"The Board's role in such a period of change has been particularly important with robust corporate governance supporting the transition."
Dear fellow shareholder
On behalf of the Board, I am pleased to present our corporate governance reports for 2015.
This year the business has gone through a very significant period of change with the appointment of our new Group Chief Executive. The Board's role in such a period of change has been particularly important with robust corporate governance supporting the transition. Further details can be found in the Nomination Committee report.
The Company and the Group are committed to high standards of corporate governance and the Board is accountable to the Company's shareholders and actively engages in two-way communication with them. During the year we held numerous face-to-face meetings, hosted site visits and invited shareholders to presentations on both the Group's ﬁnancial results and elements of its strategy. I also had several meetings with shareholders about management succession.
As a UK listed company, we are required to explain how we have applied the main principles set out in the UK Corporate Governance Code (Code) and whether the relevant provisions have been complied with throughout the ﬁnancial year. This report explains how we have applied the Code during the year and conﬁrms our compliance.
During the last financial year we conducted our first externally facilitated Board evaluation. This year we have carried out an internal evaluation which was built upon the findings of last year's. The results and recommendations of this year's evaluation are discussed in detail later in this report, as well as progress made on last year's external evaluation.
Executive remuneration has been a topic of considerable interest again over the year with the new regulations coming into play for the first time. The Remuneration Committee has been busy reviewing the consequent evolution of market practice and considering the implications for implementation of our policy. The Directors' Remuneration Report sets out in detail the Company's approach.
21 May 2015
"The Company and the Group are committed to high standards of corporate governance and the Board is accountable to the Company's shareholders and actively engages in two-way communication"
Throughout the year, the Board has reviewed the Group's strategy and plans for delivering our key strategic priorities. Regular discussions have taken place with senior management monitoring progress against the strategic and budgetary targets. Full details of our key strategic priorities can be found in the Strategic Report. On an ongoing basis as well as tracking progress against the strategic KPIs, the Board approves investment proposals and significant capital expenditure. Previous strategic investment proposals are reviewed, to consider whether they delivered on their anticipated benefits and to establish any learnings from the relevant projects. The Board has also received updates on competitor results as well as general developments in the market. To enhance the Board members knowledge of the business, they visited the German business in September, and in January they visited one of the Group's operational sites in the UK. During these visits they met with the management teams, had a demonstration from a key supplier and presentations on global inventory planning and eCommerce.
The Board reviewed and signed off on the 2014 Annual Report and Accounts and the Half-year financial report for the year under review, including discussion and approval of the relevant final and interim dividends. The Board receives monthly updates on the financial performance of the Group, approves the annual budget, monitors progress on the strategic five-year plan and the reforecasts during the year. The Board reviewed the investment strategy and recovery plan for the Defined Benefit pension plan, and has reviewed and agreed the ongoing bank and loan refinancing programme.
The Board engaged with smaller shareholders at the 2014 Annual General Meeting (AGM) held in July, and during the year the Executive Directors had face-to-face meetings and calls with institutional shareholders and analysts in the UK, North America and Europe. Further details can be found in Relations with shareholders. The Board regularly reviews reports that contain investor feedback from institutional investors, compiled by the Company's brokers. This included a detailed review of investor feedback, perceptions and a review of the shape of the existing shareholder register.
Following last year's externally facilitated evaluation of its effectiveness, the Board carried out an internal review this year, of itself, its committees and individual members. Further details are given in the Board evaluation. It considered updates on a number of areas including the management of inside information, corporate governance and competition law risk. On a quarterly basis the Board considers Group health and safety, and receives reports on any grievances raised across the Group together with a summary of the themes arising from the whistleblowing process (Speak Up).
During the year the Board has undertaken its annual full Group Risk Review and has also considered more specific and detailed risk reviews such as the Group's approach to managing export controls, IT system dependencies and risk in relation to competition law. The Board has been updated on the ever changing nature of cyber risk and what actions are being taken to manage this risk. Looking forward, the Board has reviewed a register of principal risks affecting the Group.
