Board of Directors

1. Wolfhart Hauser N 2. Tim O’Toole CBE 3. Matthew Gregory Chairman Chief Executive Chief Financial Officer

Appointed: May 2015 and became Chairman Appointed: 2009 and became Chief Executive Appointed: 2015 in July 2015 in 2010 Key areas of prior expertise: Finance, M&A Key areas of prior expertise: Governance, Key areas of prior expertise: Transportation, Skills and experience: Matthew has strong Strategy Strategy financial and operational expertise, including Skills and experience: Starting his career with Skills and experience: Tim brings to the Board strategic and financial planning and control, as various research activities covering also road traffic a wealth of international transport management well as extensive international experience of driving safety, Wolfhart went on to establish and lead a experience gained over a number of years in the performance improvement and restructuring. broad range of successful international service sector. Prior to joining the Company, he was Former Group Finance Director of Essentra plc, industry businesses. He was Chief Executive of Managing Director, London Underground, having having previously been Director of Corporate Intertek Group plc for ten years until he retired previously been at Transport for London. He was Development as well as having held a number in May 2015. He was previously Chief Executive President and Chief Executive of Consolidated Rail of senior finance roles. His early career was Officer (CEO) and President of TÜV Süddeutschland Corporation and a Non-Executive Director of CSX spent at Rank Group plc and Ernst & Young. AG for four years and CEO of TÜV product services Corporation until March 2017. Nationality: British for ten years. Nationality: American/British Other appointments: independent Non-Executive Director of Associated British Foods plc and Senior Independent Director of RELX Group plc. Nationality: German

6. Jimmy Groombridge B 7. Drummond Hall N R 8. Martha Poulter Group Employee Director Senior Independent Non-Executive Director Independent Non-Executive Director

Appointed: 26 May 2017 Appointed: 2014 Appointed: 26 May 2017 Key areas of prior expertise: Bus Industry, Key areas of prior expertise: Marketing, Strategy Key areas of prior expertise: IT, Business Employee Relations, Employee Engagement, Safety Skills and experience: Drummond brings to the Process Transformation Skills and experience: Jimmy has been a Board a wealth of experience gained across a Skills and experience: Martha’s experience bus driver for almost 40 years and is currently number of customer-focused businesses in the in technology spans the telecommunications, employed as a bus driver for First Eastern UK, Europe and the US. He was formerly Chief financial services, and hospitality industries. She Counties, one of the Group’s bus operations. An Executive of Dairy Crest Group plc, prior to which was most recently the Executive Vice President Employee Director for First Eastern Counties Buses his career was spent mainly with Procter & Gamble, and Chief Information Officer (CIO) of Starwood Ltd. for more than a decade, he was also elected Mars and PepsiCo. He has also been Chairman Hotels & Resorts Worldwide and, prior to that, as the regional Employee Director for Norfolk and and a Non-Executive Director of Mitchells & Butlers she was Vice President of General Electric and Essex. Safety is a passion for Jimmy and as such plc and a Non-Executive Director of Taylor Nelson CIO of GE Capital with global responsibility for IT he is a Be Safe champion. Having gained Sofres PLC. strategy and operations. experience working on projects for different Other appointments: Senior Independent Other appointments: Board Director of Norwalk departments within FirstGroup, he has a unique Non-Executive Director and Chair of the Community College Foundation wealth of experience of employee engagement. Remuneration Committee of WH Smith plc Nationality: American Nationality: British and of The Sage Group plc. Nationality: British

44 FirstGroup Annual Report and Accounts 2017 Governance

Board Committees 4. Richard Adam A R 5. Warwick Brady A Independent Non-Executive Director Independent Non-Executive Director A Audit Committee R Remuneration Committee Appointed: 24 February 2017 Appointed: 2014 N Nomination Committee Key areas of prior expertise: Finance, M&A, Key areas of prior expertise: Transportation International Business Skills and experience: Warwick has a strong B Board Safety Committee Skills and experience: Richard has served as track record of delivering restructuring, cost Chair Finance Director of private and listed businesses reduction and modernisation programmes. His for nearly 30 years. From 2007 until retiring in 2016 previous roles include Chief Executive of Mandala he was Group Finance Director of Carillion plc. Prior Airlines in Asia, Deputy Operations Director at to this he was Group Finance Director of Associated Ryanair plc and Chief Operating Officer at Air British Ports Holdings plc for seven years. He was also Deccan/Kingfisher in India and easyJet plc. Executive Committee: previously Non-Executive Director and Chair of the Warwick also held board positions at Airline Group supports the Chief Audit Committee of SSL International plc. He qualified and NATS, the UK’s airspace provider, and was Executive in the day-to-day as a chartered accountant with KPMG in 1982. Deputy CEO of Buzz. Other appointments: Non-Executive Director of Other appointments: Deputy Chief Executive running of the Group Countryside Properties plc, Countrywide plc and Officer (CEO) of Stobart Group Ltd (until 1 July 2017 In addition to the Chief Executive, who BMT Group Ltd; Chair of the Audit Committee of when he will become CEO) and strategic Board chairs it, and the Chief Financial Officer, Countryside Properties plc and Countrywide plc; Advisor at Vistair Systems Ltd. its members are: Chair designate of the Audit Committee of BMT Nationality: British Constance Baroudel Group Ltd; Senior Independent Director of Director of Strategy & Operational Performance Countryside Properties plc. Nationality: British Rachael Borthwick Group Corporate Services Director Giles Fearnley Managing Director, First Bus Michael Hampson General Counsel & Company Secretary Dave Leach President, Greyhound Dennis Maple President, First Student Steve Montgomery 9. Imelda Walsh R N B 10. Jim Winestock B N A Managing Director, First Rail Independent Non-Executive Director Independent Non-Executive Director Brad Thomas President, First Transit Appointed: 2014 Appointed: 2012 Key areas of prior expertise: Remuneration, HR Key areas of prior expertise: Distribution Skills and experience: Imelda brings Skills and experience: Jim brings to the Board considerable experience to the Board gained considerable operational experience gained within across a number of sectors, as well as a large complex organisation, together with a outstanding remuneration practice skills. She track record of achievement. He has served in a was formerly Non-Executive Director and Chair number of senior roles and was a member of the of the Remuneration Committee of Sainsbury’s management committee during his career at Bank plc and Mothercare plc and has held senior United Parcel Service, Inc, latterly as Senior Vice executive roles at J Sainsbury plc (where she President and Director of US operations and global was Group HR Director), Barclays Bank plc and security with responsibility for all US operations and Coca-Cola & Schweppes Beverages Limited. 360,000 employees. Other appointments: Non-Executive Director Other appointments: Non-Executive Director of and Chair of the Remuneration Committees of YRC Worldwide, Inc; also serves on the Board of William Hill plc and Mitchells & Butlers plc. two not-for-profit organisations in the US. Nationality: British Nationality: American

FirstGroup Annual Report and Accounts 2017 45 Corporate governance report

Chairman’s report Our values Board and Committee composition At a time when breaches of corporate trust The Board underwent some changes during and integrity are under the spotlight, resulting the year with Mick Barker and Brian Wallace in ever greater scrutiny, regulation and control, stepping down, whilst welcoming Richard we believe our values, which were put in place Adam, Jimmy Groombridge and Martha to promote the required culture for the delivery Poulter as new additions. I would like to thank of our vision and the transformation of the Mick and Brian on behalf of the Board for their Group into a customer-focused entity, could commitment and contribution over their years not be more relevant: with the Group.

■■ Committed to our customers In February 2017, Richard Adam was appointed as a Non-Executive Director, ■■ Dedicated to safety succeeding Brian Wallace as Chair of the Audit ■■ Supportive of each other Committee. Richard has a wealth of financial ■■ Accountable for performance acumen, M&A and international business experience and we look forward to working ■■ Setting the highest standards with him. Our values are recognised across the Group In May 2017, Martha Poulter joined the Board and are fundamental to the way we operate. as Non-Executive Director. Martha’s strong We see these values as key to the way we background and experience in customer- work with our customers, our suppliers, our focused, technology-led businesses will be of I believe firmly that good employees and our other stakeholders across immense value to the Board. governance lies at the heart the Group. We will not get everything right all of a successful and of the time, but we will aim to learn where we Group Employee Director make mistakes, and our Board evaluation We are proud of our long history in bringing sustainable company. assists us in highlighting areas in which the voice of our colleagues into the boardroom The Board sets out the improvements can be made. through our Employee Directors. Such a role Understanding our business has received significant focus over the year, Group’s strategic aims, in particular since the launch of the Corporate governance does not exist monitors the Group’s strategic Government’s consultation on corporate in isolation and cannot be reduced to governance reform. Whether or not it objectives and oversees its compliance with checklists and codes. becomes a requirement for all companies to In order for the Board to be able to review implementation by the have employee representation on the board, in strategy, to determine our approach to risk our experience, the perspectives and input of management team. The and to respond to events, we need to have Employee Directors aid decision-making and a thorough understanding of our businesses. Board is also responsible demonstrate the Company’s desire to hear for shaping the culture During the year, the Board visited our from our workforce. operations in Miami and San Francisco. These and values of the Group. Mick Barker was our Group Employee Director visits provided us with an opportunity not only from January 2012 until his resignation on to see our businesses in action, but also to 17 February 2017. Mick was succeeded by meet our employees and understand their Jimmy Groombridge on 26 May 2017, with views and opinions on the Group. The visits whom we look forward to working over the were combined with in-depth presentations coming years given his important and unique from our divisional management teams on perspective as an employee of the Group. the risks, opportunities, performance, customer propositions and strategic initiatives Remuneration of their businesses. There continues to be a great deal of focus on Directors’ remuneration and the way it is disclosed. The Remuneration Committee has ensured that there is a clear line of sight for management between pay and performance in the areas most valued by our shareholders.

