal control framework, and emerging risks, as well as determine the nature and extent of the principal principal risks. risks the company is willing to take in order to achieve its long-term strategic objectives. “Board responsibility for culture is essential for considering and addressing internal and external risk.”*

FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting

* Paraphrased from FRC document

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Provisions of the Code

The board should establish an audit committee of • developing and implementing policy on the engagement of The board should carry out a robust assessment 24 28 Required Annual Report disclosures independent non-executive directors, with a minimum the external auditor to supply non-audit services, ensuring of the company’s emerging and principal risks. membership of three, or in the case of smaller companies, two. there is prior approval of non-audit services, considering the The board should confirm in the Annual Report • The significant issues considered in relation to the The chair of the board should not be a member. The board impact this may have on independence, taking into account that it has completed this assessment, including a financial statements, and how these issues were should satisfy itself that at least one member has recent and the relevant regulations and ethical guidance in this regard, description of its principal risks, what procedures are addressed (Provision 26) relevant financial experience. The committee as a whole and reporting to the board on any improvement or action in place to identify emerging risks, and an explanation • How the independence and effectiveness of the shall have competence relevant to the sector in which the required; and of how these are being managed or mitigated. external audit process is assessed and how the company operates. • reporting to the board on how it has discharged its The board should monitor the company’s risk 29 external auditor was appointed (Provision 26) The main roles and responsibilities of the audit committee responsibilities. management and internal control systems 25 • The tenure of the current auditors, date of last should include: The Annual Report should describe the work of the audit and, at least annually, carry out a review of their 26 committee, including: effectiveness and report on that review in the Annual tender and any retendering plans (Provision 26) • monitoring the integrity of the financial statements of the Report. The monitoring and review should cover all company and any formal announcements relating to the • the significant issues that the audit committee considered • If the board does not agree with the audit material controls, including financial, operational and company’s financial performance, and reviewing significant relating to the financial statements, and how these issues committee on the external auditor appointment compliance controls. financial reporting judgements contained in them; were addressed; and explanation of the reasons (Provision 26) • an explanation of how it has assessed the independence and In annual and half-yearly financial statements, • providing advice (where requested by the board) on whether 30 • If there is no internal audit function, an explanation effectiveness of the external audit process and the approach the board should state whether it considers the Annual Report and accounts, taken as a whole, is fair, for its absence, how internal assurance is balanced and understandable, and provides the information taken to the appointment or reappointment of the external it appropriate to adopt the going concern basis achieved, and how this affects the work of external necessary for shareholders to assess the company’s position auditor, information on the length of tenure of the current audit of accounting in preparing them, and identify any audit (Provision 26) and performance, business model and strategy; firm, when a tender was last conducted and advance notice of material uncertainties to the company’s ability to any retendering plans; continue to do so over a period of at least 12 months • reviewing the company’s internal financial controls and • An explanation of how auditor objectivity and from the date of approval of the financial statements. internal control and risk management systems, unless • in the case of a board not accepting the audit committee’s independence are safeguarded (Provision 26) expressly addressed by a separate board risk committee recommendation on the external auditor appointment, Taking account of the company’s current 31 • Statement that the Annual Report is considered composed of independent non-executive directors, or by reappointment or removal, a statement from the audit position and principal risks, the board should to be fair, balanced and understandable the board itself; committee explaining its recommendation and the reasons explain in the Annual Report how it has assessed why the board has taken a different position (this should also (Provision 27) • monitoring and reviewing the effectiveness of the company’s the prospects of the company, over what period it be supplied in any papers recommending appointment or internal audit function or, where there is not one, considering has done so and why it considers that period to be • What procedures are in place to identify emerging reappointment); annually whether there is a need for one and making a appropriate. The board should state whether it has risks and mitigating them (Provision 28) recommendation to the board; • where there is no internal audit function, an explanation for a reasonable expectation that the company will be • The principal risks of the company and how they the absence, how internal assurance is achieved, and how this able to continue in operation and meet its liabilities • conducting the tender process and making affects the work of external audit; and as they fall due over the period of their assessment, are being mitigated (Provision 28) recommendations to the board, about the appointment, drawing attention to any qualifications or assumptions reappointment and removal of the external auditor, and • an explanation of how auditor independence and • Confirmation that the board has carried out a as necessary. approving the remuneration and terms of engagement of the objectivity are safeguarded, if the external auditor provides review of the company’s emerging and principal external auditor; non-audit services. risks (Provision 28) The directors should explain in the Annual Report • reviewing and monitoring the external auditor’s independence 27 • A statement on the review of the effectiveness their responsibility for preparing the Annual Report and objectivity; of the company’s risk management and internal and accounts, and state that they consider the Annual • reviewing the effectiveness of the external audit process, control systems (Provision 29) Report and accounts, taken as a whole, is fair, balanced and taking into consideration relevant UK professional and understandable, and provides the information necessary for regulatory requirements; • The going concern and viability statements shareholders to assess the company’s position, performance, (Provisions 30 and 31) business model and strategy.

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Considerations for engaging reporting Provision 26 example – Bunzl plc The Annual Report should describe the work of the audit committee

This example from the Bunzl Annual Report outlines the process for evaluating the effectiveness of their external audit process and internal audit function. This is an engaging way of discussing how the external audit is assessed.

