Board Performance Evaluation

Board Performance

Evaluation

Review of the 2009 annual reports of the

FTSE 200 companies

April 2010

ICSA Board Evaluation

16 Park Crescent



London



W1B 1AH

Phone: 020 7612 7080



E-mail: [email protected]

www.icsaboardevaluation.co.uk

Review of the 2009 annual reports of the FTSE 200 companies

Page 2 of 78

www.icsaboardevaluation.co.uk

Aberdeen Asset Management PLC 8

Admiral Group plc 8 Aegis Group plc 8 Aggreko plc 9 Alliance Trust PLC 9 AMEC plc 9 Amlin plc 9 Anglo American plc 10 Antofagasta plc 10

Aquarius Platinum Limited 10

ARM Holdings plc 10

Arriva plc 11

Ashmore Group plc 11

Associated British Foods plc 11

Astra Zeneca PLC 11

Autonomy Corporation plc 12

Aviva plc 12

Babcock International Group plc 12

BAE Systems plc 13

Balfour Beatty plc 13

Barclays PLC 14

Barratt Developments plc 15

Bellway p.l.c. 15

The Berkeley Group Holdings plc 15

BG Group plc 15

BHP Billiton Limited 16

Black Rock World Mining Trust plc 17

BP p.l.c. 17

British Airways Plc 17

British American Tobacco PLC 17

British Sky Broadcasting Group plc 18

BT Group plc 18

Bunzl plc 18

Burberry Group plc 19

Cable & Wireless plc 19

Cadbury Schweppes plc 19

Cairn Energy PLC 20

Caledonian Investments plc 21

Capita Group Plc 21

Carillion plc 22

Carnival Corporation & plc 22

The Carphone Warehouse Group PLC 22

Catlin Group Limited 23

Centrica plc 23

Charter plc 24

Chemring Group PLC 24

Close Brothers Group plc 25

Cobham plc 25

Colt Telecom 25

Compass Group PLC 26

Croda International Plc 26

Daily Mail & General Trust plc 26

Dana Petroleum plc 27

De La Rue plc 27

Debenhams plc 27

Derwent London plc 28

Diageo plc 28

Dimension Data Holdings plc 28

Drax Group plc 29

DSG International plc 29

Easyjet plc 29

Eurasian Natural Resources Corporation PLC 30

Experian plc 30

Ferrexpo 31

First Group plc 31

F & C Asset Management plc 31

Introduction 5

Review of the 2009 annual reports of the FTSE 200 companies

www.icsaboardevaluation.co.uk

Great Portland Estates plc 33

Greene King plc 33 Halma p.l.c. 33 Hammerson Plc 34 Hargreaves Lansdown Plc 34 Hays plc 34 Henderson Group plc 34

Heritage Oil Limited 35

Hikma Pharmaceuticals PLC 35

Hiscox Limited 36

Hochschild Mining plc 36

Home Retail Group plc 36

Homeserve plc 36

HSBC Holdings PLC 37

ICAP plc 37

IG Group Holdings plc 37

IMI plc 38

Imperial Tobacco Group PLC 38

Inchcape plc 38

Informa plc 39

Inmarsat PLC 39

Intercontinental Hotels Group PLC 40

Intermediate Capital Group plc 40

International Power plc 40

Intertek Group plc 40

Invensys plc 41

Investec plc 42

ITV plc 42

Jardine Lloyd Thompson Group plc 43

Johnson Matthey Plc 43

Kazakhmys PLC 43

Kingfisher plc 44

Ladbrokes PLC 44

Land Securities Group PLC 44

Legal & General Group Plc 45

Liberty International PLC 45

Lloyds Banking Group plc 45

Logica CMG plc 46

London Stock Exchange Group plc 46

Lonmin Plc 46

Man Group plc 47

Marks & Spencer Group plc 48

Meggitt PLC 48

Melrose plc 48

The Mercantile Investment Trust PLC 49

Michael Page International PLC 49

Micro Focus International plc 49

Millenium & Copthorne Hotels plc 49

Misys plc 49

Mitchells & Butler plc 50

Mondi PLC 50

Morrison Supermarkets PLC 51

National Express Group PLC 51

National Grid plc 51

Next PLC 52

Northumbrian Water Group plc 52

Old Mutual plc 52 Party Gaming Plc 53 Pearson plc 53 Pennon Group Plc 53 Persimmon Plc 54 Petrofac Limited 54 Petropavlovsk plc 54 Premier Oil plc 54 Provident Financial plc 55 Prudential plc 55

Contents

Review of the 2009 annual reports of the FTSE 200 companies

Page 4 of 78

www.icsaboardevaluation.co.uk

PZ Cussons Plc 55

Qinetiq Group plc 56

Rangold Resources Limited 56

Reckitt Benckiser plc 56 Reed Elsevier PLC 57 Rentokil Initial plc 57 Resolution plc 57 Rexam PLC 57 Rio Tinto plc 58

