Corporate governance

“The KCOM Group is committed to high standards of corporate
governance and responsiveness to stakeholder expectations.
We report as fully and transparently as possible on our methods
of corporate governance and on whether we have complied with
the UK Corporate Governance Code. We regularly review published
guidance regarding corporate governance and, wherever possible,
we aim to follow the best practices.”

Bill Halbert
Executive Chairman

Appointment and replacement of Directors

The Articles of Association of the Company require that one-third of the Directors retire by rotation at each Annual General Meeting (AGM); however, Provision B.7.1 of the UK Corporate Governance Code requires that all directors of FTSE 350 companies should be subject to annual election by shareholders. At the time of the 2011 AGM, KCOM Group was not a member of the FTSE 350 and therefore did not implement this provision. However, in September 2011 we became a member of the FTSE 350 and therefore the Board has resolved that at the 2012 AGM the entire Board will be standing for re-election.

The Nomination Committee and the Board as a whole have reviewed the performance and contribution of each of the Directors and have no hesitation in proposing the re-appointment of the entire Board.

In accordance with the Articles of Association, the Board may appoint a new Director at any time but the new Director will only hold office until the next AGM at which point they must stand for election or vacate the office. The Articles of Association state also that the Company may remove a Director by ordinary resolution with special notice before the expiration of their period of office.

Independence

All three of the Non-Executive Directors are considered to be independent in relation to the criteria set out in Provision B.1.1 of the UK Corporate Governance Code and the NAPF Corporate Governance Voting Policy and Guidelines. Martin Towers and Tony Illsley were appointed in 2009 and elected by the shareholders at the AGM in 2009. Graham Holden was appointed by the Board in 2007, elected by the shareholders at the AGM in 2008 and then re-elected by the shareholders in 2011.

The Board reviews the independence of the Non-Executive Directors each year and takes into account the length of tenure, relationships and circumstances as well as the behaviour of the individual at Board meetings and their contribution to unbiased and independent debate. All of the Non-Executive Directors were independent upon appointment and the Board believes that all three remain wholly independent.

Commitments of the Executive Chairman

Bill Halbert works full-time for the Company. He sits on the boards of a number of smaller private limited companies but these do not require a significant time commitment and he manages successfully these commitments alongside his role at KCOM Group. His commitments have not changed significantly in the year.

Monitoring the combined roles of Chairman and Chief Executive

The main principle of the Code, which is supported by Provision A.2.1, is ‘There should be a clear division of responsibilities at the head of the Company between the running of the Board and the executive responsibility for the running of the Company’s business. No one individual should have unfettered powers of decision.’ To ensure that we comply with this principle whilst combining the roles of the Chairman and Chief Executive, we have put the following measures in place:


Balance of Executive and Non-Executive Directors

Group Leadership team by gender


UK Corporate Governance Code

Bill Halbert was appointed as our Executive Chairman in July 2009. Combining the roles of Chairman and Chief Executive is not in accordance with the UK Corporate Governance Code Provision A.2.1 and at the time of his appointment it was intended that his dual role would be for a maximum of two years whilst he oversaw the required transformation of the business. However, in 2011 the Board requested that Bill stay on in a dual role for a further year to oversee the transition into the early stages of the Group’s growth plans. This was a move which was supported by our shareholders, as shown by the re-election of Bill at our AGM in 2011 by 96.2% of our shareholders. Following further consultation with our largest shareholders, who supported unanimously the proposal, the Board has requested once again that Bill remains in his dual role. This reflects the strong performance that the Group has delivered under Bill’s leadership and the desire of the Board and our largest shareholders to ensure that Bill continues to lead the business while we seek to achieve our long-term vision.

Apart from the exception noted above, the Board considers that it has complied with all the detailed provisions of the UK Corporate Governance Code throughout the year ended 31 March 2012 and the Board as a whole is committed entirely to the principle of achieving and maintaining a high standard of corporate governance.

How the Board operates

The Board meets nine times a year and considers all aspects of Group performance. The Board considers both past performance and the future long-term success of the Group and sets accordingly the strategic aims of the Group.

During the year the Board held meetings to consider specifically the future direction of the Group and to discuss, challenge and develop the future strategies of each part of the business.

