CORPORATE GOVERNANCE

The Listing Rules of the Financial Services Authority require listed companies to disclose, in relation to section 1 of the Combined Code on Corporate Governance 2003 (the Combined Code), how they have applied its principles and whether they have complied with its provisions throughout the accounting period.

This statement, together with the remuneration report, explains how the Company has applied the principles and complied with the provisions set out in the Code.

The board operates through monthly meetings which senior executives attend on a regular basis. Major strategic decisions and the approval of any significant capital expenditure are reserved for decision by the board. The board is updated of operational decisions through the monthly meetings. Terms of reference for the board committees (as set out below) are available on the Company's website.

The board
The board comprises the chairman and chief executive, one further executive director and three independent directors. It is chaired by the chairman and chief executive, T H F Kirby. This arrangement does not comply with provision A.2.1 of the Combined Code, which states that the roles of chairman and chief executive should not be exercised by the same person.

T H F Kirby agreed to resume an executive role with the Company in 2000. At the time the board determined that the interests of the Company would be best served if the roles of chairman and chief executive were combined: a situation that remains the case today.

Since then, the subject of board and senior management development and succession planning has continued to be a high priority for the board. A key development in this area has been the introduction of a new structure whereby the management of the business is conducted through the functions of sales and operations, each with a senior executive, not a member of the board, responsible for that function. The sales activities aim to maximise revenue and the operations activities aim to maximise efficiencies and cost effectiveness. Prior to this development, the managers responsible for each of the Group's sales businesses and factory operations around the world reported directly to the chairman and chief executive; the creation of the new structure reduced the number of people reporting directly to him, and at the same time increased the responsibilities of the head of sales and the head of operations.

A further development during 2006/7 has been the attendance of the head of sales and the head of operations at the monthly meetings of the board when operational matters are discussed.

It is the board's intention that the management structure will develop over time and ultimately enable the roles of chairman and of chief executive to be split between the day to day executive management responsibilities and the strategic and oversight functions. The approach being adopted by the board is evolutionary and its implementation is dictated by the timescales required to develop appropriate senior managers. The position underlying this approach, which has been arrived at after much thought and debate by the board, is that the operational management of Games Workshop is best undertaken, where possible, by senior managers from within the business. This position takes into account the requirement to balance on the one hand the needs for commercial and line management experience, and on the other the requirement for a real understanding of, and empathy with, the Games Workshop Hobby.

In summary, the combined role of chairman and chief executive is regularly discussed both by the board and by the remuneration and nomination committee, when its effectiveness is reviewed and alternative options considered. These discussions have concluded that it would be irresponsible to split the roles unless there were an alternative which would be more value enhancing to the business. To date, no such alternative has been identified. The board believes that the combined role arrangement continues to work well, but recognises that it is important to keep succession plans under review for implementation as and when appropriate and does so on a regular basis.

The senior independent director is C J Myatt. The senior independent director is the lead independent director. His principal responsibilities include:

  • to be available to shareholders if they have concerns which contact through the normal channels of the chairman and chief executive, or the group finance director, has failed to resolve, or for which such contact is not appropriate; and
  • to ensure that the performance evaluation of the chairman and chief executive is conducted effectively.

The three independent directors have a breadth of successful commercial and professional experience and are considered by the board to be independent of the Group. The Combined Code states that the board should identify each independent director it considers to be independent, and the Code then lists various circumstances which may appear relevant to its determination. This includes (amongst others) if the director has served on the board for more than nine years.

At Games Workshop the board has had to confront this list of circumstances as two of the independent directors have served for more than nine years.

In making this assessment the board has taken into account the personal attributes of each director in relation to the current and future needs of the board. Independence (like judgement and wisdom) is not an attribute which can be measured by reference to a checklist. It is rather an attribute which the members of the board can observe being demonstrated by a director in his actions and interactions with other members of the board as it faces the various issues which are placed before it. It is the absence of complacency, lazy thinking and acceptance of the status quo.

In addressing this process, the chairman has set out his position as to the independence of the independent directors in his preamble to the 2003 annual report.

Regarding the specific Combined Code circumstance of service of over nine years, the board's position is as follows.

The 'nine year rule' is a handy guide to the risk of directors becoming ‘stale’. The board considers this risk periodically, but has not yet found it to be an issue at Games Workshop. If it did, it would react accordingly. Indeed, at present the board feels that both the long-term nature of the succession planning referred to above, and the requirement for members of the board to have a real understanding of, and empathy with, the Games Workshop Hobby, point in favour of retaining the experience the board currently has.

Based upon its assessment, which focuses on each director's attitude towards making his best contribution to the progress of the Company, the board considers that all three of the independent directors are independent.

The board operates primarily through its monthly meetings and is responsible for leading and controlling the Group and monitoring executive management. It meets at least nine times a year.

All directors bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct. In 2007 the board and its committees had twelve meetings, each of which was attended by all members of the board, with the exception of C J Myatt who attended eleven meetings. There is a procedure for directors to take independent professional advice at the Company's expense where relevant to the execution of their duties. The board considers that it has been supplied with sufficient timely and accurate information to enable it to discharge its duties.

All members of the board have access to the services and advice of the company secretary. The executive directors attach great importance to ensuring that the independent directors are provided with accurate, timely and clear information on the Group. In addition, the independent directors are actively encouraged to update continually their knowledge of and familiarity with the Group and the issues affecting it, so as to enable them to fulfil effectively their roles on both the board and its committees.

