Corporate Governance
(Statement from the Annual Report and Accounts 2007)

Compliance with the Combined Code
Board composition and operation
Nomination Committee
Remuneration Committee
Audit Committee
Treasury Committee
Internal Control
Going concern
Communications with shareholders
Organisation and people

The Board is committed to maintaining high standards of corporate governance throughout the Group and therefore applies, where they are deemed appropriate, the principles of corporate governance set out in the Combined Code (the “Code”) as issued in June 2006. The statement below describes how the directors have applied the principles of corporate governance and the extent to which the principles and provisions of the Code have been complied with during the financial year ended 30 December 2007. The one departure from full compliance is explained below.

From 1 January 2008, upon the appointment of Michael Ruettgers as a non-executive director and Chairman, the Board comprises nine directors: the Chairman, three executive directors and five non-executive directors, of whom three are independent in accordance with the terms of the Code. The three independent non-executive directors, in accordance with the Code, are: BM Rose, RK Graham and R Eckelmann. There have been some changes to the composition of the Board during 2007 and these are summarised in the table below: 

                                                                         Number of executive       Number of non-executive executive  
                                                                         Directors directors          during the period  
                                                                         during the                        Not
Period                                                               period                              Independent               Independent
1 January to 15 January 2007                        4                                         3                               1
16 January to 28 February 2007                    5                                         3                               1
1 March to 8 November 2007                         4                                         3                                1
9 November to 31 December 2007                 3                                         3                                2
From 1 January 2008                                      3                                        3                                 3


The Board considered that, on his appointment as Chairman, M Ruettgers met the independence criteria as set out in provision A.3.1 of the Code. Biographical details of the directors serving as at the date of the 2007 Annual Report are given in Corporate Officers.


Compliance with the Combined Code

The Group has complied, throughout the financial year ended 30 December 2007, with the provisions set out in Section 1 of the Code except that, during the year, at least half the Board, excluding the Chairman, did not comprise non-executive directors determined by the Board to be independent. (Code provision A.3.2). The Board considers that it has an appropriate number of directors, who amongst them have the appropriate range of skills and experience given the size and complexity of the Group. The Board’s view is that the independent directors are of sufficient calibre and number that their views carry appropriate weight and influence on the Board’s decision making.

Board composition and operation

The Board considers all of its non-executive directors to be independent in character and judgement. However, only BM Rose, RK Graham and R Eckelmann are independent in terms of Code provision A.3.1 as none of these non-executive directors: 

• has been an employee of the Group within the last five years;
• has, or has had within the last three years, a material business relationship with the Group;
• receives remuneration other than a director’s fee, participates in the Company’s share option schemes or is a member of the Company’s pension scheme;
• has close family ties with any of the Group’s advisers, directors or senior employees;
• holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;
• represents a significant shareholder; or
• has served on the Board for more than nine years.

The division of responsibilities between the Chairman of the Board and the Chief Executive Officer is clearly delineated, set out in writing and is regularly reviewed and monitored by the Board.

BM Rose is the Senior Independent Non-executive Director.

All directors must submit themselves for election at the annual general meeting following their appointment and, thereafter, for re-election at least once every three years. The non-executive directors are generally initially appointed for fixed terms of three years. In 2006, the Board (in accordance with the terms of the letter of appointment) invited DJ Carey and RK Graham to serve for an additional period of three years and BM
Rose for an additional period of two years; the non-executive directors accepted these extensions to their term of appointment. The Group seeks to retain the services of the non-executive directors for periods that may be longer than is recommended by the Code due to their experience and knowledge. The terms and conditions of appointment of non-executive directors are available for inspection at the Company’s registered office during normal business hours. These terms and conditions are also made available for inspection on the day of the annual general meeting.

There is a formal schedule of matters reserved for the Board which has been reviewed and updated during 2007. The responsibilities of the Board include: determining and setting the strategic direction of the Group and approving the business plan and annual budget; ensuring that high standards of corporate governance are maintained; monitoring the performance of the Group; approving financing and significant capital expenditure; authorisation of significant transactions; reviewing the Group’s systems of risk management and internal control; approving appointments to the Board and of the Company Secretary; determining the scope of delegations to Board committees; approving policies relating to directors’ remuneration; the appointment and removal of the principal advisers and auditors; and ensuring that a satisfactory dialogue takes place with shareholders. The Board is responsible for reviewing and approving the annual report and accounts, the interim report and quarterly results announcements and for ensuring that these present a balanced assessment of the Group’s position.