Provision 26 – The Annual Report should describe the work of Provision 27 – The directors should explain in the Annual Strategic report Directors’ report Financial statements the audit committee, including an explanation of how it has Report their responsibility for preparing the Annual Report assessed the independence and effectiveness of the external and accounts, and state that they consider the Annual audit process and the approach taken to the appointment Report and accounts, taken as a whole, is fair, balanced and or reappointment of the external auditor, information on the understandable, and provides the information necessary for length of tenure of the current audit firm, when a tender was shareholders to assess the company’s position, performance, The Committee is satisfied that each of the last conducted and advance notice of any retendering plans. business model and strategy. above mentioned significant accounting Auditors’ effectiveness reviews matters have been properly recorded in During 2018 the Committee undertook reviews of the effectiveness of both the Company’s the Company’s books and records and external audit process for the 2017 financial statements and the Company’s internal audit An explanation of how the audit committee has assessed the The list of criteria that the directors use to determine whether accounted for appropriately, including function. Each of the reviews followed a broadly similar process, as summarised below: relevant disclosure in the Annual Report. effectiveness of the external audit process would be supported the Annual Report is fair, balanced and understandable is a Detailed Questionnaires Results of Action plan and Internal control and risk management questionnaires completed by: questionnaires implementation by disclosure of the criteria used in this process. useful disclosure. It adds some insight into a process that is often of different considered and time frames As mentioned above, the Committee is • directors; and responsible for reviewing, on behalf of the aspects of discussed by agreed. reported on in a very boilerplate way. • senior managers Board, the effectiveness of the Company’s external audit the Committee. The process for the appointment of the external auditor is best at Group and internal financial controls and the assurance process/internal explained with the use of an infographic to show what stages audit function. business procedures relating to the Company’s risk area levels. occurred and how long each stage took. management system. These controls and procedures are designed to manage, but not Internal audit function Following these assessments, eliminate, the risk of failure of the Company The questionnaire covered a total of 35 to meet its business objectives and, as such, different aspects of the internal audit the Committee concluded provide reasonable, but not absolute, function including: purpose, authority and that it was satisfied with the assurance against material misstatement responsibility; independence and objectivity; effectiveness of the external or loss. During the year, the Committee quality assurance processes; adequacy of monitored the effectiveness of the internal resources; auditors’ skills and capabilities; audit process relating to the financial controls framework through and the quality of reporting. 2017 financial statements reports from the Finance Director, the Head External audit process and that the internal audit of Internal Audit and the external auditors. The questionnaire covered a total of 24 function continued to be In particular the Committee considered the different aspects of the external audit process, scope and results of the work of the internal grouped under four separate headings: the effective, efficient and audit function, the findings of the external robustness of the audit process; the quality appropriately resourced. auditors in relation to the year end audit, of delivery; the quality of people and service; the assessment of fraud risk carried out and the quality of reporting. by management, the controls over the The Committee will carry Company’s financial consolidation and out similar effectiveness reviews reporting system, the treasury controls, in 2019 in respect of the audit of the tax risks and the processes for the 2018 financial statements setting strategic plans and budgets and for monitoring the ongoing performance and the internal audit function. of the Company.

In relation to the risk management system, in addition to considering the results of the external assessment referred to above, the function covers all systems and activities work of the internal audit function provides Committee reviewed the process by which of the Group. Work is prioritised according to the Committee with a further means of significant current and emerging risks had the Company’s risk profile with the annual monitoring the processes and actions to been identified by management and the audit plan being approved by the Committee manage and mitigate those risks identified Board, the key controls and other processes each year. Internal audit reports are regularly as posing the greatest threat to the Company. designed to manage and mitigate such risks provided to the Committee. These reports and the assurance provided by the internal include details of the audit findings, and the External auditors’ independence audit function, the external auditors and other relevant management actions required The Committee ensures that the external oversight from management and the Board. in order to address any issues arising, as auditors remain independent of the well as updates on the progress made by Company and receives written confirmation Internal audit management in addressing any outstanding from the external auditors as to whether The Company has an internal audit recommendations from previously reported they consider themselves independent department which comprises nine in-house findings. In addition, the internal audit within the meaning of their own internal auditors, including the Head of Internal Audit function reports on any significant issues and the relevant regulatory and professional who reports jointly to the Chairman of the relating to the processes for controlling the requirements. Key members of the audit Audit Committee and the Finance Director. activities of the Group and the adequacy and team rotate off the Company’s audit after The scope of work of the internal audit effectiveness of such processes. Overall, the a specific period of time.

EXAMPLES

Bunzl plc Annual Report 2018 71

See how Bunzl plc has See how GBG plc has See how Provident Financial See how RSA Group plc has addressed Provision 26 on addressed Provision 26 on Group plc has addressed addressed Provision 28 on page 69 page 70 Provision 27 on page 71 page 72

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Provision 26 example – GBG plc Provision 27 example – Provident Financial plc The Annual Report should describe the work of the audit committee Directors should explain their responsibility for preparing the Annual Report and accounts

This example discusses the process that has been followed for the tender of auditors and explains how the selection of the auditor This section in the Provident Financial’s Annual Report includes a description of the process undertaken and the key questions was made. This brings greater clarity and insight for readers of the Annual Report. used to ensure that the Annual Report is fair, balanced and understandable. This is much more engaging than the normal level of disclosure on the fair, balanced and understandable requirement, which is often simply a small paragraph of boilerplate text.

Overview Strategic Review Governance Financial Statements 128 Provident Financial plc

