Corporate governance is the framework of business principles, structures and controls within which the Group, its management, directors and shareholders operate. Its aim is to ensure: • accountability;
• transparency of responsibility;
• the appropriate management of conflicts of interest; and • effective relationships between the Company’s stakeholders,
especially its Board, other decision makers (such as Committees) and shareholders.
all of which support the Company’s underlying purpose of creating shareholder value.
This report sets out the practical elements of the Company’s corporate governance policies and practices. It is followed by separate reports from the Nomination and Audit Committees and by the Directors’ remuneration report.
Commitment and basis of reporting
The Company is committed to high standards of corporate governance, including to the principles contained in the revised Combined Code on Corporate Governance which is appended to the Listing Rules of the Financial Services Authority (the Combined Code or Code). The Code, which was published in July 2003, applied formally to the Company for the first time from 1 January 2004.
This report, together with the Director’s remuneration report, describes how the Company applied the Main and Supporting Principles of the Combined Code during the year and, in the section entitled ‘Summary of Combined Code compliance’ on page 45, highlights the one provision with which the Company is not yet fully compliant. Role and responsibilities of the Board, its committees and the Company Secretary
The schedule of matters reserved to the Board for its own and its committees’ decisions provides that the Board’s primary obligation is to lead and control the Company and its business, with exclusive decision making powers over such matters as: overall strategy and resources; investment strategy; remuneration policies; accounting policies; and capital expenditure, acquisitions and debt facilities over certain thresholds. Matters reserved to the Board also include certain key Group policies, appointments and categories of public announcements. The detailed implementation of all these matters, and day-to-day business, are left to management, which reports formally to the Board at least quarterly on underwriting, financial and other operational matters and objectives. The current schedule of matters reserved to the Board is available in the ‘Corporate Governance’ section of ‘Investor Relations’ on the Company’s website or from the Company Secretary on request.
The Board is supplied in a timely manner with the appropriate information to enable it to discharge its duties, including providing constructive challenge to, and scrutiny of, management. Further information is obtained by the Board from the executive directors and other relevant senior executives as the Board, particularly its non- executive members, considers appropriate. Procedures are in place for directors to take independent professional advice, when necessary, at the Company’s expense.
There is a division of responsibilities on the Board between the Chairman, who is responsible for leading and running the Board and related matters such as Board induction and evaluation, and the Group Chief Executive, who has executive responsibility for running the Group’s business. A statement detailing this division of responsibilities, which includes provision for the Chairman’s role in shareholder relations and in ensuring constructive relations between executive and non-executive directors, was in place throughout the year. The Deputy Chairman, Lord Stewartby, is the senior independent director and is designated as an appropriate director to whom shareholders’ concerns may be conveyed if contact through the normal channels of Chairman, Chief Executive or Finance Director has failed to resolve them or is inappropriate. Key parts of the duties of the Board, notably with regard to Board appointments, controls, risk management and remuneration-related matters, are carried out through or on the recommendation of the Board’s Nomination, Audit and Remuneration Committees. The majority of the members of the Nomination Committee and all the members of the other two committees are independent non-executive directors. The terms of reference of each of these committees, as well as a statement of the relationship between the Company and its remuneration advisers, are also available in the ‘Corporate Governance’ section of ‘Investor Relations’ on the Company’s website or from the Company Secretary on request. Further details of the membership and activities of each of the Board’s Nomination and Audit Committees are contained in their separate corporate governance reports. Similar details of the Remuneration Committee are contained in the Directors’ remuneration report. The Board is supported by the Company Secretary who, under the direction of the Chairman, helps to ensure good communication and information flows within the Board, including between executive and non-executive directors and between the Board and its committees (to all of which either he or his deputy acts as Secretary). He is also, with the Chairman, a guardian of all Board procedural matters, regularly advises the Board on governance matters and facilitates the Board updating and induction work outlined below.
The non-executive directors also met on a number of occasions during the year without executive directors or other executive management present, including at least once without the Chairman. The Chairman chairs full non-executive meetings and the senior independent director chairs meetings when the Chairman is not present.
Board meetings
The Board meets on a regular basis, holding six main pre-scheduled Board meetings in 2004 (2003: seven) plus a planning and strategy day (2003: one). In addition three single item Board meetings were held at shorter than usual notice (2003: one). The attendance record during the year of each director at the six main Board meetings was as follows:
Board meeting attendance 2004
Number of meetings Number of meetings Committee member whilst a director attended
N J C Buchanan 4 4 B D Carpenter 6 6 R A Hextall 6 6 A W Holt 6 6 R S Joslin 6 6 K T Kemp 6 5 J M Kennedy 3 2 R W Mylvaganam 6 5 C E L Philipps 6 6 J R Sanders 3 2 J L Stace 3 2 Lord Stewartby 6 6 R J Taylor 6 6 Average % attendance 93%
In addition, all ten directors serving in November 2004 attended the planning and strategy day referred to above. The three formal one-item meetings, of which all directors received notice and the opportunity to comment on the proposed business, were attended by six, two and two directors respectively.