The Board receives regular reports from the business on financial performance, human resources, health, safety and environmental matters, investor relations, governance and risk, along with regular updates on key projects and strategic programmes.

There is a schedule of Matters Reserved for the Board which is reviewed and updated annually. This schedule requires that specific matters relating to budgets, strategy, performance against objectives, financial reporting, internal controls, communications, remuneration and governance, along with any proposed changes to business operations or the structure and capital of the Company, are referred to the Board for consideration and approval.

The Group operates also within a contracting risk framework which has been drawn up by the internal legal team and which indicates clearly when contractual clauses must be escalated to the Board for approval. Business cases of a certain value are submitted also to the Board for approval, in accordance with our Group-wide delegations of authority.

Our Company Secretary, Kathy Smith, has been with the Group for over six years. She is a Chartered Accountant and Graduate member of the Institute of Chartered Secretaries and Administrators. The Board places great importance on the role of the Company Secretary in helping the Group and the Board to ensure it has the right governance in place.

All the Directors have access to the advice and services of the Company Secretary who ensures that Board processes are followed and that good corporate governance standards are maintained. The Company Secretary meets with each of the Directors individually as necessary to discuss governance-related matters and provides a governance report to the Board on a monthly basis. The Directors are able also to obtain independent professional advice at the Group’s expense whenever necessary.

Board length of service

The balance of the Board

It is the responsibility of the Nomination Committee to review continually the composition and balance of the Board to ensure that it is optimal to meet the requirements of the Group.

During the year the Nomination Committee proposed a Board Appointments policy, which was approved by the Board. This policy sets out the procedure which will be followed in the event of a Board vacancy being identified, along with the approach of the Board to diversity.

The key principle set out in the policy is that the Board will seek always to appoint on merit, in line with the current and foreseeable future requirements of the Group. The Board recognises the benefits of diversity of all types, including gender diversity, and will aim always to develop the diversity of the Board, whilst remaining true to the key principle of appointing on merit. The Board believes that setting specific targets for the proportion of women on the Board may lead to recruitment decisions being made which are not aligned with this key principle.

The policy states also that the Nomination Committee will ensure always that it only uses executive search firms that have signed up to the voluntary Code of Conduct addressing gender diversity and best practice, that female applicants are given the same consideration and opportunity as male applicants and that gender diversity is considered specifically when drawing up a list of potential candidates.

In addition, through the Board Appointments policy, the Board has committed to:

Whilst we do not have currently any female representation on the Group’s Board of Directors, 44 per cent of our Group Leadership team, which sits just below Board level, is female. This is broadly consistent with the proportion of women across the Group as a whole, which sits at 39 per cent.

Training and development

The Board receives monthly updates on governance-related matters and more formal training where appropriate. Potential training needs are discussed as part of individual performance evaluation, plus each Board member is given the opportunity to flag any additional training requirements which they may have identified as part of the annual Board evaluation process.

Performance evaluation

For the past nine years the Board has undertaken a formal internal process to evaluate the effectiveness of its own performance, as well as that of its various Committees. The Board acknowledges that, now it is a member of the FTSE 350, the UK Corporate Governance Code requires an externally facilitated evaluation at least once every three years. As a result of the value gained from the internal process in 2011 it was decided to once again use an internal process in 2012 but to give consideration to an externally facilitated evaluation over the next two years.

The internal evaluation process in 2011 and 2012 has consisted of a questionnaire, drawn up by the Company Secretary, which covers all of the different areas of Board and Committee responsibility. This enables each Board member to provide detailed feedback on how they feel the Board and the Committees have performed. The feedback from the questionnaire is collated and discussed by the whole Board at a subsequent meeting; in addition the Executive Chairman meets with each Board member individually to go through the feedback from the questionnaire and to discuss individual performance. The Non-Executive Directors meet separately to discuss the performance of the Executive Chairman and the Senior Independent Director then discusses this feedback with the Executive Chairman.

The results of the performance evaluation process this year indicated that the Board members are satisfied with the effectiveness of the Board and its Committees, as well as the effectiveness and commitment of each Director. Particular areas of strength were identified during the evaluation, including the level of contact with senior managers outside of the Board, the culture of open challenge and debate in the boardroom and the mutual trust and respect between the Board members.

