Corporate Governance
1 INTRODUCTION
The principal corporate governance rules applying to UK companies listed on the London Stock Exchange are the Combined Code on Corporate Governance as updated by the Financial Reporting Council (“FRC”) in June 2008 (the “Code”), the UK Financial Services Authority (“FSA”) Listing Rules and the FSA’s Disclosure and Transparency Rules.
The Board has overall responsibility for corporate governance and is accountable to the Company’s shareholders for good governance. It is committed to achieving a high standard of corporate governance which best fits the Company and it shares the view that this contributes to better company performance by assisting the Board to discharge its duties in the best interests of shareholders.
The Board fully supports the principles of good governance as set out in the Code, which is publicly available on the FRC’s website (www.frc.co.uk).
Save as identified and explained below, the Board considers that throughout 2009 it has complied with the Main Principles and the supporting principles as set out in Section 1 of the Code.
2 THE BOARD
The Board comprises three Executive Directors, including the Executive Chairman, and six Non-Executive Directors.
Their biographies can be found on pages 21 and 22 of the Annual Report.
On 24 November 2009 John Whiteley, the Company’s Chief Financial Officer, was appointed to the Board and Thomas Lundqvist, Non-Executive Director, became Vice Chairman in succession to Thomas Thomson, who remains a Non-Executive Director. As at the date of this report there were no other changes to the composition of the Board.
The Board notes that the Code guidance recommends that at least half the Board should comprise independent Non-Executive Directors. The Board recognises it is not compliant with provision A.3.2 of the Code but believes that it has demonstrated a proven track record of success which has been beneficial to shareholders notwithstanding the financial uncertainly affecting property companies over the past two years. Its experience, prudence and choice of strategic direction has, for example, meant that the Company has not been required to seek further capital from shareholders.
The Board understands the need for independent non-executive directors to challenge the views of the executive team and contribute to the Company’s overall strategy. It considers its current independent Non-Executive Directors fulfil this role exceptionally well. It has determined that Malcolm Cooper and Christopher Jarvis are independent in character and judgement and that there are no relationships or circumstances which could materially affect or interfere with the exercise of their independent judgement. Mr Cooper is the Senior Independent Director and he is available to shareholders who do not wish to approach either the Chairman or the Chief Executive about a Company matter.
The Board has determined that, in accordance with the Code provisions, four Non-Executive Directors, Joseph Crawley, Thomas Lundqvist, Bengt Mörtstedt and Thomas Thomson, are not independent. Mr B Mörtstedt and Mr Lundqvist have both served on the Board for more than nine years. Mr B Mörtstedt is the brother of the Executive Chairman and Mr Lundqvist is the Vice Chairman of the Sten Mortstedt Family and Charity Trust. Mr Crawley has a close family tie with the Executive Chairman by way of marriage. Mr Thomson has been an employee of the Group within the last five years. The Board is satisfied with the experience, expertise and performance of each board member. They continue to add significant value to the operation of the Company through their combined knowledge and experience, and exercise objectivity in decision-making and proper control of the Company’s business.
During the year the Chairman conferred with the Non-Executive Directors without the other Executive Directors present. A formal meeting of the Non-Executives took place during the year, without the Executive Directors or the Chairman present, at which a thorough review of the performance of the Board and that of the Chairman took place. The Non-Executive Directors also reviewed the composition of the Board and considered that, whilst the current Non-Executive Directors fulfil their role, a further independent Non-Executive Director would be beneficial, although no suitable candidate has yet been found.
In accordance with the Articles of Association, which can be amended by a special resolution of the shareholders, the Board has the power to appoint directors and, where notice is given signed by all the other directors, to remove a director from office. In addition all Directors are subject to reappointment by shareholders at the first Annual General Meeting after their appointment, and are subject to re-election at least every three years. Non-Executive Directors are appointed for a specific term of office which provides for their removal in certain circumstances, including under section 168 of the Companies Act 2006. The terms of appointment of the Non-Executive Directors can be obtained by request to the Company Secretary. Those Directors seeking re-election and re-appointment at the forthcoming Annual General Meeting are detailed in the Directors’ Report on page 22 of the Annual Report.
