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On behalf of the Board, I am pleased to present the Corporate Governance Statement for the period under review. Corporate governance is not simply an exercise in compliance, but a key foundation for the long term success of the Group and, as Chairman, I am conscious of my responsibility to provide leadership to the Board in order to ensure its effectiveness and enable the delivery of the Group's long term strategy. The Board considers this corporate governance statement, as set out below, to be important as it explains the governance of the Group and identifies how we apply The UK Corporate Governance Code's ("the Code") principles relating to the role of the Board, its effectiveness and accountability, but also as it forms part of our wider engagement with shareholders and other stakeholders.
The UK Corporate Governance Code, as published in June 2010, contains the principles and provisions that the Board was required to consider in respect of the corporate governance practices in the Group during the 52 week period ended 30 December 2012. We are committed to maintaining high standards of corporate governance throughout the Group and therefore aim to apply the principles of corporate governance set out in the Code. We are pleased to confirm that we complied with the Code in respect of this period.
We believe that good governance involves ensuring that the business is being led in the right strategic direction; that the executives are leading and managing the Group effectively and are accountable; that the Group has appropriate controls in place and that risks are managed; and our actions are in the best interest of the Company's shareholders and its wider stakeholders. The activities of the Board and its Committees, as described in this statement, underpin the Company's commitment to achieving these objectives.
Ultimately, however, culture and behaviour are the real factors that create good governance – and this has to be led, by example, from the top. The Board, executives and non-executives alike, are conscious of this and strive to create the right environment for this strategy to flourish.
The Board is accountable to the Company's shareholders for good corporate governance. The Code emphasises the Board's responsibility for providing the leadership to promote the long term success of the Group within an effective framework of authority and accountability that encourages innovation and best practice, while properly managing risk. We acknowledge the importance of having an appropriate balance of skills, experience, independence and knowledge of the Company on the Board.
Ross Graham's period of service as a non-executive director reached nine years in September 2012 and therefore, in terms of the Code's criteria for independence, he is deemed not to be independent from that time. In order to allow for the smooth transition of Ross' roles on some of the Board committees and his position as Senior Independent Director, he stepped down from those roles from 8 June 2012. The details are provided on page 41 of the Annual Report and Accounts 2012. I thank Ross for his significant commitment, financial expertise and enthusiasm which he brought during his tenure as chairman of the Audit Committee in particular. In view of the considerable listed company and extensive financial experience which he brings to the Board, Ross was invited to continue to serve as a non-executive director following the nine year anniversary of his appointment.
In September 2012 one of our other non-executive directors, David Milne, retired from the Board. David was a founder of the Company and played a crucial role in the creation and successful development of the Company over the past 28 years from a start-up design house to a listed global semiconductor Company. David has made a huge contribution to the Company and the Board in his roles as founder and Chief Executive Officer (until 28 February 2007), as an executive director (until 8 November 2007) and then as a non-executive director. The Board thanks David for his outstanding contribution to the success and development of the Company and wishes him well for the future.
The Board has enhanced further its high standards of corporate governance relating to the evaluation of the Board performance and the re-election of directors. Although the Company was not in the FTSE 350 in the current or the previous reporting period, the Board believes that annual re-election promotes its accountability to shareholders. Therefore, all Board members offered themselves for re-election at the Annual General Meeting ('AGM') in 2012 and will again offer themselves for re-election at the AGM in 2013.
We report on pages 44 and 45 of the Annual Report and Accounts 2012 on the Board and Committee evaluation process carried out in 2012. For the first time, the evaluation was externally facilitated by an independent consultancy experienced in board evaluation procedures. We report on the methodology used and the outcome – the agreed actions from the recommendations have been or are being implemented. The Board will conduct an internal evaluation review process in 2013.
The emphasis in the Code on risk management and on shareholder engagement is consistent with the Board's approach and activity over the last two years with notably a stronger link between our strategic review, our approach to risk management and the remuneration policy. This is communicated by our on-going and regular meetings and communications with shareholders.
Monitoring the level of risk and the governance to support risk management has therefore been an important focus involving the support of both the Audit Committee and the senior management team. It is important that we ensure that the risk identification, assessment and monitoring procedures remain active and adaptive and thus reflect the effects of relevant changes to the economic, general market and competitive environment within which the Group operates.