UK Corporate Governance Code
During the year ended 31 March 2015, the Company has been subject to the provisions of the Code published in September 2012. The Code is publicly available at www.frc.org.uk. There are ﬁve main principles of the Code covering:
- Relations with shareholders
The sections within this Directors' report explain how these principles have been applied.
The information required by the Code on Directors' accountability, our process for the appointment of Directors (including our approach to diversity) and our report on Directors' remuneration, can be found in the following sections:
During the year ended 31 March 2015, the Directors consider that the Company complied throughout the accounting period with all the relevant provisions set out in the Code.
Role, effectiveness and composition
The Board is collectively responsible for promoting the long-term success of the Company. The Board has carefully considered the guidance criteria regarding the composition of the Board under the Code. In the opinion of the Board, the Chairman and all the Non-Executive Directors bring independence of judgement and character, a wealth of experience and knowledge, the appropriate balance of skills, and assign sufﬁcient time to enable them to effectively carry out their responsibilities and duties to the Board and to the committees on which they sit. They are sufﬁciently independent of management and are free from any other circumstances or relationships that could interfere with the exercise of their judgement.
Biographical details of the Directors standing for election or re-election at the forthcoming AGM are set out on the Board of Directors page and in the Notice of Meeting. These set out their skills and experience, together with details of their membership of Board committees. Details of the Board's composition, tenure and international experience are also shown on these pages.
The Board has a formal schedule of matters reserved for its approval which includes responsibility for:
- The approval of the Group strategy and its budgetary and business plans
- The review and approval of major investment proposals and capital expenditure
- The approval of annual and half-year results and trading updates
- The approval of the Group's dividend policy and the payment and recommendation of interim and ﬁnal dividends
- The review and approval of Group tax strategy
- Ensuring and maintaining the Group's systems of risk management, internal control and corporate governance
- Reviewing health and safety policy and its effectiveness
- Discussing and agreeing strategic plans
- On the advice of the Nomination Committee, reviewing succession plans for the Board and senior management
- Evaluating Group and subsidiary performance and reviewing forecasts
The Board is fully committed to diversity of gender, race and nationality and ensures it considers candidates from all such backgrounds when appointing new Board members. Further details of our approach to diversity in relation to appointments at Board level can be found in the Our people section and the Nomination Committee report.
The Board has a number of standing committees consisting of certain Directors and, in the case of the GEC and Treasury Committee, certain senior managers to whom speciﬁc responsibilities have been delegated, and for which written terms of reference have been agreed. These terms of reference are available for inspection on the Company's website. Board members receive minutes of meetings of all of its committees, where appropriate, and can request presentations or reports on areas of interest.
The performance of the Audit, Nomination and Remuneration Committees are assessed annually as part of the evaluation process described below. Further details of the work, composition, role and responsibilities of the Audit, Remuneration and Nomination Committees are provided in:
Effective division of responsibilities and Board operation
The roles of Chairman and Group Chief Executive are held by different individuals. The division of responsibilities between the Chairman and Group Chief Executive has been clearly established; their responsibilities are set out in writing and have been agreed by the Board.
Responsible for leadership of the Board and ensuring its effectiveness across all aspects of its role, setting its agenda to ensure adequate discussion of all items of business and promoting openness and debate. The Chairman facilitates constructive relations between Non-Executive and Executive Directors and holds meetings with Non-Executive Directors without Executives being present. The Chairman also ensures all Directors receive accurate, timely and clear information and is responsible for effective communication between the Board and its shareholders.
Senior Independent Director
Responsible for chairing the meeting of Non-Executive Directors for the purpose of evaluating the Chairman's performance. The Senior Independent Director also provides an alternative communication channel for shareholders, and other Directors if required, as well as providing a sounding board for the Chairman.
Group Finance Director
Maintains strong financial management and implements effective financial controls as well as developing the Group's financial policies and strategies including debt finance management and advising on capital structure. Ensures a commercial focus across all business activities, the appropriateness of risk management as well as supporting and advising the Group Chief Executive and maintaining effective communications with shareholders and investors.