46 FirstGroup Annual Report and Accounts 2017 Risk management We continue to adopt a risk-based approach Key achievements in establishing the Group’s system of internal control and in reviewing its effectiveness. during the year Governance Overall management of risks is vested in ■■ Delivery of the transformation plans the Board, with the Audit Committee having ■■ Development of the Group’s strategy delegated authority for reviewing the Group’s and business objectives risk management framework. ■■ Further review of succession planning More detailed information on the Group’s and talent management for the Board system of internal control and risk management and senior management can be found in the Principal risks and ■■ Review of recommendations arising uncertainties section on page 32 onwards and out of the internal Board evaluation in this Corporate Governance Report. ■■ Further development of the Board’s Engaging with shareholders understanding and approach to Engaging with shareholders and being fully risk appetite aware of their views is one of the key aspects of corporate governance. My fellow Directors ■■ Appointments of Richard Adam and and I welcome open, meaningful discussion Martha Poulter as Non-Executive with shareholders, particularly with regard to Directors, and Jimmy Groombridge governance, strategy and remuneration. The as Group Employee Director Board and management have undertaken a number of activities in this regard during the year, many of which are detailed in this Annual Report and Accounts. Areas of focus in the future The Board receives regular reports on investor relations activities and, in particular, ■■ Disciplined growth and bidding on shareholder sentiment and feedback. ■■ South Western rail franchise The Board continues to believe that ongoing mobilisation engagement with shareholders and other stakeholders is vital to ensuring their views and ■■ Strong cash management perspectives are fully understood and taken ■■ Ongoing development of into consideration. This will remain a key focus Group’s strategy for the Board. At the Company’s forthcoming Annual General Meeting (‘AGM’), all Directors who are able to attend will be available, as usual, to meet with shareholders after the meeting to discuss any issues they may have. I encourage as many shareholders as possible to attend the AGM on 18 July 2017. Wolfhart Hauser Chairman

Index to section Page Chairman’s report 46 Nomination Committee report 56 Audit Committee report 58 Board Safety Committee report 62 Directors’ Remuneration Report 63

FirstGroup Annual Report and Accounts 2017 47 Corporate governance report continued

Governance framework including those regarding risk management as a whole. The Board ensures that an The Annual Report and Accounts for the year and internal control. The Board also confirms appropriate balance between promoting ended 31 March 2017 has been prepared that we will detail in next year’s Annual Report long-term growth and delivering short-term in accordance with the UK Corporate and Accounts how we have applied the objectives is achieved. Governance Code which was issued in April principles and provisions of the Code, as The Board provides entrepreneurial leadership 2014 (the ‘Code’) by the Financial Reporting revised by the FRC in April 2016. of the Group within a framework of prudent Council (the ‘FRC’) and is available to view at Leadership and effective controls for risk assessment www.frc.org.uk. The role of the Board and management. The Board is primarily Code compliance and internal control The Board is accountable to shareholders responsible for: determining strategic direction The Board confirms that throughout the year for managing the Company in a way which and demonstrating leadership; focusing on the Company has applied the main principles promotes the long-term success of the matters that consistently add value for and complied with the provisions of the Code, Company for the benefit of the shareholders shareholders of the Company, both present

Shareholders

Board of Directors Leadership, strategy, risk, governance, values and standards

Board Safety Audit Nomination Remuneration Committee Committee Committee Committee Overseeing a framework Financial reporting, Board composition and Remuneration framework of safety policies and internal control and succession planning and individual Director standards to manage risk auditor relationship packages

Executive Safety Committee Safety standards and sharing of best practice

Strategy/Principal Risks/Budget/Three-Year Plan

Chief Executive Implementing the strategy determined by the Board

Executive Committee Supporting the Chief Executive in the day-to-day running of the Group

48 FirstGroup Annual Report and Accounts 2017 and future; the governance and stewardship of management on their businesses’ performance, the Group to provide protection and security employees, opportunities, risks and strategy. for the shareholders’ assets; the management In order to carry out its work, the Board has of the Group’s employees; setting the Group’s Governance established a planned programme of agendas culture, standards and values, and ensuring to ensure all necessary matters are covered that its obligations to shareholders and other and to allow sufficient time for debate and stakeholders are understood and met; and challenge. The Board also takes time to review determining the nature and extent of the past decisions where necessary. At Board principal risks the Group is willing to take to meetings, the Board receives and considers achieve its strategic objectives. Another key papers and presentations from management responsibility of the Board is to ensure that on relevant topics and senior executives are management maintains a system of internal regularly invited to attend meetings for specific control that provides assurance of effective and items. Effective review and decision-making efficient operations, internal financial controls is supported by providing the Board with and compliance with laws and regulations. high-quality, accurate, clear and timely Board visit to First The Board is the decision-making body for information including input from advisers Student operation in all matters of such importance as to be where necessary. San Francisco significant to the Group as a whole because Board meetings are structured around of their strategic, financial or reputational The purpose of the visit was to provide the following areas: implications or consequences. the Board with a full year review of the ■■ divisional updates; division’s performance to date and to Specific key matters have been reserved discuss major operational initiatives and ■■ strategy; for approval by the Board. These include future plans for the business, including approval of: ■■ financial and operational updates; an increased focus on growth.

■■ the Group’s strategy; ■■ assessment of risks and how they During the visit the Board toured ■■ risk appetite; should be managed and mitigated; the facility, met and interacted with ■■ location personnel, and attended the ■■ major acquisitions, mergers or disposals; other reporting items for approval, including UK rail franchise bids; and business briefing. ■■ UK rail franchise bids; ■■ reports from Committee Chairs. The areas of greatest interest for the ■■ dealings with regulatory authorities Board were touring the maintenance Division of responsibilities on matters of significance; area, and meeting employees and the The Board has agreed a clear division of ■■ capital and liquidity matters; location’s routing team and local responsibilities between the Chairman and location management. ■■ medium-term plan and annual budget; the Chief Executive, and these roles, as well ■■ Board and Committee membership; and as those of other Directors, are clearly defined so that no single individual has unrestricted ■■ financial results, viability statement powers of decision. and governance. ■■ ensures effective induction and development Roles and responsibilities of Directors; Board meetings and visits Chairman The core activities of the Board are carried ■■ ensures the performance of the Board, its ■■ establishes the Group’s values and Committees and individual Directors are out in scheduled meetings of the Board and standards and sets the tone from the top; its Committees. Additional ad-hoc meetings formally evaluated annually, with an externally and conference calls of the Board and its ■■ promotes the interests of the Company facilitated evaluation performed at least every Committees are arranged to consider with special regard to Group planning and three years; matters which require decisions outside development to secure the Group’s future ■■ facilitates effective and constructive the scheduled meetings. and sustainable success; relationships and communications between ■■ Non-Executive Directors and Executive To ensure the Board sees the Group’s promotes the Board, ensuring it functions Directors and senior management; operations in action, the Board normally efficiently and in conformity with the highest holds at least three meetings each year at the standards of corporate governance; ■■ ensures effective communication with Group’s sites in the UK and North America. ■■ ensures Board meetings are effective and shareholders and other stakeholders, This provides senior management from across open and constructive debate is promoted, and that their views are understood by the Group with the opportunity to present to the views of all Directors are taken into the Board; and the Board and its Committees and to meet account and adequate time is available ■■ provides an appropriate balance of support Board members informally. It also provides for discussion on all agenda items; and challenge to the Chief Executive in order the Board with the opportunity to review ■■ ensures that shareholders and the Board to maintain an effective working relationship. operational matters on site. For example, receive accurate, timely, clear and high- during the year the Board visited our quality information; operations in Miami and San Francisco, which included presentations from senior ■■ chairs the Nomination Committee;

