CSR & Governance
Governance
Governance
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The following details are taken from the Group's 2007 Annual Report & Accounts - they will be updated annually
Dear ShareholderThis section of our Annual Report & Accounts details how we have complied with the principles of the Combined Code on Corporate Governance in 2007. The Board is committed to and recognises the importance of high standards of corporate governance as a contribution to the success of the Group. In our continuing drive towards transparency and maintaining an effective dialogue with our shareholders, I would, again, welcome any comments that you may have about Alliance & Leicester and our corporate governance.
Sir Derek Higgs
Chairman
For the year ended 31 December 2007, Alliance & Leicester has applied the principles and complied with the provisions of Section 1 of the Combined Code on Corporate Governance. The Code was revised with effect from 1 November 2006 and the revised Code applies to Alliance & Leicester with effect from 1 January 2007. Details of how Alliance & Leicester complied with the Code are summarised in this statement.
At the date of this report, the Board comprises the Chairman, Sir Derek Higgs, the Group Chief Executive, David Bennett, two executive directors and eight independent non-executive directors. There is a clear division of responsibility between the roles of the Chairman and the Group Chief Executive.
All Board members have the collective responsibility for ensuring that the affairs of the Company and its subsidiaries are managed competently and with integrity.
The Directors come from diverse business backgrounds and each actively and effectively contributes to the work of the Board and its Committees.
On 27 July 2007 Richard Pym retired as Group Chief Executive and was succeeded by David Bennett, who also has direct responsibility for Retail Banking. Chris Rhodes, previously the Managing Director, Retail Banking, has taken over the role of Group Finance Director from David Bennett.
Roy Brown was appointed to the Board as a non-executive director on 4 May 2007 and succeeded Peter Barton, who resigned on 13 May 2007, as Deputy Chairman and Senior Independent Director.
Mary Francis was appointed to the Board as a non-executive director on 2 May 2007.
The Directors are required to report any material change in their circumstances to the Board. The Chairman, during 2007, reported that he resigned as Chairman of Partnerships UK Plc on 31 May 2007. The significant other commitments of the Directors are monitored and are set out in their biographical details.
The Board considers all the non-executive directors to be independent. Their role is to constructively challenge the management team and to utilise their business expertise, skills and experience to supplement the executive directors’ management of the Company.
The Group Secretary, Simon Lloyd, is an employee of the Company.
The Board is responsible for setting the Company’s strategy to deliver increased shareholder value and for reviewing the Company’s operating, financial and risk performance. The Chairman is responsible for leading and managing the Board, ensuring it operates effectively and fully discharges its legal and regulatory responsibilities.
The Board has established a number of Committees to support its work. Both the Board and its Committees meet regularly and details of the number of Board and Committee meetings and the attendance at those meetings are set out in the table below. The Board also met twice in 2007 to consider strategic matters and to receive presentations from the Executive Directors. Minutes or reports of each of these meetings are circulated to all directors.
The formal schedule of matters specifically reserved to the Group Board includes:
The Executive Committee is chaired by the Group Chief Executive and makes decisions in relation to significant operational and financial matters affecting the Group. The Board delegates the management of the Group to the Group Chief Executive to approve all other matters within agreed financial limits, and he in turn delegates the operational and financial management of the Group to the executive directors and senior managers.
The Board composition is kept under review to ensure that there is an appropriate balance of directors, and their skills and experience are relevant for the requirements of the business.
The Nomination Committee is responsible for the process for appointing new directors and making recommendations to the Board. When considering a new appointment, the Committee agrees clear selection criteria and appoints an external consultancy to identify potential candidates, from whom a short list is presented to the Committee.
Newly appointed directors submit themselves for election by shareholders at the first Annual General Meeting after their appointment and at least every three years thereafter. The new directors have undertaken an induction programme, including guidance on each director’s statutory duties and legal responsibilities, to provide an understanding of the Group and its strategy, products, markets and financial position. They have held a series of introductory meetings with senior management, and all non-executive directors have made regular visits to the Group’s operational locations.
The Group Secretary has responsibility for advising the Board on all governance matters and as such all directors may, at any time, seek access to the services of the Group Secretary and his colleagues. Furthermore, all directors may in addition seek independent professional advice on issues affecting the Group, on request via the Group Secretary, at the Group’s expense.
Most members of the Board have attended external training and development events to ensure that they continue to maintain the necessary skills and knowledge to fulfil their roles.
The appointment of all non-executive directors is documented in a letter of appointment, the standard terms of which are available on the Group website at www.alliance-leicester-group.co.uk.
