For the Year ended 31 October 2007The Company fully supports the principles of corporate governance contained in the Combined Code on Good Governance issued by the Financial Reporting Council in 2006 (‘the Combined Code’).
Except as stated in the section on Dialogue with Shareholders, the Company has, throughout the year, been in compliance with the Code Provisions set out in Section 1 of the Combined Code and has applied the principles set out in Section 1 of the Combined Code. An explanation of how the principles have been applied is set out below and in the Remuneration Report and the Audit Committee report.
Board of Directors
The Board comprises the Chairman, five Non-Executive Directors and four Executive Directors. The roles of Chairman and Group Managing Director are defined and separate. The division of responsibilities between the Chairman and Managing Director is clearly established, set out in writing and agreed by the Board.
The Board has a balance of Executive and Non-Executive Directors, which enables it to provide effective leadership and control of the Company and its subsidiaries. It also ensures that the decision making process cannot be dominated by any individual or small group of individuals.
All of the Non-Executive Directors are considered to be independent of management and free from any business or other relationship which affects their independent judgement. Mr Smith is the Senior Independent Non-Executive Director. Mr Ruffles will take over this role with effect from 19 March 2008.
The Board believes that to be judged independent each director should be impartial and free from any relationship or connection which could affect their ability to discharge their responsibilities impartially and objectively. In addition, each director should in practice have demonstrated a scrupulously independent approach by conducting himself impartially in all matters relating to the Group, challenging the views of management and other Board members and by showing a willingness and ability to defend his
own views.
On the basis of these criteria, the Board has determined that each of the Non-Executive Directors is independent. In reaching this conclusion the Board has considered the factors identified in Combined Code provision A.3.1. The only one of these factors relevant in Domino’s case is length of service. Mr Smith joined the Board in 1986 and Mr Jensen and Mr Everitt joined in 1997. The Board believes that no connection or relationship has arisen from this period of service which impairs the directors’ independence. Each director has continued to demonstrate objectivity and impartiality and has consistently subjected decisions and proposals to rigorous review. The annual appraisal process has confirmed that each of these directors remains a very effective member of the Board. Mr Everitt and Mr Jensen have announced their intention to stand down from the Board at the Annual General Meeting and the Board is in the process of selecting another independent Non-Executive Director. It is expected that the new director will join the Audit, Remuneration and Nomination Committees. Terms of appointment and time commitment
The terms of appointment of the Non-Executive Directors can be viewed on the Company’s website or are available from the Company Secretary. The Non-Executive Directors are expected to spend 20 days per year on Domino business. This comprises approximately 10 days per year attending Board and committee meetings and the remainder spent in preparation and in providing advice and assistance.
Activities of the Board and attendance
The Board met eight times during the year to consider operational, financial and strategic matters. All directors attended each Board meeting. There is a formal schedule of matters specifically reserved for the Board’s decision. The Chairman periodically meets with the Non-Executive Directors without the Executive Directors being present. In broad terms, the Board is responsible for creating and maintaining the framework within which the Company operates. It sets the Company’s strategy, objectives and policies and approves operating and capital expenditure budgets and material initiatives and commitments. The executive managers are responsible for the decisions necessary to implement such strategies, policies and initiatives.
Each director regularly receives detailed written reports on the performance of the Group, future plans and any significant issues facing the business. Standard formats have been developed for these reports to ensure key facts are readily ascertainable. In addition, senior management give presentations to the Board on matters requiring Board approval or on topics that the Board selects. For example, the Board received presentations on specific development projects and acquisition proposals. One meeting a year is generally held at an overseas subsidiary and this year the Board visited the recently acquired companies Easyprint A/S and Mectec Elektronic AB. It uses such visits to meet local employees and to gain a fuller understanding of issues faced throughout the business. One meeting during the year is scheduled over two days and set aside to consider strategic issues. Independent legal advice
There is a procedure in place for directors to take independent professional advice at the Company’s expense if this is necessary in connection with their duties.
Directors’ insurance and indemnity arrangements
The Company has purchased and maintained throughout the year directors’ and officers’ liability insurance. The directors also have the benefit of the indemnity provision contained in the Company’s Articles of Association.