RIT Capital Partners plc 58

Rolls-Royce Group plc 59

Rotork P.L.C. 59

The Royal Bank of Scotland Group plc 59

Royal Dutch Shell PLC 60

RSA Insurance Group plc 60

SAB Miller plc 61

The Sage Group plc 61

J Sainsbury plc 62

Schroders plc 62

Scottish & Southern Energy plc 62

Scottish Mortgage Investment Trust PLC 63

Segro plc 63

Serco Group plc 63

Severn Trent Plc 64

Shire Pharmaceuticals Group plc 64

Smith & Nephew plc 64

Smiths Group plc 65

Soco International plc 65

Spirax-Sarco Engineering plc 65

SSL International plc 65

St James’s Place Capital plc 66

Stagecoach Group plc 66

Standard Chartered PLC 66

Standard Life plc 67

Talvivaara Mining Company plc 67

Tate & Lyle PLC 68

Taylor Wimpey plc 68

Templeton Emerging Markets Trust PLC 69

Tesco PLC 69

Thomas Cook Group plc 69

3i plc 70

Tomkins plc 71

Travis Perkins plc 72

Tui Travel PLC 72

Tullow Oil plc 72

Ultra Electronics Holdings plc 73

Unilever PLC 73

United Business Media plc 73

United Utilities Group plc 74

Vedanta Resources PLC 74

Vodaphone Group PLC 75

VT Group plc 75

The Weir Group plc 76

Whitbread PLC 76

William Hill PLC 77

Witan Investment Trust plc 77

Wolseley plc 77

John Wood Group PLC 78

WPP Group plc 78

Xstrata plc 78

Yell Group plc 78

Review of the 2009 annual reports of the FTSE 200 companies

Page 5 of 78

www.icsaboardevaluation.co.uk

Introduction

The Institute of Chartered Secretaries and Administrators (ICSA) has again reviewed, for the 2009 reporting season, the manner in which the top 200 UK listed companies (as at the end of 2009) have chosen to undertake and report their annual evaluation of the performance of the board, the audit, nomination and remuneration committees and the individual members of the board in line with Principle A6 of the Combined Code.

ICSA acknowledges that it is an independent provider of board evaluation services, but it offers this review to promote greater interest in the virtues of well conducted evaluations of boards, committees and directors and in the belief that board evaluation is a key to developing better performing boards. It was stated in the introduction to last year’s report on the 2008 reporting season that ‘in the light of the financial crisis, ICSA believes profoundly that government, regulators, shareholders and boards of directors should be focusing on the value of objective and rigorous evaluations as a means of promoting better governance and achieving better performing boards in all business sectors.’ We believe that that statement of belief is just as relevant at the beginning of 2010.

The setting for this year’s report is the two major reports on governance; the final report of Sir David Walker ‘A review of corporate governance in UK banks and other financial entities’ published in November 2009 and the Financial Reporting Council’s ‘2009 Review of the Combined Code: Final Report’. Both reports discuss board evaluation.

The Walker Review proposes in Recommendation 12 that:

‘ The board should undertake a formal and rigorous evaluation of its performance, and that of committees of the board, with external facilitation of the process every second or third year. The evaluation statement should either be included as a dedicated section of the chairman’s statement or as a separate section of the annual report, signed by the chairman. Where an external facilitator is used, this should be indicated in the statement, together with their name and a clear indication of any other business relationships with the company and that the board is satisfied that any potential conflict given such other business relationship has been appropriately managed.’

Picking up on Sir David’s recommendation, the FRC report states:

3.38. In his report on the governance of banks and other financial institutions, Sir David Walker

recommended that board evaluations should be externally facilitated at least every two or three years. 3.39. It is not entirely clear how many listed companies currently undertake externally facilitated evaluation on a rolling basis. Recent research suggests that approximately 20% of the larger companies involve external advisers each year. Anecdotally, the practice appears to be less frequent among smaller listed companies.

3.40. Most investors and other commentators, including many companies, considered that external facilitation can add a necessary degree of objectivity to board effectiveness reviews. Many of them supported extending Sir David’s recommendation to all listed companies through a new provision in the Code, although some considered that companies should continue to be free to decide whether to involve external advisers without having to comply or explain. Other commentators were concerned at the potential resource implications or were not persuaded that external involvement would add value to the process.

3.41. While acknowledging these concerns the FRC considers, on balance, that the potential benefits resulting from the greater objectivity that an external facilitator can bring to the evaluation process are such that a provision should be added to the Code recommending external facilitation of the board

Review of the 2009 annual reports of the FTSE 200 companies

Page 6 of 78

www.icsaboardevaluation.co.uk

review at least every three years. Those companies that consider this to be unnecessary or undesirable will, of course, continue to be able to choose to explain rather than comply. Those companies that choose to comply will be free to decide what form of external involvement would be most beneficial to them.

