Corporate Governance

The Board of directors leads and controls the Company by holding at least seven meetings a year at which its current and forecast performance is examined. Regular reports on monthly performance and other matters of importance to the Company and Group ensure that the Board is supplied in a timely manner with the information necessary to make an informed judgement. In addition, the Board holds regular meetings to discuss and devise the Group’s medium-term and long-term strategic focus and management development strategy. Regular informal presentations are given by senior business managers and occasionally by the Group’s advisors in order to advise directors of issues of importance affecting the Group.

In accordance with the provisions of its Articles of Association and with the Code, each director is subject to re-election by the Company’s shareholders at the Annual General Meeting immediately following appointment and at least every three years thereafter.

The Board has a Schedule of Matters specifically reserved to it for decision and has approved the written terms of reference for the various committees to which it has delegated its authority in certain matters. The Schedule makes it clear that all directors have access to the advice and services of the Company Secretary and establishes a procedure for all directors to take independent advice, if necessary, at the Company’s expense. Matters reserved to the Board include the recommendation or approval of dividends, the approval of final and interim financial statements, major financial commitments, the acquisition of companies or businesses, appointments to the Board and its committees, the Group’s future strategy and the Group’s internal controls. This Schedule is kept under regular review.

During the year, the Board was led by John Rennocks, the Chairman. He also served as a member of the Board’s Audit, Remuneration and Nomination Committees. Until 30th April 2008, the Chairman acted solely as a non-executive Chairman. In this role his responsibilities are clearly defined in a written specification agreed by the Board prior to his appointment in 2003. They include the smooth running of the Board, effective communication between executive and non-executive directors and the general progress and long-term development of the Group. His other significant commitments were disclosed to the Board prior to his appointment.

At the end of April 2008, the Board decided to appoint John Rennocks as Chief Executive, in a part-time capacity, whilst also retaining his existing responsibilities as Chairman. This arrangement has continued throughout 2009. On his appointment as Chief Executive the Board considered, and still considers, that this was in the best interests of the Company and the Group, notwithstanding the Board’s recognition that it was not consistent with normally accepted best practice or with provision A 2.1 of the Code.

The other two non-executive and independent directors, Sir Andrew Foster and Roger Dye, have separately commented on the position of the Chairman and Chief Executive in their independent directors’ statement in the Annual Report.

The day-to-day running of the business of the Company and the Group has throughout 2009 been delegated to Mr Rennocks, the Finance Director Mr Martyn Ellis and their management teams.

During the year, the independent non-executive directors who together have extensive business, finance, health and social care backgrounds provided the Board with a breadth of experience and with independent judgement. Roger Dye and Sir Andrew Foster served throughout the year, with Sir Andrew Foster being nominated as the senior independent non-executive director.

The Board considers that its present membership, comprising the Chairman also taking the role of Chief Executive, two independent non-executive directors and one executive director is appropriate at the present time, with a balance of skills and experience appropriate for the requirements of the business. This recognises that in John Rennocks, the Board has a Chairman who remains de facto “independent” (having met the criteria of independence referred to in Provision A 3.1 of the Code on his appointment in October 2003) whilst in the role solely of non-executive Chairman, but who may not be considered so whilst also assuming the role of Acting Chief Executive. The Board has agreed with Mr Rennocks that he will continue in this dual role until approximately 30th June 2010. The Board’s Nomination Committee have initiated a recruitment process for the appointment of a new Chief Executive to take over the role on a full-time basis from Mr Rennocks.

The Board also considers that its policies and procedures are of sufficient strength to ensure that the performance and proceedings of the Company and Group are effectively challenged and controlled.

The Board actively encourages all directors to deepen their knowledge of their roles and responsibilities and to gain a clear understanding of the Group and the environment in which it operates. Newly appointed Board members undergo an induction programme and have received the opportunity to receive formal training. In 2009 the non-executive directors received the opportunity to meet with various members of the Group’s management teams on several occasions. Further training for directors is available and offered as appropriate.

The Board has adopted a formal process for reviewing its own effectiveness and that of its individual members. In addition, regular meetings of the non-executive directors are held without the executive directors, and at least once a year, without the Chairman present, in order to evaluate his performance. This process has been in place throughout 2009. A formal review by the Board of its own effectiveness took place in 2009, combined with assessments of individual directors and assessments by the non-executive directors of the Chairman’s performance.

Both Sir Andrew Foster and Roger Dye meet the criteria of independence as laid down in Provision A 3.1 of the Revised Code.