The terms of reference for the principal Board Committees are reviewed annually and can be found on the Group website at www.alliance-leicester-group.co.uk. The composition of each Committee seeks the best use of the non-executive directors’ skills and experience. The current Board Committee structure and the work of the principal Committees is set out below.
The Nomination Committee comprises the Chairman and up to four non-executive directors and is responsible for:
As at 19 February 2008, the Committee members are:
Sir Derek Higgs Chairman
Roy Brown (from 4.05.07)
Mary Francis (from 2.05.07)
Margaret Salmon
Jonathan Watts
Peter Barton resigned from the Committee on 13 May 2007.
Simon Lloyd is the secretary of the Committee.
The main focus of activity for the Committee during 2007 was the appointment of various directors, following a review of succession plans.
Following the retirement of Michael Allen in December 2006 and the impending retirement of Peter Barton in May 2007, the Committee engaged executive search consultants to assist in the selection of their replacements. The Committee’s review of the mix of skills and experience that would benefit the Group the most formed the basis for the search criteria. From the shortlist of candidates interviewed, the Committee recommended the appointments of Mary Francis and Roy Brown to the Board and they were duly appointed on 2 and 4 May 2007 respectively.
In February 2007, Richard Pym, Group Chief Executive, announced his intention to retire once a suitable replacement had been found. The Committee considered the leadership needs of the Group and, after considering both external and internal candidates shortlisted by an executive search consultant, recommended that David Bennett, the existing Group Finance Director, be appointed as Group Chief Executive and take on Retail Banking responsibilities.
As a result of this appointment, Chris Rhodes, Managing Director, Retail Banking, was invited by the Board and accepted the role of Group Finance Director. These appointments were effective from 27 July 2007.
In addition, the Committee has adopted a continuous approach to identify suitable candidates to join the Group Board as non-executive directors, with the help of an executive search consultant, and has interviewed candidates for future positions.
The Committee has reviewed and updated the standard non-executive director’s letter of appointment in light of parts of the Companies Act 2006 becoming effective from 1 October 2007.
Remuneration Committee
The Remuneration Committee is responsible for determining the remuneration and contractual arrangements of individual directors, having regard to a policy framework on executive remuneration agreed by the Board. The composition and work of the Remuneration Committee and the Group’s remuneration policy is described in detail in the Directors’ Remuneration Report.
Group Audit Committee
The Group Audit Committee is responsible for a number of internal controls and the Group’s Financial Reporting.
The Committee:
As at 19 February 2008 the members of the Committee are:
Jane Barker Chairman
Malcolm Aish
Rod Duke
Mary Francis
Mike McTighe
The Board considers that the members of the Committee have relevant skills and experience from a range of financial services and technology backgrounds, enabling them to apply meaningful independent judgement as part of their role. In particular, Jane Barker has the requisite ‘recent and relevant financial experience’, as recommended by the 2006 Combined Code, to ensure that the Committee can fulfil its role effectively.
Alison Ward, Head of Group Internal Audit, is the secretary of the Group Audit Committee and during 2007 the meetings were attended by the Chairman, the Group Chief Executive, the Executive Directors, the Director of Group Financial Control and Reporting, the Director of Group Risk, the Group Secretary, the Head of Group Compliance and representatives from Deloitte, the external Auditors.
Jane Barker, the Chairman of the Committee, reports on the Group Audit Committee’s activities during 2007 as follows:
“I am pleased to report to you on the Committee’s activities in 2007.
The responsibilities of the Committee are set out in its Terms of Reference, which are available at www.alliance-leicester-group.co.uk. An annual review was carried out to confirm the Committee has complied with these Terms of Reference.
We met four times in 2007, and in accordance with the Terms of Reference we met privately with the Head of Group Internal Audit and the external Auditors, to allow them to discuss freely any items of concern.
Risk Management and Internal Control
At each meeting the Committee considered a number of reports which detailed the Group’s systems of risk management and internal control. Key issues identified in these papers were reviewed and reported back to the Committee until a satisfactory resolution had been reached. An annual report on Key Current and Emerging Risks supplement the Committee’s understanding of potential emerging risks that might impact the Group’s business in the future.
Internal Audit and Compliance
The Committee reviewed and approved on behalf of the Board the Terms of Reference for the Group Compliance and Internal Audit departments, the reports to the Committee of Group Internal Audit and the Head of Group Compliance and the Group Internal Audit and Group Compliance plans and resourcing for 2008.