FirstGroup Annual Report and Accounts 2017 49 Corporate governance report continued

Chief Executive Non-Executive Directors exceptional circumstances that prevent ■■ promotes the creation and maintenance The NEDs provide a strong independent them from doing so. Only members of the of a safe working environment and a element to the Board and a solid foundation Committees are entitled to attend their safety-focused culture across the Group; for good corporate governance. Although all meetings, but others may attend at the Directors are equally accountable under the Committee’s discretion. ■■ leads the Executive Committee iin the law for the stewardship of the Company’s day-to-day running of the Group’s business; The terms of reference of each Committee are affairs, the NEDs fulfil a vital role in corporate ■■ available to view on the Company’s website develops the Group’s business objectives accountability. They have responsibility for (www.firstgroupplc.com) and on request and strategy, having regard to the Group’s constructively challenging the strategies from the Company Secretary. The terms responsibilities to its shareholders, customers, proposed by the Executive Directors, of reference are normally reviewed annually, employees and other stakeholders; scrutinising the performance of management as they have been this year. ■■ ensures the business of the Group is in achieving agreed goals and objectives, as conducted, and results are delivered, well as playing a leading role in the functioning Executive Committee in the right way; of the main Board Committees. Between The Executive Committee supports the Chief them, the current NEDs have the appropriate Executive in the day-to-day running of the ■■ establishes and maintains an organisational balance of skills, experience, knowledge Group. Its membership is shown on page 45. structure that enables the Group’s strategy and independent judgment gained through It meets every month to communicate, review to be implemented effectively; experience in a variety of business sectors. and agree on significant issues and actions. ■■ leads communication with shareholders; It helps to develop, implement and monitor Group Employee Director ■■ strategic and operational plans, considers the ensures at all times that the Group conducts The Board considers that it is extremely continuing applicability, appropriateness and its business in accordance with the legal beneficial for its employees to be represented impact of risks and leads the Group’s culture requirements of the countries in which it on the Board so that employee-related issues and safety programme. operates and the Company’s standards, are raised directly and providing a two-way if higher; communication between the Board and Effectiveness ■■ establishes a strong senior management employees. The Group Employee Director Board balance team which has the knowledge, skills, (GED) is nominated by his fellow Employee Effective management and good stewardship attitude and motivation to achieve the Directors at the Forum, and serves a of the Group are led by the Board. The Board Group’s business objectives and strategy, maximum of three, three-year terms. is currently comprised of the Chairman, two Executive Directors, one GED and six NEDs. and with appropriate succession planning Board Committees The balance of Directors on the Board ensures to ensure that this continues in the future; The four principal Committees of the Board that no individual or small group of Directors ■■ develops and maintains an effective are: Audit; Board Safety; Nomination; and can dominate the decision-making process framework of internal controls and risk Remuneration. Board Committee members and that the interests of the minority management; and are appointed by the Board upon the shareholders are protected. Biographies of all recommendation of the Nomination ■■ ensures the Board is kept appraised in current Directors are set out on pages 44 and Committee, which reviews the composition a timely manner of the issues facing the 45. Mick Barker resigned on 17 February 2017 of each Committee regularly. Committee Group and of events and developments and Brian Wallace retired on 24 February 2017. membership is spread between the NEDs as they arise. Richard Adam was appointed on and the GED, drawing on each of their 24 February 2017 and Jimmy Groombridge Senior Independent Director relevant skills and experience. ■■ acts as a point of contact for shareholders and Martha Poulter were appointed on and other stakeholders to discuss matters Committee members are expected to attend 26 May 2017. of concern which would not be appropriate each Committee meeting, unless there are through the normal channels of communication with the Chairman, Chief Executive or CFO. No such matters of concern were raised by shareholders Board Committee membership or stakeholders during the year ended Audit Board Safety Nomination Remuneration 31 March 2017; Director Committee Committee Committee Committee Wolfhart Hauser – – C – ■■ acts as a sounding board for the Chairman and serves as an intermediary for the other Tim O’Toole – – – – Matthew Gregory – – – – Directors when necessary; Richard Adam C – – M ■■ meets with the Non-Executive Directors Warwick Brady M – – – (NEDs) without the Chairman being present Jimmy Groombridge – M – at least annually and leads the Board in the Drummond Hall – – M M ongoing monitoring and annual performance Martha Poulter – – – – evaluation of the Chairman; and Imelda Walsh – M M C Jim Winestock M C M – ■■ deputises for the Chairman, as necessary. C: Chair of Committee M: Member of Committee

50 FirstGroup Annual Report and Accounts 2017 The attendance of Directors at scheduled Board and Committee meetings, which they were eligible to attend, and the number of meetings attended in the year ended 31 March 2017, is shown below. Jimmy Groombridge and Martha Poulter were appointed on 26 May 2017 and are therefore not included.

Board Audit Committee Remuneration Committee Nomination Committee Board Safety Committee Governance Number of Number of Number of Number of Number of scheduled Number of scheduled Number of scheduled Number of scheduled Number of scheduled Number of meetings scheduled meetings scheduled meetings scheduled meetings scheduled meetings scheduled eligible meetings eligible meetings eligible meetings eligible meetings eligible to meetings Director to attend attended to attend attended to attend attended to attend attended attend attended Chairman Wolfhart Hauser 9 9 8 8 Executive Directors Tim O’Toole 9 9 Matthew Gregory 9 9 Non-Executive Directors Richard Adam1 1 1 1 1 Mick Barker2 7 7 3 3 Warwick Brady 9 9 4 4 Drummond Hall 9 8 3 3 8 7 Brian Wallace3 8 8 3 3 2 2 7 6 Imelda Walsh 9 8 3 3 8 7 3 3 Jim Winestock 9 9 4 4 8 8 3 3

1 Richard Adam was appointed a Non-Executive Director on 24 February 2017. 2 Mick Barker resigned on 17 February 2017. 3 Brian Wallace retired on 24 February 2017.

Board independence Commitment The Board is satisfied that each of the It is the Company’s policy that at least half the All Directors are expected to attend each Non-Executive Directors is able to devote Board should be independent Non-Executive Board meeting and each Committee meeting sufficient time to the Company’s business. Directors. The Board carries out a review of for which they are members, save for in Non-Executive Directors are advised on the independence of its Directors on an annual exceptional circumstances. To help enable appointment of the time required to fulfil the basis. The Board considers each of its current this, scheduled Board and Committee role and are asked to confirm that they can NEDs to be independent in character and meetings are arranged at least a year make the required commitment. judgment. In reaching its determination of in advance to allow Directors to manage During the year the Chairman met on several independence, the Board has concluded other commitments. If a Director is unable occasions with the Non-Executives without that each provides objective challenge to to attend a meeting because of exceptional the Executive Directors present, allowing for management, is willing to stand up and circumstances, they still receive the papers more informal discussions on a variety of defend their own beliefs and viewpoints in and other relevant information in advance issues. The Senior Independent Director also order to support the ultimate good of the of the meeting and have the opportunity led the Non-Executive Directors in evaluating Company and there are no business or other to discuss with the relevant Chair or the the performance of the Chairman, with the relationships likely to affect, or which could Company Secretary any matters they wish to Chairman showing effectiveness in leadership. appear to affect, the judgment of Richard raise and to follow up on the decisions taken Adam, Warwick Brady, Drummond Hall, at the meeting. The Chairman, Chief Executive Development Martha Poulter, Imelda Walsh or Jim and Company Secretary are always available On appointment, all new Directors receive Winestock. Jimmy Groombridge, the GED, to discuss issues relating to meetings or other a comprehensive and structured induction, is not considered by the Board to be matters with the Directors. Reasons for tailored to their individual requirements. The independent as he is an employee of one non-attendance are generally prior business induction programme, which is arranged by of the Group’s subsidiaries. and personal commitments or illness. the Company Secretary, includes visits to the Group’s businesses and meetings with senior managers and advisers, as appropriate. Board composition Length of tenure The programme is designed to facilitate their understanding of the Group, the key drivers Chairman 1 0-2 years 5 of business performance, the role of the Executive Directors 2 2-4 years 3 Board and its Committees, the Company’s Independent 4-6 years 1 corporate governance practices and Non-Executive 6-8 years 1 Directors 6 procedures, as well as providing them Group Employee with appropriate training and guidance as Director 1 to their duties, responsibilities and liabilities as a director of a public limited company.