The FRC went on to propose, on page 24 of its report, the following actions:

‘ A new provision should be added to the Code stating that board evaluation reviews should be externally facilitated at least every three years, and that any other connections with the reviewer should be disclosed (as is the case with remuneration consultants).

‘ The FRC will discuss with providers of board evaluation services and other interested parties what actions might be taken to address the quality of such services and concerns about conflicts of interest.

‘ Chairmen are encouraged to report personally in their annual statements how the principles in sections A and B of the new Code relating to the role and effectiveness of the board have been applied.’

These are encouraging developments and it is to be hoped that boards (especially the boards of smaller companies) will take account of the views of the FRC in determining their approach to board evaluation.

Additionally, ICSA and the Institute of Directors have launched a joint working group on board performance evaluation. The objective of the group is to develop ‘best practice’ guidance on the undertaking of externally facilitated board evaluations. It is hoped that the guidance will be published by late summer 2010.

As in previous years, we have reproduced from the annual reports of these companies the passages which address the conduct and outcomes of the evaluation processes adopted by each company’s board. We leave it to readers to form their own views on what each company has claimed to have done and chosen to disclose to its shareholders. However we offer the following observations:

1. There continues to be a disappointing level of repetitive, and largely uninformative, ‘boiler plate’ reporting. It is to be hoped that the beneficial influence of the ICSA/Hermes Transparency in Governance Awards will percolate into more companies’ drafting efforts in the next year or so. 2. A number of institutional investors in the top 200 companies seem to be wedded to internally

facilitated evaluations. If investors are to take a lead in promoting better governance in their investee companies, it may be helpful if they consider an externally facilitated board evaluation in 2010. 3. A few companies say that they will consider externally facilitated evaluation when the board considers

it appropriate. One is tempted to ask whether it will ever be ‘appropriate’ when the identical formula has been trotted out for three years!

4. Only 30 (or 15.0%) of the 200 companies covered by this report have elected to undertake some form of externally developed or managed evaluation process. Those companies were:

Anglo American

Associated British Foods (also in 2008) AstraZeneca (also in 2008)

Babcock International (also in 2008) BAE Systems (also in 2008)

Barclays (also in 2006, 2007 and 2008) Barrett Developments

Review of the 2009 annual reports of the FTSE 200 companies

Page 7 of 78

www.icsaboardevaluation.co.uk

BHP Billiton (also in 2008) BT Group

Cable & Wireless

Cadbury Schweppes (also in 2007 and 2008) Centrica (also in 2006, 2007 and 2008) Close Brothers Group

Cobham Drax Group

Eurasian Natural Resources Corporation G4S

HSBC Holdings (also in 2008) IG Group Holdings

Imperial Tobacco Group (also in 2006, 2007 and 2008) Kazakhmys

Lloyds Banking Group (also in 2007 and 2008) Man Group

Mitchells & Butler (also in 2008) National Express Group (also in 2008) Northumbrian Water Group

Prudential (also in 2006, 2007 and 2008) Rotork

Severn Trent (also in 2008)

Smith & Nephew (also in 2006 and 2007) Wolseley

5. Some companies have engaged the services of a search consultant to undertake the evaluation. In view of the conflict of interest where the search firm has an extant and ongoing relationship with a company, it is submitted that one should at least consider whether the review was rigorous, within the meaning of Principle A6 of the Combined Code, and objective.

The fact that only 16% of companies covered by this review have elected to use an external facilitator for their effectiveness evaluation prompts ICSA to express again the hope that companies which have only ever employed an internally driven process will seek periodically to benchmark performance of the board and committees by engaging an external facilitator (of whom there are several) to undertake the performance evaluation process. The real concern is whether an internally driven evaluation process (particularly where it is limited to the use of questionnaires) has been objective and rigorous in every case.

6. Some of the reports are informative and reflect a desire to share helpful information and to improve (?) performance. Ultimately only shareholders can attempt to discover whether reviews have been genuinely rigorous. It is hoped that over time institutional shareholders in particular will begin to take more interest in how companies choose to apply Principle A.6 and its successor under the proposed UK Corporate Governance Code.

Review of the 2009 annual reports of the FTSE 200 companies

Page 8 of 78

www.icsaboardevaluation.co.uk

Aberdeen Asset Management PLC

The board has established a formal process, led by the chairman, for the annual evaluation of the performance of the board, its appointed committees and each director, to ensure that they continue to act effectively and efficiently and to fulfil their respective duties, and to identify any training requirements.