Although not effective until the Group's financial year 2013, the Board is also conscious of the revised UK Corporate Governance Code issued by the Financial Reporting Council in September 2012 ("the 2012 Code") - in particular, the 2012 Code provisions relating to: fair, balanced and understandable annual reports; greater disclosure around audit committee activities; external audit tenders (for FTSE 350 companies only); and boardroom diversity. We consider diversity more broadly than just gender – we believe it is important to get the right balance of independence, skills, knowledge and experience – in reality, 'diversity of thought'. In 2013 the Board will address further these aspects of the 2012 Code to ensure that it remains compliant, as far as practicable and appropriate in view of the size and complexity of the Group, with best practice and high standards of corporate governance.
The statement that follows 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 52 week period ended 30 December 2012.
The Group has complied, throughout the 52 week period ended 30 December 2012, with the provisions of the UK Corporate Governance Code ("The Code") as issued by the Financial Reporting Council in June 2010.
For the current reporting period, the Company is deemed to be a "smaller company" in terms of provision B.1.2 of the Code, and has had at least two independent non-executive directors throughout the 52 week period ended 30 December 2012. Also, throughout the 52 week period ended 30 December 2012, at least half of the board (excluding the chairman) comprised independent non-executive directors as defined in Code provision B.1.1.
In addition, by implementing both an externally facilitated evaluation of the Board at least every three years, and the annual re-election of the directors by shareholders, the Company is achieving higher corporate governance standards than is mandated by the provisions in the Code as they relate to "smaller companies".
To the extent that it is not specifically included in this Corporate Governance Statement, the information required by section 7.2 of the Disclosure Rules and Transparency Rules of the UK Listing Authority is included in the Directors' Report (pages 36 to 38 of the Annual Report and Accounts 2012).
Board composition and operation
From the beginning of 2012 until 11 September 2012, the Board comprised eight directors: the Chairman, two executive directors and five non-executive directors. AD Milne resigned as a non-executive director of the Company on 11 September 2012 from that date, and until the date of approval of the Annual Report and Accounts 2012, the Board has comprised seven directors: the Chairman, two executive directors and four non-executive directors. RK Graham was the Senior Independent Director until 8 June 2012. R Eckelmann serves as the Senior Independent Director from that date. The roles and other biographical details for the directors who held office at 30 December 2012 and until the date of approval of the Annual Report and Accounts 2012, are set out on pages 34 and 35 of the Annual Report and Accounts 2012.
The changes in the Board composition during the period since 2 January 2012 are summarised below:
Number of executive directors during the period
Number of non-executive directors during the period
|2 January - 11 September 2012||
|12 to 24 September 2012||
|From 25 September 2012||
*as defined in Code provision B.1.1
The Board considers all of its non-executive directors to be independent in character and judgement. However, only R Eckelmann, G Collinson, and J Grant were independent in terms of Code provision B 1.1 throughout the 52 week period ended 30 December 2012, as none of these:
- has been an employee of the Company or Group within the last five years;
- has, or has had within the last three years, a material business relationship with the Company or 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 Company's or 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.
In accordance with the terms of the Code, RK Graham satisfied the independence criteria until 25 September 2012, when he had served as a non-executive director of the Company for nine years. In view of his ceasing to satisfy the Code's independence criteria, on 8 June 2012 RK Graham stepped down as the Senior Independent Director and from the Audit and Remuneration Committees . Also with effect from 8 June 2012:
- R Eckelmann became the Senior Independent Director;
- J Grant became the chairman of the Audit Committee and a member and chairman of the Treasury Committee (as it is appropriate that the chairmanship of both of these committees is held by the same independent non-executive director). Also, to address the appropriate membership constitution of the committees, J Grant became a member of both the Remuneration and Nomination Committees with effect from the same date; and
- G Collinson became a member of the Nomination Committee.
The membership of each committee of the Board during 2012 is shown on pages 45 to 49 of the Annual Report and Accounts 2012.
The Board considers that it has an appropriate number of directors, who amongst them have the necessary balance of skills, experience, independence, and knowledge given the size and complexity of the Group. The directors contribute a range of complementary skills, knowledge and experience to the Board. Biographical details of the directors serving as at 30 December 2012 are given on pages 34 and 35 of the Annual Report and Accounts 2012. 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. All directors are aware of their responsibility to take decisions objectively which promote the success of the Company for the benefit of its members and other stakeholders.
The Company's Articles of Association require that all directors must submit themselves for election at the annual general meeting ('AGM') following their appointment and, thereafter, for re-election at least once every three years. Any director who has held office with the Company, other than employment or executive office, for a continuous period of nine years or more at the date of the AGM shall retire from office.
RK Graham has now served as a non-executive director of the Company for more than nine years and is therefore subject to this annual re-election provision. Although it is not a requirement of the Code for "smaller companies", the Board believes that annual re-election promotes its members' accountability to our shareholders. Each director stood for re-election at the 2012 AGM and all directors were re-elected. All directors will be offering themselves for re-election at the 2013 AGM.