Group Chief Executive
Responsible for the Group on a day-to-day basis. Accountable to the Board for the operational performance of the Group. Responsible for the development of strategy and its presentation to the Board, the implementation of the agreed Group strategy and the achievement of its agreed objectives and its communication within the business and with shareholders and the investment community. Executive management, including leadership of the executive team, ensuring robust management succession plans are in place and discussed with the Board and championing health and safety, risk, corporate responsibility and environmental matters.
Responsible for upholding high standards of integrity and probity. Constructively challenge regarding strategy, performance of management and also satisfy themselves on the integrity of ﬁnancial information and controls and systems of risk management. In doing so, they take into account the views of shareholders and other stakeholders.
Ensures efficient information flows within the Board and its committees and between Executive Directors and Non-Executive Directors, as well as acting as Secretary to the Board and its committees. Supports and advises the Chairman on various matters including succession planning. Facilitates the induction of new directors and assists with training and development needs as required. Ensures compliance with Board procedures, corporate governance matters, statute and regulatory regimes affecting the Group, and updates the Board on these. Co-ordination of Board evaluations including presenting the findings and recommending actions.
Information and development
Training and induction
Directors are encouraged to update and refresh their skills, knowledge and familiarity with the Group by attending external seminars and brieﬁngs, through participation at meetings and through visits to operating units, both in the UK and overseas, as well as by receiving presentations from senior management. This is in addition to the access that every Director has to the Company Secretary.
Board committees and Directors are given access to independent professional advice at the Group's expense if they deem it necessary in order for them to carry out their responsibilities. Specific training provided to the Board during the year included share dealing requirements and processes for the management of inside information procedures, competition law risk and an update regarding corporate governance matters.
A tailored induction programme is provided for each new Director. Further details of our induction programme can be found in the Nomination Committee report.
Directors receive a pack of relevant and timely information on the matters to be discussed at each meeting. The Board uses a third-party Board portal which enables faster and more secure distribution of information whilst avoiding the need to circulate paper copies, minimising our effect on the environment. The Company Secretary ensures good information flows within the Board and its committees and between executive management and Non-Executive Directors.
At each Board meeting:
- The Group Chief Executive presents a comprehensive update on the business issues across the Group
- The Group Finance Director presents a detailed analysis of the ﬁnancial performance, as well as reports on investor relations and feedback from investors
- GEC members and other senior managers attend relevant parts of Board meetings in order to make presentations on their areas of responsibility, providing updates on developments and changes to the business
- The Strategic Dashboard is included to provide an update on progress on the Group's strategic objectives
- The Company Secretary presents a report on key regulatory and legal issues that affect the Group
Between Board meetings, Directors also meet with GEC members and are provided with information in a timely manner on matters affecting the business as and when relevant.
The table below sets out the number of meetings of the Board and of the Audit, Remuneration and Nomination Committees during the year and individual attendance by the relevant members at these meetings, demonstrating commitment to their role as Directors of the Company. The Board normally meets seven times per year and supplementary meetings of the Board are held as and when necessary.
Audit Committee (scheduled)
|Number of meetings held during the year||73||4||33||6|
(The maximum number of meetings held during the year that each Director could attend is shown in brackets)
- Ian Mason stood down as Group Chief Executive with effect from 31 March 2015.
- Adrian Auer resigned as a Non-Executive Director with effect from 30 June 2014.
- Unscheduled Board and Remuneration Committee meetings were held during the year in relation to the change of Group Chief Executive.
The Board recognises the beneﬁt of an external evaluation which it believes provides fresh insight and objectivity to its committees and Directors, enabling it to improve its leadership, effectiveness and focus. We aim to carry out externally facilitated evaluations every two or three years.
Following last year's external evaluation, we have this year carried out an internal evaluation which was co-ordinated by the Company Secretary. Initial discussions between the Chairman and the Company Secretary were held to discuss the design of the questionnaire and what the Board was seeking to achieve from the evaluation.