FirstGroup Annual Report and Accounts 2017 51 Corporate governance report continued

To assist Directors in the performance of Directors are provided between meetings with breaching their duty if a conflict of interest their duties, there are procedures in place relevant information on matters affecting the arises. These provisions will only apply where to provide them with appropriate and timely business. Such updates were carried out by the circumstance giving rise to the potential information, including receiving information a variety of methods, including conference conflict of interest has previously been between meetings regarding Group business calls amongst the full Board or between the authorised by the Directors. developments and financial performance. This Chairman and/or the Chief Executive and the The Board considers that the formal enables the Directors to discharge their duties Non-Executive Directors, and by way of the procedures for managing conflicts of interest on strategic, financial, operational, compliance Company Secretary circulating monthly currently in place have operated effectively and governance issues effectively. financial and operational reports as well as during the year under review. papers and updates on relevant issues. All Directors are provided with the opportunity Performance evaluation for, and encouraged to attend, training to Throughout the year a fully encrypted The Board undertakes regular evaluations ensure they are kept up to date on relevant electronic portal system was operated, which of its own performance as well as that of legal, regulatory and financial developments enabled the Board and Committee papers to its Committees providing an opportunity or changes in best practice. Typical training for be delivered securely to the Directors. This to consider ways of identifying greater Directors includes attendance at seminars, enables a faster and more secure distribution efficiencies, maximising strengths and forums, conferences and working groups as of information, accessed using electronic highlighting areas for further development. well as receiving updates from relevant bodies tablets, and reduced resource usage. on various legal, regulatory and corporate Following an internal review in 2016, the Board The Company Secretary is Michael Hampson, governance matters. conducted another internal review in 2017 who joined the Group in 2016. Michael is led by the Chairman with the support of the To ensure the Board as a whole remains fully secretary to the Remuneration and Company Secretary. The 2017 evaluation was informed of the views of shareholders, the Nomination Committees and his deputy, carefully structured but pragmatic, designed Board receives regular reports on shareholder Silvana Glibota-Vigo, is secretary to the Audit to bring about a genuine debate on issues sentiment at Board meetings. and Board Safety Committees. that were relevant, check on progress against Although not part of their induction Conflicts of interest matters identified in the previous evaluation programme, all Non-Executive Directors can The Directors have a statutory duty under the and assist in identifying any potential for attend shareholder meetings and analyst Companies Act 2006 (the ‘2006 Act’) to avoid improvement in the Company’s processes. presentations, and shareholders may meet situations in which they have or can have a It entailed completion of a questionnaire to informally with Directors at the AGM. direct or indirect interest that conflicts or may assess the effectiveness of the Board, its conflict with the interests of the Company. Committees and individual Directors, and Information and support This duty is in addition to the existing duty the preparation of a report. The questionnaire The Company Secretary, through the that a Director owes to the Company to focused on the oversight responsibilities and Chairman, is responsible for advising the disclose to the Board any transaction or effectiveness of the Board, the role of the Board on all governance matters and for arrangement under consideration by the Chairman and the operation of the Committees. ensuring that Board procedures are followed, Company. The Company’s conflict of interest The results of the performance evaluation were applicable rules and regulations are complied procedures are reflected in the Articles of presented and discussed at the May 2017 with and that due account is taken of relevant Association (the ‘Articles’). In line with the 2006 Board meeting and therefore will be disclosed codes of best practice. The Company Act, the Company’s Articles allow the Directors in next year’s Annual Report and Accounts. Secretary is also responsible for ensuring to authorise conflicts and potential conflicts of communication flows between the Board As set out in last year’s Annual Report and interest where appropriate. The decision to and its Committees, and between senior Accounts, an internal Board performance authorise a conflict can only be made by management and Non-Executive Directors. evaluation process was undertaken in 2016 non-conflicted Directors. Directors do not All Directors have access to the advice of and the results were presented at the June participate in decisions concerning their the Company Secretary and, in appropriate 2016 Board meeting. It was concluded that own remuneration or interests. circumstances, may obtain independent the dynamics, culture and effectiveness of the professional advice at the Company’s The Company Secretary minutes the Board had improved and that the individual expense. The appointment and removal of consideration of any conflict or potential conflict members of the Board remained effective the Company Secretary is a matter reserved of interest and authorisations granted by the in their ability to discharge their duties and for the Board as a whole. Board. On an ongoing basis, the Directors responsibilities. Each Director continued inform the Company Secretary of any new, to make a valuable contribution whilst All Directors receive detailed papers and other actual or potential conflict of interest that demonstrating commitment to their role. relevant information on the business to be may arise or if there are any changes in The main areas identified for improvement conducted at each Board or Committee circumstances that may affect an authorisation and corresponding actions taken during meeting well in advance and all Directors have previously given. Even when authorisation is 2016/17 are detailed in the table on page 53. direct access to senior management should given, a Director is not absolved from their duty they wish to receive additional information on to promote the success of the Company. any of the items for discussion. The head of each Division attends Board meetings on Furthermore, the Company’s Articles include a regular basis to ensure that the Board is provisions relating to confidential information, properly informed about the performance attendance at Board meetings and availability of that Division and any issues that it faces. of Board papers to protect a Director from

52 FirstGroup Annual Report and Accounts 2017 Area identified Responsibility Action taken Modern Slavery and Human Trafficking On human rights, we continue our zero- Review the Board calendar, Chairman Rolling agendas were developed not only for tolerance approach to slavery and human information flows and the use of supported the Board but also for the Audit, Nomination time when Directors are together by Company and Remuneration Committees. The trafficking, which extends to all business Governance for Board and Committee Secretary Company Secretary and his team provide dealings and transactions in which we are meetings to determine how guidance to senior management on the involved, regardless of location or sector. better to optimise the use of structure and content of Board and As part of our contracting processes with Directors’ time Committee papers. suppliers, we include prohibitions against the use of forced, compulsory or trafficked Information flow and contact Chairman Informal contact in between meetings labour, or anyone held in slavery or servitude, involving the Chairman and increased. whether adults or children. We implemented the Non-Executive Directors between Board meetings our Code of Conduct on Anti-Slavery and Human Trafficking Prevention and published Prioritisation of agenda items Chairman Rolling agendas were developed and the our Modern Slavery and Human Trafficking and allocation of time for supported Company Secretary and his team monitor Statement across the Group. The statement discussion in Board meetings by Company the time allocated on agendas in line with sets out the steps we have taken to address Secretary business priorities. this issue during the previous financial year, and sets goals for the current one. We will Aspects of strategy into the Chief Executive As the Group moves out the transformation planning cycle and Board phase, certain aspects of strategy now have publish an updated statement for the year programme a prominent place in the Board cycle. ended 31 March 2017 on our Group websites in due course. We remain committed to Succession planning and Chairman The Nomination Committee, led by the strengthening our practices in this area, both talent management Chairman and supported by the HR Director, within our own business and across our continued to keep under review the leadership supply chains. needs of the Company. Accountability Role and modus operandi of Chairman The Nomination Committee had previously The Board is responsible for promoting the the Nomination Committee met on and ad-hoc basis. Meetings are now long-term success of the Company for the scheduled one year in advance. benefit of shareholders and other stakeholders. Development of a positive safety Board Safety Proactive steps were taken across the Group This includes ensuring that an appropriate culture across the organisation Committee in training, technology and management to system of governance is in place throughout promote the embedding of a safety culture. the Group. To discharge this responsibility, the Board has established a framework for risk management and internal control which The review of the performance of the Anti-Bribery and Corruption identifies, evaluates and manages the principal Chairman, led by the Senior Independent The Group has implemented and refreshed its risks associated with the Group’s achievement Director, concluded that Wolfhart continued existing compliance programmes and specific of its business objectives, with a view to to operate to a high level. policies around key legislation (e.g. UK Bribery safeguarding the shareholders’ investment Act and the Modern Slavery Act). In particular, The evaluation of the Board was externally and the Group’s assets. policies upholding our zero-tolerance position facilitated in 2014/15 and it will be so again on bribery and corruption, including on the The Board considers the Annual Report in 2017/18, in line with the requirements of giving and receipt of appropriate gifts, and Accounts, taken as a whole, to be fair, the Code. hospitality or entertainment, have been balanced and understandable and provides Election and re-election of Directors updated. Colleagues in high-risk areas have the necessary information required for Directors newly appointed by the Board are received training and policy communications shareholders to assess the Company’s required to submit themselves for election to support their ongoing awareness of these position and performance, business model by shareholders at the AGM following their polices and other regulatory risks. There is also and strategy, and that the business continues appointment. Richard Adam, who was an externally managed whistleblowing service to operate as a going concern. The co- appointed on 24 February 2017, and Jimmy available across the Group for colleagues, ordination and review of the Annual Report Groombridge and Martha Poulter, who were with a dedicated helpline for the anonymous and Accounts follows a well-established and appointed on 26 May 2017, will retire and reporting of inappropriate conduct. The documented process, which is conducted submit themselves for election at the anti-bribery steering committee has the in parallel with the formal audit process forthcoming AGM. primary and day-to-day responsibility to undertaken by the external auditor and the ensure that our internal control systems and review by the Board and its Committees In accordance with best practice and the Code, procedures are effective in countering bribery (of relevant sections). it is proposed that all other Directors will submit and corruption. The Group continues to themselves for re-election at the forthcoming develop its effective systems to counter bribery AGM as, following the formal performance and corruption, including the introduction of its evaluation process, the Chairman is content integrated risk and compliance online tool to that all Directors’ continue to be effective and monitor the use and awareness of policies and demonstrate commitment to their role. procedures and, to provide management data on compliance risks.