Annual Report and Financial Statements 2018 Governance

Report on the work of the Committee Percentage Attendance Audit, Risk and Internal Control continued (4 meetings) Annual Report This year the Committee reviewed and discussed the audited consolidated financial statements in the Annual Report with the Liz David Charmaine Audit Committee and auditor continued external auditor and management. Our challenges and discussions Catchpole Rasche Carmichael focussed on the quality, not just the acceptability, of the accounting 100% 100% 100% principles, as well as the reasonableness of significant judgements, Fair, balanced and understandable The report is balanced the clarity of disclosures in the financial statements and the At the request of the Board, the Committee considered whether, > Is there a good level of consistency between the narrative effectiveness of internal control over financial reporting. This year meetings were attended by the Company Secretary, external in its opinion, the Annual Report and Financial Statements 2018, reporting and the financial reporting and is the messaging auditors, Senior Managers and Executive Directors by invitation. taken as a whole, is fair, balanced, and understandable and provides in each consistent when read independently of each other; the necessary information for the reader to assess the Group’s External Audit – Audit Tender > Does the narrative reporting on the Divisions reflect both position and performance, business model and key audit matters. the positive and negative aspects of performance; Last year I reported that we would consider a formal tender The Committee approved and oversaw a thorough tender process when it was thought appropriate to do so. process, including agreeing the timetable and preparing > Are both the statutory and adjusted financial measures Process explained clearly and given equal priority and prominence; Ernst & Young LLP (‘EY’) has audited the Group’s accounts the tender document in accordance with the relevant In justifying this statement the Committee considered the robust Are the key judgements referred to in the narrative reporting since 1993. Although the Board and the Committee have requirements. Having carefully considered and followed the process in place to create the Annual Report and Financial > and the significant issues reported in this Audit Committee been satisfied with EY’s quality of service, independence and Financial Reporting Council (“FRC”) guidance on audit tenders, Statements 2018 including: report consistent with the disclosures and critical judgements objectivity, the Committee recommended to the Board that due we decided that the process should follow five rigorous and > The early involvement of the Committee in the preparation set out in the financial statements; and to EY’s length of tenure, a competitive tender process should comprehensive stages set out as follows: of the Annual Report and Financial Statements 2018 which How do these judgements and issues compare with the risks take place in the financial year. enabled it to provide input into the overall messages and tone; > that the external auditor will include in its report. Prior to undertaking the auditor tender, the Company consulted > The input provided by divisional and Group senior management and the process of review, evaluation and verification to ensure with its largest institutional shareholders on the scope of the Stage: We invited the final two firms to present to the Audit & Risk The report is understandable exercise and also whether EY should be included in the process Committee in March 2019. The Committee then met to balance, accuracy and consistency; > Is there a clear and understandable structure to the report; and took account of the feedback provided. 04 evaluate each firm using pre-agreed key decision criteria to > The reviews conducted by external advisors appointed to advise reach its recommendation to the Board. > Are the important messages highlighted appropriately and on best practice; consistently throughout the document with clear signposting > The regular review of the Group internal audit activity reports to where additional information can be found; and Stage: Stage: The Committee recommended the audit tender to the Board The Committee concluded that both firms taking part which are presented at Committee meetings and the opportunity > Is the narrative within the Annual Report and Financial Statements in November 2018 to take place in the financial year. The in stage four of the process demonstrated a high level for the non-executive directors to meet the external auditor 2018 straightforward and transparent. 01 successful firm’s first year would be signing the audit opinion for 05 of competence on all audit matters. However, it was without any executive of the Group being present via the the 12 months to 31 March 2020. The Committee agreed the timetable agreed that the proposed audit approach by the unsuccessful firm private sessions of the Committee; This assessment was also underpinned by the following: for the tender, the tender document, the tender shortlist and the key significantly understated the resource requirement to audit the Group, The papers on critical accounting assumptions and key sources decision criteria for the recommendation it would make to the Board. in addition to having a lack of international coverage and experience > The Committee meetings reviewed and considered the draft > to accommodate the Group’s expansion. The Committee therefore Annual Report and Financial Statements 2018 in advance of estimation uncertainty presented by management to the recommended that EY be reappointed on the following basis: of the final sign-off; and Audit Committee which documents the approach taken to the Stage: Before issuing the tender to audit, Dave Wilson, the Chief − EY demonstrated innovation in their approach to continue critical accounting assumptions and key sources of estimation Finance & Operating Officer, met separately with the improving on audit quality, with an increased use of software to > The final sign-off process by the Board. uncertainty documented in the financial statements on page 178. 02 audit partner of each shortlisted firm. This provided an select and automate their substantive testing. When forming its opinion, the Committee reflected on the The assumptions and the going concern statement were carefully opportunity to assess each audit partner in terms of independence, − The audit partner would be rotated ahead of the financial year information it had received and its discussions through the year. reviewed and challenged by the Committee with the assistance internatonal capability and experience. audit, one year ahead of mandatory rotation rules. The new audit In particular, the Committee considered whether: We invited four firms to tender for the audit of GBG, including one partner demonstrated independence of mind and a fresh approach. of the external auditor who also fully analysed and concurred from outside of the ‘Big Four’. One of the ‘Big Four’ firms was not This view was supported by the references I personally took on the with the assumptions made as part of the year-end process; invited to tender because of independence conflicts arising from prospective audit partners through phone calls with their other The report is fair > The consistency between the risks identified and the issues that non-audit services provided in recent years. We sent each firm a list clients. The Committee was satisfied this would maintain the high > Is the narrative reporting on the divisions consistent with the of proposal requirements and the evaluation criteria. The criteria quality challenge EY has demonstrated in the past. are of concern to the Committee; reporting in the financial statements; included, but was not limited to, the audit quality record of the − Feedback from the Finance Team was that the EY team has always > The comprehensive reviews of the Annual Report and Financial firm and lead partner, demonstration of a probing and challenging demonstrated a probing and challenging attitude, while striking > Are the key messages in the narrative reporting reflective attitude, industry and geographic capability and coverage with GBG. Statements 2018 undertaken at different levels in the Group the right balance between materiality, professional scepticism and of the financial reporting; and which aims to ensure consistency and overall balance; and We invited each firm to meet with me seperately, as well as additional co-operation. meetings with other members of GBG’s management and Finance > Are the KPIs disclosed appropriate to understanding the − Their proposed audit approach, specifically the balance between > The external auditor’s report on the Annual Report and Team. Firms were also invited to a secure data room where they could underlying performance of the Group and its divisions. a substantive and controls-based audit, was more reflective of Financial Statements 2018. access information about GBG to help them understand the business and our policies on key accounting areas of judgement. GBG’s current control environment, especially following two recent overseas acquisitions. Conclusion − EY has the international coverage required as the Group continues Following its review, the Committee was of the opinion that the Stage: to expand as well as partners and audit teams experienced in Due to a lack of responsiveness and engagement during conducting global audits. Annual Report and Financial Statements 2018 is representative of stage two of the process, it was mutually agreed that one the year, and presents a fair, balanced, and understandable overview, of the firms should withdraw. The remaining three firms − The Committee was satisfied with EY’s audit quality results (taking 03 providing the necessary information for shareholders to assess the submitted extensive written proposals in February 2019. into account the FRC’s audit quality reports and open investigations). We reviewed the proposals and agreed a shortlist. The firms were challenged on these results throughout the process Group’s position, performance, business model and strategy. and specifically during the oral presentations. The Committee While completing their final independence checks, one of the firms highlighted that they owned an overseas company which provided was satisfied with the responses from EY on their commitment to critical IT services to GBG. This conflict led to the firm withdrawing maintaining and improving audit quality. from the process as both the audit firm and Audit & Risk Committee − As a further safeguard the Committee intends to appoint an internal agreed the importance of this service to the Group would have led to audit provider in 2019/20. EY would be prohibited from providing it being an independence conflict. this service.