Re-election
All directors are subject to election by shareholders at the first Annual General Meeting after their appointment and one third of the directors retire by rotation at each Annual General Meeting. In recent years each director has retired each year and stood for re-election. The Board has now decided to revert to one third of the directors retiring by rotation at each Annual General Meeting in accordance with the Articles of Association. The Non-Executive Directors were appointed for specified terms subject to re-election and to Companies Act provisions relating to the removal of a director.
Appointment of new directors
There is a formal and transparent procedure for the appointment of new directors to the Board, which is described in the Nomination Committee section.
Board committees
The Board has three standing committees:
Audit Committee
Members: C M G Wrightson (Committee Chairman) (appointed 1 February 2007), W H Everitt, P C Ruffles, P S Jensen and J L Smith (Mr Smith was Chairman of the committee until 1 February 2007. He has announced his intention to step down from the Committee with effect from 19 March 2008). Mr Byrom attends Audit Committee meetings by invitation and the Executive Directors are also invited to attend.
Each year the Committee makes an assessment of the qualifications, expertise, resource and independence of the Company’s auditors. This assessment is based upon reports produced by the auditors, the Committee’s own dealings with the auditors and feedback from the Executive team.
Prior to the commencement of each audit, the auditors present a proposal to the Committee detailing how the audit will be conducted and the fees payable. The Committee reviews the proposal with senior representatives of the auditors.
The Committee meets with the auditors to consider the interim and full year financial statements and to review a report by the auditors on any issues raised by the audit. The Committee met once during the year with the auditors without members of the Executive team being present.
The independence and objectivity of the auditors is regularly considered by the Committee. The Committee receives an annual statement from the auditors detailing their independence policies and safeguards and confirming their independence. The Committee ensures that an audit partner rotation policy is operated and reviews the relationship between auditor and management to see if this has the potential to affect independence.
The Committee monitors the fees paid to the auditors in respect of non-audit work. As a matter of policy, the only non-audit work which the auditors may undertake is tax compliance and acquisition due diligence. The Committee considers that it is cost effective to use the auditors for such work and that the amount and nature of such work does not impair the independence and objectivity of the auditors. Specific Audit Committee approval is required to engage the auditors to provide any other type of non-audit work. The Committee would only give approval if it was satisfied that it would be beneficial to use the auditors and the nature and extent of the work would not impair auditor independence.
The Committee reviews the scope and effectiveness of systems to identify and address both financial and non-financial risk. Detailed presentations on risk control issues are made to the full Board. The Committee is responsible for reviewing ‘whistleblowing’ procedures.
The Committee reviews the internal audit programme with the Group Financial Controller who has responsibility for the programme. The Audit Committee has access to all internal audit reports and the Group Financial Controller has a direct reporting line to the Audit Committee Chairman on any issue relating to internal audits. The Committee met three times during the year.
Nomination Committee
Members: P J Byrom (Committee Chairman), J L Smith, W H Everitt, P C Ruffles, P S Jensen, N R Bond and C M G Wrightson (appointed 1 February 2007).
The Committee is responsible for identifying and recommending suitable candidates for appointment to the Board. There is a formal and transparent procedure for appointments to the Board. Under this procedure, a job specification is drawn up and a recruitment consultancy engaged to identify suitable candidates. Candidates are assessed against the job specification and selected candidates are interviewed by members of the Nomination Committee and other directors and senior managers. The final appointment decision is made by the Board.
The Committee considers succession planning for appointments to the Board and keeps under review the leadership needs of the Company.
The Committee advises the Board on the reappointment of Non-Executive Directors and the independence of such directors. It also reviews the structure, size, composition and performance of the Board and its committees and makes recommendations to the Board regarding such matters. The Committee has recommended the appointment of an additional Non-Executive Director. This recommendation has been accepted by the Board and a recruitment process is under way. The Committee met four times during the year.
Remuneration Committee
Details of the Remuneration Committee are given in the separate Board Report on Remuneration set out on pages 20 to 23 of the annual report.
Committee meeting attendance
All Committee members attended each committee meeting.
Committee terms of reference
The terms of reference for the Remuneration, Nomination and Audit Committees can be viewed on the Company’s website or copies obtained from the Company Secretary.