The process identified the following areas for focus in the coming year:

In 2011 the areas for focus that were identified were:

Area identified What have we done?
The Board requested increased
visibility of succession planning
for key senior management
outside of the Board.
Each member of the senior management team has been through a rigorous assessment process in the year to identify their strengths and potential areas for development, as part of the people strategy work, which is described further on the Corporate responsibility page. The output from this work has been reviewed by the Board and used as the basis for discussions around succession planning. This will continue to be a regular agenda item for the Board going forward to ensure that the Board has the continued visibility that it requires in this area.
The Board proposed obtaining
more formal 360-degree feedback
on Board performance from
senior management.
Formal feedback was obtained from the Group Leadership team, which sits just below Board level, regarding the performance of the Board, the interaction of the Board with senior management and the communication of Board decisions to the rest of the Group. This did not highlight any areas for concern; however, suggestions for minor improvements were discussed and subsequently implemented by the Board.

Meetings

The record of Directors’ attendance at Board meetings is set out below. During the year the Board held nine scheduled meetings.

Six of the meetings were preceded the evening before by an informal meeting allowing more time to debate issues in depth.

Director Number of
meetings
Out of
possible
Bill Halbert (Chairman) 9 9
Paul Simpson 9 9
Kevin Walsh 9 9
Graham Holden 8 9
Tony Illsley 9 9
Martin Towers 9 9

The Non-Executive Directors have a regular dialogue concerning Board matters and the Executive Chairman meets with the Non-Executive Directors, without the other Executive Directors present, at regular intervals. The Non-Executive Directors met formally twice during the year without any of the Executive Directors present to discuss matters, including the performance of the Executive Chairman.

Board Committees

The Board has established and delegated specific responsibilities to the following Committees and takes care to regularly review Committee membership to ensure continued effectiveness. Each Committee reports back to the Board after each meeting and minutes of Committee meetings are circulated to all Board members, where appropriate, to ensure that the whole Board is aware of the matters considered by the Committees.

Remuneration Committee

The membership and attendance at Committee meetings during the year is shown below. The report of the Remuneration Committee and details of its role are given in the Remuneration report.

Audit Committee

The membership and attendance at Committee meetings during the year is shown below. Details of the role of the Audit Committee are given on the Risk management page.

Nomination Committee

The membership and attendance at Committee meetings during the year is shown below.

The Nomination Committee meets as often as required and is responsible for reviewing the structure, size and composition of the Board and ensuring that the balance of skills, knowledge and experience of the Board is right for the Group, both in terms of the current challenges and opportunities facing the Group and the skills and expertise that are expected to be needed on the Board in the future. The approach of the Nomination Committee to diversity on the Board is noted above.

When Board vacancies arise, the Nomination Committee is responsible for preparing a description of the role and capabilities required for a particular appointment and then identifying and nominating candidates for the approval of the Board. In order to identify suitable candidates the Committee uses open advertising or the services of external advisors to facilitate the search, where appropriate.

The Committee is responsible also for considering succession planning for the Directors and for key senior management across the Group; as noted above this has been a matter considered also by the full Board during the year.

The Nomination Committee reviews annually the time required from each of the Directors to perform their role effectively. Following this review in the year, the Committee is satisfied that each of the Directors committed sufficient time during the year to fulfil their duties as Directors of the Company.

The Committee reviews the re-appointment of any Director standing for re-election at the AGM, giving regard to their performance and ability to continue to contribute to the requirements of the Board. The Nomination Committee then makes recommendations to the Board on whether each Director under consideration should be put forward for re-election.

The Committee’s Terms of Reference are in line with the recommendations in the UK Corporate Governance Code and the ICSA Guidance on Terms of Reference for Nomination Committees. Copies of the Terms of Reference are available from the Company Secretary and are on our website, www.kcomplc.com.

Attendance at Committee meetings

Remuneration Committee

Director Number of
meetings
Out of
possible
Graham Holden (Chairman) 7 7
Tony Illsley 7 7
Martin Towers 7 7

Audit Committee

Director Number of
meetings
Out of
possible
Martin Towers (Chairman) 3 3
Graham Holden 3 3
Tony Illsley 3 3

Nomination Committee

Director Number of
meetings
Out of
possible
Tony Illsley (Chairman) 5 5
Graham Holden 5 5
Martin Towers 4 5

Risk management and internal control

The required corporate governance disclosures in respect of risk management and internal control are made within the risk management section of the Directors’ report.