The non-executive directors are generally initially appointed for fixed terms of three years, subject to election and re-election by shareholders. The Group in certain circumstances may seek to retain the services of a non-executive director for periods that may be longer than is recommended by the Code due to their special experience and knowledge.
|Non-executive director||Date of original appointment as non-executive director of the Company||Length of tenure as a non-executive director of the Company as at 30 December 2012||Date term of appointment extended until (upon invitation from the Board to serve for an additional period)|
|G Collinson||1 September 2008||4 years & 4 months||31 August 2014|
|R Eckelmann||1 November 2004||8 years & 2 months||31 October 2013|
|RK Graham||25 September 2003||9 years & 3 months||25 April 2013|
|J Grant||1 September 2011||1 year & 4 months||n/a - within original 3 year term|
|M Ruettgers||1 January 2008||5 years||31 December 2013|
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 Company's annual general meeting.
Chairman and Chief Executive
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.
The Chairman is responsible for leadership of the Board and for ensuring its effectiveness. He sets the agenda for Board meetings, in consultation with the Chief Executive Officer and the Company Secretary, and is responsible for ensuring that the directors are provided with information in an accurate, clear and timely manner and the promotion of effective decision making. The Chairman is also responsible for ensuring that the interests of the Company's shareholders are safeguarded and that there is effective communication with them. In addition, the Chairman is responsible for ensuring that the Board plays a full and constructive part in the development and determination of the Group's strategy and overall commercial objectives. The Chairman is accountable to the Board for leading the direction of the Group's corporate strategy and for the overall supervision of the Group's policies governing the conduct of its business. The Chairman is also charged with ensuring that the directors continually update their skills and knowledge and that the performance of the Board, its committees and the individual directors are evaluated on an annual basis. The Chairman is responsible for promoting high standards of integrity, probity and corporate governance throughout the Group and particularly at Board level.
The Chief Executive Officer provides leadership to the Group to enable the successful planning and execution of the objectives and strategy agreed by the Board. The Chief Executive Officer is therefore primarily responsible for the day to day management of the Company's business. He is also responsible for: the stewardship of the Group's assets; promoting and conducting the affairs of the Group with the highest standards of integrity, probity and corporate governance; proposing and developing strategic objectives for the Group; managing the Group's risk exposures in line with Board policies; implementing the decisions of the Board; and facilitating appropriate and effective communication with shareholders.
There is a formal schedule of matters reserved for the Board which has been reviewed and updated since the beginning of 2012. 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; authorising 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; dealing with the appointment and removal of the Company's 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 management report and half yearly financial report and quarterly results announcements and for ensuring that these present a balanced assessment of the Group's position. The Business Review on pages 4 to 19 of the Annual Report and Accounts 2012 provides details of the strategy of the Company and Group and explanations of the business model and activities conducted by the Group.
The Board delegates to management responsibility, inter alia, for: the implementation of the strategies and policies of the Group as determined by the Board; 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 main areas of focus for the Board, amongst other areas, during 2012 are summarised as:
Strategy formulation, implementation and monitoring
- Received regular updates from the Chief Executive Officer on progress regarding implementation of the Group's strategy
- Attended meetings with the senior management team to review, update and challenge the strategy review, including the product development roadmap
- Regular review of competitive landscape, including analyses / presentations from the Chief Operating Officer, Chief Commercial Officer and the Portfolio Director
- Reviewed both monthly reports and, as required, update reports during particular months, from the Chief Executive Officer and the senior management team on the key issues affecting the business
- Reviewed, on a monthly basis, the performance compared to the financial and non-financial metrics in the business scorecard
- Reviewed reports in advance of each Board meeting from the Chief Financial Officer on monthly and quarterly performance against budget and forecast
- Reviewed reports, in advance of each Board meeting, from the Chief Financial Officer on the financial position of the Group, which included treasury management
- Approved the full year 2011 and half year 2012 results announcements and quarter one and quarter three results of the Group prior to their publication
- Reviewed reports on peer group comparison of results following the release of each quarter’s results
- Reviewed the Company’s dividend policy to ensure it is appropriate at the current time
- Approved the Group's budget for 2013 and long-range plan
Governance and risk
- Reviewed reports on governance matters, including changes arising from the revision of the UK Corporate Governance Code in 2012
- Reviewed the effectiveness of the Board during the externally facilitated Board evaluation process
- Performed regular review of the significant risks affecting the Group and conducted a risk review analysis with the senior management team as part of the strategy review update
- Reviewed the effectiveness of the systems of internal control and risk management for the period.