Board terms of appointment, membership and time commitments The Articles of Association of the Company provide that, following a director’s election by shareholders at the Annual General Meeting immediately following his or her initial appointment by the Board, no director may serve in office in excess of three years before being required to submit himself or herself to shareholders for re-election. Details of the procedures whereby appointments and re-appointments to the Board are considered on a formal, rigorous and transparent manner, on merit and against objective criteria, are set out in the Report from the Nomination Committee.
At the start of the year the Board comprised: the Chairman, seven other non-executive directors (of whom, from January 2004, five were classified as independent and two not) and four executive directors. On 22 March 2004 a new independent non-executive director, Mr Nigel Buchanan, was appointed to the Board and at the Annual General Meeting (AGM) on 19 May 2004 three non-executives, Messrs Kennedy (independent), Sanders (independent) and Stace (non-independent), retired. There were no other changes in the Board during or since the year and thus from 19 May 2004 to date the Board has comprised: the Chairman, five other non-executive directors (of whom four are independent) and four executive directors. Biographical details of all the current directors are included on pages 36 and 37.
The Board continues to satisfy itself that the Chairman has sufficient time available to devote to his duties as non-executive Chairman of Amlin. He entered into a minimum time commitment to Amlin from 2004 onwards of 75 days per annum. Each of the other non- executive directors has also made the following minimum annual time commitments in respect of their periods of service from 1 January 2004 onwards:
Deputy Chairman, Chairman of the Audit Committee and a member of the Remuneration
and Nomination Committees (Lord Stewartby): 35 days
Chairman of the Remuneration Committee and a member of the Audit Committee (until May 2004, Mr Kennedy; thereafter, Mr Mylvaganam, who is
also a member of the Nomination Committee): 30 days
Other non-executive directors (plus an extra five days if a member of both the Audit and
Remuneration Committees): 20 days
Further details of the terms of appointment of both the non-executive and executive directors are set out in the Directors’ remuneration report, which refers to executive service contracts and non-executive letters of appointment, copies of both of which are available for inspection at the Company’s registered office.
Board independence
The non-executive Chairman was independent, in terms of the new Combined Code, on his appointment in 1998.
Apart from Mr Kemp, from late January 2004 onwards, and Mr Stace, who served as a non-executive for five months from his retirement from executive office until leaving the Board in May 2004, all the non- executive directors serving during or since the year were determined by the Board as being independent in character and judgement with (in the words of the Combined Code) ‘no relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement’.
Until 31 December 2002 Mr Joslin was Vice Chairman of State Farm Mutual Automobile Insurance Company (State Farm), which is a 9.8% shareholder in the Company and until November 2004 provided material Letter of Credit facilities to the Group (on commercial terms). As stated in last year’s Annual Report, with effect from 1 January 2004, Mr Joslin has been classified as independent, notwithstanding provision A.3.1 of the Code which suggests that a three year period should elapse following such relationship. The Board continues to consider that an exception to this provision is justified as neither State Farm nor the Board consider him as any form of conduit of information between them, he has no continuing personal interests in State Farm and, most importantly, his previous directorship of State Farm does not, in practice, affect his independent judgement as an Amlin director.
Lord Stewartby reached his ninth anniversary as a director of the Company in October 2004. Notwithstanding provision A.3.1 of the Code regarding length of service, the Board continues to classify him as independent, bearing in mind that the merger of the Company with Murray Lawrence in 1998 so transformed the size and scope of the Company’s business as to
CORPORATE GOVERNANCE REPORTS
render the earlier service of questionable relevance. The Board is also mindful of the need to maintain sufficient continuity on its Board and on important Board committees, such as the Audit Committee, where specific longer term experience of a Lloyd’s underwriting group are particularly valuable. The Board has resolved that Lord Stewartby remains robustly independent in character and judgement, has no relationships that are relevant to such independence and that his circumstances are not such as to require that his independent status should be altered.
Messrs Kennedy and Sanders, who both left the Board in May 2004, had also by that time both served on the Board for more than nine years. As outlined in last year’s corporate governance statement, for similar reasons to those now applying to Lord Stewartby the Board continued to classify each of them as independent throughout their periods of service.
From June 2002 to September 2004 Mr Kemp was temporarily Chief Financial Officer of Montpelier Re Holdings Limited (Montpelier), with which the Group’s managed syndicate already had a qualifying quota share arrangement (on commercial terms) prior to his appointment to that position. The Board considered that this should not alter his independent status. However, for commercial reasons the syndicate entered into more substantive reinsurance arrangements with Montpelier from January 2004 (again on commercial terms). Although Mr Kemp was not involved in the negotiation of these arrangements, the Board considered that the business relationship between Amlin and Montpelier, of which Mr Kemp presently remains a non-executive director, had become sufficiently material that it was no longer appropriate for Mr Kemp to be classified as independent. Mr Kemp’s re-classification meant that, instead of at least half the Board being independent non-executive directors throughout the year as had been envisaged, for most of the year such independents (excluding the Chairman) comprised less than half the Board. Nonetheless the Board believes that the continuing value of Mr Kemp to the Board outweighs this consideration and thus, although he left the Remuneration Committee in January 2004, he has remained on the Board.