FirstGroup Annual Report and Accounts 2017 53 Corporate governance report continued

Internal control The Board has adopted a risk-based are presented to the Executive Committee The Board is responsible for determining the approach in establishing the Group’s system prior to being assessed by the Audit nature and extent of any significant risks the of internal control and in reviewing its Committee; Group is willing to take in order to achieve its effectiveness. To assist in the identification and ■■ an established methodology for ranking the strategic objectives and for maintaining sound management of key risks, the Board has: level of risk in each of its business operations risk management and internal control systems ■■ established a number of Group-wide and the principal risk issues associated to ensure that an appropriate culture is procedures, policies and standards; therewith; embedded throughout the Group. The Board has established a Group-wide system of risk ■■ set up a framework for reporting matters ■■ implementation of appropriate strategies management and internal control that of significance; to deal with principal risks, including careful internal monitoring and ensuring external identifies and enables management and the ■■ authorised the Audit Committee to review specialists are consulted where necessary; Board to evaluate and manage the Group’s the Group’s approach to risk management principal risks with a view to safeguarding the and the effectiveness of the Group’s ■■ a centrally coordinated internal audit Group’s stakeholders. This system is bespoke financial reporting, internal control and programme to verify that policies and internal to the Company’s particular needs and the assurance systems; control procedures are being correctly risks to which it is exposed and is designed to implemented and to identify any risks at an ■■ authorised the Board Safety Committee manage, rather than eliminate, risk. Owing to early stage; the limitations inherent in any system of internal to oversee the Group’s framework of safety ■■ reviewing and monitoring the confidential control, this system provides robust, but not policies and procedures to manage risk; reporting system to allow employees to raise absolute, assurance against material ■■ developed a system of regular reports from concerns about possible legal, regulatory, misstatement or loss. The effectiveness of the management; and financial reporting or any other improprieties; Group’s system of internal control is regularly ■■ reserved specific key matters for its decision. reviewed by the Board. ■■ regular reports to the Audit Committee on The process is designed to provide assurance the adequacy and effectiveness of internal The Board confirms that throughout the year by way of cumulative assessment. controls; and ended 31 March 2017 and up to the date of approval of this Annual Report and Accounts, Key elements of the Group’s system of internal ■■ a remuneration policy for executives there have been rigorous processes in place control which have operated throughout the that motivates them, without delivering to identify, evaluate and manage the principal year are: excessive benefits or encouraging excessive risks faced by the Group, including those that risk-taking. ■■ a clearly defined organisation structure would threaten its business model, future with established responsibilities; Reviews of internal controls within operating performance, solvency or liquidity in units by internal audit have sometimes ■■ a focused business strategy, thus restricting accordance with the Guidance on Risk highlighted control weaknesses, which are potential risk exposures; Management and Internal Control published discussed with management and, where by the FRC. ■■ Group financial, treasury, operating, appropriate, the Audit Committee, and To assist in the identification and management compliance and administrative policies and remedial action plans are agreed. Action plans of the Group’s principal risks, the Board has procedures which incorporate statements are monitored by internal audit and, in some established a risk management framework, of required behaviour; cases, follow up visits to the operating entity developed a system of regular reports from ■■ ongoing review of safety, operating are conducted until such time as the controls management and reserved specific key and financial performance of the that have been put in place are working matters for its decision. The Board has Group’s businesses; effectively. No material losses, contingencies or uncertainties that would require disclosure authorised the Audit Committee to oversee the ■■ regular reports to the Board, Board Safety risk management framework and the in the Annual Report and Accounts have been Committee and Executive Safety Committee identified during the year by this process. effectiveness of the Group’s financial reporting, on safety matters; internal control and assurance systems. Twice The Board, in conjunction with management, ■■ monitoring by the Board of a comprehensive a year the Board is presented with an update continually reviews and develops the internal reporting system, including monthly results, for its robust assessment on the principal risks control environment. No significant internal periodic short-term forecasts, annual facing the Group together with a risk map, control failings were identified during the year. budgets and a medium-term business plan; highlighting any changes made since the Where any gaps are identified, processes are previous update and the reasons for any ■■ well-defined procedures for the assessment, put in place to address them and these are changes. Each Committee that reports approval, control and monitoring of major continually monitored. regularly to the Board provides an update on investments, with proposals being subject the status of risks considered within its remit. to rigorous strategic, financial and The Group’s approach to risk management Biannually, the Group’s risk management commercial examination; and how it profiles the risks identified is set framework is robustly reviewed by the Audit out on pages 32 onwards. ■■ Divisions identifying and reviewing their Committee, together with the process for principal risks and controls for monitoring Financial and business reporting identifying and assessing risks and a detailed and managing risks, which are reviewed by In its reporting to shareholders the Board analysis of the risks identified in the previous senior executive management. The updated recognises its responsibility to present a fair, six months. divisional and Group risk profiles, which are balanced and understandable assessment of reviewed by the Chief Executive and CFO, the Group’s position and prospects. This

54 FirstGroup Annual Report and Accounts 2017 responsibility encompasses all published be addressed. It provides objective assurance The Company responds as necessary to information including, but not limited to: the on risk and controls to senior management, requests from individual shareholders on a year-end and half-yearly financial statements; the Audit Committee and the Board. Internal wide range of issues. There is regular dialogue

regulatory news announcements; and other audit’s work is focused on the Group’s with key institutional shareholders, fund Governance public information. principal risks. The mandate and programme managers and sell-side analysts to discuss of work of the internal audit department is strategy, financial performance and investment The quality of the Company’s reporting is considered and approved by the Audit activities throughout the Group. General ensured by having in place procedures for Committee. Based on the approved internal presentations to shareholders and the the review of information by management. audit plan, a number of internal audits took wider financial community are made by There are also strict procedures determining place across the Group’s divisions to facilitate the Executive Directors following the who has authority to release information. improvement of the Group’s internal controls announcement of trading updates and A statement of the Directors’ responsibilities and findings were reported to relevant half and full-year results. for preparing the financial statements can be operational management and to the Audit found on page 84. Investors are kept informed of key business Committee. Internal audit follows up on the activities, decisions, appointments and other The Group adopts a financial reporting and implementation of recommendations and key announcements on an ongoing basis information system that complies with reports on progress to senior management via the regulatory news service and generally accepted accounting practice. and to the Audit Committee. press releases. The Group’s website A Group Finance Manual details the Group’s The Group Director of Assurance reports (www.firstgroupplc.com) contains all of this accounting policies and procedures with regularly to the Chair of the Audit Committee information, together with financial reports, which subsidiaries must comply. Budgets and attends each Audit Committee meeting presentations and other information on are prepared by subsidiary company to present the internal control findings from the Group’s operations. management which are then consolidated into the internal audits performed. The Audit divisional budgets. These are subject to review Annual General Meeting Committee reviews and discusses the by both senior management and the Executive The Notice of AGM is circulated to all effectiveness of internal audits on an annual Directors followed by formal approval by shareholders at least 20 working days prior basis with the Group Director of Assurance. the Board. Regular forecast updates are to such meeting. All shareholders are invited to This is done by the review of the internal audit completed during the year and compared attend the AGM where there is an opportunity plan of work for the year and monitoring against actions required. Each subsidiary for individual shareholders to question the progress against the plan and actions unit prepares a monthly report of operating Chairman and, through him, the Chairs of the identified by internal audit. The Group Director performance with a commentary on variances principal Board Committees. After the AGM, of Assurance meets with the Audit Committee against budget and the prior year, which is shareholders can meet informally with the every time the Committee meets, without reviewed by senior management. Similar Directors. management present. reports are prepared at a Group level. Key At the 2016 AGM, the Chairman provided performance indicators, both financial and Relations with shareholders shareholders with a brief summary of the operational, are monitored on a weekly basis. The Board welcomes the opportunity openly Company’s activities for the previous year. In addition, business units participate in and purposefully to engage with shareholders All resolutions at the 2016 AGM were voted strategic reviews, which include consideration as it recognises the importance of a continuing on by way of a poll. The procedure for voting of long-term financial projections and the effective dialogue, whether with institutional on a poll follows best practice and allows the evaluation of business alternatives. shareholders, private or employee Company to count all votes, rather than just shareholders. The Board takes responsibility Treasury operations those of the shareholders attending the meeting. for ensuring that such dialogue takes place. The Board has set a policy for the management The Chief Executive and CFO are closely As recommended by the Code, all resolutions of the risks from treasury operations and this involved in investor relations, and the Group proposed at the 2016 AGM were voted is set out in more detail in note 24 to the Corporate Services Director has day-to-day separately and the voting results, which consolidated financial statements. A Group responsibility for such matters. Feedback from included all votes cast for, against and those Treasury Policy has been formulated and shareholders is provided at Board meetings. withheld, together with all proxies lodged prior adopted to ensure compliance with best to the meeting, were announced to the London practice and to control and monitor effectively The Executive Directors are available, through Stock Exchange and made available on the the risks attendant upon treasury and banking the Group Corporate Services Director, to Company’s website as soon as practicable operations. In addition, a treasury committee discuss the concerns of major shareholders at after the meeting. As in previous years, the approves decisions regarding fuel, foreign any time during the year and the Chairman is Form of Proxy clearly advised that a vote exchange and other matters reserved for its available to discuss governance and strategy withheld is not a vote in law and is not used in decision as set out in the Group Treasury Policy. with major shareholders. The Senior calculating the votes for or against a resolution. Independent Director is available to discuss Internal audit matters of concern that would not be Internal audit advises management on the appropriate through normal channels of extent to which systems of internal control are communication, including issues relating to the adequate and effective to manage business Chairman’s performance. Non-Executive risk, safeguard the Group’s resources, and Directors make themselves available to attend ensure compliance with the Group’s policies meetings with shareholders in order to develop and legal and regulatory requirements as well an understanding of their views. as advising on ways in which areas of risk can