External Audit
We considered and recommended to the Board the terms of engagement for the external Auditors. A report on the non-audit services provided by the external Auditors was considered and the level and categorisation of non-audit services was noted. The Committee also reviewed Management Representations given to the external Auditors and considered the appropriate accounting policies applied to the Group Financial Statements.
Financial Statements
The Committee considered and recommended to the Board for approval the draft 2007 Annual Report and Accounts, Summary Annual Report and Preliminary Results Announcement. It also noted the final dividend payment for 2007 and financial reporting developments. In the last quarter of the year, we considered the Group Accounting Disclosures Review, this Statement of Corporate Governance and the Statement of Information given to the external Auditors by directors for the 2007 Annual Report and Accounts.”
Jane Barker
Chairman of the Group Audit Committee
Group Risk Committee
The Group Risk Committee approves the Group’s overall risk appetite and reviews and approves the policy statements relating to credit, market, liquidity and funding risks. In addition, the Committee oversees the effective implementation of the Group’s operational risk policies. The Committee also monitors the risks associated with the Group’s pension scheme.
The Committee also approves the use of the Group’s economic capital models in relation to credit, market, operational, pension fund and other risks, for the purposes of assessing capital adequacy and measuring the risk adjusted performance of business units and activities.
It receives and considers reports on the status of key current and emerging risks and internal controls relating to those risks. The Committee also receives the report from the Group Money Laundering Reporting Officer.
An overview of the Group’s risk management and control framework can be found in Note 2 on pages 54 to 72 of notes to the accounts.
The Committee comprise four non-executive directors, the Group Chief Executive and Michael Thomas, the Director of Group Risk. In 2007 meetings were also attended by the Chairman, the executive directors, the directors of Credit & Risk for the Commercial and Retail Banks, the Director of Lending, the Group Secretary, the Head of Group Compliance, the Head of Group Internal Audit and the Money Laundering Reporting Officer.
The Committee members as at 19 February 2008 are:
Malcolm Aish Chairman
Jane Barker
Roy Brown
Rod Duke
David Bennett
Michael Thomas
Richard Davies, Head of Operational Risk, acts as secretary to the Committee.
Malcolm Aish, the Chairman of the Committee, reports on the Committee’s activities in more detail below:
“I am pleased to report to you on the Committee’s activities in 2007.
We met five times during 2007. Our responsibilities are set out in the Committee’s Terms of Reference, which are available at www.alliance-leicester-group.co.uk. I have set out below some of the key activities of the Committee in 2007.
Risk Management Framework
Throughout the year we have regularly reviewed reports on key current and emerging risks and internal controls relating to those risks, to ensure that key risks impacting the bank are understood and appropriate action is being taken to mitigate them. Reports from Group Internal Audit and Group Risk were received, detailing risk issues and control matters that have occurred across the Group.
As part of monitoring the overall effectiveness of the Group’s risk management framework, we have received regular reports on the activities of the Group’s other risk management committees including the Executive Credit Committee, the Assets and Liabilities Committee, and the Group Operational Risk Committee. At the February and July 2007 meetings we reviewed and approved the Group’s Internal Control Policy certification.
As part of our task of monitoring the effectiveness of the Group Risk function, in November 2007 we approved the Group Risk Terms of Reference along with its 2008 plan and resourcing levels.
Credit, Market, Liquidity and Funding
During the year, the Committee received and discussed reports from the Retail Banking and Commercial Banking in relation to the extent of the Group’s Credit, Market, Liquidity and Funding risks. It has approved all the key credit, market, liquidity and funding policies, asset quality plans, lending triggers and internal ratings models.
We take a keen interest in risks arising from changes in the UK economy and these are discussed in depth at each meeting. We also regularly reviewed the risks associated with retail property prices.
The Committee has verified that we have at all times complied with our liquidity policy, and the FSA rules on liquidity (IPRU-BANK, Chapter LS), and reviewed the liquidity stress test results.
Operational Risk and Capital Adequacy
The Committee has received and discussed reports from the Head of Group Compliance and the Group’s Money Laundering Reporting Officer. We approved the key Operational Risk Policies for the Group.
From time to time we receive specific presentations from senior managers within the Group that have functional risk responsibility. In February 2007 we received a detailed update in relation to Legal Risk within the Group.
Throughout the year we have received reports on the status of the Group’s capital adequacy framework and we have approved the Group’s capital adequacy and stress testing policies. We have reviewed and approved the summary Full Internal Capital Adequacy Assessment.”