Activities of the Board
The Board met five times during the year. It is responsible to the shareholders of the Company for the strategy and future development of the Group and the management of its resources. The Board’s primary objective is to focus on adding value to the assets of the Group by identifying and assessing business opportunities as they arise and ensuring that associated potential risks are identified, monitored and controlled. The Board has a formal schedule of matters specifically reserved to it for decision, which is reviewed annually and was last revised in November 2009. Matters reserved for Board decisions include strategic long-term objectives and the capital structure of major transactions. The implementation of Board decisions and day-to-day operations of the Group are delegated to senior management.
Directors are able to obtain independent professional advice at the Company’s expense and have access to the services of the Company Secretary. They are given appropriate training and assistance on appointment to the Board and later, if and when required.
Board members are given appropriate documentation in advance of each Board and Committee meeting and senior executives below Board level attend Board meetings to present and discuss their areas of speciality. In making commercial assessments the Directors review detailed plans including financial viability reports which, among other things, detail the impact of proposals in respect of return on capital, return on cash and the likely impact on the income statement, cash flows and gearing.
Strategy is determined after having taken due regard of relevant forecasts, and domestic and international developments. The views of shareholders are sought by the Executive Directors and are reported back to the Board. The Board is also appraised of the views of shareholders as received by the Company’s advisers.
Group and divisional budgets and quarterly financial forecasts including net assets and cash flow projections are formally reviewed by the Board on a quarterly basis. In addition the Executive Directors monitor cash flows weekly.
The Companies Act 2006 introduced a new conflicts of interest regime for Directors. In compliance with this the Company’s Articles of Association contain procedures to deal with Directors’ conflicts of interest. The Board considers that these have operated effectively during the year.
The attendance of Directors at meetings during the year is set out below:
| Board | Audit Committee | Remuneration Committee | |
| Number of meetings held | 5 | 4 | 1 |
| Sten Mortstedt | 5/5 | - | - |
| Henry Klotz | 5/5 | - | - |
| John Whiteley(1) | 1/1 | - | - |
| Thomas Lundqvist | 5/5 | 4/4 | 1/1 |
| Malcolm Cooper | 5/5 | 4/4 | - |
| Joseph Crawley | 5/5 | - | 1/1 |
| Christopher Jarvis | 5/5 | 4/4 | - |
| Bengt Mortstedt | 5/5 | - | - |
| Thomas Thomson | 5/5 | - | - |
(1) Appointed to the Board on 24 November 2009
In addition to attending Board meetings, senior management meet regularly to discuss management issues relating to the Group.
There is a division of responsibilities between the Executive Chairman, who is responsible for the overall strategy of the Group, and the Chief Executive Officer, who is responsible for implementing the strategy and day-to-day running of the Group. He is assisted by the senior management team. The Board has approved a written statement of the division of responsibilities between the Executive Chairman and the Chief Executive Officer.
The Company has arranged insurance cover in respect of legal action against its directors and officers. The Company has granted indemnities to each of the Directors and other senior executives, uncapped in amount but subject to applicable law, in relation to certain losses and liabilities which they may incur in the course of acting as directors or employees of the Company or of one or more of its subsidiaries or associates.
The Board is assisted by the Audit and Remuneration Committees, the Terms of Reference for which can be obtained from the Company Secretary.
THE AUDIT COMMITTEE
The Audit Committee comprises Malcolm Cooper (Chairman), Thomas Lundqvist and Christopher Jarvis. The Board is satisfied that Mr Cooper and Mr Jarvis are independent and Mr Cooper is regarded as having recent and relevant accounting and financial experience As Mr Lundqvist is deemed not to be independent, the Board notes that the composition of the Committee does not comply with the recommendation contained in C.3.1 of the Code. The Committee considers that Mr Lundqvist’s experience and detailed knowledge of the Group greatly assists the Committee when making decisions within its remit.
The Committee met four times during the year. Certain senior management and the external auditors are normally invited to attend the meetings.