FirstGroup Annual Report and Accounts 2017 55 Corporate governance report continued

Nomination Committee Role and responsibilities When considering the recruitment of a new The key roles and responsibilities of the Director, the Committee adopts a formal, Committee are to: rigorous and transparent procedure with due regard to diversity. Prior to making an ■■ review regularly the structure, size and appointment, the Committee will evaluate the composition (including skills, experience, balance of skills, knowledge, independence, independence, knowledge and diversity) experience and diversity on the Board and, of the Board and make recommendations in light of this evaluation, will prepare a full to the Board with regard to any changes; description of the role and capabilities ■■ identify and nominate for Board approval, required. In identifying suitable candidates, candidates to fill Board vacancies having the Committee: regard to, amongst other things, the benefits ■■ uses open advertising or the services of of diversity, including gender, as and when external advisers to facilitate the search; they arise; ■■ considers candidates from different genders ■■ recommend to the Board suitable candidates and a wide range of backgrounds; for the role of Senior Independent Director, and membership of the Board Committees; ■■ considers candidates on merit and against objective criteria ensuring that appointees have ■■ ensure that the Company’s Board and sufficient time to devote to the position, in light executive leadership skills are fully aligned to The Committee is primarily of other potential significant positions; and responsible for leading the the Company’s long-term strategy; ■■ engages from time to time with the ■■ oversee succession planning for Directors process for Board appointments. Group’s major shareholders on future and other senior executives, taking into skills requirements and ideas for The Committee also keeps under review the account the challenges and opportunities potential candidates. balance of skills, experience, independence, facing the Company, and the skills and knowledge and diversity, including gender, on experience that will be needed on the Board Where the Committee appoints external the Board to ensure the orderly evolution of the in the future; advisers to facilitate the search, it ensures that membership of the Board and its Committees. ■■ the firm selected has signed up to the relevant In identifying and nominating candidates for ensure any appointees have sufficient time to undertake their role; industry codes (for example, on diversity) approval by the Board, the Committee and has no connection with the Company. continues to take account of the Board’s aims ■■ recommend the re-appointment of any in relation to diversity and succession, whilst Non-Executive Director at the conclusion of The full terms of reference of the Committee ensuring that the right people with the right their specified term of office having given can be found on the Company’s website range of skills and experience are on the regard to their length of tenure, performance (www.firstgroupplc.com). Board and in senior management positions in and ability to continue to contribute to the Membership the coming years. Board in the light of the skills, experience, The current members of the Committee are independence and knowledge required; We have seen further changes on our Board the Group Chairman, who chairs it; the Senior composition this year. In February 2017, ■■ recommend the re-election by shareholders Independent Director; the Chair of the Mick Barker resigned and Brian Wallace of any Director in accordance with the Remuneration Committee, and the Chair of retired from the Board. During the year, we provisions of the Code having due regard to the Board Safety Committee. A majority of its welcomed Richard Adam to the Board, who their performance and ability to continue to members are independent Non-Executive was appointed on 24 February 2017 and he contribute to the Board, taking into Directors, in accordance with the provisions succeeded Brian as Chair of the Audit consideration the skills, experience and of the Code. knowledge required and the need for Committee. Jimmy Groombridge was If a matter were to concern the Group progressive refreshing of the Board; and appointed as Group Employee Director Chairman, then he would leave the meeting and Martha Poulter also joined the Board ■■ report formally to the Board on how the and the Senior Independent Director would on 26 May 2017. We look forward to working Committee has discharged its responsibilities. instead take the Chair. with them. The Chief Executive attends meetings of the In the coming year, we will continue to monitor Committee at the invitation of the Committee. the needs of the Board and its Committees, with the aim of ensuring the Group’s Members of the Committee took no part succession planning policy is aligned to, in any discussions concerning their own and evolves to meet, the ongoing business membership of the Board or appointment objectives and strategic goals of the Group. as a Chair of a Committee, but were involved in the recommendations on Committee Wolfhart Hauser membership changes. Chair, Nomination Committee

56 FirstGroup Annual Report and Accounts 2017 Activities in 2016/17 Diversity At its meetings in 2016/17, the Committee The Company takes account of diversity when considered, amongst other matters, recruiting, including when it considers Board the following: appointments, and will continue to do so in Governance the future. ■■ selecting and recommending to the Board the appointments of Richard Adam and The Board consists of Directors with a wide Martha Poulter as Non-Executive Directors; range of skills and business experience drawn from a number of industries, which is vital for ■■ recommending to the Board the appointment of Jimmy Groombridge as bringing both the expertise required and to Group Employee Director; enable different perspectives to be brought to Board and Committee discussions. ■■ reviewing the composition of the Board and its Committees; Furthermore, the Board comprises a range of nationalities, which bring cultural diversity as ■■ succession planning for the Non-Executive well as different geographical experiences and Directors and, in so doing, considering the viewpoints. The combination of these factors tenure, mix and diversity of skills and means that the Board benefits from a diverse experience of existing Board members range of competencies, perspectives and and those of prospective Board members thoughts, which provides a dynamic in the context of the Group strategy, and environment for decision making. ■■ reviewed the results of the performance Whilst the Board is currently below its target of evaluation of the Committee. 25% female representation at 20%, it remains Recruitment of Non-Executive committed to achieving that goal as soon as Directors practicable. The Board remains of the opinion A comprehensive and rigorous search that appointments should be made on merit process was put in place with candidate and relevant experience, against the criteria profiles and position specifications. Spencer identified by the Committee, having regard Stuart and MWM Consulting, external search to the benefits of diversity, including gender. consultancies who have no other connection Future appointments to the Board must also with the Company, were engaged to assist complement the balance of skills the Board with the selection process and conducted already possesses. searches to identify suitable, qualified The Board recognises the need to create the candidates. A number of interviews and conditions that foster talent and encourage meetings were held with shortlisted more women to achieve their full potential candidates. Richard Adam and Martha Poulter in their careers in the Group. The Board were then recommended to the Board for also welcomes the recommendations of the approval as they fully met the criteria required. Hampton-Alexander report. In that sense, as Group Employee Director part of an overall approach to HR management, Following the resignation of Mick Barker in a framework has been developed which February 2017, the Employee Directors’ Forum includes an Equality, Diversity and Inclusion met on 20 April 2017 to nominate a candidate Policy as well as practical training materials for this position. Jimmy Groombridge was put and support for line managers to promote forward to the Nomination Committee, who its communication across the Group. Further in turn was pleased to recommend his details on the Group’s approach to diversity appointment to the Board. are set out in the Corporate responsibility section on pages 38 to 42.