GBG Annual Report and Accounts 2019 51

GB Group Plc AR 2019.indd 51 24-Jun-19 8:12:27 PM 26510 24 June 2019 8:09 pm Proof 17

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Provision 28 example – RSA plc The board should carry out an assessement of emerging and principal risks

The Code requires disclosure of the process for identifying and mitigating emerging risks. RSA Group outlines the risk culture and their risk management system, as well as including case studies on risk management.

STRATEGIC REPORT GOVERNANCE FINANCIALS RISK MANAGEMENT APPROACH

In a rapidly developing business environment we strive for best-in-class risk management in RISK MANAGEMENT SYSTEM order to protect our customers from loss and EMERGING RISK – MONITORING FUTURE THREATS poor outcomes, while maximising shareholder risk-adjusted returns. We leverage our core expertise in order to be selective in the risks Risk Management System EMERGED RISK NEAR TERM RISK MEDIUM-TERM RISK LONG-TERM RISK we wish to retain, while ensuring we manage, underpins the Operational Planning Cycle mitigate and avoid risks we are not adequately rewarded for. As a pure general insurer our Cyber risk Financial market uncertainty Geopolitical tensions Climate change accelerates key area of expertise is insuring property and Emerging threats arise on a Volatile capital markets Geopolitical tensions could Climate Change trends have casualty risks. This means we can provide our frequent basis, however there negatively impact on the result in new diplomatic, been recognised as a key customers with competitive products, while Board sets business remains a risk of increasing value of assets and potential economic, cyber or emerging risk for insurers serving them well and ensuring the risks we 1 capability of foreign powers increase capital requirements physical confl icts. for some time, however, the accept are collectively managed to maximise strategy and organised crime to for market/credit risk. recent work of the IPCC* has our long-term performance. Board sets the business engineer severe attacks. increased understanding. strategy which is incorporated in the three-year operational Longevity risk Risk culture – culture of ORSA reported plan. Risk Strategy provides Critical infrastructure Longevity risk can arise with accountability and openness 8 Terrorist/organised to Board robust challenge of validity and Failure of critical infrastructure PPO and in relation to pensions We consider the foundation of an effective achievability of plan. Terrorist threats remain high. impact on global communications, Validated output from the risks. Several factors including risk management framework to be the Attacks could impact a large provision of power and/or medical advances could shift model is reported to the Board, number of our customers as telecommunications and GPS. the risk in the future. cultivation of a risk culture that promotes so that changes can be made well as broader society. accountability and openness (a willingness to to the three-year operational admit mistakes and learn from the past), within plan to ensure the Group an organisation built on respect, integrity and remains in appetite. Cycle will Global socio-political Autonomous machines a clear focus on customer and employee continue until the Board is Brexit uncertainty Autonomous machines are outcomes. At RSA, the senior management satisfi ed with the future plan. Board sets risk Risks exist associated with a Tensions over trade, US likely to change insurance 2 disorderly Brexit with potential relations, Russia tensions needs and could have varying team has been instrumental in setting the strategy and appetite for economic shocks, capital and EU stability are all factors effects on frequency and right ‘tone from the top’, which is further Risk Strategy creates the impacts, claims infl ation and that have signifi cant social severity of losses. underpinned by the Group’s quarterly cultural overarching principles for supply chain implications. and economic implications. health check and annual staff survey. Model outputs setting the Risk Appetite 7 used in ORSA Indicators. A key part of our culture is ensuring our customers are at the heart of all we do, and The internal model is run regularly Persistent or more extreme throughout the year in order to weather patterns our staff are passionate about achieving good assess the risks impacting the customer outcomes. We give considerable A warming planet is resulting Group and determines how much in more extreme weather attention to ensuring our customers are capital the Group needs to hold to with the potential for further treated fairly. remain solvent even after a major stress event(s), which forms part worsening with more persistent * Intergovernmental Panel patterns arising. of the ORSA process. Policies guide on managing on Climate Change Risk management in action case studies 3 risks within appetite

Themes: Political Economic Social/environmental Technology and digital Comprehensive policy suite sets the required business Managing risk to good Model outputs checked and processes and controls to 6 customer outcomes used in business decisions deliver the operational plan within appetite. Robust control Risk management in action case studies Following a best practice review, we decided Output from the model is sense testing used to identify risks to strengthen governance over customer checked against non-modelled stress out of appetite. risk and achievement of good customer and scenario events to ensure it Responding to climate change for our stakeholders Enhancing underwriting capability for the future outcomes, to ensure appropriate oversight provides a reliable basis for making informed by insightful MI. A new UK business decisions, including capital In 2018, RSA actively engaged in the climate change debate through Underwriting and Risk work closely to understand current and future Customer Committee was established and planning, reinsurance purchase, membership of organisations such as ClimateWise, UN PSI1 and needs in relation to underwriting skills and capability. For example, a new risk appetite statement implemented, performance analysis and pricing. Flood Re. Moreover, we chaired the CRO2 Forum’s Emerging Risk Canada focuses on further developing weather models and pricing Monitor appetite supported by redeveloped management 4 Initiative, which resulted in the publication of a paper on insurance capabilities, and the UK initiated a long-term programme of work to and action tracking industry implications. We continued monitoring threats to and enhance data, portfolio management and pricing models. Opportunities information. These new arrangements will be Regional Risk and Control opportunities for our products, reinsurance and investments on to improve profi tability are taken in a coordinated and informed way, with further monitored and enhanced as we learn Committees track actions behalf of customers and stakeholders. We also quantifi ed climate the UK taking the decision to exit certain segments and follow a more from the experiences gained from across Risk assessment 5 for risks outside appetite, trends and took them into account in our weather assumptions and focused London Markets portfolio in 2019. the Group and from our customers. and update internal model reinsurance strategy. The creation of a new ESG committee will and escalate to local and maintain this momentum going forward. Signifi cant changes in risk Group boards. assessments are considered by the Internal Model 1 United Nations Principles Governance Committee and, for Sustainable where appropriate, the Group’s Insurance. 2 The CRO Forum is a internal model is updated. group of professional risk managers from the insurance industry that focuses on developing and promoting industry best practice in risk management.