- Reviewed and approved the corporate Intellectual Property Policy
- In respect of the Annual Report and Accounts 2011, ensured that procedures and confirmations were in place to establish that all directors were satisfied that the external auditors were made aware of relevant audit information
- Received reports from the chairman of each of the Board committees following each meeting of those committees
- Approved the visits by the chairman of the Remuneration Committee (plus another non-executive director) to major shareholders to consult on proposals for executive remuneration for 2013 and linkage to the Company’s strategy (refer to page 56 of the Annual Report and Accounts 2012 for further details)
- Reviewed reports from the corporate brokers/financial advisers on shareholder feedback from meetings ,with the Chief Executive Officer and Chief Financial Officer, following the full year 2011 and half year 2012 results announcements
- Approved the 2011 annual report, the 2012 half year report prior to their publication
- Approved the Notice of the 2012 Annual General Meeting prior to its publication and all directors attended the Annual General Meeting held on 26 April 2012
- Reviewed the draft contents for inclusion in the draft Annual Report and Accounts 2012 , particularly in respect of Corporate Governance and the description and explanation of the Company’s business model and strategy
Attendance at Meetings
The Board requires all directors to devote sufficient time to discharge their duties effectively and to use their best endeavour to attend meetings. The Board normally meets at least eight times during the year 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 52 week period ended 30 December 2012 was as follows:
|Scheduled Board meetings||Audit Committee meetings||Remuneration Committee meetings||Nomination Committee meetings|
|M Ruettgers||7 (8)||n/a||5 (5)||2 (2)|
|JM Hickey||8 (8)||n/a||n/a||n/a|
|M Cubitt||8 (8)||n/a||n/a||n/a|
|AD Milne*||5 (5)||n/a||n/a||n/a|
|RK Graham**||8 (8)||2 (2)||2 (2)||2 (2)|
|R Eckelmann||8 (8)||5 (5)||5 (5)||2 (2)|
|G Collinson***||8 (8)||5 (5)||5 (5)||1 (1)|
|J Grant****||8 (8)||5 (5)||3 (3)||1 (1)|
(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).
* resigned from the Board on 11 September 2012
** a member of the Audit and Remuneration Committees until 8 June 2012
*** a member of the Nomination Committee from 8 June 2012
****a member of the Remuneration and Nomination Committees from 8 June 2012
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.
In addition to the scheduled Board meetings noted in the table above, an annual two day strategy review was held with the Board and senior management team at which the Group's strategy, progress with the strategy and competitive positioning were reviewed in depth.
Information, Support and Development
Prior to each Board meeting an agenda, together with supporting papers, are circulated to the directors with all the necessary information. The Chief Executive Officer and the Chief Financial Officer ensure that the rest of the Board is kept aware, on a timely basis, of business issues and prospects throughout the Group.
All directors receive regular briefings which are designed to update their knowledge on a regular basis, for example in relation to the business, its technology and product developments, market analyses and on legal and regulatory requirements. During the year, Board members attended the strategic review meetings where specific industry sector information was communicated. Detailed briefings were also provided to the directors during 2012 particularly in relation to the UK Corporate Governance Code (revised 2012), the Department for Business Innovation & Skills' (BIS) consultations in relation to shareholder voting rights on remuneration issues and revised remuneration reporting regulations and also the BIS consultation regarding narrative reporting.
During the year, the Chairman held meetings with the non-executive directors without the executive directors present.
All directors have access to the advice and services of the Company Secretary and to the 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 2012. This insurance cover has been renewed for 2013.
An induction process is in place for any new director, tailored to the individual director's requirements in the light of his or her experience and prior industry knowledge.
In order to comply with the Code and in an effort to strive for continual improvement in the effectiveness of the Board, its committees and the individual Board members, the Board applies a formal process for evaluating the performance and effectiveness of the Board, its committees and its members.
The Board acknowledges that the Code recommends that an external evaluation of performance of the board of FTSE 350 companies should be undertaken at least every three years. Although this Code provision does not apply to the Company, which was not in the FTSE 350 in the current reporting period nor in the prior reporting period, the Board considered introducing external independent facilitation of the Board evaluation process, and proposes to use an external facilitator every third year, starting in 2012, to complement and enhance the questionnaire-based Board evaluation procedures which have been adopted in prior years.