FirstGroup Annual Report and Accounts 2017 57 Corporate governance report continued

Audit Committee Role and responsibilities The terms of reference of the Committee The Committee acts independently of can be found on the Company’s website management to ensure that the interests of (www.firstgroupplc.com). shareholders are properly protected in relation Membership to financial reporting, the effectiveness of the The current members of the Committee are Group’s system of internal control and risk Richard Adam, who chairs it, Warwick Brady management, and the relationship with the and Jim Winestock. external auditor. Richard Adam has recent and relevant The key responsibilities of the Committee are to: financial experience for the purposes of the ■■ monitor and challenge, where necessary, Code, being a chartered accountant and the integrity of the Financial statements of the having held a number of senior finance roles. final and half-yearly results relating to financial The other Committee members have performance, including a review of the significant current or recent executive financial reporting judgments which they experience in the transport and distribution contain and the methodology and industries. This range and depth of financial assumptions used in relation to them; and commercial experience enables the Committee to deal effectively with the matters ■■ review and challenge, where necessary, it is required to address and to challenge the actions and judgments of management management when necessary. I am pleased to present my first taking into account the views of the external auditor, in relation to the Company’s Financial The Group Chairman, Chief Executive, the report as Chair of the Audit statements, Strategic report, financial review, Chief Financial Officer, the General Counsel & Committee. I succeeded Brian corporate governance statement (insofar as Company Secretary, the Director of Finance, Wallace on 24 February 2017 and it relates to audit and risk management), the Group Director of Assurance, the Group I am looking forward to continuing half-yearly and final results announcements, Financial Controller and the external auditor his good work. including the going concern assumption and are normally invited to attend Committee the viability statement; meetings, as well as members of the Board. During the year the Committee has continued ■■ review the Company’s internal controls, The Deputy Company Secretary acts as to devote significant time to reviewing the including financial controls and risk Committee Secretary. integrity of the Group’s Financial statements, management systems; At the end of each meeting the Committee including the significant financial reporting ■■ normally meets with the external auditor and judgments, as well as reviewing internal approve the internal audit plan and monitor the Group Director of Assurance, without controls, and the effectiveness of both internal the role and effectiveness of the internal management present, to discuss any matters and external audit. audit function; relating to their remit and any matters arising ■■ oversee the Company’s relationship with In my role as Chair of the Committee, I intend from external and internal audits. the external auditor, including monitoring to meet and communicate regularly with our its independence and expertise, its Activities in 2016/17 external auditor, Deloitte, outside of the normal engagement terms and fees, and assessing At its meetings in 2016/17, the Committee meeting schedule and with various senior the effectiveness of the audit process with considered and discharged its responsibilities managers to further understand the way in due regard to relevant UK professional and on the following matters: which the Group operates, the risks it faces regulatory requirements; and its internal control framework. These Financial Reporting discussions help shape thought processes ■■ agree the scope of the external auditor’s ■■ reviewed the Group’s final and half-yearly and decision making, and promote a more annual audit plan and the output; results, and considered the significant rounded view of the Group. ■■ review and amend as necessary the policy accounting policies, principal estimates and accounting judgments used in their Richard Adam on the provision of non-audit services by preparation and the transparency and Chair, Audit Committee the external auditor with due regard to ethical guidance; clarity of disclosures within them, and compliance with financial reporting ■■ consider and make recommendations to standards and governance; the Board in respect of the appointment, re-appointment, dismissal or resignation ■■ reviewed the matters which informed the of the external auditor; Board’s assessment that it was appropriate to prepare accounts on a going concern basis; ■■ review annually the Committee’s own performance and terms of reference; and ■■ reviewed the process for assessing the long-term viability of the Company; ■■ report formally to the Board on how the Committee has discharged its responsibilities. ■■ received reports from management and the external auditor on accounting, financial reporting regulation and taxation issues;

58 FirstGroup Annual Report and Accounts 2017 ■■ reviewed reports from the external auditor on ■■ assessed the objectivity and independence ■■ permitted non-audit services – there are a its audit in respect of the final and half-yearly of the external auditor. In assessing number of projects or engagements where results prior to them being approved by the independence and objectivity, the the external auditor is best placed to perform Board; and Committee considered the level and nature the work due to their skills and knowledge Governance of service provided by the external auditor as of the business, or experience and market ■■ reviewed and assessed the process by which the Annual Report and Accounts, well as confirmation from the external auditor leadership in a particular area. These are set taken as a whole, was fair, balanced and that it has remained independent; out in the policy and include providing tax compliance advice (in line with the Ethical understandable and provided the information ■■ received reports on the findings of the external necessary for shareholders to assess the auditor during the half-yearly review and annual Standard and other related corporate Company’s position and performance, audit, and reviewed the recommendations governance guidance), formalities relating business model and strategy. made to management by the external auditor to shareholder circulars and various other and management’s responses; regulatory reports, and professional training. Internal control, risk management and Before engaging in any work of this type, internal audit ■■ reviewed letters of representation to the approval is required from the CFO with ■■ reviewed the structure and effectiveness external auditor; and services likely to cost more than £125,000 of the Group’s system of risk management ■■ recommended the re-appointment of the requiring the approval of the Committee; and internal control and the disclosures external auditor. ■■ other permitted non-audit services – for made in the Annual Report and Accounts those projects or engagements that are not on this matter; Other matters ■■ reviewed its terms of reference and the covered by the permitted non-audit services ■■ reviewed the Group’s risk management results of its performance evaluation; category and where the external auditor is activities undertaken by the divisions and best placed to provide them, approval is ■■ at Group level in order to identify, measure received reports from divisional and required from the CFO, with services likely and assess the Group’s principal risks and functional management on a range of to cost more than £75,000 requiring the develop a risk appetite statement for financial, operational, risk management, legal approval of the Committee. In addition, recommendation to the Board; and corporate governance matters, including the Committee considers whether a tender a review on cyber security arrangements ■■ reviewed the effectiveness of the Group’s risk should be conducted before awarding such across the Group, and GWR performance work to the external auditor; and management framework, and reports arising regime receipts; from the risk management process; ■■ not permitted services – there are some ■■ received reports on the latest technical ■■ approved the annual internal audit plan and projects that are not to be performed by accounting, taxation and regulatory the external auditor because they would reviewed reports from the internal audit changes; and department relating to control matters. represent a threat to the independence Progress against the internal audit plan was ■■ received reports on matters raised on of the audit team, for example where the monitored and any deviations to the plan the confidential reporting system and the external auditor is remunerated through were agreed; process for the investigation of such matters, a success fee or where the project could ensuring that the arrangements in place were lead to the external auditor being in a position ■■ monitored and assessed the Group’s appropriate for employees to confidentially of auditing their own work or making insurance arrangements; and raise concerns about possible legal, management decisions for the Company ■■ considered reports from the General Counsel regulatory or other improprieties. or its subsidiaries. & Company Secretary on litigation matters. Policy on the provision of non-audit The policy requires that non-audit services External auditor services of the external auditor will only be used where ■■ approved the terms of engagement of The Committee’s policy on the use of the the Group benefits in a cost-effective manner the external auditor, the fees paid to it external auditor for non-audit services, which and the external auditor maintains the and the scope of work carried out by it; has been updated to reflect the FRC’s Ethical necessary degree of independence Standard (revised in 2016), includes the and objectivity. ■■ performed an annual review of the policies identification of non-audit services that may be on the independence and objectivity of Twice a year the Committee is also provided provided and those prohibited, and a process the external auditor, the use of the external with a report on all non-audit assignments through which other non-audit services may auditor for non-audit services and the awarded to the external auditor and a be provided. The policy can be summarised employment of former employees of the breakdown of non-audit fees incurred. Details as follows: external auditor; of amounts paid to the external auditor for ■■ ■■ reviewed the performance and effectiveness audit-related services – the external auditor audit and non-audit services for the year of the external auditor in respect of the can be invited to provide services, which in ended 31 March 2017 are set out in note 6 previous financial year; its position as external auditor, it must or is to the consolidated financial statements. best placed to undertake as it is clearly audit-related. These include reviews of half-yearly and other interim financial information, advice on correct accounting treatment of proposed transactions and reporting on regulatory returns;

FirstGroup Annual Report and Accounts 2017 59 Corporate governance report continued