The Board operates three committees, consisting wholly of the non-executive directors (subject to the current dual role of the Chairman) to which it has delegated certain specific responsibilities and each of which has formally adopted terms of reference. These comprise the Nomination, Audit and Remuneration Committees.

Nomination Committee

The Nomination Committee, which makes recommendations to the Board on the appointment of directors, is chaired by John Rennocks. The Committee draws on the advice of such professional advisors as it considers necessary.

In 2009 the Committee comprised John Rennocks, Roger Dye and Sir Andrew Foster.

The terms of reference of the Nomination Committee are regularly reviewed by the Board.

No additions to the composition of the Board were made during the year, so no formal meetings of the Nomination Committee were held. Nonetheless the members of the Committee continued to discuss and keep under review succession planning and in particular the position of Chief Executive. The process of recruiting a full-time successor as Chief Executive to take over from Mr Rennocks is now underway, a process which will necessitate formal meetings of the Committee as and when appropriate during 2010.

Audit Committee

The Audit Committee is chaired by Roger Dye, a chartered accountant and who was until 31st December 2009 the Chief Executive of the Davis Service Group Plc. It comprises the independent non-executive directors, Mr Dye and Sir Andrew Foster, together with the Chairman John Rennocks. Its terms of reference are regularly reviewed by the Board.

The Committee met three times during the year to review the preliminary full year results announcement and the Annual Report for the year ended 31st December 2008 and interim results for the six months ended 5th July 2009 before they were presented to the Board, to receive reports from the external auditors and to make recommendations to the Board on accounting policies. Its primary duties include the monitoring, on behalf of the Board, of compliance with, and the effectiveness of, the Group’s accounting and internal control systems. The Committee’s duties also include monitoring the scope and results of the Group’s annual audit and the independence, general performance and objectivity of its auditors. Having previously agreed and implemented a procedure for reviewing and assessing its own effectiveness, the Committee carried out such a review in the year. From time to time the Chairman of the Committee also meets informally with the auditors.

The Audit Committee have approved the remuneration and terms of engagement of the Company’s auditors, BDO LLP. Resolutions are to be put to the Annual General Meeting to seek shareholder approval for the appointment of BDO LLP until the next general meeting and to authorise the Audit Committee to determine their remuneration.

Remuneration Committee

The Remuneration Committee’s responsibilities include determining the Group’s overall remuneration strategy and the remuneration packages of the executive directors and other senior executives, after having consulted with the Chief Executive and having received professional advice where appropriate from external remuneration consultants. The Committee is also responsible for approving the grant and exercise of executive long-term incentive arrangements. In determining remuneration policy, the Committee is free to obtain such professional advice as it sees fit, and regularly monitors both the policies of comparator companies and current market practice, in order to ensure that the packages provided are sufficient to attract and retain executive directors of the necessary quality. Any professional advice will be obtained only from remuneration consultants or other specialist advisors who are wholly independent of the Group.

The remuneration of non-executive directors, including the Chairman, is a matter for the Company’s Board and the Committee’s terms of reference make it clear that the framework for the remuneration of the Group’s senior executives (including executive directors) must be agreed by the Board as a whole.

The terms of reference of the Committee are regularly reviewed by the Board.

The Committee met twice in the year.

Sir Andrew Foster acted as Chairman of the Remuneration Committee throughout the year. In 2009 the other members of the Committee were Roger Dye and John Rennocks. The remuneration report prepared by the Remuneration Committee is set out in the Annual Report and discloses the remuneration policy of the Company and the remuneration of the directors.

Short biographies of each of the directors, including their membership of the Board’s committees outlined above, may be found in the Annual Report.

During 2009 there were seven scheduled meetings of the Board, two meetings of sub-committees of the Board, three meetings of the Audit Committee and two meetings of the Remuneration Committee. With the exception of one of the scheduled meetings of the Board, for which Sir Andrew Foster was unfortunately but unavoidably committed elsewhere at short notice, all directors attended all meetings that they were entitled to attend.

The Board, on behalf of the Company and Group, recognises the need to maintain an active dialogue with its shareholders. The Chairman and Finance Director meet regularly with institutional investors and analysts to discuss the Group’s performance and all shareholders have access to the senior non-executive director, who is available to discuss any questions which investors may have in relation to the running of the Group. The Board encourages shareholders to attend the Annual General Meeting and is always willing to answer questions, either in the meeting itself or, more informally, afterwards. In addition, shareholders may contact the Company direct through this website.