A tailored questionnaire, taking into account developments over the year and including specific references to the

objectives of the board and its committees, was completed by each director. The responses were analysed and the results were subsequently discussed at meetings of the committees and of the board, as well as in individual discussions between the chairman and each director. Additionally, the non-executive directors held a meeting without the executive directors present at which executive directors’ performance was discussed.

The non-executive directors also met without the chairman present to discuss the results of the evaluation of the chairman’s performance, having taken into consideration the views of the executive directors, and the results of this meeting were subsequently discussed between the senior non-executive director and the chairman.

Admiral Group plc

During the year the board carried out an evaluation of itself and its committees. The process was facilitated by the chairman and consisted of the completion of a questionnaire followed by one-to-one discussions between each director and the chairman where the board’s role and structure, process and relationships and any emerging issues were discussed. A final detailed report was circulated to the board and a number of recommendations agreed. The evaluation concluded that the board and its committees performed well during the year and are effective in meeting their objectives and fulfilling their obligations.

The chief executive, to whom they report, appraises the performance of the individual executive directors annually. The chairman, taking into account the views of the other directors, conducts the performance appraisal of the chief executive. The performance of the chairman is reviewed by the non-executive directors, led by the senior independent non-executive director (John Sussens), taking into account the views of the executive directors. John Sussens gave individual feedback to the chairman and was able to confirm that the performance of the chairman continues to be effective, and that the chairman continues to demonstrate commitment to his role.

Aegis Group plc

The non-executives, led by the senior independent director, continued the process of meeting annually without the chairman being present to appraise the chairman’s performance. As a result of this the senior independent director meets with the chairman to discuss any particular issues where it is felt that improvements could be made. In the normal course of business an annual performance review of the board and its committees is undertaken in accordance with A.6.1 of the Code. However, following the change of chairman mid-way through the year and with the other changes in the board it was not considered appropriate to undertake the performance review of the board and its committees during 2008. It is expected that this process will be reintroduced either late in 2009 or early in 2010.

Review of the 2009 annual reports of the FTSE 200 companies

Page 9 of 78

www.icsaboardevaluation.co.uk

Aggreko plc

The board conducts an annual evaluation of its own performance. This involves the completion of assessment questionnaires by all directors covering the performance of the board and its committees. Other aspects that are

reviewed include the effectiveness of the chairman, executive and non-executive directors, the monitoring of operational performance, and corporate governance, as well as leadership and culture. The board considered a summary of the conclusions from this year’s evaluation and appropriate actions were taken.

Alliance Trust PLC

The board is committed to undertaking annual reviews of its own performance, and also the performance of its committees and individual directors. This can be facilitated either internally or, as was the case last year, with external assistance. This year this review was undertaken by way of questionnaires followed by interviews between the chairman and each of the directors, with the company secretary in attendance.

In each case the board and its committees were considered to be functioning effectively.

The senior independent director led the evaluation of the chairman’s performance, which was the subject of discussion at a meeting of the non-executive directors following completion by them of questionnaires which were devised to assess her performance against a series of key attributes for a chairman. The evaluation confirmed that the chairman was effective in her role.

AMEC plc

An internal review of the effectiveness of the board and its committees was carried out during the year by the chairman by way of a review of questionnaires completed at his request by individual directors. Findings were considered by the board as part of its review of both collective and individual board member performance. No material changes were identified as being necessary as a result of this exercise.

The independent non-executive directors also met privately both with and without the chairman present and also with both the chairman and chief executive together to consider management performance and succession issues.

A formal process exists for the directors to take independent professional advice and receive appropriate training in the course of their duties at the company’s expense, organised by the company secretary.

Amlin plc

Since the last annual report the board has both considered an interim progress report from the previous annual board evaluation and undertaken a fresh annual evaluation of the performance of the board, its committees and each director. The annual evaluations were initiated by a questionnaire completed by each director giving his assessment of both collective and individual performances. The results of the latest board evaluation were summarised by the chairman at its meeting in February 2009 and the board agreed its conclusions. Each board committee evaluated its performance in late 2008, and the conclusions were also reported to the board.

The chairman also discussed any issues arising from the evaluation of each individual director, including the performances of executive directors in respect of their boardroom as opposed to executive roles (which are evaluated as part of the

Review of the 2009 annual reports of the FTSE 200 companies

Page 10 of 78

www.icsaboardevaluation.co.uk

group’s regular performance development review process), with the director concerned. The chief executive’s total performance is reviewed by the chairman.

The chairman’s own evaluation was conducted by the non-executive directors led by the senior independent director, taking into account the views of the executive directors. The senior independent director discussed and agreed the conclusions with the chairman.