Auditor independence The Group’s system of internal control and risk It remains the Committee’s intention to put the and objectivity management was reviewed by the Committee external audit out to tender during the lead The independence of the external auditor throughout the year. Key external audit findings audit partner’s five-year tenure, which is due to is essential to the provision of an objective and management actions were discussed as expire at the conclusion of the 2019/20 audit. opinion on the true and fair view presented in well as reports at each meeting on the This means that the external audit will be put the financial statements. The external auditor’s outcomes of Internal Audit planned activities. out to tender in 2019 so that the process is independence and objectivity are safeguarded The operation and effectiveness of Internal completed by the conclusion of the 2019/20 by a number of control measures: Audit were also reviewed, including its focus, audit. This approach is in accordance with the plans and resources. The Committee EU audit reform legislation and the Statutory ■■ limiting the nature of non-audit services monitored the progress of action plans to Audit Services for Large Companies Market performed by the external auditor; ensure they were completed satisfactorily. Investigation (Mandatory Use of Competitive ■■ placing restrictions on the employment Tender Processes and Audit Committee Assessing the effectiveness of the by the Group of certain employees of the Responsibilities) Order 2014. external auditor; external audit process The Committee manages the relationship with Significant issues ■■ monitoring the changes in legislation related the external auditor on behalf of the Board. The external audit process identifies significant to auditor objectivity and independence to During 2016/17, the effectiveness of the issues and accounting judgments which help ensure the Company remains compliant; external audit process was reviewed by the are reviewed by the Committee. These ■■ providing a confidential helpline that Committee and the findings reported to the are summarised in the table on page 61. employees can use to report any concerns, Board. This involved an initial assessment of Management prepared papers and analysis including those relating to the relationship the delivery and performance of the external on the significant issues and judgments which between Group employees and the auditor against the external audit plan for the were discussed in Committee meetings during external auditor; year, which includes the reports and updates the year. The Committee also discussed these provided to the Committee. An annual issues with the external auditor at the half year ■■ the rotation of the lead auditor partner after assessment was then carried out by the and year end. All the significant issues were five years; Committee, taking into account the results also areas of focus for the external auditor ■■ independent reporting lines from the external of questionnaires completed by each of the as detailed in the auditor’s report. auditor to the Committee and the opportunity divisions and Group management. These to meet the Committee independently; and questionnaires covered a variety of topics ■■ an annual review by the Committee of including: the audit partners and team; the the policy in place to ensure the objectivity planning and execution of the audit approach; and independence of the external auditor and insights and added value provided by is maintained. the audit process. Feedback from the annual assessment was shared with the external Internal control and auditor so that any areas for improvement risk management could be followed up. The Committee During the year the Committee reviewed the concluded that the external audit process requirements of the Code in relation to the was effective. assessment and reporting of longer-term viability, risk management and internal control. External audit tendering The Committee assessed the Group’s risk The current external auditor, Deloitte LLP, was management methodology, which is used to appointed in 1998 following a full tendering identify and manage the principal risks, as well process. The Committee has undertaken a as the reporting and categorisation of Group review of Deloitte’s performance every year risks. The Committee also reviewed the since its appointment. The Committee, which process for assessing the principal risks remains satisfied with Deloitte’s performance, that could threaten the Company’s business believes that consistency of approach in the model, future performance, solvency or audit is of particular importance as the Group liquidity in order to make the long-term viability returns to a leadership position. The Company statement on page 83 and considered the will not, therefore, be putting its audit out to appropriate period for which the Company tender in the next year, but the Committee was viable. will review this annually.

60 FirstGroup Annual Report and Accounts 2017 Significant issues and judgments How the Audit Committee addressed these issues Carrying value of First Student goodwill and intangible assets Management exercises a significant amount of judgment during the The Committee has considered the inputs for the impairment test Governance impairment testing process as it is based on an estimation of future model. The cash flow forecasts have been reviewed alongside past cash flows and a suitable discount rate. performance and committed operational changes to the business. The discount rate has been benchmarked to externally available data. The growth rate assumptions have been applied in line with both market data and the macroeconomic environment in the UK and North America. Sensitivities to the model inputs have been tested for reasonableness. Further detail on impairment testing is provided in notes 2 and 11 in the consolidated financial statements.

North America self-insurance provisions Provisions are measured at management’s best estimate of the likely The Committee has reviewed the provision and considered the settlement of all known incidents. A valuation of the expense required assumptions used to calculate the liability. Independent actuarial to settle the obligation and, where applicable, the discount rate is expert advice on the adequacy of the provisions against such used to calculate the expected settlement. liabilities is sought on a regular basis and the discount rate has been benchmarked against external data. Further detail on the assumptions used in determining the value is provided in notes 2 and 26 in the consolidated financial statements.

Pensions The Group participates in a number of defined benefit pension Management has engaged with external experts and the Committee schemes. Management exercises significant judgment when has considered the assumptions used for calculating the liability. determining the assumptions used to value the pension liabilities as Sensitivity analysis has been performed on the key assumptions these are materially sensitive to changes in the underlying assumptions. which are: the discount and the inflation rates. The overall liability has also been assessed for reasonableness. Further detail on pensions is provided in notes 2 and 34 in the consolidated financial statements.

Revenue recognition Estimates are made on an ongoing basis when determining the The Committee has reviewed the revenue recognition policies. These recoverability of amounts due and the carrying value of related assets policies and their application are in line with accounting standards. and liabilities arising from franchises and long-term service contracts. Regular forecasts are compiled on the outcome of these types In addition, revenue recorded may be subject to adjustment to reflect of franchises and contracts to assess the reasonableness of the the timing and valuation of revenue recognised, e.g. due to timing of assumptions applied. Further detail on revenue recognition is travel or where amounts are unbilled at a period-end. provided in note 2 in the consolidated financial statements.

FirstGroup Annual Report and Accounts 2017 61 Corporate governance report continued

Board Safety Committee Membership ■■ assess the impact of safety decisions and The current members of the Committee are Jim actions taken by the Group on its reputation, Winestock, who chairs it; Jimmy Groombridge, employees and other stakeholders; Group Employee Director and Imelda Walsh, ■■ monitor and assess the commitment Chair of the Remuneration Committee. and behaviour of management towards The Deputy Company Secretary acts as safety-related risks; Committee Secretary. ■■ review safety performance and significant Safety Governance safety incidents, considering the key causes The Committee meets at least three times thereof and ensuring actions are taken and per year and reviews safety performance on communications made by management to behalf of the Board, providing oversight of the prevent similar incidents occurring in the future; management of the Group safety risk profile. ■■ make proposals to the Remuneration The Committee promotes a positive safety Committee regarding appropriate safety culture throughout the business and reports performance objectives for Executive back to the Board on safety trends, actions Directors and certain senior managers; and and other deliberations. ■■ review the findings of internal or external The Executive Safety Committee, chaired reports on the Group’s safety, assessing any by the Chief Executive, meets six times per The tragic tram incident in Croydon, strategies and action plans developed by year to review and oversee the Group’s safety management in response to issues raised and, which resulted in the loss of seven strategy and the performance, procedures where appropriate, making recommendations lives, highlights the importance of and practices of the divisions and operating to the Board on such matters. continuously reviewing and improving companies. Activities in 2016/17 our safety strategy, procedures, Divisions and operating companies consider The Committee’s agenda during the year systems and performance. safety at executive level at monthly meetings covered a range of matters including: to review performance, agree divisional safety We continue to provide full support to the plans and actions and drive safety performance. ■■ safety performance of the Group, its divisions ongoing investigations into the incident. It is and operating companies and significant absolutely essential that we learn the lessons The overall structure of FirstGroup’s safety incidents across the Group; that emerge; all relevant recommendations governance represents a balance between ■■ lessons learnt and steps taken following from the investigations will be implemented. delegated decision making to the operating company and retaining strategic direction, significant incidents; We welcome the roll out of the Be Safe oversight and challenge from the Board. ■■ safety targets for incentive plans and programme across the Group. This is a highly approval of performance outturns; valuable investment that will change behaviours Our approach to safety governance is and culture, building on established compliance characterised by: ■■ key safety initiatives across the Group; and with safety management systems, processes, ■■ the Committee overseeing material ■■ terms of reference and performance procedures and practices to achieve the goal safety matters and risks across the Group, evaluation of the Committee. of zero harm. The Board commends the as well as reviewing safety targets for In addition to the above, a key focus of the implementation of this forward-looking and remuneration purposes; Committee has been the Be Safe programme, innovative programme, which was sponsored ■■ management of the relevant operating which is designed to deliver a step change in by the Committee. company having primary responsibility for safety performance through the enhanced The year finishes with the Group having the design and implementation of an safety behaviours of our employees. Be Safe successfully improved the majority of its effective safety management system, and is a comprehensive programme which occupational performance indicators, with the accountability for safety performance; and encompasses the safety management total number of staff injuries, days lost through system, includes safety rules enforcement and ■■ the safety function providing advice directly incidents at work, staff major injuries and and through a series of networks across promotes behavioural change using positive fatalities all reduced. Total passenger injuries the Group. reinforcement. Initial indications from the reduced but major injuries and fatalities locations who were first to implement Be Safe increased and included those who were For more information on the Group’s approach are encouraging. injured and lost their lives in Croydon. to safety and activities in the year, see pages 40 and 41 in the Corporate responsibility section. Also, to better understand the safety risk Proactive steps are being taken across exposures and challenges faced by the the Group in training, technology and Role and responsibilities divisions and the operating companies and management to ensure the safety of The key responsibilities of the Board Safety the actions being taken to address these, customers, employees and third parties. Committee are to: during the year presentations were given by Safety is front of mind but we must accelerate ■■ keep under review the development and the senior management teams of Greyhound, our progress toward achieving zero harm. maintenance of a framework of policies and First Rail and First Student. Jim Winestock standards for managing safety risks and Chair, Board Safety Committee their impact on the Group’s activities;

62 FirstGroup Annual Report and Accounts 2017