42 RSA Annual Report and Accounts 2018 rsagroup.com 41

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Code principles

The fifth section of the new P. Remuneration policies and practices should be designed to support strategy and promote long- Remuneration Corporate Governance Code term sustainable success. Executive remuneration is ‘Remuneration’. This section 05 should be aligned to company purpose and values, is markedly different from the and be clearly linked to the successful delivery of Remuneration section in the the company’s long-term strategy. previous Code. Q. A formal and transparent procedure for The revisions to this section developing policy on executive remuneration and are clearly attempting to determining director and senior management address some of the recent remuneration should be established. No director issues with executive should be involved in deciding their own remuneration outcome. remuneration, such as remuneration determined R. Directors should exercise independent judgement by the formula of the and discretion when authorising remuneration remuneration policy leading outcomes, taking account of company and “Focus should be on individual performance, and wider circumstances. to disproportionate payouts to strategic rationale, executive directors. and links between remuneration, strategy and long- term success”*

FRC Guidance on Board Effectiveness

* Paraphrased from FRC document

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Provisions of the Code

The board should establish a remuneration committee Remuneration schemes should promote long-term When determining executive director remuneration policy 32 36 40 Required Annual Report disclosures of independent non-executive directors, with a minimum shareholdings by executive directors that support and practices, the remuneration committee should • Identification of remuneration consultants membership of three, or in the case of smaller companies, alignment with long-term shareholder interests. Share awards address the following: and whether they have any other connection two. In addition, the chair of the board can only be a member granted for this purpose should be released for sale on a • clarity – remuneration arrangements should be transparent with the company or directors (Provision 35) if they were independent on appointment and cannot chair phased basis and be subject to a total vesting and holding and promote effective engagement with shareholders and the the committee. Before appointment as chair of the period of five years or more. The remuneration committee workforce; • Rationale for executive directors’ remuneration committee, the appointee should have should develop a formal policy for post-employment remuneration policies, structures and • simplicity – remuneration structures should avoid complexity and served on a remuneration committee for at least 12 months. shareholding requirements encompassing both unvested their rationale and operation should be easy to understand; performance metrics (Provision 41) and vested shares. The remuneration committee should have delegated 33 • risk – remuneration arrangements should ensure reputational • Reasons why the remuneration is appropriate responsibility for determining the policy for executive Remuneration schemes and policies should enable the 37 and other risks from excessive rewards, and behavioural risks that using internal and external measures director remuneration and setting remuneration for the chair, use of discretion to override formulaic outcomes. They can arise from target-based incentive plans, are identified and (Provision 41) executive directors and senior management. It should review should also include provisions that would enable the company mitigated; workforce remuneration and related policies and the alignment to recover and/or withhold sums or share awards and specify • A description, with examples, of how the • predictability – the range of possible values of rewards to of incentives and rewards with culture, taking these into account the circumstances in which it would be appropriate to do so. remuneration committee has addressed individual directors and any other limits or discretions should be when setting the policy for executive director remuneration. Only basic salary should be pensionable. The pension the factors of clarity, simplicity, risk, 38 identified and explained at the time of approving the policy; The remuneration of non-executive directors should be contribution rates for executive directors, or payments in predictability, proportionality and alignment 34 • proportionality – the link between individual awards, the delivery determined in accordance with the Articles of Association lieu, should be aligned with those available to the workforce. to culture in the remuneration policy and of strategy and the long-term performance of the company or, alternatively, by the board. Levels of remuneration for the The pension consequences and associated costs of basic salary practices (Provision 41) should be clear. Outcomes should not reward poor performance; chair and all non-executive directors should reflect the time increases and any other changes in pensionable remuneration, and • Whether the remuneration policy commitment and responsibilities of the role. Remuneration for or contribution rates, particularly for directors close to • alignment to culture – incentive schemes should drive operated as intended in terms of company all non-executive directors should not include share options or retirement, should be carefully considered when compared behaviours consistent with company purpose, values and other performance-related elements. with workforce arrangements. performance and quantum, and, if not, any strategy. necessary changes (Provision 41) Where a remuneration consultant is appointed, Notice or contract periods should be one year or less. 35 39 There should be a description of the work of the this should be the responsibility of the remuneration If it is necessary to offer longer periods to new 41 • What engagement has taken place with remuneration committee in the Annual Report, including: committee. The consultant should be identified in the Annual directors recruited from outside the company, such periods shareholders and the impact this has had • an explanation of the strategic rationale for executive directors’ Report alongside a statement about any other connection it should reduce to one year or less after the initial period. on remuneration policy and outcomes; remuneration policies, structures and any performance has with the company or individual directors. Independent The remuneration committee should ensure compensation (Provision 41) metrics; judgement should be exercised when evaluating the advice of commitments in directors’ terms of appointment do not • What workforce engagement has taken external third parties and when receiving views from executive reward poor performance. They should be robust in reducing • reasons why the remuneration is appropriate using internal place to explain how executive remuneration directors and senior management. compensation to reflect departing directors’ obligations to and external measures, including pay ratios and pay gaps; aligns with wider company pay policy mitigate loss. • a description, with examples, of how the remuneration committee has addressed the factors in Provision 40; (Provision 41) • whether the remuneration policy operated as intended in • To what extent remuneration outcomes have terms of company performance and quantum, and, if not, been affected by board discretion and the what changes are necessary; reasons why (Provision 41) • what engagement has taken place with shareholders and the impact this has had on remuneration policy and outcomes; • what engagement with the workforce has taken place to explain how executive remuneration aligns with wider company pay policy; and • to what extent discretion has been applied to remuneration outcomes and the reasons why.