The principal duties of the Committee are to review the half yearly and annual financial reports before their submission to the Board and to consider any matters raised by the auditors. The Committee also reviews the Interim Management Statements of the Company and the independence and objectivity of the auditors, taking into account relevant professional and regulatory requirements and the relationship with the auditors as a whole, including the provision of any non-audit services. The terms of reference of the Committee reflect current best practice, including authority to:
During the year the Committee formally reviewed the preliminary year end results announcement and annual financial report and
the half yearly report, focusing on key areas of judgement and complexity, critical accounting policies and any changes required to them. It also reviewed the audit strategy and the findings of the external auditors from their review of the half yearly financial report and their audit of the annual financial report. In accordance with the Audit Committee Guidance 2008, the Committee reviewed the internal controls and risk management systems of the Group.
The Committee also met with the Group’s valuers, Lambert Smith Hampton and DTZ, to discuss the methodology used for the bi-annual valuations of the Group’s properties.
The external audit was last put out to tender in 2007 when the current auditor, Deloitte LLP, was appointed, and the lead audit partner has been in place since that time. There are no contractual obligations to restrict the Company’s choice of external auditor.
Due to the relatively low number of personnel employed within the Group, the nature of the business and the current control and review systems in place, the Committee recommended, and the Board has decided, not to establish an internal audit department.
4 THE REMUNERATION COMMITTEE
The Remuneration Committee comprises Thomas Lundqvist (Chairman) and Joseph Crawley. The Remuneration Committee has met formally once during the year but held other informal discussions. The Committee considers the employment and performance of individual Executive Directors and determines their terms of service and remuneration. It also has authority to grant options under the Company’s Executive Share Option Scheme and Company Share Option Plan, although no options were granted during the year. The Board notes that, as both Mr Lundqvist and Mr Crawley are deemed not to be independent, the Company does not comply with the composition of the Committee recommended in provision B.2.1 of the Code. Mr Lundqvist’s experience and detailed knowledge of the Group and Mr Crawley’s current experience in the real estate sector greatly assists the Committee when making decisions within its remit. Full details of the Committee’s work are given in the Remuneration Report on pages 30 to 33 of the Annual Report.
5 NOMINATIONS
The Board has considered the setting up of a separate Nomination Committee, as recommended by the Code, but due to the size and nature of the Company, the Board has decided that this function is better carried out by the Executive Chairman and other Directors, Non-Executive and Executive, as appropriate for each appointment.
6 INTERNAL CONTROL AND RISK MANAGEMENT
The Company has in place internal control and risk management systems in relation to the Company’s financial reporting process and the Group’s process for the preparation of group accounts.
It is the Company’s aim to manage risk and to control its business and financial affairs cost-effectively in a way that enables it to exploit profitable business opportunities in a disciplined way, avoid or mitigate risks that can cause loss, reputation damage or business failure and enhance resilience to external events. The Board acknowledges that the Directors are responsible for the Group’s system of internal control and risk management and have established procedures which are designed to provide reasonable assurance against material misstatement or loss. These procedures have operated for the entire financial year and up to the date of approval of the annual financial report.
The Audit Committee has reviewed the effectiveness of the system of internal control and risk management for the period and, as reported to the Board, has not identified any significant weaknesses during the financial year and therefore no remedial action has been necessary. The Directors recognise that such a system can only provide a reasonable and not absolute assurance that there has been no material misstatement or loss.
The key elements of the process by which the system of internal control and risk management is monitored are as follows:
Internal Control
The Company has an established framework for internal financial controls, which is regularly reviewed by the executive management and the Audit Committee, who update the Board on its effectiveness.
The Board is responsible for the Company’s overall strategy, for approving budgets, property acquisitions and disposals, and for determining the financial structure of the Group.
The Audit Committee assists the Board in the discharge of its duties regarding the Group’s financial reports and provides a direct link between the Board and the external auditors through regular meetings.
There is an established organisational structure which has clearly defined lines of reporting and responsibility. The Group has in place control processes in relation to all aspects of its financial dealings, such as the authorisation of banking transactions, capital expenditure and treasury investment decisions.