The Board delegates to management responsibility, inter alia, for: the implementation of the strategies and policies of the Group as determined by the Board, monitoring the operating and financial results against budgets and managing and controlling the allocation of capital, human and technical resources. The Board regularly receives detailed financial and operational information in order for it to monitor the performance of the key areas of the business. 

The Board normally meets monthly and may meet at other times at the request of any director. The number of scheduled Board meetings and committee meetings attended by each director during the year was as follows: 

                             Scheduled              Audit                 Remuneration           Nomination
                             Board                     Committee         Committee                 Committee
                             meetings                meetings           meetings                    meetings     

DJ Carey              11 (11)                     n/a                      n/a                                 4 (8)
AD Milne               11 (11)                     n/a                      n/a                                1 (1)
DA Shrigley          11 (11)                     n/a                      n/a                                7 (7)
JM Urwin              11 (11)                     n/a                      n/a                                 n/a
M Cubitt*               11 (11)                     n/a                      n/a                                 n/a
GR Elliott**             1 (2)                         n/a                      n/a                                 n/a
BM Rose               11 (11)                     6 (6)                  7 (7)                              8 (8)
RK Graham           11 (11)                     6 (6)                  7 (7)                              8 (8)
R Eckelmann         11 (11)                     6 (6)                  7 (7)                              8 (8) 

* appointed to the Board on 15 January 2007
** resigned from the Board on 28 February 2007

(The figures in brackets indicate the total number of meetings held in the period during which the individual was a director and a member of the relevant Committee).

When directors were unable to attend Board meetings they were provided with all of the documentation for the meeting and were given the opportunity to provide their views to the Chairman or the Chief Executive Officer regarding the matters to be discussed. The minutes from the meeting were then provided as appropriate.

During the year, the Chairman has held meetings with the non-executive directors without the executive directors present.

An induction process is in place for any new directors, tailored to the individual directors’ requirements in the light of his or her experience and prior industry knowledge.

In 2007, the Board again applied a formal process for evaluating the performance and effectiveness of the Board, its committees and its members. This was performed through a series of detailed questionnaires completed by the members of the Board and its committees. The results of this evaluation were collated and reported by the Senior Independent Non-executive Director to the Chairman so that follow up actions could be implemented. The general results of this evaluation process were communicated to the rest of the Board and any specific feedback communicated to the individual directors. Appropriate actions were then identified and taken. The Senior Independent Non-executive Director conducts the performance evaluation of the Chairman, taking into account the views of all directors. A formal process of evaluation of the performance and effectiveness of the Board and its committees is conducted on an annual basis.

All directors have access to the advice and services of the Company Secretary and to provision of independent professional advice in furtherance of their duties at the Company’s expense. The Company maintained directors’ and officers’ liability insurance cover throughout 2007. This insurance cover has been renewed for 2008.

The Board has a Nomination Committee, Remuneration Committee and Audit Committee. The terms of reference for each committee can be found on the Investor Relations further information. The Board also has a Treasury Committee.


Nomination Committee

Committee Chairman:         DJ Carey (until 31 December 2007)
                                          M Ruettgers (from 1 January 2008)
Committee Members:         AD Milne (until 28 February 2007)
                                          DA Shrigley (from 1 March 2007)
                                          BM Rose
                                          RK Graham
                                          R Eckelmann

A majority of the members of the Nomination Committee during the year were independent non-executive directors. The Nomination Committee, which meets not less than once per year, has responsibility for considering the size, structure and composition of the Board and its committees, the retirements and appointments of additional and replacement directors and makes appropriate recommendations to the Board. It is considered by the Board to be appropriate to have the Chief Executive Officer as a member of this committee as he has many years of experience in the industry and is able to provide valuable input regarding suitable candidates for the Board.

During 2007, the Nomination Committee led the search for a successor to the Chairman of the Board and an external search consultancy was engaged to assist with this process. This involved a detailed process of identifying the skills and experience that the ideal candidate for this position would require as well as the amount of time that the individual would need to devote to the role. BM Rose chaired the Nomination Committee when it was dealing with this appointment. This process resulted in the appointment, from 1 January 2008, of M Ruettgers as Chairman of the Board.