The evaluation of the Board, which is led by the Chairman, aims to be as rigorous and objective as possible. It considers the Board's strengths and weaknesses, its range and balance of skills, experience, independence and knowledge of the Company, its diversity, how the Board works together as a unit and any other factors considered relevant to its effectiveness. Individual evaluation aims to consider whether each director continues to contribute effectively and to demonstrate commitment to the role (including time commitment).
During 2012, this Board and Committee evaluation exercise was conducted with the facilitation of external advisers, ICSA Board Evaluation, who had no other connection with the Company and were not subject to any conflict of interest. The evaluation process included a series of in-depth one to one meetings with each director, within a framework of topics agreed by the Chairman. Feedback from the evaluation was provided in the form of a report which was presented by ICSA at a meeting of the Board, which then discussed the findings, ICSA recommendations and the evaluation process itself. The agreed improvement actions have been, or are in the process of being, implemented
The Senior Independent Director conducts the annual performance evaluation of the Chairman, taking into account the views of all directors.
In addition to the formal Board evaluation process, the Chairman also discusses the effectiveness and performance of directors immediately before they make themselves available for reappointment. The Notice of the 2013 Annual General Meeting confirms that performance of the directors being proposed for reappointment continues to be effective and that they continue to show commitment to their role.
Conflicts of Interest
The Company has procedures in place to deal with conflicts of interest and believes that the procedures are operated appropriately, in accordance with the Company's Articles of Association and relevant legislation. Any decision of the Board to authorise a conflict of interest is only effective if it is agreed without the conflicted directors being included in the quorum at any meeting at which such authorisation is given.. The Board will continue to monitor and review potential conflicts of interest on a regular basis. The Audit Committee will keep under review any conflict or potential conflict of interest situations authorised by the Board and determine whether it is appropriate for such matter to remain so authorised. No such conflicts existed during 2012.
Committees of the Board
The Board has a Nomination Committee, a Remuneration Committee and an Audit Committee. The terms of reference for each committee can be found on the Investors section of the Group's website at www.wolfsonmicro.com. The Board also has a Treasury Committee.
- M Ruettgers
- G Collinson (from 8 June 2012)
- R Eckelmann
- RK Graham
- J Grant (from 8 June 2012)
A majority of the members of the Nomination Committee during the 52 week period were independent non-executive directors. G Collinson and J Grant, each being independent non-executive directors, became members of the Committee from 8 June 2012. RK Graham, in terms of the Code, no longer satisfied the independence criteria from 25 September 2012 but remained a member of the Committee as there were still a majority of independent members of the Committee and the Board agreed that this Committee would continue to benefit from RK Graham's extensive business and corporate governance experience.
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. The changes to the roles and membership of the Committees of the Board, effective from 8 June 2012, as explained on page 41 of the Annual Report and Accounts 2012 were recommended by the Committee and approved by the Board.
The Nomination Committee has reviewed the size, composition and structure of the Board and considers that the current composition of the Board is appropriate to provide the proper governance, administration and business counsel of the Company's affairs.
The other significant commitments of each non-executive director are required to be disclosed to the Board prior to his appointment and the Board is kept informed of subsequent changes to these commitments.
The Terms of Reference of the Nomination Committee were reviewed during the period and there were no significant changes to these terms.
- G Collinson
- R Eckelmann
- M Ruettgers
- RK Graham (until 8 June 2012)
- J Grant (from 8 June 2012)
Only non-executive directors served on the Remuneration Committee in 2012 although the Chief Executive Officer is normally invited to attend meetings of this 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 making recommendations to the Board on the shape of incentive arrangements throughout the Group;
- 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 period since the beginning of 2012 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 2012, the business discussed and considered by the Remuneration Committee included, amongst others:
- review of AGM voting guidelines, as issued by investor groups, in respect of the notice of the 2012 annual general meeting;
- approval of cash bonus payments in respect of 2011;
- assessment of the extent to which performance conditions had been achieved for those performance share plan awards and share option awards which had been granted in 2009 and the performance period for those awards concluded at the end of 2011;
- obtaining and reviewing comparative remuneration data from external organisations;
- review of compensation structure for employees across the Group;
- review and approval for 2012 of increases in base salaries for employees other than the executive directors and the other members of the senior management team;
- review and approval for 2012 of the decision, in view of the Group's 2012 budget and general company practice in UK and overseas, for no increase in base salaries for the executive directors and the other members of the senior management team;
- agreement of 2012 remuneration packages and setting of performance targets for 2012 performance-related remuneration for directors and senior management;
- review and approval of long term incentive arrangements for awards in 2012;
- review and approval of the terms for the awards under the Executive Deferred Bonus Plan in 2012;
- review and approval of contingent share awards in 2012 to employees, other than executive directors and senior managers;
- review and approval of cash bonus arrangements for all employees in 2012;
- approval of the terms of and grant of share option awards under The Wolfson Microelectronics Approved Save As You Earn scheme;
- review of the Company's pension arrangements including the funding position of the defined benefit pension scheme;
- review of terms, and recommendation to the Board to obtain agreement with the Trustees, to the offer of an Enhanced Transfer Value to the deferred members of the defined benefit pension scheme (refer to notes 4 and 20 to the financial statements on pages 93 and 107 of the Annual Report and Accounts 2012);
- review of the Committee's Terms of Reference;
- review of best practice in remuneration policies;
- review and consideration of the Department of Business Innovation & Skills' (BIS) consultation regarding executive remuneration regulations and compilation of a response from the Committee to the consultation;
- review and consideration of the Association of British Insurers' (ABI) 'Principles of Remuneration' published in November 2012;
- agreement of proposals to be discussed in meetings held in December 2012 with shareholders and investor bodies (which the chairman of the Committee attended accompanied, at those meetings, by the Senior Independent Director or another non-executive director) for the outline proposals for the policy and structure of executive remuneration in 2013;
- review and discussion, with the rest of the Remuneration Committee, of feedback from the meetings held in December 2012 with shareholders and investor bodies.