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Considerations for engaging reporting

The Directors’ Remuneration Report in many Annual Reports Provision 41 – There should be a description of the work Considerations when determining only contains the disclosures required by remuneration, with no of the remuneration committee in the Annual Report, remuneration policy additional content. This means that the Directors’ Remuneration including: an explanation of the strategic rationale for The new Code requires a list of factors (clarity, simplicity, Report is frequently unengaging and difficult to follow. executive directors’ remuneration policies, structures and risk, predictability, proportionality and alignment to culture) Consequently, there are few examples in current Annual Reports any performance metrics; reasons why the remuneration is to be considered when determining the remuneration policy of good communication in the Directors’ Remuneration Report. appropriate using internal and external measures, including and the inclusion of a description of how these factors have With the addition of the new provisions in the Remuneration pay ratios and pay gaps; and a description, with examples, of been addressed in the remuneration policy. This could be section of the Code, this should hopefully change. how the remuneration committee has addressed the factors communicated with the use of a table with a description of how in Provision 40. Provision 33 – The remuneration committee should have each factor has been addressed in the remuneration policy. delegated responsibility for determining the policy for As the requirement to consider these factors is new, there are no executive director remuneration and setting remuneration Strategic rationale examples that exemplify this approach specifically, but there are for the chair, executive directors and senior management. Effective remuneration policy would encourage alignment examples of where companies have outlined the principles that It should review workforce remuneration and related policies of executive directors’ interests with long-term shareholder they have considered when creating the remuneration policy. and the alignment of incentives and rewards with culture, interests. This has typically been done through long-term The Code also requires companies to report on their taking these into account when setting the policy incentive plan schemes, which are share plans that have a engagement with shareholders on the remuneration policy. for executive director remuneration. several year vesting period. However, it is not clear that the use It would be useful if companies reported shareholders’ views of long-term incentive plan schemes has achieved what they on whether the executive director remuneration policy and The Code states that the remuneration committee should review were intended to do. Long-term incentive plans are a key factor practices effectively implement the factors of clarity, simplicity, workforce remuneration and related policies, so that they can be in the rapidly increasing executive pay. risk, predictability, proportionality and alignment to culture. taken into account when the remuneration committee is setting A different approach to encouraging alignment of executive the policy for executive director remuneration. It would be useful directors’ interests with long-term shareholder interests would for the Annual Report to include explanations of what actions the be to use metrics to determine remuneration that gives remuneration committee has taken to inform itself of workforce consideration to wider stakeholders, such as customer metrics, remuneration and the alignment of incentives and rewards with investment in the business, health and safety, environmental culture and of how the knowledge of workforce remuneration, metrics, etc. and closely aligning the metrics used in the incentives and rewards has affected decisions in determining the remuneration policy to the strategy of the company. executive director remuneration policy. Appropriate remuneration A ‘Remuneration at a glance’ spread is an engaging way to outline how the performance of the company and the remuneration of the executive directors are aligned. This spread shows the results of key metrics, shows the remuneration pay for the executive directors and gives a brief overview of how it was determined. This allows a reader to get the key highlights of the Directors’ Remuneration Report without having to read the entire report and also makes it clear why the company considered the remuneration to be appropriate.

EXAMPLES

See how Ocado plc has See how Experian plc has addressed Provision 41 on addressed Provision 41 on page 80 page 81

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Provision 41 example – Ocado plc Provision 41 example – Experian plc There should be a description of the work of the remuneration committee There should be a description of the work of the remuneration committee

The Code requires that the remuneration committee should address the factors of clarity, simplicity, risk, predictability, The ‘Remuneration at a glance’ page in Experian’s Annual Report contains performance metrics and metrics that give a wider context for proportionality and alignment to culture when determining executive remuneration. executive director pay. Details of how the remuneration policy has been applied has also been included. By having this content together on one page, it makes it easier for stakeholders of Experian to judge whether the executive director remuneration is appropriate.

112 Our Governance Experian plc Code principle: Remuneration Annual Report 2019 89 Directors’ Remuneration Report

Our executive remuneration at a glance

Alignment of proposed 2019 Policy with the requirements under the UK Corporate Governance Code 2018 Performance snapshot Under the headings prescribed by the UK Corporate Governance Code 2018, the rationale for the main changes to the 2019 Policy are:

Clarity term of the VCP, leading to substantial long-term shareholder 9% 15.9% USc98.0 10% 75% Organic revenue Return on capital Benchmark EPS Benchmark EBIT Employee 2018 Code provision: remuneration arrangements should be transparent alignment. growth* employed growth* engagement and promote effective engagement with shareholders and the workforce • There is an ability to override formulaic outcomes produced • The complexity of setting three-year performance targets under by the performance conditions where in the Remuneration Committee’s opinion they do not reflect the true performance of the current LTIP along with the commercial sensitivity of much Performance measure Incentive plan Outturn Achievement (% of max) of Ocado’s long-term strategic plans meant that the targets the business over the period, individual performance or where Benchmark PBT growth* Annual bonus 8.4% 85% and performance against them were not sufficiently clear to the outcome will not deliver the policy intentions. shareholders. • In addition, malus and clawback provisions are contained in both Three-year Benchmark PBT per share growth* CIP/PSP 9.3% 100% • The single total shareholder return performance measure of the plans. Three-year cumulative Benchmark operating cash flow* CIP US$3.6bn 70%