The Nomination Committee considers that the current composition of the Board is satisfactory to provide the proper governance, administration and business counsel of the Company’s affairs. It will continue to monitor the situation in 2008.

The other significant commitments of each non-executive director are required to be disclosed to the Board prior to their appointment and the Board is kept informed of subsequent changes to these commitments. Details of M Ruettgers’ professional commitments are included in his biography on page 30. M Ruettgers holds a number of other directorships but the Board is satisfied that these are not such as to interfere with the performance of his duties as Chairman of the Company.

The terms of reference of the Nomination Committee were reviewed during the year and there were no significant changes to these terms.


Remuneration Committee

Committee Chairman:        BM Rose
Committee Members:         R Eckelmann
                                          RK Graham
                                          M Ruettgers (from 1 January 2008)

Only non-executive directors served on the Remuneration Committee in 2007 although the Chief Executive Officer is normally invited to attend meetings of this Committee. M Ruettgers, upon his appointment as a non-executive director of the Company and Chairman of the Board on 1 January 2008, became a member of the Remuneration Committee.

The Remuneration Committee, which normally meets at least three times a year, has the delegated responsibility:  

• for making recommendations to the Board on the policy for remuneration of executive directors and other senior management;
• for reviewing the performance of executive directors and senior management; and
• for determining, within agreed terms of reference, specific remuneration packages for each of the executive directors and senior management, including pension rights, any compensation payments and the implementation of executive incentive schemes.

The Board is responsible for setting the remuneration of the non-executive directors subject to the limits contained in the articles of association. In accordance with the Remuneration Committee’s terms of reference, no director may participate in discussions relating to his own terms and conditions of service or remuneration. During the year the Terms of Reference of the Remuneration Committee were reviewed, revised and approved by the Board. The revisions to these Terms of Reference did not fundamentally alter the role and responsibilities of the Remuneration Committee.

During 2007, the business discussed and considered by the Remuneration Committee included: 

• approval of cash bonus payments in respect of 2006;
• review and approval of 2007 salaries for directors and senior management;
• setting of performance targets for 2007 performance-related remuneration for directors and senior management;
• negotiation and approval of remuneration packages for incoming directors and senior management;
• obtaining and reviewing comparative remuneration data from external organisations;
• review of compensation structure for employees across the Group;
• review and approval of company-wide share option awards;
• review and approval of profit share for all staff;
• review of the Company’s pension arrangements including the funding position of the defined benefit pension scheme;
• review and updating of the Committee’s terms of reference; and
• consideration of 2008 executive remuneration policy.

Further information regarding the activities of the Remuneration Committee in 2007 are included in the Directors’ Remuneration Report which is set out on pages 39 to 50 of the 2007 Annual Report.

Executive directors can accept external appointments as non-executive directors of other companies and retain any fees paid to them if such an appointment does not conflict with their duties to the Company. Specific approval of the Board is required in each case. JM Urwin is a nonexecutive director of System Level Integration Limited and, during 2007, he was also elected to the board of the Global Semiconductor Alliance; he does not receive any remuneration from these appointments. AD Milne was a non executive director of Edinburgh Research and Innovation Limited until 31 August 2007 and he did not receive any remuneration from this appointment. During 2007, AD Milne was appointed as a director and chairman of Edinburgh International Science Festival Limited and he did not receive any remuneration from this appointment. DA Shrigley is a non-executive director of Rambus, Inc. (a company listed on NASDAQ) and he receives and retains the remuneration from this appointment, as set out in the Directors’ Remuneration Report on page 42 of the 2007 Annual Report.

Audit Committee

Committee Chairman:        RK Graham
Committee Members:         BM Rose
                                          R Eckelmann

Only independent non-executive directors serve on the Audit Committee and members of the Audit Committee have no links with the external auditors. The Board considers that the members of the Audit Committee have sufficient recent and relevant financial experience to discharge its functions. Members of this committee have considerable past employment experience in either finance or accounting roles or comparable experience in corporate activities. The Audit Committee normally convenes at least three times per year and meets the external auditors at least twice a year with no executive directors present. During 2007 the Audit Committee met six times with the external auditors present at four of these meetings.