Further information regarding the activities of the Remuneration Committee in 2012 is included in the Directors' Remuneration Report which is set out on pages 56 to 73 of the Annual Report and Accounts 2012.
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. Neither of the executive directors currently hold external appointments as non-executive directors of other companies.
- J Grant (from 8 June 2012)
- RK Graham (until 8 June 2012)
- R Eckelmann
- G Collinson
- J Grant (was a member of the Committee throughout 2012 and became chairman of the Committee with effect from 8 June 2012)
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 experience in finance or accounting roles or comparable experience in corporate activities.
RK Graham stepped down from being chairman and a member of the Audit Committee with effect from 8 June 2012, as explained on page 41 of the Annual Report and Accounts 2012. J Grant, having previously served as a member of the Committee, became Committee chairman from 8 June 2012. As referred to in the biography on page 35 of the Annual Report and Accounts 2012, J Grant also chairs the Audit Committee in three other companies where he holds non-executive director appointments.
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 2012 the Audit Committee met five times with the external auditors present at all of these meetings. The Chairman of the Board is invited to attend, and does attend most, meetings of the Audit Committee.
During the period since the beginning of 2012, 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.
Key responsibilities of the Audit Committee
(summarised from the Terms of Reference of the Audit Committee)
- Monitor the integrity of the Company's financial statements and the form and content of the half yearly financial report and quarterly results announcements regarding the Company's performance.
- Review significant financial reporting judgements contained in the financial statements, in the half yearly financial report and quarterly reports before their submission to the Board for approval.
- Review accounting policies, judgements and disclosures in financial reports.
- Review the Group's system of risk management, regulatory compliance and internal control.
- Review the Company's systems and controls for the prevention of bribery and corruption and receive reports on any non-compliance.
- Review the Group's whistle blowing procedures to ensure that they continue to be appropriate and effective.
- Make recommendations to the Board on the appointment and remuneration of the external auditors and approve their terms of engagement; oversee the relationship with the external auditors; assess the independence of the external auditors and monitor and approve non-audit services provided by the external auditors.
- Monitor the role and effectiveness of the internal audit function, including: resourcing; setting and adherence to the internal audit plan; key findings; management responses; and implementation of corrective actions by management.