Directors’ re-elections
The present three year terms of office of Messrs Taylor, Joslin, Kemp and Mylvaganam, and Lord Stewartby, all expire at the forthcoming AGM on 18 May 2005. The Board has accepted the recommendations of the Nomination Committee that they each be nominated for re- election. In view of his length of service, Lord Stewartby is to be proposed for a term of office of one year only. The other candidates are to be proposed for re-election for the usual three year terms. Board information and professional development
In addition to information about the Company, all directors are provided with written materials on their responsibilities as directors of a public company and on other relevant regulatory, legal, accounting and insurance industry matters, including through web access to a directors’ update service provided by the Company’s lawyers, Linklaters. Update sessions on technical and/or industry matters are included regularly as part of Board meetings and, in addition, the Company encourages, facilitates and monitors other professional development for both executive and non-executive directors as is required for their particular roles and responsibilities. The Company maintains a model director induction programme, which is tailored to suit the needs of any new
director joining the Board. The director who joined the Board during the year, Mr Buchanan, undertook the programme.
Board evaluation
During the year the Board formally evaluated the performance of the Board as a whole, its Committees and each director. The evaluations were initiated by comprehensive questionnaires completed by each director giving his assessment of both collective and individual performances, including self-evaluation. The results of the evaluation of the Board as a whole were summarised by the Chairman and, at its meeting in January 2005, the Board agreed its conclusions. A similar procedure was adopted by each Board Committee, with the results being reported by each Committee chairman to the Board.
The Chairman also discussed the conclusions on each individual director, including the performances of executive directors in respect of their boardroom as opposed to executive roles, at private meetings with the director concerned. Executive directors’ managerial roles continue to be assessed as part of the Group’s well-established executive Performance Development Review process, in respect of which the Chief Executive’s performance is reviewed by the Chairman. The Chairman’s own evaluation, which was also initiated with a questionnaire completed by all directors, was conducted by the non-executive directors led by the senior independent non-executive Director. Conclusions were discussed and agreed with the Chairman by the senior non-executive director.
As well as providing useful feedback for all concerned, the results of the evaluations were used when considering nominations for re-election and in non-executive succession planning.
Relations with shareholders
The Company has been committed for many years to a process of continuing dialogue with its shareholders. In addition to usual briefings on financial results, the Company made appropriate contact during the year with institutional investors and their representative bodies, both as issues or developments arose and through a series of lunches between some of the larger shareholders and non-executive directors led by the Chairman with the Chief Executive in attendance.
Shareholder views on the Company are the subject of specific reports at Board meetings at least twice annually. An independently conducted survey of institutional shareholders’ investment criteria, and their perceptions of the Company, its management and its investor communications, first conducted in 2003, was repeated in December 2004 and its results were presented to the Board in January 2005. Further details of investor relations activities are included in the relevant section of the OFR.
Annual General Meeting participation and voting
Shareholders are encouraged to attend the Annual General Meeting, when a presentation on the Group’s progress is made each year. The Company also attaches importance to encouraging a high level of voting participation at its general meetings, receiving proxies representing 65%, 69% and 76% of its shares in issue at its 2002, 2003 and 2004 AGMs respectively. Details of electronic proxy voting, which is being made available for the first time for the 2005 AGM, are included in the AGM circular and Notice of Meeting. For many years the totals of proxy votes on each resolution, including details of any votes withheld
(i.e. deliberately abstained), have been announced after each resolution has been dealt with on a show of hands. In 2004 such proxy voting results were also announced through a regulatory news service and on the Company’s website. In the event of a close result as indicated by the proxies held by the chairman of the meeting, it is the Company’s policy that the chairman would call a poll, but this has not yet proved necessary.
Accountability and internal control
The Company has an ongoing process for identifying, evaluating and managing its significant risks. This process has been in place throughout the year and up to the date of approval of the Annual Report. The process and its findings are regularly reviewed by the Audit Committee, which reports on the matter to the Board, and accords with the guidance in the document ‘Internal Control: Guidance for Directors on the Combined Code’ published by the Institute of Chartered Accountants in England and Wales. As discussed in more detail in the ‘Corporate responsibility’ section of the Directors’ report, this process explicitly includes the risks, and opportunities to enhance value, arising from social, environmental and ethical matters. The directors are responsible for the Company’s systems of internal control and in respect of the year ended 31 December 2004 the directors have reviewed the effectiveness of these systems which are designed to provide reasonable, but not absolute, assurance against material avoidable loss or misstatement of financial information. They are also designed to manage rather than eliminate the risk of failure to achieve business objectives. Other procedures which may assist the
effectiveness of internal controls, such as ‘whistle blowing’ procedures whereby any member of staff may take matters of concern direct to the head of Audit & Compliance or, if appropriate, to the Chairman of the