Anglo American plc

Evaluation of the performance of all board members and members of subcommittees is formally conducted annually by an independent third party, who confers with and assesses the board of directors and subcommittees based on a self-evaluation process, and specific questions and criteria. Each director is encouraged to focus on his or her personal perception of the board as a whole. (The process does not seek to evaluate individuals or their personalities.) Directors are also required to comment on the roles of the chairman and the company secretary. A comprehensive report and feedback are delivered to the board once the results of the assessments have been finalised. Feedback includes the assessor’s thoughts on changes or developments that might assist the board in becoming more effective and more efficient, with particular reference to future objective-setting, strategic thinking and prudent control. Board effectiveness assessments were conducted in 2009 by Thina Siwendu, a specialist in governance, corporate leadership, director development and strategic thinking.

Antofagasta plc

The board periodically considers its performance and effectiveness. A performance evaluation of the board, its committees and its individual members was conducted during 2008 by Mr G S Menéndez, with the assistance of senior management. Mr C H Bailey, as the senior independent non-executive director was responsible for the evaluation of the chairman. The results were discussed with the chairman and considered by the board and were taken into account in the decision to recommend re-election of the retiring directors at the forthcoming Annual General Meeting during 2009. The board is satisfied that each director continues to contribute effectively and to demonstrate commitment to his role.

Aquarius Platinum Limited

The board of Aquarius conducts a performance review of itself on an ongoing basis throughout the year. The size of the company and hands on management style requires an increased level of interaction between directors and executives throughout the year. Board members meet amongst themselves and with management both formally and informally. The board considers that the current approach that it has adopted with regard to the review of its performance and of its key executives, provides the best guidance and value to the group.

ARM Holdings plc

The board undertakes an annual board evaluation. During 2008, this exercise was conducted internally with each director completing a questionnaire and was led by the chairman and facilitated by the company secretary. The evaluation covered board performance, processes, committees, composition, skills and director induction. The overall conclusion was that individual board members are satisfied that the board works well. They are also satisfied with the contribution made by their colleagues and that board committees operate properly and efficiently. Various recommendations resulted from the evaluation which have been discussed by the board and will be acted upon by the board in 2009, as appropriate. In particular, time is now allocated at board meetings and conference calls for discussions between the non-executive directors with and without the chairman present and the chairman will meet regularly with members of the executive

Review of the 2009 annual reports of the FTSE 200 companies

Page 11 of 78

www.icsaboardevaluation.co.uk

committee in 2009. Further, the chief executive officer will meet each non-executive director individually at least once per year. It is intended that there will be a further board evaluation each year, involving external consultants as and when the board deems appropriate.

A full, formal induction programme is arranged for new directors, tailored to their specific requirements, the aim of which is to introduce them to key executives across the business and to enhance their knowledge and understanding of the group and its activities. The group has a commitment to training and all directors, executive or non-executive, are encouraged to attend suitable training courses at the group’s expense.

Arriva plc

Each year the board undertakes an evaluation of its own performance. The performance evaluation for 2008, conducted in early 2009, was led by Steve Williams as the senior independent director and included a specific element concerning an assessment of the performance of the chairman

Ashmore Group plc

The board has established a formal process, led by the chairman, for the annual evaluation of the performance of the board, its appointed committees and each director, to ensure that they continue to act effectively and efficiently and to fulfil their respective duties, and to identify any training requirements.

Meetings were held between the chairman and each individual director in which issues and developments over the year were discussed and performance was considered by reference to the objectives of the board and its committees. The responses were collated by the company secretary and the results and issues raised were subsequently discussed by the board. The board also evaluated the chairman’s performance.

Associated British Foods plc

During the year, the board commissioned Egon Zehnder to carry out an independent evaluation of its performance. The review was conducted by way of a detailed questionnaire completed by each of the directors and the company secretary, followed by one-to-one interviews between each individual and the external consultant.

The review produced areas for consideration, in particular how the board could improve its deliberations. The issues identified have been discussed and changes to board practice implemented as appropriate. Overall, the evaluation process in 2009 confirmed that the board and its principal committees had functioned efficiently during the year and that all the directors continue to contribute effectively and with proper commitment to their roles, including of time.

Astra Zeneca PLC

Prior to the publication of this report, the board conducted its annual review and assessment of how it operates. This was facilitated through a series of web-based questionnaires as well as through interviews between each of the directors and an external facilitator. These interviews included consideration and discussion of the nature and level of its interaction with the company’s management; the quality, quantity and scope of information which flows to the board from management, and the way in which it flows; the content of and presentations to board meetings; the composition of the board; the practical arrangements for the work of the board; and the work and operation of the board’s committees. Overall, it was concluded that the board and its committees were operating in an effective and constructive manner.

Review of the 2009 annual reports of the FTSE 200 companies

Page 12 of 78

www.icsaboardevaluation.co.uk

As part of the assessment process the external facilitator gave feedback to each non-executive director about his or her individual performance. The non-executive directors reviewed the performance of the chief executive officer and other executive directors in their absence. In addition, the board, under the chairmanship of the senior independent director, reviewed the performance of the chairman in his absence.