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 reference on page 49 of the Annual Report and Accounts 2012 to Policy on Use of External Auditors for Non-audit Services). On internal controls, the Audit Committee participates in the process for identifying and managing risk and links the focus of internal controls and the internal audit programme to the Group's risk register. The Audit Committee reviews the programmes of both the external auditors and the internal audit function and the findings from their audits. 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 2012, the business discussed and considered by the Audit Committee included, amongst others:
- review of the Group's preliminary announcement of the financial results for the 52 week period ended 1 January 2012, the 2012 half yearly financial report and the quarterly results announcements prior to approval by the Board and their release;
- consideration and review of the Group's 2011 financial statements and the 2012 half yearly financial report prior to Board approval and reviewing the relevant external auditor's detailed reports;
- review and consideration of the statement regarding going concern in the 2011 Annual Report and Accounts in respect of the financial statements for the 52 week period ended 1 January 2012;
- monitoring ongoing compliance with International Financial Reporting Standards ("IFRS"), including consideration of the appropriateness of the Group's and the Company's accounting policies in accordance with IFRS;
- review and consideration of the significant areas of management judgement and estimate, in relation to financial reporting matters, as summarised in note 28 to the 2012 financial statements;
- consideration and review of compliance with legal requirements and the Listing Rules and the Disclosure Rules and Transparency Rules of the UK Listing Authority;
- considering and approving the assumptions in the annual review of potential impairment of goodwill, prior to approval by the full Board;
- review of key performance indicators;
- review and discussion of the proposals from the external auditors and the internal audit function regarding their audit programmes for 2012 with particular regard to the Group's risk register and the assessment of the adequacy of internal controls generally;
- approval of the audit fee and review and approval of non-audit fees payable to the Group's external auditors;
- consideration and assessment of information technology systems and controls;
- consideration of business continuity arrangements;
- review of the Group's intellectual property policy and arrangements for its implementation;
- review of reports from management on the Group's main risks and the assessment and management of those risks;
- review of 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;
- review of the appropriateness of the Group's 'whistle blowing' policy;
- review of any conflict or potential conflict of interest situations and determination of whether it is appropriate for any such matter to be authorised by the Board;
- consideration and review of non-audit services by the external auditors in accordance with the policy regarding the provision of those services;
- review and consideration of the Department of Business Innovation & Skills' (BIS) consultation regarding narrative reporting;
- review of draft sections for the Annual Report and Accounts 2012;
- monitoring and assessment of the independence of the external auditors; and
- review of the performance of the external auditors at the beginning of 2012, resulting in a recommendation that the re-appointment of KPMG Audit Plc as the Company's external auditors be proposed to shareholders at the annual general meeting in April 2012.
KPMG Audit Plc have been the Group's auditors since the period before the Company listed on the London Stock Exchange in 2003. The external auditors are required to rotate the audit partner responsible for the Group and subsidiary audits every fifth year; the current audit engagement leader has been in place since 2008 and accordingly a new audit engagement leader shall be responsible for the audit of the 2013 consolidated financial statements of the Group. The Audit Committee remains satisfied with the effectiveness of the external auditors; accordingly, the Audit Committee to date has not considered it necessary or appropriate to initiate a competitive tender for the audit.
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 2012, the Audit Committee reviewed the 'Policy on the Use of External Auditors for Non-audit Services' which aims to monitor the non-audit services being provided to the Group by its external auditors so as to ensure that the independence of the external auditors is not compromised. Some minor amendments were made to the policy as a result of this review. The policy is intended to ensure that non-audit work is undertaken by the external auditors only when they are best suited to undertake it. Any non-audit work involving expenditure of more than $30,000 but less than $50,000 requires approval of the chairman of the Audit Committee, with the approval being reported to the Audit Committee at its next meeting. Any non-audit work involving expenditure of more than $50,000 requires approval of the whole Audit Committee. The policy 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 period for audit and other services are set out in note 5 to the financial statements on page 94 of the Annual Report and Accounts 2012. 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 employees of the Company may raise concerns about possible improprieties in financial reporting or other matters. The "Whistle Blowing" policy, which details the arrangements for the confidential and independent investigation of such matters and the appropriate follow up actions, was reviewed by the Committee during 2012 and is considered still to be appropriate. It is included in the Employee Handbook, which was updated in 2011, and is available for reference to all employees on the Company's intranet.
- J Grant (from 8 June 2012)
- RK Graham (until 8 June 2012)
- JM Hickey
- M Cubitt
- RK Graham (from 8 June 2012)
RK Graham stepped down as chairman of the Treasury Committee on 8 June 2012 but continued to serve as a member (see section Board Composition on page 41 of the Annual Report and Accounts 2012 for further details). J Grant joined the Committee from 8 June 2012 and was immediately appointed Committee chairman. 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 policies of the Group and the Company in these areas are explained in note 23 to the financial statements on pages 118 to 124 of the Annual Report and Accounts 2012. The Treasury Committee reports to and makes recommendations to, the Board regarding these matters.
During 2012, the Committee reviewed the Treasury policies to ensure their ongoing appropriateness and adequacy including the currency hedging policy, as referred to in note 23 of the financial statements on page 118 of the Annual Report and Accounts 2012. In the fourth quarter of 2012, the Committee recommended a modification to the Company's policy to extend the period of currency hedging further into the future. Under the revised policy, forward foreign exchange contracts covering the majority of the US dollar to Sterling exchange rate exposure, which arises on the Company's Sterling denominated overhead costs, will generally be put in place for twelve months ahead on a rolling basis. The previous policy was to hedge a minimum of one quarter ahead (unless otherwise approved by the Board). Under this new policy, the financial year 2013 has been hedged at an average rate of $1.60 to £1.