The aim of the questionnaire sent to Board members was to gain views on certain key corporate governance areas and to give members an opportunity to say candidly what they thought, including what was being done well and what needed to be improved. Views were also sought on the Chairman and Senior Independent Director (SID) and also the workings of the committees of the Board.
The questionnaire included issues such as:
- Balance of skills and experience
- Effectiveness of meetings and team dynamics
- Development and performance against strategy
- Succession planning
- Risk management
- Training and development
The responses to the questionnaires were collated by the Company Secretary who prepared reports for the Chairman and the Chairman of each committee. These reports were then reviewed and discussed by the Board and each of the committees as appropriate.
The results of this year's internal evaluation were again positive with good levels of engagement. Board members agreed that meetings worked well, that the right topics were being discussed and believe that clear strategic targets are being properly tracked and reported against. It was also acknowledged that the risk process was working well with positive discussions during the year around key areas such as cyber risk, export controls and IT disaster recovery. The Board discussed the results of feedback for the Chairman and SID and overall the feedback was positive.
The Chairman also held one-to-one meetings with each of the Directors individually covering the themes outlined above, the dynamics of the Board, and the training and development needs of the Directors, as well as any other areas of concern.
Outputs from last year's external evaluation
As a result of last year's external evaluation, the Board now receives regular updates on the seven strategic priorities as part of its annual timetable, including an update on competitors, with a Strategic Dashboard being discussed at each meeting. The Nomination Committee has met more frequently during the year to discuss Board succession plans and recruitment, taking into account the need for more diversity at Board level. The Board met with members of the senior management team to assess available talent within the Group.
Outputs from this year's internal evaluation
The Board agreed there should be greater discussion around succession plans for both the GEC and senior management. Succession planning contingencies should be discussed including, in a period of change of the Group Chief Executive, the prioritisation of short-term issues, as well as the longer-term questions (such as the development of change capability around the business). The Board will continue to focus on the competitor landscape, looking at the different business models and marketplace developments in more detail.
The Chairman discussed and agreed the scope of the evaluation with the Company Secretary.
The Company Secretary prepared a questionnaire which was sent to Board members for completion.
The Company Secretary prepared reports of the findings from the review identifying strengths, challenges and priorities. A number of recommendations were also included for discussion by the Board and each of its committees.
The reports of the findings and recommendations were discussed by the Board, and each of its committees, agreeing any relevant actions for the year ahead.
The Code requires all Directors to retire and stand for re-election at each Annual General Meeting (AGM). The Company complies with the Code requirement in this respect.
The Board has a broad range of skills and experience and works together effectively as evidenced throughout this Annual Report and Accounts. The Board, following its evaluation process, also considers that the performance of all the Directors continues to be effective and demonstrates commitment to their role and therefore recommends their re-election.
Further details of each Director standing for election and re-election are provided in Board of Directors and details of their attendance at Board and committee meetings are given in the Board meetings table.
Internal control and risk management
The Board is responsible for the effectiveness of the Group's system of internal control, which has been designed and implemented to meet the particular requirements of the Group and the risks to which it is exposed. The Group has an established and ongoing process of risk management and internal control, which has continued throughout the year under review and up to the date of approval of the Annual Report and Accounts.
In accordance with the requirements of the Code and the recommendations of the Turnbull Review Group on internal control, the Audit Committee has regularly reviewed the effectiveness of the Group's system of internal control and risk management and reported the results to the Board. These reviews covered material controls, including ﬁnancial, operational and compliance controls and risk management systems. Further details of this process are given in the Audit Committee report and the Strategic Report.
The Group's internal control system can provide reasonable but not absolute assurance against material misstatement or loss.
In its review of the ﬁnancial statements for the year ended 31 March 2015, the Audit Committee also considered analysis to support the going concern judgement.
The Group's activities, strategy and performance are discussed in the Chairman's introduction, Our strategy and the Business and financial review.
