CORPORATE GOVERNANCE

The Company has complied throughout the year with the provisions set out in section 1 of the Combined Code with the following exceptions:

Provision A.6.1 of the Combined Code requires that non-executive directors should be appointed for specified terms, however, the board has decided that it is preferable to retain the flexibility of rolling contracts which can be terminated without notice or compensation, but which, under normal circumstances, operate with a maximum of six months’ notice. The board believes that the requirement for at least one third of the directors to seek re-election by rotation at each annual general meeting adequately ensures that appointment periods are not excessive.

Provision C.2.3 requires that the chairman of the audit committee attends the annual general meeting, however, A J H Stewart was not able to attend the meeting on 19 September 2002 but the other members of the audit committee were in attendance to answer shareholders’ questions.

In accordance with paragraph 12.43A of the Listing Rules there is set out below and, in connection with directors’ remuneration, in the remuneration report, an explanation of how the Company has applied the Principles of Good Governance set out in section 1 of the Combined Code.

Board composition
The board comprises the chairman and chief executive, one further executive director and three independent non-executive directors. It is chaired by the chairman and chief executive, T H F Kirby and meets for regular business on a monthly basis. The senior independent non-executive director is C J Myatt. The board has identified various matters which are reserved for consideration by it. The board is responsible for the overall direction and strategy of the Group and for securing the optimum performance from group assets. The three non-executive directors are independent of the Group and have a breadth of successful commercial and professional experience.

Following the return of T H F Kirby to executive responsibilities in September 2000, the board considers it appropriate, for the time being, for the roles of the chairman and chief executive to be combined. This situation will be kept under review by the board.

All directors have access, as appropriate, to independent professional advice and the services of the company secretary. Training is provided for all directors as appropriate. The three independent non-executive directors do not participate in the Company’s bonus, pension or share schemes.

In accordance with the Company’s articles of association, all directors are subject to election by shareholders at the first opportunity after their appointment. The articles also provide that at least one third of the directors be subject to re-election by rotation at each annual general meeting. The directors’ report contains biographical information to enable shareholders to make informed decisions on the re-election of the directors.

Board committees
The Group executive committee meets monthly and comprises the executive directors and other senior managers. Under the chairmanship of T H F Kirby it deals with strategy proposals, detailed operational matters and business reviews.

The audit committee comprises the non-executive directors and is chaired by A J H Stewart. It meets not less than three times a year and assists the board in ensuring that the published financial statements give a true and fair view and in securing reliable internal financial information for decision making. It reviews the suitability and effectiveness of the Group’s internal controls (including internal audit), the findings of the external auditors and key accounting policies and judgements. It also reviews audit and non-audit services provided to the Group.

The remuneration and nomination committee comprises the non-executive directors and is chaired by C J Myatt. It meets not less than four times a year and is responsible for making recommendations to the board on remuneration policy for senior executives and all directors and for setting salaries, incentive payments and granting share options. It is also responsible for nominating, for approval by the board, candidates for appointment to the board. The procedures and guidelines used by the remuneration committee in determining remuneration are outlined in the separate remuneration report.

The city committee comprises the non-executive directors and is chaired by N J Donaldson. It meets not less than twice a year and is responsible for corporate governance, investor relations, city presentations and liaison with city advisers.

The business committee comprises the non-executive directors and is chaired by C J Myatt. It meets on a monthly basis and is responsible for reviewing operational performance, financial reports and the planning and forecasting processes.

Supply of information
Relevant papers are circulated to all board members on a timely basis and in advance of each meeting. Directors provide feedback to management to enhance reporting formats and information content of board papers and, in addition, make further enquiries of management wherever they consider it necessary, to allow the appropriate decisions to be made with regard to Company matters.

Constructive use of the annual general meeting
The chairmen of the audit, and remuneration and nomination, committees will be available to answer questions at the annual general meeting. Separate resolutions are proposed for substantially separate issues at the meeting and the chairman of the Company will declare the number of proxy votes received both for and against each resolution.

Internal control
Detailed reviews of the performance of the Group’s main business activities are included in the operating review and the financial review. The board presents these reviews, together with the directors’ report to give a balanced and understandable assessment of the Company’s position and prospects.

The directors recognise that they have overall responsibility for ensuring that the Group maintains a sound system of internal control to safeguard shareholders’ investment and the Group’s assets, and for reviewing its effectiveness. The system is designed to manage risks that may prevent the Group from achieving its business objectives, rather than to eliminate these risks. However, even the most effective system can provide only reasonable, and not absolute, assurance against material misstatement or loss.

The directors have established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place from the start of the year until the date of approval of this report. This process is regularly reviewed by the board, in accordance with the Guidance for Directors on the Combined Code issued in September 1999. Steps are also being taken to embed internal control in the business processes of the Group.

The effectiveness of the Group’s system of internal control is continuously reviewed by the board. The review covers all controls, including financial, operational and compliance controls and risk management. The monitoring of control procedures is achieved through regular review by the group finance director, reporting to the board. This review process considers whether significant risks have been identified, evaluated and controlled. Regular reporting by senior management ensures that, as far as possible, the controls and safeguards are being operated appropriately. This process is considered by the audit committee, alongside the independent auditors’ reports.

The Group has continued its programme of internal audit reviews during the year. The audit committee agrees an annual internal audit plan, focussing on business specific issues. Elements of this programme are outsourced to external advisers. Actions agreed by management in response to recommendations made are followed up.

The board, with advice from the audit committee, has completed its annual review of the system of internal control in accordance with the guidance as set out in the Turnbull report, and is satisfied that it has acted appropriately and in accordance with that guidance.

Treasury policy
The principal financial exposure to the Group is movements in foreign exchange rates. The Group’s transactional exposure on trading cash flows settled in non-sterling currencies is managed through the use of forward currency contracts covering a prospective period of 12 months rolling. Translational exposures, for both the trading results and balance sheets of non-sterling denominated subsidiaries, are not hedged.

The Group’s exposure to interest rate fluctuations is reviewed periodically by the board, however this exposure has not been significant in recent years.

There are no other exposures which the Group manages with financial instruments.

Going concern
After making appropriate enquiries, the directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the Group’s financial statements.

By order of the board

M Sherwin
Secretary
28 July 2003

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