Framework for corporate governance
As an AIM listed entity, the Company complies with the corporate governance principles of the Quoted Companies Alliance Corporate Governance Code (the "QCA Code") except in respect of the evaluation of the Board which will be addressed in 2019. The QCA Code identifies ten principles to be followed as a guide to help companies deliver value for shareholders. This relies of efficient and effective management by the Board, accompanied by good communication which serves to develop confidence and trust.
The Statement of Compliance with the 2018 QCA Corporate Governance Code can be found online at www.flowtechfluidpower.com.
The main responsibilities of the Board are the creation and delivery of sustainable Shareholder value by promoting the long-term success of the Company and upholding good corporate governance.
The Board, in addition to routine consideration of both financial and operational matters, determines the strategic direction of the Group. The Board has a formal schedule of matters specifically reserved for it which includes:
- Development and approval of the Group's strategic aims and objectives.
- Approval of annual operating and capital expenditure budgets.
- Oversight of the Group's operations.
- Approval of the Group's announcements and financial statements.
- Declaration and recommendation of dividends.
- Approval of major acquisitions, disposals and capital expenditure.
- Succession planning and appointments to the Board and its Committees.
- Maintenance of sound internal control and risk management systems.
- Approval of the division of responsibilities between the Chairman, Chief Executive and other executive directors and the terms of reference of the Board Committees.
The main responsibilities of the Chairman are to lead the Board, ensuring its effective management of the Group's operations and governance, and to maintain relations with major Shareholders thus enabling the Board to gain an understanding of their views. The Chairman sets the Board's agenda and promotes a strong culture of challenge and debate.
The Chief Executive is responsible for the day-to-day management of all the Group's activities and the implementation and delivery of the Board's strategic objectives. He also promotes appropriate cultural values and standards and maintains good relationships and communications with investors.
In accordance with their terms of reference, certain matters are delegated to the Committees of the Board. These terms of reference are available on the Group's website and summarised later in this report along with the main activities of each Committee during the year.
The Board comprises an independent Chairman, two Executive Directors and two independent Non-Executive Directors. Details of the Directors' remuneration and terms of appointment are set out in the Directors' Remuneration Report. Biographical details of the Directors are included in The Board.
Malcolm Diamond is Chairman of the Board and the Nomination Committee. Each of the independent Non-Executive Directors performs additional roles: Nigel Richens is the Senior Independent Director and Chairman of the Audit and AIM Compliance and Corporate Governance Committees and Bill Wilson is Chairman of the Remuneration Committee.
The Executive Directorships are full-time positions. The Roles of Chairman and Non-Executive Director require a commitment of approximately five days per month. All the Non-Executive Directors have confirmed their ability to meet such commitment. Each Non-Executive Director is required to inform the Board of any changes to their other appointments.
The Executive Directors, together with Nick Fossey (Chief Operating Officer) constitute a separate Executive Board. The activities of this Executive Board include:
- Implementing the strategy as set out/agreed by the Board
- Overseeing all commercial operations of the Group, ensuring good communication in key areas and alignment of local business objectives to the strategic direction at Group level
- Assessment of growth opportunities, both organic and potential acquisition opportunities
- Talent management and succession planning
- Investor relations
- Product quality
- Health and safety
- Financial control and systems, including IT infrastructure and development
- Risk management
Meetings of the Board
There were eight formal Board meetings during the year, six prior to the retirement of Sean Fennon and appointment of Bill Wilson and Russell Cash and two thereafter. Other than the meeting in September, for which Sean Fennon gave his apologies, all meetings were attended by all eligible Directors.
Formal meetings are supplemented, when circumstances dictate, by other meetings often making use of teleconference facilities. In addition, the Chairman and Non-Executive Directors have met during the year without the Executive Directors.
Russell Cash is the Company Secretary and is therefore responsible for legal and regulatory compliance as well as assisting the Chairman in preparation for and effective running of Board meetings.
Since he is also an Executive Director, Nigel Richens, as the Senior Independent Director and Chairman of the Audit Committee, acts as a conduit for all Directors, giving advice and guidance where appropriate. The Chairman plays a key role in investor relations and corresponds with major Shareholders as he sees fit.
The Board formally delegates responsibility to four committees: the Audit, Remuneration, Nomination and the AIM Compliance and Corporate Governance Committees. Full terms of reference for each committee can be found on our website.
The Nomination Committee
Chaired by Malcolm Diamond
During the year the Nomination Committee was heavily involved in the development of Board structure and succession planning, culminating in the appointment of Bill Wilson and Russell Cash and the promotion of Bryce Brooks. Sean Fennon retired during the year and, although not a Board position, the Nomination Committee was instrumental in the creation of the Chief Operating Officer role and the appointment of Nick Fossey.