During the year the Terms of Reference of the Audit Committee were reviewed, revised and approved by the Board. The revisions to these Terms of Reference did not fundamentally alter the role and responsibilities of the Audit Committee.

The Audit Committee is responsible for, amongst other things, making recommendations to the Board on the appointment of the external auditors and their remuneration. The Audit Committee considers the nature, scope and results of the auditors’ work and reviews (and reserves the right to approve) any non-audit services that are to be provided by the external auditors (see later reference to Policy on Use of External Auditors for Non-audit Services). On internal controls, the Audit Committee reviews the programmes of both the external auditors and the internal audit function and findings therefrom. It receives and reviews reports from management and the Group’s auditors relating to the Group’s annual report and accounts. The Audit Committee focuses particularly on compliance with legal requirements, accounting standards and the Listing
Rules and on ensuring that the auditors have full access to accounting records and personnel to enable them to undertake their work. The ultimate responsibility for reviewing and approving the annual report and accounts remains with the Board.

During 2007, the business discussed and considered by the Audit Committee included: 

• the review of the Group’s preliminary announcement of the financial results for the year ended 31 December 2006, the 2007 interim results announcement and the quarterly results announcements prior to approval by the Board and their release;
• the consideration and review of the Group’s 2006 financial statements and the 2007 interim report prior to Board approval and reviewing the relevant external auditor’s detailed reports;
• monitoring the ongoing compliance with International Financial Reporting Standards (“IFRS”) by the Group and by the Company;
• the consideration and review of the appropriateness of the Group’s and the Company’s accounting policies in accordance with IFRS in particular the policies in respect of the accounting for the business combinations that occurred in 2007;
• the consideration and review of compliance with legal requirements and the Listing Rules of the Financial Services Authority;
• review of key performance indicators;
• the review and discussion of the proposals from the external auditors and the internal audit function regarding their audit programmes for 2007 with particular regard to the assessment of internal systems and controls;
• the approval of the audit fee and reviewing non-audit fees payable to the Group’s external auditors;
• reports from management on the Group’s main risks and the assessment and management of those risks;
• the review of the reports from the internal audit and compliance functions and the external auditors on the Group’s systems of internal control and its effectiveness, reporting to the Board on the results of the review;
• the review of the appropriateness of the Group’s (whistle blowing) policy by which staff of the Company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters;
• the consideration and review of non-audit services by the external auditors in accordance with the policy regarding the provision of those services;
• the monitoring and assessment of the independence of the external auditors; and
• the review of the performance of the external auditors at the beginning of 2007 which resulted in the Audit Committee recommending that a resolution for the re-appointment of KPMG Audit Plc as the Company’s external auditors be proposed to shareholders at the annual general meeting in May 2007.

The Audit Committee has discussed with the external auditors their independence and has reviewed the written disclosures received from them as required by the Auditing Practices Board’s International Standard on Auditing (ISA) (UK and Ireland) 260 ‘Communication of Audit Matters to those Charged with Governance.’

During the year, the Audit Committee reviewed the ‘Policy on the Use of External Auditors for Non-audit Services’ which aims to monitor the nonaudit services being provided to the Group by its external auditors. The purpose of this review was to consider whether the policy continues to be appropriate or if any amendments to the policy were required. No significant amendments were made to the policy as a result of this review other than the level of expenditure above which requires the approval of the chairman of the Audit Committee. This policy should ensure that nonaudit work is only undertaken by the external auditors when they are the most suited to undertake it. Any non-audit work involving expenditure of more than $30,000 requires approval of the chairman of the Audit Committee. The policy specifically prohibits the external auditors from: making management decisions for the Group; being put in the role of advocate for the Group or conducting any other work which is prohibited by ethical guidance. The amounts paid to the external auditors during the year for audit and other services are set out in note 3 to the financial statements on page 63. The amount of non-audit fees was higher in 2007 compared to 2006 as a result of: the provision of financial and taxation due diligence services in respect of the acquisitions carried out by the Company during the year and also export regulations advice, which the audit firm were considered to be best-placed to provide expeditiously given their knowledge of the Company. However the amount of non-audit fees is not significant overall and therefore it is considered that KPMG’s independence is not compromised.

