Corporate Governance Report

Directors' Report: Corporate Governance

The Board recognises its accountability to Shareholders and is committed to maintaining high standards of corporate governance. In the opinion of the Directors, the Company has complied with the UK Corporate Governance Code (the “Code”) throughout the period under review except in respect of the composition of its Audit Committee. For the majority of the year the Audit Committee consisted of three independent Non-Executive directors, in line with the Code. However, from the date of Malcolm Diamond’s retirement until the appointment of Dr Chris Richards (a period of less than four weeks) the Audit Committee consisted of only two independent Non-Executive Directors. It should be noted that the Audit Committee did not meet during this period.

The Board has discussed the various changes which have been recommended by the Code, in particular the recommendations relating to the annual re-election of directors and the externally facilitated evaluation of the Board every three years. As the Company is no longer a constituent member of the FTSE 350 it does not need to comply with these two new recommendations; however the Board will always seek to comply with the Code where it determines that to do so would be beneficial to the Company and its stakeholders. In relation to the annual re-election of all directors, the Board concluded that given the changes to the board composition over the past 18 months (i.e. one Non-Executive retiring and the appointment of two new Non-Executives) it would not be conducive to the effective management of the development of the Company’s strategy to comply with the recommendation for annual re-election this year. The Board will however keep the matter under review during the forthcoming year. In respect of the recommendation for an externally facilitated evaluation of the Board every three years, the Board has reassessed its current evaluation process and a number of changes have been made. However, a decision has been taken that an external evaluation will not be carried out this year; this decision will be reviewed annually. Further detail in respect of these decisions is provided below.
 

Application of the Principles of the Combined Code

The Code sets out the main and supporting principles of good governance for companies. The following report details how the Company has applied the principles of the Code to its activities.

Directors

The Board

The Board is collectively responsible for the success of the Company and provides entrepreneurial leadership within an embedded framework which allows for the ongoing assessment and management of risk. There is a formal schedule of matters reserved to the Board, which covers areas such as strategy, corporate structure, financial reporting and controls, approval of material contracts, internal controls, corporate governance and delegation of authority. The schedule was reviewed during the 2010/2011 financial year and updated in line with best practice guidelines. In addition the Board focused on the existing financial controls imposed on executives to ensure that these were at the requisite levels so as not to hinder day-to-day administration of the business but to ensure adequate internal control. The Board has also begun a review of the delegated authorities within the businesses, and as a matter of best practice the schedule of matters and delegated authorities will be reviewed on an annual basis.

At least one week prior to all board meetings an agenda and supporting documentation is circulated to the Board. Every meeting agenda comprises reports from the following individuals:
• Chief Executive;
• Group Finance Director;
• Managing Director of each Business Unit;
• Group HR Director; and
• Product and Regulatory Affairs Director.

In addition, twice a year the Board receives detailed health, safety and environmental reviews encompassing the UK, European and US businesses plus activities of the Transport Risk and Sustainability Committees. Three times a year the Board receives a full risk assessment review for discussion; this is following detailed risk reviews in each of the business units. Other ad hoc material relating to specific projects, legal and regulatory matters are included as necessary. The reports ensure that the Board is informed and updated on all major items of strategic planning, business performance, personnel, investments and significant policy issues; this allows the Board to continuously monitor the progress of the business and provides transparency across all areas within the Group. As in previous years, the senior management team were invited to attend board meetings on a quarterly basis and in the intervening period if required, enabling the Board to explore specific issues in detail when required.

In January the Board carried out a comprehensive review of the Group strategy. As a result of the review an annual strategic agenda has been drawn up and approved by the Board. This agenda will ensure that key strategic objectives are discussed on a regular basis. A list of operational areas including topics such as business development, marketing, product development, human resources and IT are now diarised as agenda items for strategic consideration at future board meetings. As a result of this, members of the senior management team will be individually invited to attend specific board meetings rather than as a group (with the number of group meetings reduced accordingly). This will provide the Board with an opportunity to speak with the senior managers on a one to one basis and gain a more in-depth understanding of their specific business units/ area of responsibility.