The number of discussions held by Malcolm Diamond and Nigel Richens, both separately and together with other members of the Board, obviated the need for formal meetings of the Committee. The changes to the composition of the Board were approved by the Board as a whole.
Recruitment specialists were engaged to identify potential director candidates to add to the recommendations of other advisers and members of the Board. Those candidates shortlisted were interviewed by the recruitment specialists and Bryce Brooks. Candidates progressing to the next stage were interviewed by Malcolm Diamond and Nigel Richens and took part in a psychometric assessment. The appointees were further interviewed by our Nominated Adviser to assess their suitability for a public company directorship.
The Remuneration Committee
Chaired by Nigel Richens until September, thereafter by Bill Wilson
The Remuneration Committee meets at least once a year to determine and agree remuneration packages of the Chairman and Executive Directors and other employee benefits. This year it met in September prior to the appointment of Bill Wilson; both Nigel Richens and Malcolm Diamond participated. Where appropriate, the Committee seeks advice from remuneration consultants to gain an understanding of current trends and latest developments. In addition, taxation and legal advisors will usually be involved in drafting and finalising reward agreements.
The remuneration of the Non-Executive Directors is agreed by the Chairman and Executive Directors. Details of Directors' remuneration are set out in the Directors' Remuneration Report.
The AIM Compliance and Corporate Governance Committee
Chaired by Nigel Richens
The AIM Compliance and Corporate Governance Committee usually meets twice a year. It is responsible for establishing, reviewing and monitoring the Group's procedures and controls for ensuring compliance with the AIM Rules and the timely disclosure of information to satisfy the Group's legal and regulatory obligations. The meeting in May 2018 was attended by all Directors. The meeting scheduled for September was deferred until January 2019 to allow the recently appointed Directors to make a full contribution. All Directors attended that meeting.
The Audit Committee
Chaired by Nigel Richens
The Audit Committee meets at least twice a year with the Group's Auditor and as otherwise required. Its duties are to:
- Monitor the integrity of the financial statements;
- Review the quality of the Group's internal controls, ethical standards and risk management systems;
- Review the Group's procedures for detecting and preventing bribery and fraud; corruption, sanctions and whistleblowing
- Ensure that the financial performance of the Group is properly reported on and monitored, including reviews of the annual and interim accounts, results announcements and accounting policies; and
- Oversee the relationship with the Group's external Auditor.
During the year the Audit Committee discharged its responsibilities by:
- reviewing the Group's draft financial statements, preliminary announcements and interim results statement prior to Board approval and reviewing the external Auditor's reports thereon;
- reviewing the external Auditor's plan for the audit of the Group financial statements, confirmations of auditor independence and proposed audit fee and approving terms of engagement for the audit;
- considering the effectiveness and independence of the external Auditor and recommending to the Board the reappointment of Grant Thornton UK LLP as external Auditor;
- considering the review of material business risks;
- monitoring of reporting and follow-up of items reported by employees;
- considering the significant risks and issues in relation to the financial statements and how these were addressed including:
- impairment reviews of goodwill
- valuation of intangibles
- new accounting standards
- going concern, covenants and cash headroom;
- considering the adequacy of accounting resource and the development of appropriate systems and controls;
- reviewing the risk register;
- review of progress in introducing best practice systems and procedures Group-wide;
- reviewing the plans and progress to interface and integrate IT systems post acquisition; and
- considering policies on non-audit engagements for the Company's Auditor.
Three Audit Committee meetings were held in the year, each attended by all eligible Directors. In addition, the Chairman of the Audit Committee met with the Audit partner privately on two occasions.
Collectively and individually, the Directors monitor the performance of the Board and its members on a range of measures, The Non-Executive Directors discuss regularly the performance of the Executive Directors. Hitherto this process, apart from the establishment of medium-term goals and targets, has been relatively informal. In 2019 the Executive Directors, together with the recently appointed COO, have been set challenging objectives covering a range of financial, operational and personal matters. These will be subject to a more formal process overseen by the Remuneration Committee. In addition, Nigel Richens will, in his role as Senior Independent Director, coordinate a review of the Chairman's effectiveness. The Chairman will manage the process to consider the effectiveness of the other Non-Executive Directors.
The Board continues to believe that a formal evaluation of Board performance by an outside agency would not be cost effective and is inappropriate given the size of the Board.
Knowledge and training
Each newly appointed Director is provided with an induction programme comprising visits to Group locations, meetings with key personnel and introductions to the Group's advisers. In addition, care is taken to ensure each new Director has as good an understanding as soon as possible with regards to the Group's strategy, risks, challenges and control and governance procedures.