The Audit Committee also monitors the arrangements by which staff of the Company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters (whistle blowing). A policy was implemented and communicated to all staff several years ago which details the arrangements which are in place for the proportionate and independent investigation of such matters and for the appropriate follow up actions. This policy was reviewed during the year and is considered still to be appropriate. It is included in the staff handbook and employees have been reminded during 2007 that this policy is contained within the handbook.

Treasury Committee

The Treasury Committee is chaired by RK Graham and its other members are: the Chief Executive Officer and the Chief Financial Officer. This committee meets periodically, as required, and provides a report to the Board after each meeting. The Treasury Committee reviews the Group’s overall financial risk management including specific areas such as: foreign exchange risk (and related hedging policies); interest rate risk; credit risk and liquidity management. The Treasury Committee reports to and makes recommendations to the Board regarding these matters.

Internal control

The Board has overall responsibility for the Group’s systems of internal control and risk management and for monitoring their effectiveness. The purpose of these systems is to manage, rather than eliminate, the risk of failure to achieve business objectives, and provide reasonable assurance as to the quality of management information and to maintain proper control over income, expenditure, assets and liabilities of the Group with particular reference to the risks identified. No system of control can, however, provide absolute assurance against material misstatement or loss.

The Board confirms that it has reviewed the effectiveness of the system of internal control for the period under review and up to the date of the approval of the financial statements. The Board has established an internal control framework consistent with the guidance issued by the Turnbull Committee. The Board seeks regular assurance to enable it to satisfy itself that the systems of internal control are functioning effectively and to ensure that they are effective in managing risks. The key elements of the systems of internal controls are as follows:

Control environment

The Group has operational and financial controls and procedures. These controls include physical controls, segregation of duties, authorization controls and reviews by management.

Risk identification

The Board has established a process of identifying, evaluating and managing the key commercial, financial and general risks facing the Group’s business. This risk identification and review process has been in place for the year under review and up to the date of approval of the Annual Report and Accounts. The Board undertakes a quarterly review to analyse how the key business risks are being managed consistent with the expansion of the business and its risk profile. Regular meetings take place to review the status of actions, procedures and controls aimed to mitigate or manage the key business risks. The outcomes from these meetings are reported to the Board on a quarterly basis. The key business risks identified are taken into account by the Board when assessing the Group’s internal controls.

Financial reporting and monitoring of operations

A detailed annual plan is collated from submissions by each functional department. The plan is reviewed by the executive directors and approved by the Board. The annual plan is rolled forward on a quarterly basis and is used to monitor and control actual performance. Monthly financial information, including trading results, a cash flow statement and balance sheet details are presented and explained, in comparison to the plan, to the Board. The trading and operating results, compared to the plan, for each business unit are also reported to the Board each month.

The executive directors hold meetings on at least a weekly basis with the senior managers to review business and financial performance compared to the plan and forecasts and also to discuss operational matters including order levels compared to forecasts, product and project status and manufacturing statistics. Relevant matters arising from these meetings are reported to the Board.

Capital investment

Capital expenditure requirements are assessed as part of the annual plan. Strict authorisation processes are laid down for the making of capital investment commitments against the plan.

Monitoring and corrective action

There are procedures in place to monitor the systems of internal controls. These include the performance of internal audit procedures which are aligned with the areas of key business risk. The annual internal audit plan is reviewed and approved by the Audit Committee. Reports of the findings and conclusions, from the internal audit procedures, are reviewed by the Audit Committee and the status of the implementation of the agreed
actions is monitored. The Group has a Quality Management System ‘QMS’, which conforms to BSI ISO9001: 2000. This lays out the fundamentals required to control all aspects of product development and delivery in support of the Group’s business goals and customer satisfaction. An integral part of the QMS is the phase review process for delivering and monitoring the introduction of new products. Internal audit procedures are conducted to ensure ongoing compliance with the requirements of BSI ISO9001: 2000. 

Going concern

The directors have reviewed the latest forecast results and cash flow projections. The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The financial statements have therefore been prepared on a going concern basis.


Communications with shareholders

The directors believe firmly in the importance of communication with shareholders. In order to provide information regarding the Group’s trading and financial performance on a regular basis, the Company produces quarterly results announcements.