Ten times a year the Chief Executive and Group Finance Director attend the board meetings of the businesses which make up the four operating segments (excluding the US). The meetings are chaired by the Chief Executive and allow him and the Group Finance Director the opportunity to obtain detailed information into the progress being made and any issues being faced by the individual business units. In relation to the US, the Chief Executive ensures that he meets with the US management team at least three times a year and obtains regular updates from the DVP US President, Mike Eldred. Key operational information obtained from these meetings is fed back to the Board.

The Chief Executive along with the Product Development and Regulatory Affairs Director also chairs at least two product development meetings per year. Representatives from marketing and manufacturing departments generally attend the meeting thereby allowing the product pipeline to be comprehensively reviewed.

The Chairman and the Non-Executive Directors meet prior to each board meeting which allows them time to review and discuss any matters arising from the agenda without the Executive Directors being present.

The Board has formally delegated specific responsibilities to board committees, including the Audit, Remuneration and Nomination Committees. The terms of reference for each of these committees are available on this website or on request from the Company Secretary. The Board also appoints committees on an ad hoc basis to approve specific projects as deemed necessary.

The Board is scheduled to meet 11 times per annum with additional meetings called if necessary, including two meetings where a review of the full year and half-year results are prioritised. No additional meetings were required during the 2010/2011 financial year.

Attendance at the board and nomination committee meetings during the year to 30 June 2011 was as follows (details of attendance at the audit and remuneration committee meetings are provided on pages 50 and 53 respectively of the 2011 Annual Report):
 

Note: n/a denotes that the Director is not a member of this committee, but may attend by invitation.
* Actual attendance/maximum number of meetings Director could attend based on date of appointment
+ Actual attendance/maximum number of meetings Director could attend based on date of retirement.

Following the board meetings the Company Secretary ensures that an accurate record of the meeting is made which is circulated to the Board as soon as possible after the meeting. Should Directors have concerns of any nature which cannot be resolved within the board meeting, they have the right to ensure their view is recorded in the minutes. Further, on resignation, should a Non-Executive Director have any concerns, the Chairman would invite him to provide a written statement for circulation to the Board.

The Company maintains an appropriate level of Directors’ and Officers’ insurance in respect of legal action against Directors

 

Chairman and Chief Executive

There is a clear division of responsibilities between the Chairman, Michael Redmond, and the Chief Executive, Ian Page. The Chairman is responsible for the leadership and effective working of the Board and ensures that each Director, in particular the Non-Executive Directors, is able to make an effective contribution to the Board. The Chief Executive is responsible for the management of the Company, implementing policies and proposing strategy.

During the financial year under review, the Chief Executive was appointed Non-Executive Chairman of Sanford DeLand Asset Management Limited (“Sanford”). The Board fully considered whether this would impact materially on his current time commitment as Chief Executive of the Group and whether it could give rise to any conflict. As Ian Page is not involved in any investment decision made by Sanford it was not considered that any conflict would arise nor would there be any impact on his time commitment. Further details in relation to the appointment can be found in the Remuneration Report of the 2011 Annual Report.

The Chairman, at the time of his appointment, did meet and continues to meet the independence criteria set out in the Code. Having held a non-executive position within Dechra for over nine years the Chairman is to present himself for re-election at the forthcoming Annual General Meeting. The Nomination Committee (excluding the Chairman) has reviewed his appointment in detail and considers that he continues to lead the Board effectively, at all times maintaining his independence and providing invaluable contribution and insight to the Board gained from his extensive experience within the pharmaceutical sector. The Nomination Committee also reviewed the Chairman’s current time commitments particularly in light of his position as Chairman of Abcam plc. After consideration the Nomination Committee determined that this would not adversely impact his time commitment as Chairman of the Group and that he would continue to fulfil his role to the highest standards.