The Chairman is responsible for ensuring that each Director is supplied with timely and relevant information of a quality, and in a form, that enables them to discharge their duties.
There is a policy in place by which a Director may obtain independent professional advice at the Group's expense where their duties so require.
The training needs of Directors are discussed and appropriate arrangements put in place. We work closely with external training providers and have a programme in place to deliver tailored training to all members of our central and divisional management teams.
Each Director is required to keep up to date with developments in the Group's areas of operation and their own knowledge base. Regular discussions with senior members of Group management and the Group's advisers together with their own professional development obligations and experience in other roles are usually sufficient to achieve this.
Our Nominated Adviser is invited to the AIM Compliance and Corporate Governance Committee to inform the Board of developments in these areas. The Non-Executive Directors also participate in teams set up to focus on key Group initiatives, currently IT, health and safety, talent management, product quality, business continuity planning and the financial control environment.
A recent initiative has seen the appointment of a number of Group Mentors. These part-time positions are designed to accommodate individuals with specific skills or recently retired former members of senior management so that the Group can have access to, and benefit from, their knowledge and experience.
The Nomination Committee reviews various matters when considering the constitution of the Board, including diversity alongside other factors such as experience and capabilities. The Board is committed to this policy of equal opportunity and diversity to attract and retain the talent needed to fulfil our strategic aspirations. Our culture recognises the need for diversity across a wide spectrum of factors including experience, skills and potential as well as ethnicity, sexual orientation and gender. Appointment and advancement is based on merit with no positive or negative discrimination. We recognise that further strengthening our diversity as and when opportunities arise is important to our future well-being.
Internal controls and risk management
The Directors are responsible for the Group's system of internal control. However, such a system is designed to manage, rather than eliminate the risk of failures to achieve business objectives and can provide only reasonable and not absolute assurance against misstatement or loss. The key elements within the Group's system of internal control are as follows:
- regular Board meetings to consider matters reserved for Directors' consideration;
- regular management reporting;
- an annual Board review of corporate strategy, including a review of material risks and uncertainties facing the business;
- established organisational structure with clearly defined lines of responsibility and levels of authority;
- documented policies and procedures;
- regular review by the Board of financial budgets, forecasts and covenants with performance reported to the Board monthly;
- detailed investment process for major projects, including capital investment coupled with post investment appraisal analysis.
The Audit Committee reconsidered the need to establish a formal internal audit function and such a process has started work in 2019.
Communication with Shareholders
To ensure the Board is aware of Shareholder opinion and concerns, the Non-Executive Directors receive regular Shareholder feedback which is communicated at Board meetings. Additionally, independent information is received through the Company's Advisers, from both investors and analysts.
The Group aims to maintain a regular dialogue with both existing and potential Shareholders through an established investor relations programme, managed by the CEO, CFO and Company brokers.
All Shareholders receive a printed copy of the Annual Report and Accounts and at the same time receive the Notice of the Annual General Meeting (AGM). By way of proxy form, Shareholders may vote in advance of the AGM. All Shareholders are invited to attend the AGM at which the results are considered and questions may be answered by the Board. Following each AGM, a notice is posted on the corporate website confirming that all resolutions have been passed. To provide more information to Shareholders, following future AGMs, a notice will be posted outlining the specific results of voting on all resolutions including any actions to be taken as a result of resolutions for which votes against have been received from at least 20% of independent Shareholders.
Beyond the Annual General Meeting, the Chief Executive Officer, Chief Financial Officer and, where appropriate, other members of the senior management team meet regularly with investors, analysts and media to provide them with updates on the Group's business and to obtain feedback regarding the market's expectations of the Group.
The Company engages in a minimum of two investor roadshows per annum.
Presentations by the Executive Directors of interim and full-year results are offeredto all major Shareholders. Other Shareholders are welcome to contact the Company and wherever possible their concerns or questions are responded to by a Director in person.
Furthermore, the Group invites investors and potential investors to visit the premises of its subsidiary companies, should they wish to see day-to-day operations and speak with representatives from the Group in a more informal setting.
General information about the Group is also available via the Company's corporate website, www.flowtechfluidpower.com, which includes further information about the business, reports and key documents and recent company announcements. Interested parties have the opportunity to register for RNS alerts, to keep them informed when important announcements are released.
Shareholder feedback is regularly presented and reviewed at Board meetings. On an ongoing basis, the Board is also furnished with brokers' and analysts' reports when published.
The Company maintains a dedicated email address and telephone number which investors may use to contact the Company which, together with the Company's address, are prominently displayed on the Contacts page of the Company's website. Investors may also make contact requests through the Company's joint brokers, Zeus Capital and FinnCap.