The board maintains and regularly reviews a full list of matters and decisions that are reserved to, and can only be

approved by, the board. These include the appointment, termination and remuneration of any director; the annual budget; any item of fixed capital expenditure or any proposal for the acquisition or disposal of an investment or business which exceeds $150 million; raising of capital or loans by the company (subject to certain exceptions); any guarantee in respect of any borrowing of the company; and allotting shares of the company. The matters that have not been expressly reserved to the board are either delegated to its committees or to the chief executive officer.

Autonomy Corporation plc

The members of the board evaluate the performance of the board, its committees and individual members at meetings, at the first meeting following the end of the year. The non-executive directors, led by the senior independent director, are responsible for the scope of the evaluation, taking into account the views of executive directors.

Aviva plc

The effectiveness of the board is vital to the success of the group and the company undertakes a rigorous evaluation each year in order to assess how well the board, its committees, the directors and the chairman are performing. The aim is to improve the effectiveness of the board and its committees and the group’s performance. The process is led by the chairman and supported by the group company secretary. This year the evaluation was carried out by Boardroom Review, an independent consultancy, and interviews were conducted with each board member. All directors also completed a questionnaire evaluating the board and committees’ processes, their effectiveness and where improvements may be considered. Boardroom Review prepared a report based on the interviews with the directors and the questionnaire circulated and the overall results of the evaluation were presented to and reviewed by the board in January 2009. The performance of the chairman is also included in the above process and takes into account the views of both the executive and non-executive directors. The chairman’s evaluation is managed by the senior independent director who provides feedback to the chairman. As part of the chairman’s evaluation the non-executive directors meet separately under the chairmanship of the senior independent director.

The board evaluation process assesses the executive directors in their capacities as directors of the company. They are evaluated in respect of their executive duties through a separate process whereby the chairman and the non-executive directors assess the group chief executive and the group chief executive assesses the executive directors.

Following this comprehensive review, the directors have concluded that the board and its committees operate effectively and agreed actions in respect of certain processes identified for improvement. Additionally, the chairman has concluded that each director contributes effectively and demonstrates full commitment to his/her duties.

Babcock International Group PLC

During the year, a review of the performance of the board as a whole, its committees and individual directors was carried out. The company secretary, using as a starting point the results of an evaluation process carried out in the preceding financial year using an independent facilitator, conducted a series of individual confidential interviews with each board member in February 2009. The results of those interviews were reported to the chairman and made available to and

Review of the 2009 annual reports of the FTSE 200 companies

Page 13 of 78

www.icsaboardevaluation.co.uk

discussed by the board. The review concluded that the board and its committees, and individual directors, continued to work well and effectively. It was agreed that strategy and succession planning should continue to be areas of particular board focus.

The chairman’s performance was evaluated by the remuneration committee and was within the scope of the confidential interview process described above.

BAE Systems plc

The BAE Systems board has recently completed its annual performance evaluation. For the past four years we have engaged in the same process, using an external facilitator to undertake one-to-one interviews with all the directors. This provides a rich source of information not just on the board’s performance but also on that of individual directors and of myself as chairman.

Through the evaluation we try to ensure that as a board we are spending the right amount of time on the right things. Last year, the BAE Systems board held nine meetings plus a day spent conducting a strategy review. Looking back over the time we allocated to various matters at these meetings and analysing this under a few generic headings provides the following analysis:

Operational performance 32% Strategy/M&A 31% Governance 26% Training and awareness 8%

Other 3%

This analysis is fairly basic but I think it fairly represents the work of the BAE Systems board last year and hopefully will provide some insight into how it operates. As you can see, most time was spent on operational performance and Strategy/ Mergers and Acquisitions (M&A), with the rest of the time spent largely dealing with governance matters. The detail of what was included in these categories is discussed in more detail below.

Balfour Beatty plc

Formal evaluation of the performance of the board and of the principal board committees, as well as individual assessments of the directors themselves, are normally carried out by an external consultant tri-annually, with internal assessments carried out in the intervening two years. The last external evaluation was completed in October 2007. In the intervening years, an evaluation process is carried out by the company secretary, at the request of the chairman. This comprises an assessment questionnaire covering the effectiveness of the board and its committees including composition, arrangements for and content of meetings, access to information, and administrative procedures.

The findings are then reported back to the board by the chairman and an action plan addressing any areas of concern is established.

Following Steve Marshall’s appointment as chairman on 15 May 2008, an internal evaluation process commenced in January 2009. As a result of the feedback, the board has concluded that both it and the directors operate effectively.