Proposal to re-appoint the external auditors

PricewaterhouseCoopers LLP have advised of their willingness to continue in office and have confirmed their continued independence. Following consideration of the relationship with the external auditors, as described on the Risk management page, the Audit Committee has recommended to the Board that PricewaterhouseCoopers LLP are reappointed and a resolution to reappoint them will be proposed at the AGM. They have provided an independent audit opinion on these accounts which can be found in the Independent auditors' report.

Powers of the Directors

The business of the Company is managed by the Directors, who may exercise all the powers of the Company, subject to the provisions of the Articles of Association, relevant statutes and any special resolution of the Company.

The Articles of Association give the Directors the power to authorise conflicts of interest in relation to transactions or arrangements with the Company, in accordance with the Companies Act 2006. Conflicts of interest are a standing agenda item at Board meetings and each Director proposes any potential conflicts for consideration as soon as they become aware of them. The Director with the potential conflict is excluded from the vote to authorise the transaction or arrangement.

Any conflicts that are authorised are then logged on a register, along with details of any specific terms imposed upon authorisation. Internal controls are in place to ensure that transactions or arrangements which may lead to a potential conflict of interest are conducted on an arm’s length basis.

Substantial shareholdings

As at 31 March 2012, the Company had been notified of the following interests amounting to three per cent or more of the voting rights in the issued ordinary share capital of the Company. As at 23 May 2012, there had been no additional disclosures received.

Substantial shareholdings
Number of shares
with voting rights
% of total
voting rights
Invesco Asset Management 56,146,530 10.87
SVG Capital 27,729,523 5.37
Schroder Investment Management 27,068,801 5.24
Aberforth Partners 26,418,983 5.11
Legal & General Investment Management 18,613,970 3.60
JP Morgan Asset Management 18,035,747 3.49
Scottish Widows Investment Partnerships 17,400,791 3.37

Relations with shareholders

We place a great deal of importance on communicating with our shareholders and understanding their views. Our Executive Chairman and Chief Financial Officer meet regularly with our institutional shareholders to discuss the strategy, performance and governance of the Company and to obtain feedback. There are also general presentations following the interim and final results announcements each year. During the year, meetings have been held with 34 such shareholders.

Since the year end the Executive Chairman and Senior Independent Director have met also with six of our largest shareholders to discuss the current Board structure and the proposal from the Board to extend further the dual role of the Executive Chairman.

Feedback from meetings with shareholders is discussed as a standing agenda item at each Board meeting, along with details of any analyst reports, to ensure that each of our Directors has a clear understanding of the views of our shareholders. Our Non-Executive Directors are available to meet face-to-face with our institutional shareholders if requested to do so, although no such requests have been received during the year.

We have a large number of shareholders in Hull and East Yorkshire and, as a Group, are very much involved in local life in the region. More information about our community activities is on the Corporate responsibility page. We believe that being a part of local life enables us to learn more about our local shareholders and the issues that matter to them.

We consider our AGM to be an important means of communication between our shareholders and our Directors. Our Directors are all available at the AGM to answer questions and we seek to encourage shareholder participation by inviting questions in advance.

We believe that voting on a show of hands at our AGM provides a valuable opportunity for local sentiment and concerns to be expressed but we will keep under review developing best practice with regard to voting of all resolutions on a poll. The results of proxy voting are made available at the AGM and subsequently on our website.

All of our Company announcements are published on our website, together with presentation materials and financial reports, so that all of our shareholders can keep up-to-date with our news.


Directors’ responsibilities statement

The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period.

In preparing these financial statements, the Directors are required to:

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Group’s website, www.kcomplc.com. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors’ statement pursuant to the Disclosure and Transparency Rules

Each of the Directors whose names and functions are listed on the Our Board page confirm that, to the best of their knowledge:

Amendments to the Company’s Articles of Association

Any amendments to the Company’s Articles of Association may be made by passing a special resolution at a general meeting of the shareholders.

Going concern

The Directors confirm that, having reviewed the Group’s budget and forecasts along with the principal risks and uncertainties facing the Group, they are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly the Group continues to adopt the going concern basis in preparing the financial statements.

Signed on behalf of the Board

Kathy Smith

Company Secretary

31 May 2012

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