 

Board Balance and Independence

The Board consists of the Non-Executive Chairman, three other Non- Executive Directors and three Executive Directors (including the Chief Executive). Taking into account the provisions of the Code, the Board has determined that during the year under review each of the Non-Executive Directors remained independent and free from any relationships which could compromise their independent judgement.

Malcolm Diamond retired from his position as Non-Executive Director at the 2010 Annual General Meeting. On Malcolm Diamond’s retirement, Neil Warner was appointed Senior Independent Director. He is available to Shareholders in respect of any concerns they may have where contact through the normal channels has failed to resolve the issues or for which such contact is inappropriate.

The Nomination Committee recognises the importance of ensuring the refreshment of the Board and of ensuring that the Non-Executive Directors provide the right mix of skill, expertise and experience to assist the Executive Directors in achieving the Group strategy. As reported in the 2010 Annual Report an independent recruitment consultant was retained to aid the Nomination Committee in the appointment of an additional Non-Executive Director. As a result, on 1 December 2010, Dr Chris Richards was appointed to the Board and as a member of the Remuneration, Audit and Nomination Committees.

At the commencement of the recruitment process an objective role description was agreed by the Nomination Committee which encompassed the requirements of the Board and the Group not only in terms of the skill and knowledge required but also diversity. The recruitment consultant was specifically requested to seek both female and male candidates who satisfied the role description; unfortunately no female candidates were highlighted. It should be noted that although neither of the two Non-Executive Directors appointed during the past 18 months had previous PLC experience, they were appointed for their wide ranging international experience and knowledge which is deemed a key attribute required to progress the Group strategy.

In response to the recent communication from Lord Davies in respect of women on boards it should be noted that the Board will continue to recruit in line with the requirements of the Board and ensure that the correct mix of skills and experience is maintained. Although there are currently no female board members, 37.0% of the senior management team, 15.8% of the subsidiary executive boards and 41.7% of the overall workforce are females. In terms of recruitment for the next Non-executive Director replacement (due to retirement) female candidates will be specifically requested.

The Board considers that all the Non-Executive Directors are independent of management and free of any business or other relationship which could materially interfere with or compromise their ability to exercise independent judgement. This independence of mind provides them with the ability to challenge decisions and think strategically.

The details of the Board of Directors are shown on pages 38 and 39 of the 2011 Annual Report.

 

Conflicts of Interest

At the 2008 Annual General Meeting the Shareholders approved a resolution to amend the current Articles of Association so as to enable the Directors to authorise any actual or potential conflict of interest which could arise in line with the Companies Act 2006. There are safeguards which will apply when Directors decide whether to authorise a conflict or potential conflict. Firstly, only independent Directors (i.e. those who have no interest in the matter being considered) will be able to take the relevant decision, and secondly, in taking the decision the Directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success. The Directors will also be able to impose limits or conditions when giving authorisation if they think this to be appropriate. During the financial year under review no actual conflicts have arisen.

 

Nomination Committee

The Board has an established Nomination Committee to lead the process for board appointments and to make recommendations to the Board. During the period the Nomination Committee comprised Michael Redmond (Chairman), Malcolm Diamond (resigned 5th November 2010), Bryan Morton, Dr Chris Richards (appointed 1st December 2010) and Neil Warner. The Chairman would not chair the committee meeting if it was dealing with the appointment of a successor to the Chairman. Details of the work carried out by the Nomination Committee during the financial year have already been detailed in this report.

The Nomination Committee normally meets once a year. However two additional meetings have been held during the financial year in view of the appointment of Dr Chris Richards.

The terms of reference set out the Nomination Committee’s role and the authority delegated to it by the Board. The terms of reference have been reviewed during the year and a copy is available on this website. They include the following responsibilities:

• to oversee the plans for management succession;
• to recommend appointments to the Board;
• to evaluate the effectiveness of the Non-Executive Directors; and
• to consider the structure, size and composition of the Board generally.