Review of the 2009 annual reports of the FTSE 200 companies

Page 14 of 78

www.icsaboardevaluation.co.uk

Barclays PLC

The Code recommends that an evaluation of the effectiveness of the board and its committees is conducted annually. The evaluation in 2007 was independently facilitated by Egon Zehnder International. All directors were sent a questionnaire to complete and return to Egon Zehnder International and these were discussed in individual interviews, which included peer review. The following actions were agreed for 2008:

 minor enhancements around the form and content of board papers and presentations, and

 refining the board calendar of business

The 2008 evaluation was again independently facilitated by Egon Zehnder International and took the form of detailed questionnaires, which were completed by each director, individual interviews and peer evaluation of fellow directors. As in previous years, the evaluation covered the following areas:

 group performance

 strategy and performance objectives

 reporting to shareholders/stakeholders

 structure, people, succession planning and remuneration

 decision-making process

 information flows

 board structure and composition

 board roles and responsibilities

 board and management relationships

 board meetings, and

 board committees.

The results of the evaluation were presented to the board in December 2008. The results from the overall review showed a continuation of the five-year trend of improving scores and the board concluded that the board and the principal board committees continue to operate effectively in terms of communication, information flows and directors’ participation and engagement, particularly during the period of difficult market conditions in 2008. The directors recognised, however, and were disappointed, that group performance has not met shareholder expectations and acknowledged that they are accountable to shareholders for their stewardship of the group during the exceptional events of 2008.

From the results of the 2008 evaluation, action points and issues that were discussed included:

 continued focus on the board’s calendar of business to ensure that non-critical items are removed or kept to a minimum, thereby ensuring that sufficient time can be allocated to items fundamental to the success of the group

 refinements to the board’s calendar of business, including additional time to be spent on items such as compensation strategy and succession planning

 the overall size and composition of the board, and

 refinements to the process for evaluating the performance of individual directors.

The board corporate governance and nominations committee has agreed an action plan to progress improvements in 2009. In terms of individual director performance, the group chairman held private meetings with non-executive directors in early 2009 so that individual and general results could be discussed. Development plans relating to their own individual performance were agreed. The senior independent director met privately with the other non-executive directors and the group chief executive to discuss feedback he received on the group chairman’s performance. These results were then shared with the group chairman.

Review of the 2009 annual reports of the FTSE 200 companies

Page 15 of 78

www.icsaboardevaluation.co.uk

Barratt Developments plc

During the year, the board undertook a formal and structured process of evaluation of the performance of the board, its committees and individual directors. Last year the performance evaluation was carried out using independent external consultants, Independent Audit Limited. This year the board decided that it would be appropriate to carry out the performance evaluation internally using a questionnaire completed by all board members and the group general counsel and company secretary.

Central to the evaluation process are the board’s annual review of business strategy and the objectives and performance targets set by the board each year for itself, its committees and for the group chief executive, and through him for the executive Team, against which overall performance is measured. In this way the evaluation is undertaken within clear parameters linked to overall strategy, operational and financial performance and the role and contribution made by the board, its committees and individual directors in the attainment of agreed objectives and targets.

The results of the evaluation were presented to the board in July 2009, and it was agreed that the chairman would conduct one-to-one discussions with each board member in respect of the evaluation results. Following on from these meetings the chairman, together with the group general counsel and company secretary, will develop and submit an action plan to the board to implement the recommendations arising from the evaluation and the one-to-one discussions.

Bellway p.l.c.

During the year the directors undertook an evaluation of the performance and effectiveness of the board, its committees and individual directors. The evaluation was performed using a self-assessment questionnaire. This involved the chairman, acting on behalf of the board, evaluating the performance of the other individual directors, and the non-executive directors, led by the senior independent non-executive director, assessing the performance of the chairman, taking into account the views of the executive directors. The board, led by the chairman, evaluated its own performance, and the committees, led by the chairman of each, evaluated their own performance. As part of the process of ensuring board effectiveness, the non-executive directors, led by the senior independent non-executive director, met without the chairman present. Additionally, the chairman held a meeting with the non-executive directors without the executives present. The chairman also had meetings with each of the executive directors. The board and its committees reviewed the results of these evaluations and are satisfied with the evidence they provided about the balance, effectiveness and performance of the board and its committees and the effectiveness and commitment of each director.

The Berkeley Group Holdings plc

A review of the operation of the board, its committees and the skills of the directors was undertaken during the year. The process was led by the chairman. All directors completed the wide-ranging appraisal questionnaire and the results were reviewed by the board. The process confirmed the ongoing effectiveness of the board.

BG Group plc

An evaluation of the performance of the board, its principal committees, the individual directors and the chairman, was conducted during the year. The board and committee evaluations were facilitated by the chairman and the chairmen of the board committees, and comprised a written questionnaire and a series of one-to-one interviews with board and committee members. The interviews covered a number of key areas including strategy, succession planning, board size and composition, risk management and the relationship between the board and management. The results of the reviews were then considered by the chairman and senior independent director and subsequently discussed collectively by the board as a whole.