The Board also recognises the need to ensure that all directors are fully aware of the views of major shareholders about the Group. Copies of all analysts’ research relating to the Group are circulated to all directors upon publication, monthly analyses of the shareholder register are made available to the Board and written feedback from shareholders and analysts, prepared by the Company’s brokers and public relations advisors, is provided to all directors after every significant corporate event and at least twice a year.

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the operating review within the Annual Report. The financial position of the Group, its cashflows, liquidity and borrowing facilities are described in the financial review.

The directors confirm that, after reviewing the current financial position and cash flows of the Group and of the Company, they have in their opinion a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. This expectation takes into account the current and projected trading and cash flows of the Group in the light of the committed banking facilities available to it. These committed banking facilities were renewed in October 2009, comprising loan, overdraft and other ancillary facilities, committed for a period of four years to October 2013, all on terms satisfactory to the Group, the Company and the directors.

For this reason, the directors continue to adopt the going concern basis in preparing the accounts.

As required by the UK Listing Authority, the Company and the Group have complied throughout the year with the provisions of the Code relating to internal controls, having implemented the procedures necessary to comply with the guidance issued in September 1999 (the Turnbull Committee Report) and to report in line with that guidance.

The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The directors first adopted a revised comprehensive process for managing, evaluating and reporting on significant risks faced by the Group in 1999. This process has been constantly reviewed and revised in subsequent years, including 2009. The revised (and further refined and extended) process has been in place for the whole of 2009 and up to the date of approval of the Annual Report and Accounts.

The key elements of the system operated by the Group to identify, evaluate and manage significant risks include the following:

• The Group’s management operates a formal process for identifying, managing and reporting on operational, clinical and financial risks faced by each of the Group’s businesses, whereby each of the risks identified is reviewed in detail by the executive directors on a semi-annual basis. Senior management team review meetings are held on at least a monthly basis at which the Group’s business managers and executive team members report on the progress of the companies or discipline for which they are responsible and share best practice. The formal process for identifying discipline-specific risks across the Group’s operations encompasses financial, IT, human resources, legal, property and clinical risks. A mechanism also exists to extend the Group’s formal risk management processes to any significant new business acquired or begun by the Group immediately upon acquisition or start-up. In this way, the Board is able to confirm that the necessary process has been operated by the Group for the whole of 2009.
• The Audit Committee of the Board reviews a register compiled by the managing director of each of the Group’s businesses and registers compiled by certain members of the Group’s senior management team, summarising the significant risks faced by the businesses or the Group as a whole, the likelihood of those risks occurring and the steps being taken to minimise or otherwise manage those risks.
• In 2004, the Board took steps better to align its risk management processes with the operational imperatives of the businesses by adopting a risk management process that assists the Group’s operational management to identify developing trends at an early stage. This has been used throughout 2009.
• Risk management processes are extended to all aspects of the financial reporting process, both internal and external, including the processes for preparation of consolidated Group accounts.

As required by the Turnbull Guidance, the Board has carried out an annual assessment of the effectiveness of the system of internal controls. The processes applied by the Board include:

• At the end of the year, the managing directors of each of the Group’s businesses, including the Group’s corporate resource, are required to complete and sign a register of the key financial and operational risks facing the business for which they are responsible and to confirm that they have complied throughout the year with the Group’s policies and procedures on risk management. From these registers, a report identifying the key risks faced by the Group is compiled and signed by the Chief Executive, Finance Director and Company Secretary, who are also required to confirm their compliance with such procedures and policies. This report and the annual compliance statements of each of the managing directors are reviewed by the Board before the Annual Report and Accounts are approved.
• At each meeting the Audit Committee reviews reports of the senior management team and external auditors, on any issues identified as having a potentially substantial impact on the results of the Group, or areas of control weakness.
• The Audit Committee reviews the effectiveness of the Group’s system of managing financial risk and refers any risks it considers significant to the Board for its consideration.
• At least twice a year, the Audit Committee reviews the work plans and results of the external auditors.
• The Audit Committee Chairman reports the outcome of all Audit Committee meetings to the Board, which also receives minutes of all such meetings.

An internal audit function does not currently exist within the Group. The Audit Committee are satisfied that this is appropriate given the extent and rigour of the financial and operational controls in place but intend nonetheless to keep it under regular review.

The Group operates two comprehensive whistleblowing policies, in respect of clinical issues and general operational and financial matters.