VCP enables the Remuneration Committee to be fully transparent Governance Predictability Three-year TSR relative to FTSE 100 Index PSP 35.2% 100% about targets and performance against them. 2018 Code provision: the range of possible values of rewards to • Under the AIP, it is easier to set meaningful and robust one- individual directors and any other limits or discretions should be * At constant currency. year annual performance targets, which can be fully disclosed identified and explained at the time of approving the policy As a result of the performance shown above, the 2016 CIP vested at 85%, and the 2016 PSP vested at 100%. retrospectively. • Payouts under the VCP are presented based on three different Simplicity share price growth assumptions on page 105. The award limits 2018 Code provision: remuneration structures should avoid and operation of a cap on annual vesting ensure the potential Executive director single figure of pay Incentive awards timelines complexity and their rationale and operation should be easy to payouts under the VCP are limited both annually and, in terms of ’000 0 2,000 4,000 6,000 8,000 10,000 12,000 Grant Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 understand number of awards, over the entire life of the VCP. Brian Cassin £10.3m Annual bonus • Simple payment mechanism – under the VCP, the Executive Proportionality Lloyd Pitchford £6.4m CIP Directors receive 2.75% of the value above the hurdle calculated 2018 Code provision: the link between individual awards, the delivery Kerry Williams US$10.0m on an annual basis with the shares received at the end of three, of strategy and the long-term performance of the company should be PSP Fixed elements of pay: Variable elements of pay: four and five years from the start of the VCP period. clear. Outcomes should not reward poor performance Base salary Annual bonus Performance paid • Simple performance condition – the VCP rewards absolute • Under the VCP, there is a clear and direct link between Company Pension and beneﬁts Share-based incentives: value at grant Holding period returns to shareholders. performance and individual rewards. The Executive Directors Share-based incentives: value attributable to share price growth and dividend equivalent payments • Simplified package – number of plans in operation reduced from receive 2.75% of the value created above the threshold hurdle, three to two with the removal of the LTIP. and nothing if the threshold growth rate is not achieved. Our new executive pay framework Risk • The underpin in the VCP operates such that share awards will 2018 Code provision: remuneration arrangements should ensure only vest if Total Shareholder Return is 10% Compound Annual Revenue growth is a reputational and other risks from excessive rewards, and behavioural Growth Rate or more and if not achieved at the final vesting date, key metric for us and 80% will provide a quality risks that can arise from target-based incentive plans, are identified any unvested share awards will lapse – so there can be no payout Executive director remuneration arrangements for FY20 Annual 20% Benchmark Revenue of earnings balance for poor performance. bonus EBIT + and mitigated – Salary increases of between 2.5% and 2.6% awarded to to the important Alignment to Culture executive directors, effective 1 June 2019. profit focus of • The combination of reward for short-term strategic decisions Benchmark EBIT. – No change to pension or benefits arrangements. (paid part in cash and part in deferred shares) and long-term, 2018 Code provision: incentive schemes should drive behaviours sustainable shareholder returns ensures the Company’s Executive consistent with company purpose, values and strategy – Annual bonus based on Benchmark EBIT (80%) and revenue performance (20%). The PSP is designed Director incentives together drive the right behaviours for the • The Remuneration Committee is satisfied that the VCP to incentivise – The opportunity is 200% of salary. Half of any payout must be 50% Company and shareholders. 50% shareholder returns, incentivises and retains the highly entrepreneurial Chief Executive deferred into the CIP for three years. Adjusted Cumulative CIP Benchmark Benchmark while the CIP is • The caps within the VCP mitigate against excessive reward. There Officers and Executive Directors in Ocado. – CIP awards will be based on cumulative Benchmark operating + operating EPS cash flow designed to is a cap on the total number of share awards which may vest • Strategic implementation within Ocado is not linear, with cash flow (50%) and adjusted Benchmark EPS (50%). The maximum incentivise cash award remains a 2:1 match. under the VCP of 2.75% of the issued share capital. The cap on priorities shifting and developing often in the short-term and the discipline. annual vesting (£20 million for the Chief Executive Officer and Remuneration Committee has worked hard to formulate a Policy – PSP awards will be based on TSR (25%), ROCE (25%) and a proportionate limit for other Executive Directors), where the adjusted Benchmark EPS (50%) performance. The opportunity However, growth is and incentive plans that drive exceptional, sustainable growth of 200% salary is unchanged. the single most excess is rolled forward and eligible to vest in future years, means 25% while also rewarding appropriate short-term strategic decisions. – CIP and PSP awards will be subject to an additional two-year 50% ROCE important aspect of the more successful the growth of the Company, the longer the Adjusted our business strategy holding period. PSP Benchmark + and therefore EPS – All incentive awards are subject to malus and clawback provisions. 25% adjusted Benchmark TSR EPS runs across both plans.

Ocado Group plc Annual Report and Accounts for the 52 weeks ended 2 December 2018 www.ocadogroup.com

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Strategic Report

Required Disclosures Your Considerations

Marketplace

How opportunities to the future success of the business have • Discussion of long-term and emerging trends in the In summary been considered and addressed (Provision 1) company’s markets and the likely impact that they will have on the company

Business Model

The sustainability of the company’s business model • State the purpose, vision and values of the company This summary guide has been created to help anyone tasked with (Provision 1) • Include discussion of the company’s sustainable competitive advantages – what resources are critical reporting on how the new UK Corporate Governance Code has been to the company’s future success and how well protected applied at their company. It is intended to encourage meaningful are they? reporting on the new Corporate Governance Code and help companies • Discussion of the value generated and the impacts on the external environment over the long term avoid the tick-box approach. As well as containing a list of the required Risk disclosures, it also gives reporting considerations that, if applied, How risks to the future success of the business have • Discussion of the extent to which stakeholder engagement would give your stakeholders a fuller and more insightful picture been considered and addressed and what procedures are in has influenced the board’s view of the principal and of how the company is applying the principles of the Corporate place to identify emerging risks and mitigate them (Provisions emerging risks of the company 1 and 28) Governance Code and its approach to governance. • Discussion of the timeframe over which each of the risks will have the most impact (short-term, medium-term The principal risks of the company and how they are being and long-term) mitigated (Provision 28)

The going concern and viability statements (Provisions 30 and 31)

CSR / Sustainability

How the interests of the workforce and other key • Discussion of risks associated with sustainability stakeholders and section 172 of the Companies Act 2006 (e.g. climate-related risks) have been considered in board discussions and • Inclusion of the Code of Conduct for employees and decision-making (Provision 5) how it is aligned to the purpose, values and culture of the company If the board has not chosen one of the recommended • Whether the culture of the company is aligned with workforce engagement methods, an explanation of the purpose, vision and values method used and the reasoning behind that choice How the directors ensure engagement with stakeholders (Provision 5) • is effective and beneficial