Malcolm Aish
Chairman of the Group Risk Committee
Chairman’s Committee
The Chairman’s Committee is empowered to make decisions on matters between Board meetings and comprises the Chairman or a non-executive director, the Deputy Chairman or another non-executive director and the Group Chief Executive or one other executive director.
Evaluation of Board and Committees Performance
The performance and effectiveness of the Board and its Committees is evaluated annually. This year’s evaluation was conducted internally using a detailed questionnaire and a self assessment by directors of their performance and a peer evaluation of fellow directors. Amongst the aspects reviewed were the role and organisation of the Board, agenda and Board materials management, Board processes and composition and functioning of Board Committees.
As part of the evaluation process, each director discussed his or her own performance and their individual effectiveness evaluation with the Chairman.
In addition, Roy Brown, as Senior Independent Director, met with the non-executive directors as a group without the Chairman present, to consider the Chairman’s performance.
The results of the evaluation of each Committee are discussed by the Committee and reported to the Board by its Chairman.
All aspects of the evaluation were reviewed and discussed by the Board and it was agreed that emphasis would continue to be placed on succession planning, consideration of risk appetite and strategic planning. The directors concluded that the Board is functioning effectively and fulfilling its duties and obligations.
Accountability and Audit
The Board is responsible for the Group’s system of internal controls and for monitoring its effectiveness. The directors are required by law to establish systems for the control of the conduct of the business under the Financial Services and Markets Act 2000 and to conduct the business with prudence and integrity, ensuring that there are adequate reserves and other capital resources and assets in liquid form for the protection of depositors.
The Board has delegated oversight of the Group’s Internal Control Policy to the Group Risk and Group Audit Committees.
The Group’s system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives, and provide reasonable assurance as to the effectiveness of the safeguards protecting the business against the risk of material error, loss or fraud. The Group Risk Committee received reports on the current operation of internal controls in relation to key and emerging risks, and the Group Audit Committee carried out an overall review of the effectiveness of the Group’s system of internal control for the year to 31 December 2007.
There has been in place for the year under review and up to the date of this report a process of identifying, evaluating and managing the significant risks faced by the Group. This process is regularly reviewed by the Board and accords with the Turnbull Guidance for directors within the Combined Code.
The Board receives monthly reports from the key executives identifying performance against budget, major business issues, the impact of the external business and economic environment on their areas of responsibility and significant risks facing the businesses and how they are being controlled. The Board also receives minutes and reports from the Chairmen of the Group Audit Committee and the Group Risk Committee. These identify any significant issues relating to the adequacy of the Group’s risk management policies and procedures across the full range of risks to which the Group is exposed, and how they are being controlled.
Each meeting of the Group Risk Committee and the Group Audit Committee receives a report identifying the effectiveness of internal controls together with specific reports on any significant issues.
The key features of the system of business control and risk assessment established by the Board are:
The activities of the Group, including the systems of business control, are subject to supervision by the Financial Services Authority. The Group is required on a regular basis to submit detailed prudential and statistical returns covering all areas of its business and meets regularly with its supervisors, conducting the relationship in an open and constructive manner.
The directors confirm that they are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.
The Company’s investor relations programme is tailored to meet different shareholder requirements.
The Company’s institutional shareholders can attend meetings, conference calls, presentations and results briefings. The Company values dialogue with its institutional shareholders, who regularly meet with the Company’s management and have the opportunity to request meetings with the Chairman and the senior independent non-executive director. A representative from one of the Company’s institutional shareholders met with the Board during 2007 as part of the Group’s communication programme with institutional investors.
The Board receives monthly updates on changes in the Group’s institutional share register, together with details and feedback from any meetings held with shareholders.
To ensure the Board is kept up to date on current external views, directors also regularly receive copies of analyst research notes on the Company.
The Chairman and some of the non-executive directors attend results presentations, and the senior independent non-executive director is available to deal with any concerns raised by shareholders which cannot be resolved through the normal channels of the Chairman or Group Chief Executive.
Communication with private shareholders is primarily managed by the Group Secretary. All shareholders have the opportunity to meet the directors at the Annual General Meeting. This is held in the evening at the Company’s Leicestershire head office. If shareholders are unable to attend they are encouraged to vote by proxy and may appoint their proxy by post, on the internet or via CREST.
Holders of ordinary shares registered on the appropriate record date are entitled to attend and vote at general meetings of the Company, or adjourned meetings (either in person or by proxy) in respect of the number of ordinary shares registered in their names at that time. Each share carries the right to one vote on a poll.