The board has established a process for the ongoing assessment of its own performance and that of its committees. This has been conducted by way of private discussions, based upon a bespoke questionnaire, between an external consultant and a selection of internal and external stakeholders. These include the directors, senior managers based both in the UK and elsewhere, external advisers and shareholders. The consultant shared the results of the discussions with the board and facilitated a discussion which identified a number of items which have formed, and will continue to form, part of the board's ongoing agenda.

As a result of this review, the committee structure has been changed this year, disbanding the business committee and replacing it with regular monthly board meetings.

This will be an iterative process which will inform the board's development agenda on a regular basis.

Board committees
The board has three principal committees, all with written terms of reference which are published on the Company's website and which are available on application to the company secretary at the Company's registered office. The company secretary serves as secretary to all three committees. The chairmen of the City, the audit and the remuneration and nomination committees will be available to answer questions at the Company's annual general meeting.

City committee
The City committee comprises the independent 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 City committee held four meetings in the year, each of which was attended by all members of the committee.

Remuneration and nomination committee
The remuneration and nomination committee comprises the independent directors and is chaired by C J Myatt. It meets not less than twice a year and is responsible for making recommendations to the board on remuneration policy for senior executives and all directors (including determining specific remuneration packages, terms of employment and performance incentive arrangements). It is also responsible for nominating, for approval by the board, candidates for appointment to the board, and for vetting and approving the appointment of senior executives. The procedures and guidelines used by the remuneration and nomination committee in determining remuneration are outlined in the separate remuneration report. The remuneration and nomination committee held two meetings in the year, each of which was attended by all members of the committee. The committee meets without the executive directors at least annually to appraise the executive directors' performance.

Audit committee
The audit committee comprises the three independent directors under the chairmanship of A J H Stewart who is a chartered accountant (CA(SA)) and has significant relevant financial and accounting knowledge and experience. The audit committee's terms of reference include monitoring the appropriateness of accounting policies, financial reporting, internal control and risk assessment and keeping under review the scope, results and effectiveness of the external and internal audits and the independence of the Group's external auditors.

The committee reviews the independence of the external auditors by assessing the arrangements for the day to day management of the audit relationship as well as reviewing the auditors' report which describes their procedures for identifying and reporting conflicts of interest. The committee has also established the policy that the external auditors will only be asked to perform services directly related to their audit responsibilities. The Group therefore uses different advisers for both taxation and internal audit services.

During the year, in discharging its duties, the audit committee undertook the following actions:

  • reviewed the 2006 annual report and 2007 interim results;
  • considered the output from the group wide process to identify, evaluate and mitigate risks;
  • reviewed the effectiveness of the Group's internal controls;
  • reviewed and agreed the scope of the audit work undertaken by the auditors;
  • agreed the fees to be paid to the external auditors for the audit of the 2007 annual report;
  • agreed a programme of work for the internal auditors;
  • received reports from the internal auditors on the work performed and management responses to points made in the audit reports.

The committee calls upon the external auditors, the internal auditors and the executive directors to attend formal meetings as required. These meetings are held at least three times a year. The external and internal auditors are given the opportunity to raise any matters or concerns they may have in the absence of the executive directors at separate meetings with the audit committee or its chairman. The audit committee held five meetings during the year, each of which was attended by all members of the committee.

Internal control
Detailed reviews of the performance of the Group's main business activities are included in the business review and the financial review. The board presents these reviews, together with the directors' report, to give a balanced and understandable assessment of the Group'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 document 'Internal Control: Revised Guidance for Directors on the Combined Code', the revised Turnbull guidance, issued in October 2005.

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 finance director, reporting to the board. This review process considers whether significant risks have been identified, evaluated and controlled and whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. 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 external auditors' reports.

The Group has continued its programme of internal audit reviews during the year. The audit committee agrees an annual internal audit plan, focusing 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 revised Turnbull guidance, and is satisfied that it has acted appropriately and in accordance with that guidance. During the course of its review of the system of internal control, the board has not identified nor been advised of any failings or weaknesses which it has determined to be significant. Therefore a confirmation in respect of necessary actions has not been considered appropriate.

Communication with shareholders
The Company encourages two way communication with its institutional and private investors and responds promptly to all queries received verbally, in writing or directly through the 'Talk to Tom' section. The interim and final results are presented publicly to analysts and other meetings with shareholders are arranged as appropriate and these, together with the institutional presentation documents, are also posted simultaneously on the website.

The Company has an established investor relations programme in the course of which the chairman and chief executive and the finance director have regular meetings with major shareholders to update them on the Company's progress and to discuss any issues which investors may have. Any issues arising at such meetings are reported and considered by the board. In addition, the Company's stockbrokers, Bridgewell, obtain shareholder feedback on a confidential basis from major investors following the meetings and this is reported in summary and considered at board meetings.

The Company offers shareholders the opportunity to receive all communication from the Company electronically. Information on how to sign up is available on the Games Workshop website.

Remuneration report
The Company's policy on executive remuneration and details of the executive directors' salaries, annual bonuses and pensions, and fees for the independent directors, are set out in the board report on remuneration.

Statement of compliance with the Combined Code
With the exception of provision A.2.1, the Company has complied throughout the year with the provisions set out in section 1 of the Combined Code.

By order of the board

M Sherwin
Secretary
30 July 2007

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