As previously reported, in November 2011, an independent review was conducted of the Treasury Policy and related processes and procedures to ensure that these are adequate, in line with best practice and properly controlled.
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 is also responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Group's approach to risk management is aimed at the early identification of key risks to the Group's business and the overall strategy, followed by a detailed understanding of the nature of those risks, the probability of them arising and their likely impact if they did occur. Mitigation plans are developed and implemented with the aim of reducing or removing the likelihood of risk occurring or managing the impact if the risk cannot be avoided. The management of risk, particularly a detailed understanding of the risks inherent in the business activities, markets and geographies in which the Group operates, is an integral part of the development and implementation of the Group's strategy.
The Board has overall responsibility for setting the risk appetite and tolerance for the Group; this is achieved by assessing risks against the corresponding business opportunities as part of the process of updating and approving the business strategy (see below).
In 2012, Wolfson conducted its formal risk management review processes in a manner similar to that adopted in 2011. Flowing from the annual strategic review, an updated risk register was generated by the senior management team, designed to align the strategy propositions with the corresponding risks; this reflected both a bottom up and top down analysis of opportunities and related risks. During 2012 this process involved the review of strategy, objectives and activities of the business and its risk profile in the context of the challenging macroeconomic conditions which were experienced during 2012. This updated risk register was reviewed by the Audit Committee and subsequently by the Board, and formally adopted. The risk register is reviewed regularly by the senior management team and pertinent issues arising are reported back to the Board and/or Audit Committee to ensure the Directors are aware of any change in profile and other relevant matters.
It should be noted that, in the context of the Disclosure Rules and Transparency Rules of the UK Listing Authority, section 7.1, the Audit Committee reviews the Company's internal financial controls and the Board of Directors is responsible for reviewing the wider internal control and risk management system.
The Board confirms that it has reviewed the effectiveness of the systems of internal control and risk management 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 risk management and 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 and on-going process for risk identification, evaluation and management
The Group has operational and financial controls and procedures in place. These controls include physical controls, segregation of duties, authorisation controls and reviews by management.
There is an on-going framework for the identification, evaluation and management of the most significant risks faced by the Group. The framework includes: the maintenance of a corporate risk register; a defined organisational structure with appropriate delegation of authority; comprehensive financial review cycle with annual budget approved by the Board and monthly variance analysis against budget; monthly reporting to the Chief Executive Officer, Chief Financial Officer and senior managers; monitoring of key performance indicators by management on a daily basis, regular meetings of the senior management team on at least a weekly basis; a capital investment process.
The identification of the most significant risks that face the Group is the responsibility of the Board. 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 throughout the period under review and up to the date of approval of the Annual Report and Accounts.
Following the extensive reviews performed in 2010 and 2011, and its update during 2012 (and the update of key business risks viewed in the context of the opportunities anticipated in the strategy), the risk register is considered to be well aligned to the strategic management priorities and reflects bottom up and top down analyses of opportunities and related risks.
As explained above, the risk register is regularly reviewed with involvement of the senior management team to ensure that changes in the Company's risk exposure are identified and understood. The Board also undertakes a regular review to analyse how the key business risks are being managed consistent with the strategy, objectives and activities 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; this forms part of the balanced scorecard against which the performance of the senior management team, and the other employees within the Group, is measured. The process to review the risk register is also performed with active senior management participation, such that the directors of the Company are kept aware of the potential cost and resources involved in managing these risks and the operational management actively balance opportunities versus any associated risks.
The key business risks identified are taken into account by the Board when assessing the Group's internal controls. This regular review of risk by the directors and senior management also ensures that changes in the Company's risk exposure are identified, analysed and understood, and that mitigating action is taken to reduce this exposure to an acceptable level. The principal risks and uncertainties facing the Group are explained in the Operating and Financial Review on pages 24 to 33 of the Annual Report and Accounts 2012. Continued on page 2
t: +44 (0)20 7618 9100
f: +44 (0)20 7329 7301
Wolfson Microelectronics plc
26 Westfield Road
Edinburgh EH11 2QB
t: +44 (0)131 272 7000
f: +44 (0)131 272 7001
CFO & Finance Director
Wolfson Microelectronics plc
26 Westfield Road
Edinburgh EH11 2QB
t: +44 (0)131 272 7000
f: +44 (0)131 272 7001
Wolfson Microelectronics plc
26 Westfield Road
Edinburgh EH11 2QB
t: +44 (0)131 272 7000
f: +44 (0)131 272 7001