An explanation of the company’s approach to investing in • What topics are discussed during engagement with and rewarding its workforce (Provision 2) stakeholders

New required disclosure

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Governance Section

Required Disclosures Your Considerations Required Disclosures Required Disclosures

Corporate Governance Audit Committee Report Nomination Committee Report

Explanation of the board’s activities and actions in relation • The general policy for approving significant external The significant issues considered in relation to the financial Identification of the external search consultancy used for to assessing and monitoring culture and addressing any appointments – under what circumstances would the statements, and how these issues were addressed appointment of chair and non-executive directors and misalignment of culture with purpose, values and strategy board approve an external appointment or refuse an (Provision 26) whether it has any other connection with the company (Provision 2) external appointment? or directors (Provision 20)

If 20 per cent or more of votes have been cast against a • A general discussion of the skills and experience that are How the independence and effectiveness of the external How the board evaluation was conducted, the nature and board recommendation on a resolution, how this has affected required in the directors of the board and why they are audit process is assessed and how the external auditor was extent of an external evaluator’s contact with the board board decisions and any actions suggested (Provision 4) required for long-term success of the company, and their appointed (Provision 26) and individual directors, detailing the outcomes, actions link to strategy taken and how it has or will influence board composition (Provision 23) The number of meetings of the board and its committees, • For each director, give specific reasons why their particular and attendance of directors (Provision 14) contribution is, and continues to be, important to the The tenure of the current auditors, date of last tender and any The process for appointments and approach to succession company’s long-term success retendering plans (Provision 26) planning, and how both support developing a diverse pipeline (Provision 23) Explanation of the reasons for approval of significant external • Explanation of the relevant experience that members appointments (Provision 15) of the committees have, in order for the committees to If the board does not agree with the audit committee on the The policy on diversity and inclusion, its objectives and be effective external auditor appointment, an explanation of the reasons linkage to company strategy, how it has been implemented (Provision 26) and progress on achieving the objectives (Provision 23) Confirmation that the board has carried out a review of the • Discussion of the framework and processes the board company’s emerging and principal risks (Provision 28) uses to align purpose, values, strategy and culture and at If there is no internal audit function, an explanation for its The gender balance of those in senior management and what stage the company is currently in that process absence, how internal assurance is achieved, and how this their direct reports (Provision 23) affects the work of external audit (Provision 26) A statement on the review of the effectiveness of the • Discussion of how the engagement with the workforce company’s risk management and internal control systems influences the board’s opinion on how aligned purpose, An explanation of how auditor objectivity and independence Identification of the external board evaluation facilitator and (Provision 29) values, strategy and culture are in the company are safeguarded (Provision 26) whether it has any other connection with the company or directors (Provision 21) How the company’s governance contributes to the delivery • How the board determined who the key stakeholders of of its strategy (Provision 1) the company are and what the level of engagement the Statement that the Annual Report is considered to be fair, How the board determined who the key stakeholders of the company needs to have with each stakeholder group balanced and understandable (Provision 27) company are and what level of engagement the company needs to have with each stakeholder group Identification of each non-executive director the company e Wher more than 20 per cent of votes have been cast • New required disclosures considers to be independent (Provision 10) against a resolution, discussion of what engagement and monitoring will be carried out to ensure that similar resolutions in the future will not have significant percentages of votes against them

New required disclosures

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Governance Section continued

Required Disclosures Your Considerations Directors’ Remuneration Report We hope that this guide has taken Identification of remuneration consultants and whether they • How the remuneration policy promotes alignment have any other connection with the company or directors of executive directors’ interests with long-term shareholder you through an understanding of interests (Provision 35) some of the high-level changes in Rationale for executive directors’ remuneration policies, • Explanation of the extent to which non-financial metrics structures and performance metrics (Provision 41) are used to determine remuneration outcomes and how principles from the new Code and those metrics link to the company’s strategy the challenges that accompany CATHERINE JOYCE Reasons why the remuneration is appropriate using internal • A discussion of the general circumstances under 0121 236 9007 and external measures (Provision 41) which the company would recover or withhold sums addressing them. catherine.joyce@ or share awards jonesandpalmer.co.uk We also hope that we have provided you with some thought-provoking insight A description, with examples, of how the remuneration • Discussion of how the remuneration policy and practices committee has addressed the factors of clarity, simplicity, link to the strategy of the company into frameworks that you might consider to be relevant for your company’s risk, predictability, proportionality and alignment to culture in response to the Code and a robust example that could be considered for the remuneration policy and practices (Provision 41) implementing your chosen framework.

Whether the remuneration policy operated as intended in • Discussion of the experience and skills of the remuneration terms of company performance and quantum, and, if not, any committee chair and why it is appropriate that they are If you wish to discuss any of the frameworks or content included in this guide in necessary changes (Provision 41) chair of the remuneration committee any further detail please contact us.

What engagement has taken place with shareholders • Explanation of what actions the remuneration committee JAMES HOUSTON and the impact this has had on remuneration policy and has taken to inform itself of workforce remuneration and outcomes (Provision 41) the alignment of incentives and rewards with culture 0121 236 9007 james.houston@ What workforce engagement has taken place to explain how • Explanation of how the knowledge of workforce jonesandpalmer.co.uk executive remuneration aligns with wider company pay policy remuneration, incentives and awards have affected (Provision 41) decisions made in determining the executive director remuneration policy

To what extent remuneration outcomes have been affected • Shareholders’ views on whether the executive directors’ by board discretion and the reasons why (Provision 41) remuneration policy and practices effectively implement the factors of clarity, simplicity, risk, predictability, proportionality and alignment to culture

New required disclosures

86 87 Contact Details: 87–95 Carver Street Birmingham, B1 3AL 0121 236 9007 [email protected] www.jonesandpalmer.co.uk

Company registration number 239324