The Group has a comprehensive system for budgeting and planning whereby quarterly and annual budgets are prepared, monitored and reported to the Board at each meeting. Three-yearly rolling cash flows are updated and distributed to the Board on a weekly basis to ensure the Group has sufficient cash resources for the short and medium term.
Set out on pages 8 to 20 of the Annual Report is the description of the Group’s operations and the strategy which it employs to maximise returns and minimise risks.
Risks
In line with the revised Turnbull Guidance, the risks which the Group faces are reviewed on an ongoing basis throughout the financial year and up to the publication of the annual financial report in Board and executive meetings.
Each business area maintains a process to ensure that key risks are identified, evaluated, managed and reviewed appropriately. This process is also applied at Board level to major business decisions and significant strategy implementations. Furthermore, a bi-weekly property portfolio update is circulated to the Board which identifies key business risks. Additional risk management processes, which include health and safety and environmental risk management, are employed within the businesses.
The Company’s key risks and how they are mitigated are described on page 15 of the Business Review.
7 DIRECTORS’ SHAREHOLDINGS AND MAJOR INTERESTS IN THE COMPANY’S SHARES
The interests of the Directors in the share capital of the Company at the beginning and end of the year are detailed in the Directors’ Remuneration Report on page 30 of the Annual Report.
Other than the 60.53% interest of the Mortstedt family referred to in note 8 of the Directors’ Remuneration Report, as at 11 March 2010 the Company has been notified of the following interests above 3% in the Company’s issued share capital:
| No. of shares | % | |
| NF&C Asset Management plc | 2,147,119 | 4.47 |
There are no shareholders who carry special rights with regard to control of the Company and there are no restrictions on voting rights.
8 SIGNIFICANT AGREEMENTS – CHANGE OF CONTROL
A change of control of the Company following a takeover bid may cause a number of agreements to which the Company or its trading subsidiaries is party, such as commercial trading contracts, banking arrangements, property leases and licence agreements, to take effect, alter or terminate. In the context of the Company as a whole, these agreements are not considered to be significant. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occur because of a change of control or takeover bid.
9 SHAREHOLDER RELATIONS
The Group issues its annual financial report to each of its shareholders. Following changes in the UK company disclosure regulations the Group does not produce and distribute its half yearly report to shareholders but makes it available on its website.
All press releases are also included on the Group’s website at www.clsholdings.com on the Press Centre, “Regulatory News” pages.
The Chairman, the Chief Executive Officer and the Chief Financial Officer have regular meetings with institutional shareholders. All shareholders have at least 20 working days’ notice of the Annual General Meeting at which all Directors are introduced and available for questions. All shareholders are welcome to attend the Company’s Annual General Meeting and to arrange individual meetings by appointment. The views received at such meetings are fed back to the Board.
10 PROXY VOTING
The proxy forms for the Annual General Meeting and General Meetings which were held in 2009 included a “vote withheld” box. Details of the proxies lodged for these meetings were announced to the London Stock Exchange and are on the Company’s website at www.clsholdings.com on the Press Centre, “Regulatory News” pages.
11 JOINT VENTURE AND ASSOCIATES
This Corporate Governance report applies to the Company and its subsidiaries. It does not include joint ventures or associates.
12 DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report, Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. The Directors are required by the IAS Regulation to prepare the group financial statements under those International Financial Reporting Standards (IFRSs) adopted by the European Union. The group financial statements are also required by law to be properly prepared in accordance with the Companies Act 2006 and Article 4 of the IAS Regulation.
International Accounting Standard 1 requires that financial statements prepared under IFRS present fairly for each financial year the Group’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s “Framework for the preparation and presentation of financial statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. However Directors are also required to:
The Directors have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (UK Accounting Standards and applicable law). The parent company financial statements are required by law to give a true and fair view of the state of affairs of the Company. In preparing these financial statements, the Directors are required to:
The Directors confirm that to the best of their knowledge the financial statements comply with the above requirements.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the parent company financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Statement of Directors’ responsibilities
We confirm to the best of our knowledge that:
This statement of responsibilities was approved by the Board on 11 March 2010.
By order of the Board
David Fuller BA FCIS
Company Secretary
11 March 2010