Performance evaluation
The Nomination Committee met during the year to appraise the performance of the Board and its committees and to make recommendations to the Board. The appraisal took the form of an assessment against a detailed list of issues. The list covered a variety of matters ranging from the alignment of strategic objectives to administrative arrangements for Board meetings.
The Chairman appraised the performance of the individual Board members in conjunction with the Managing Director where appropriate. The Non-Executive Directors met without the Chairman being present to appraise the performance of the Chairman.
These appraisals had regard to the issues raised in the Performance Evaluation Guidance contained in the Higgs Report.
Internal controls
The directors acknowledge their overall responsibility for the system of internal control and for reviewing its effectiveness. They have established a system that is designed to provide reasonable but not absolute assurance against material misstatement or loss and to manage rather than eliminate the risk of failure to achieve business objectives. There is an ongoing process for identifying, evaluating
and managing the key risks faced by the Group that has been in place for the year under review and up to the date of the approval of the annual report. The process is regularly reviewed by the Board and accords with the Revised Turnbull guidance. Steps continue to be taken to embed internal control further into the operations of the business and to deal with any issues that come to the Board’s attention. The directors have reviewed the effectiveness of the system of internal control.
Financial control
The key internal financial controls that were in operation during the year were:
Financial reporting – all operating units complete formal business plans for the year. Each month, the unit produces written reports in a defined format on its performance against these plans and provides updated business forecasts. The reports and forecasts are reviewed by the Executive Directors and significant issues are reported to the Board. Accounting policies and procedures – detailed accounting policies and procedures are in place. Written confirmation of compliance with the policies and procedures is obtained from local management. There is a formal internal audit process to verify the application
of Group policies and procedures and to confirm that there is an effective process of management and control within the business.
Internal audits are carried out by suitably qualified and experienced staff who have no current connection with the operation being audited. It is the objective of the internal audit programme to audit each active Domino Company at least once every two years. Security of the Group’s computer systems – the operation of the Group relies on financial and management information processed by, and stored on, computer systems. Controls and procedures have been established to protect the security and integrity of data held on these systems, with standby arrangements in the event of computer failure for the major systems.
Treasury – the Treasury function operates under specific guidelines set down by the Board and regular reports are made to the Board.
Capital investment – the Company has defined procedures for the review and control of capital expenditure.
Operational controls
All Domino businesses are required to operate in accordance with detailed, documented standards and procedures which cover all material aspects of their operations. Compliance with these standards is assessed by internal and external review.
Compliance
The Company has a Group policy on standards of conduct and business ethics with which all employees are required to comply. There is a detailed schedule of delegated authority designed to ensure that all material transactions are considered at the appropriate level within the Group and are subject to review by the head office legal department. All subsidiaries have access to local lawyers and the head office legal department.
Risk management
There is a risk management sub-committee chaired by Andrew Herbert, the Group Finance Director, which has been set up to ensure greater focus on risk management and in particular, the implementation of control measures. The sub-committee is required to meet at least quarterly and in practice meets more frequently. The role of the sub-committee is to:
- promote effective identification and management of risk throughout the Group
- maintain a risk register identifying significant risks, risk control measures and responsibility for control measures
- review and confirm that all significant risks have been identified and suitable control measures adopted
- monitor implementation of risk control measures for all significant risks
- ensure all subsidiaries operate an effective risk management process
A senior manager is given responsibility for devising and implementing control measures for each significant risk. The manager is required to provide a quarterly report to the sub-committee on the status of implementation of control measures to manage that risk and also to give an annual presentation to the sub-committee. The sub-committee reports to the Executive Management Committee which in turn reports to the Board. A formal risk management review of each subsidiary is conducted as part of the internal audit programme. Monthly reports to the Executive Directors submitted by subsidiaries and business units cover risk control issues relevant to the particular subsidiary or business unit.
Dialogue with shareholders
The Company actively seeks to enter into dialogue with institutional shareholders and holds regular meetings with them. In order to assist Non-Executive Directors to develop an understanding of the views of major shareholders, reports are made of meetings with such shareholders. The Company also uses the Annual General Meeting as an opportunity for communication with private shareholders. Mr Smith, the Senior Independent Director throughout the year, has not attended meetings with a range of major shareholders as suggested by the Combined Code provision D.I.I. The Board considers that Mr Smith has a good understanding of the issues and concerns of major shareholders and such attendance is unnecessary.
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