Further details on the ﬁnancial performance, ﬁnancial position and cash ﬂows of the Group are discussed in the Business and financial review.
Note 21 of the consolidated ﬁnancial statements provides details of the Group's debt maturity proﬁle, capital management policy, hedging activities and ﬁnancial instruments and its exposures to interest rate and foreign currency risks.
The Group is cash generative, as evidenced by its cash ﬂow performance, with free cash ﬂow representing 69.7% of proﬁt after tax for the year ended 31 March 2015. Management reviews its actual and forecast cash ﬂows each month to ensure that sufﬁcient facilities are in place to meet the Group's requirements.
At 31 March 2015, the Group's net debt was £152.6 million with total committed debt and loan facilities of £263.4 million and undrawn committed facilities of £105.3 million.
The Group's main sources of ﬁnance are a syndicated multi-currency facility from eight banks totalling £172 million into three tranches of US$75 million, £85 million and €50 million maturing in August 2019, and US$150 million of Private Placement (PP) notes, split US$65 million maturing June 2015 and US$85 million maturing June 2017. With the repayment of the US$65 million PP notes in June 2015, the Group has agreed to issue US$100 million of fixed rate five year PP notes with completion dates in June 2015, subject to satisfaction of customary closing conditions. These notes will be due for repayment in June 2020.
Compliance with the Group's banking covenants is monitored monthly and sensitivity analyses are periodically applied to forecasts to assess their impact on covenants and net debt. At 31 March 2015 there was signiﬁcant headroom between the Group's ﬁnancial position and its banking covenants; it is expected that such covenants will continue to be complied with for the foreseeable future.
The Group has sufﬁcient ﬁnancial resources, a large and geographically spread customer base and strong supplier relationships. Therefore, the Directors believe that the Group is well placed to manage its business risks successfully.
The Directors, having made appropriate enquiries, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Group's accounts.
The Directors conﬁrm that this statement has been prepared in accordance with Going Concern and Liquidity Risk: Guidance of UK Companies 2009, published by the Financial Reporting Council in October 2009.
Relations with shareholders
The Company encourages two-way communication with both institutional and private investors. The Annual Report and Accounts is sent to all shareholders who wish to receive a copy. It is also available on the Company's website, www.electrocomponents.com, which additionally contains up-to-date information on the Group's activities and published ﬁnancial results and presentations.
The Board ensures that regular and useful dialogue is maintained with shareholders and the Annual General Meeting is used as an additional opportunity for the Chairman and other Board members to meet with shareholders and investors and give them the opportunity to ask questions. Final voting results are published through a Regulatory Information Service and on the Company's website following the meeting.
Executive Directors have frequent discussions with institutional shareholders on a range of issues affecting the Group's performance, which include meetings following the announcements of the annual and interim results. At these meetings the Executive Directors meet with major shareholders to discuss performance, strategy and governance. During the year, the Chairman and the Chairman of the Remuneration Committee had face-to-face meetings and calls with shareholders, and the SID and Non-Executive Directors were available for discussions if required.
The Group Finance Director regularly reports to the Board on investor relations, including reports compiled by the Company's brokers and containing feedback from institutional shareholders. This ensures that the views of shareholders are communicated to the Board.
Investor relations activity during the year included:
- Face-to-face meetings and telephone briefings for analysts and investors in the UK, US and Europe, covering the vast majority of shareholdings
- Face-to-face presentation of the full-year results and audio webcast of the half-year results
- Recorded webcasts and presentations are available on the corporate website; video interviews with the Group Chief Executive and the Group Finance Director are also available on the corporate website
- Investor roadshows held in the UK, US and Europe
- Investor site visits to distribution centres in the UK
- Participation in broker conferences across the world
- Launch of a 'responsive' version of the corporate website (automatically adapts to the screen size of the viewing device) and updated for iPad and iPhone apps
- Annual General Meeting where each member of the Board is available to answer questions
- Several meetings between the Chairman and shareholders about management succession