The Group also has a policy of maintaining an active dialogue with institutional shareholders through individual meetings with members of the Board and their participation in conference meetings and calls relating to results announcements. After these meetings the views of these shareholders are reported to and discussed by the rest of the Board. All non-executive directors are available to meet with major shareholders if requested.

During the year a regular dialogue has been maintained with institutional shareholders, analysts and the financial press. Investor relations and other information is published on the Company’s website.

The Board has access to the services of Makinson Cowell Limited as external corporate and investor relations consultants. Makinson Cowell provide independent advice to both executive and non-executive directors regarding the relationship between the Company and its institutional investors and produce regular written reports for the Board.

Shareholders who attend the annual general meeting (“AGM”) are invited to ask questions and meet with the directors informally after the meeting. The numbers of proxy votes cast in respect of each resolution are announced after the resolution has been voted on. Following the AGM in 2007, a summary of the proxy votes lodged was published on the Company’s website. The Company intends to propose a separate resolution at the AGM in 2008 on each substantially separate issue and, in particular, intends to propose a resolution at the AGM relating to the Annual Report and Accounts. The chairmen of the Audit, Remuneration and Nomination Committees are available to answer questions relating to the Annual Report and Accounts at the AGM. Notice of the AGM and related papers are sent to shareholders at least 20 working days before the meeting.

Organisation and people

In April 2007, the Company appointed a Vice President of Human Resources, bringing significant experience to the leadership team. During the year, an Organisational Development Strategy was launched with the following goals: 

• progress towards a leading organisation aligned to the Company’s overall strategy and growth plans;
• maximise and appropriately reward the contribution of employees;
• establish world class leadership, management and technical capabilities;
• embed appropriate values and behaviours to deliver continuous improvement and execution;
• ensure robust integrity and corporate governance practices are in place.

During 2007, the Company also launched the Wolfson “Vision, Mission and Values” which clearly outlines the behaviours which should be demonstrated by all employees within the Company. The Company is continually assessing how well the values are understood with feedback informing the Company’s future development activities.

The Company has improved its communication programmes and provides regular updates to employees across all locations. These include the Company newsletter, all employee briefings by the CEO and senior management team following the quarterly results announcements, and monthly cascades of business pertinent information. Employees are encouraged by senior management to ask questions in order to enhance their understanding of business developments and the factors affecting the Company and to raise areas of concern or ideas for development or improvement.

Performance Management and Organisational Development

In 2007, the Company introduced a new global performance management process, designed to measure both an employee’s performance against agreed objectives and against Company values. Information from the performance management process informs the Company’s reward mechanisms and provides information on learning and developing needs for the business. All employees participate in the performance review process which is aimed at continuous improvement.

The Company is committed to developing quality leadership, technical and management capability. During 2007, the Company designed a management development programme for roll out in 2008. It is the Company’s intention that by the end of 2008, all managers will have attended this programme, which will provide them with improved management skills and will help the Company achieve its plans. The employees of Oligon and Sonaptic are now an integral part of the Group.

This year the Company has also invested in the project management teams who work alongside the Company’s development teams to ensure delivery of key project milestones to target timescales and cost. The Company has invested in project management skills training for those employees within the project management and development teams to assist closer collaboration between the teams.

The Company continues to support professional development and is currently supporting a number of employees studying for professional qualifications. The Company supports professional qualifications and reimburses professional institution membership fees where appropriate.

Recruitment 

The ongoing success of the Company is dependent on the talent of the employees and the Company continues to hire new, experienced employees as needed but within the boundaries of its business and financial plans. The Company remains committed to growing and developing its own talent and continues to hire graduate engineers, some of whom have been sponsored by the Company while at university.

The Company is currently developing a structured graduate development programme so that it can help develop the Company’s leaders of tomorrow.

The Company’s employment policy is to treat all employees in accordance with local employment legislation, fairly and equally, within a safe and healthy work environment.

Share ownership 

The Company operates discretionary employees’ share schemes. This includes the Company’s All Employee share option scheme which, although discretionary, is used to provide option grants to the Company’s employees. In this way, the Company seeks to encourage the involvement of employees in the Company’s performance.