Other significant commitments of the Chairman and the Non-Executive Directors were disclosed to the Board before appointment and the Board is also notified of any subsequent changes. Of the Executive Directors only Ian Page holds a Non-Executive Directorship (as detailed earlier in this report). The letters of appointment of the Non-Executive Directors will continue to be available for inspection at the Company’s registered office. Both the letters of appointment of the Non-Executive Directors and the service contracts of the Executive Directors will be on display at the forthcoming Annual General Meeting.

 

Information and Professional Development

The Directors are supplied in a timely manner with all relevant documentation and financial information to assist them in the discharge of their duties. This includes information on the Company’s operational and financial performance. At least one board meeting per year is held at one of the Group’s operational sites to enable the Directors to update and maintain their knowledge and familiarity with the Group’s operations. Board meetings were held at the DVP UK offices in Shrewsbury in January and at Dales, Skipton in June, where the Board had an opportunity to be shown around the respective facilities and meet with employees.

Any newly appointed Directors are provided with comprehensive documentation aimed at providing information in relation to the remit and obligations of the role, current areas under consideration for the Board and the latest broker reports. New Directors are also offered the opportunity to visit the various business units in order to allow them the opportunity to meet with the executive teams and to be shown around the operations. On an ongoing basis Directors are encouraged to keep up to date on all matters relevant to the Group and attend briefings and seminars as appropriate. The Company Secretary also provides ongoing briefings where necessary for the Directors that cover a number of legal and regulatory changes and developments relevant to the Directors’ areas of responsibility. The Company Secretary and Chairman are aware of the requirement to regularly review and agree with each Director their training needs. It is currently considered that the briefings provided at board meetings satisfy such needs however this will be reviewed on an ongoing basis.

Each Director is entitled on request to receive information to enable him to make informed judgements and adequately discharge his duties. In addition, all Directors have access to the advice and services of the Company Secretary and senior managers, and may take independent professional advice at the Company’s expense in connection with their duties. The Company Secretary is responsible to the Chairman for ensuring that all board and committee meetings are properly conducted and Directors receive all appropriate information prior to meetings to enable them to make an effective contribution. Both the appointment and removal of the Company Secretary is a matter for the Board as a whole.

 

Performance Evaluation

In previous years the board evaluation process had been based on a general discussion by the Board covering a number of topics detailed to them by the Company Secretary. However, this process has been reviewed in light of the current sentiment in relation to performance evaluation and the need for more detailed disclosure. As a result the Chairman and Company Secretary developed a discussion document covering areas such as (i) board composition; (ii) strategy review process; (iii) the format of board meetings and the decision process; (iv) training and development; (v) the performance of the Board and the individual Directors; (vi) Corporate Governance; (vii) leadership and culture; and (viii) risk assessment. The discussion document was approved by the Board and the Chairman scheduled interviews with each of the Executive and Non-Executive Directors and Company Secretary. The evaluation of the Chairman was undertaken by the Senior Independent Director. The results of the internal evaluation were presented to the Board at a meeting in August 2011. Overall, it was concluded that the Board and its committees were effective and it was agreed that the recent changes in respect of the Non-Executive Directors had been successful in aligning the board skill set with the business and its strategy going forward. However a number of recommendations were made in respect of the running of the Board and it was agreed the Chairman and Company Secretary would oversee their implementation during the 2011/2012 financial year.

 

Re-election

On appointment, Directors are required to seek election at the first Annual General Meeting following appointment. One-third of the Board are required to retire from office by rotation at the Annual General Meeting subject to all Directors having submitted themselves for re-election every three years. At the forthcoming Annual General Meeting Dr Chris Richards, who was appointed to the Board on 1st December 2010, will offer himself for re-election; both Ian Page and Neil Warner will retire by rotation in accordance with the Articles of Association and will seek re-election. In addit