All shareholders can view their shares, register or amend a dividend mandate instruction, change address details and register an email address online via www.alliance-leicester-shareregistrars.co.uk and following the online instructions. Shareholders are also able to put questions to the Company via the website.
The holders of any series of Preference Shares are entitled to vote at a General Meeting of the Company in certain circumstances set out in the Company’s Articles of Association. In those circumstances, Preference Shareholders are entitled to one vote for each share held.
The Group website provides investors and potential investors with information about the Company, share price information, annual and interim results, Company announcements, investor presentations, Group policies and terms of reference for its Board Committees.
The appointment contract is for services, it is not a contract of employment.
Appointments are subject to the provisions of the Companies Act 1985, general law and the Company’s Articles of Association.
Appointment periods are at the absolute discretion of the Board and will be for an initial term of two years unless otherwise terminated by and at the discretion of either party with immediate effect. Continuation of the contract for services is contingent on FSA approval, satisfactory performance and re-election at AGMs.
Thereafter, whilst not automatic, one or more extension periods of up to two years each may be granted at the Board’s discretion, following recommendations from the Nomination Committee.
Tax and national insurance deductions will be made as appropriate to board fees. Payment will cease immediately if an appointment ends for any reason.
Overall a time commitment of around 18 – 24 days per year is expected. This will include attendance at monthly board meetings, the AGM, and two days visiting operational centres or branches. All non-executive directors will be expected to serve on at least one committee, and the norm will be two committees. Committees meet approximately four times a year. In addition, directors are expected to devote appropriate preparation time ahead of each meeting. Additional fees are paid for Chairmanship of committees and directors may also be asked to represent the Company at meetings or functions organised by or with outside bodies.
By accepting an appointment, non-executive directors have confirmed that they are able to allocate sufficient time to meet the expectations of the role. They should seek consent from the Chairman before accepting additional commitments that might affect the time they are able to devote to their role as non-executive director of the Company.
If non-executive directors wish to take up a directorship with another company, they should seek consent from the Chairman, in order to avoid the possibility of a conflict of interest. If after consultation with the Nomination Committee, it is felt that there is the potential for a conflict of interest then the matter will be referred to the Board.
Non-executive directors have the same general legal responsibilities to the Company as any other director. The Board as a whole is collectively responsible for the success of the Company. The Board:
| - | provides entrepreneurial leadership of the Company within a framework of prudent and effective controls which enable risk to be assessed and managed; |
| - | sets the company’s strategic aims, ensures that the necessary financial and human resources are in place for the Company to meet its objectives, and reviews management performance; and |
| - | sets the Company’s values and standards and ensures that its obligations to its shareholders and others are understood and met. |
All directors must take decisions objectively in the interests of the Company and have due regard to the directors' duties codified in the Companies Act 2006.
In addition to these requirements of all directors, the role of the non-executive director has the following key elements:
| - | Strategy. Non-executive directors should constructively challenge and help develop proposals on strategy; |
| - | Performance. Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; |
| - | Risk. Non-executive directors should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible; and |
| - | People. Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, executive directors and in succession planning. |
The Board recognises the right of any director in exceptional circumstances and in furtherance of his or her duties as a director, to be able to obtain external professional advice, at the Group’s expense, provided that the director concerned has consulted the Group Secretary as to the appropriateness or otherwise of using internal professional advice. This provision has been included in the Board’s Standing Orders.
Directors' and Officers' Liability Insurance cover is maintained at the expense of the Company.
Non-executive directors may claim reimbursement of reasonable out-of-pocket expenses incurred in attending Group Board meetings and in undertaking additional duties at the request of the Board.
Security provision for non-executive directors can be made at their home address (as registered at Companies House) on request or in response to a specific threat.
Under the Articles of Association, directors are required to hold a minimum of 250 shares. The Remuneration Committee’s recommendation that directors should voluntarily increase the minimum shareholding to 5000 shares, over the initial period of appointment, has been accepted by the Group Board.
The performance of individual directors and the whole Board and its committees is evaluated annually. If, in the interim, there are any matters which cause non-executive directors concern about their role they should discuss them with the Chairman in the first instance, or the senior non-executive director.
Directors are required to comply with the Alliance & Leicester Share Dealing Code.
To assist understanding of the role of a director of the Company and the dynamics of the Group’s business, new directors undertake an induction programme.
It is expected that directors dedicate at least two days a year to visit our operational centres or branches. These offer an opportunity to see the business at first hand and to promote the image of the Group and the morale of staff.