Review of the 2009 annual reports of the FTSE 200 companies

Page 16 of 78

www.icsaboardevaluation.co.uk

The performance of individual non-executive directors was evaluated by the chairman, with input from the committee chairmen and the executive directors. The evaluation of the chairman was led by Paul Collins, the outgoing senior independent director, and involved individual meetings with each of the executive directors, followed by a group review with the non-executive directors, excluding the chairman. The performance of the chief executive was evaluated by the chairman and non-executive directors. The performance of the chief financial officer was evaluated by the chief executive in consultation with the chairman and other non-executive directors. The directors have concluded that, following this evaluation, the board and its committees operate effectively and also consider that each director is contributing effectively and demonstrates commitment to the role.

BHP Billiton Limited

The board is committed to transparency in determining board membership and in assessing the performance of directors. Contemporary performance measures are considered an important part of this process.

The board conducts regular evaluations of its performance, its committees, the chairman, individual directors and the governance processes that support board work. The evaluation of the board’s performance is conducted by focusing on individual directors in one year and the board as a whole in the following year. In addition, the board conducts evaluations of the performance of directors retiring and seeking re-election and uses the results of the evaluation when considering the re-election of directors. External independent advisers are engaged to assist these processes as necessary. It is thought that the involvement of an independent third party has assisted the evaluation processes to be both rigorous and fair. This year, there was an externally assisted evaluation of individual directors that started in the previous financial year. In addition, there was an internal review of the performance of the board as a whole (the previous board review was facilitated externally) and an internal review of each board committee to ensure they continue to satisfy their terms of reference. The review of the board as a whole indicated that the board is continuing to function effectively and in accordance with the terms of the board governance document.

The evaluation of individual directors focuses on the contribution of the director to the work of the board and the expectations of directors as specified in the group’s governance framework. The performance of individual directors is assessed against a range of criteria, including the ability of the director to:

 consistently take the perspective of creating shareholder value

 contribute to the development of strategy

 understand the major risks affecting the business

 provide clear direction to management

 contribute to board cohesion

 commit the time required to fulfil the role

 listen to and respect the ideas of fellow directors and members of management.

The effectiveness of the board as a whole and of its committees is assessed against the accountabilities set down in the board governance document and each of the committees’ terms of reference. Matters considered in the assessment include:

 the effectiveness of discussion and debate at board and committee meetings

 the effectiveness of the board’s and committees’ processes and relationship with management

 the quality and timeliness of meeting agendas, board and committee papers and secretariat support

 the composition of the board and each committee, focusing on the blend of skills and experience.

Review of the 2009 annual reports of the FTSE 200 companies

Page 17 of 78

www.icsaboardevaluation.co.uk

Black Rock World Mining Trust plc

The board will conduct an annual self-evaluation to determine whether it and its committees are functioning effectively. The nominating and governance committee will receive comments from all directors and report annually to the board with an assessment of the board’s performance. The assessment will focus on the board’s contribution to BlackRock and specifically focus on areas in which the board or management believes that the board could improve.

BP p.l.c.

The principles stipulate that the performance and effectiveness of the board, including the work of its committees, should be evaluated annually. In 2008, this evaluation was undertaken internally with the use of a questionnaire. The questionnaire focused on areas including the conduct of meetings, activities of the board versus committees, monitoring and information and board support and built on the review of board operations and governance that had taken place in 2007. The main outcome of the evaluation was a requirement for a more systematic approach to ensure that the skills of the directors met the changing demands of the business and the environment in which it operates.

British Airways Plc

During the year, each director privately met the senior independent director to review the performance of the board, its committees and the individual directors and chairman and the results were presented to, and considered by, the board. In addition, the chairman and non-executive members typically meet without any executives present at least twice each financial year.

British American Tobacco PLC

The board conducts a critical evaluation of its activities on an annual basis. A questionnaire-based peer review of the performance of the chairman, the executive directors, the non-executive directors, the board and its committees is conducted by the company secretary. In 2008, this was followed by separate interviews between the company secretary and each director to allow a further opportunity to explore particular areas in more detail:

 the results of the review of the committees and the board are discussed with the chairman and presented to the board

 the results of the review of the individual performance of each director (excluding the chairman) are raised by the chairman with that director, as appropriate, and

 the results of the review of the chairman’s performance are discussed by the non-executive directors without the chairman present and feedback is given by the senior independent director on a one-to-one basis.

The chairman also discusses the effectiveness and performance of directors immediately before they make themselves available for reappointment and, in addition, the remuneration committee evaluates the effectiveness of the chairman and the chief executive annually.

The process in 2008 confirmed that all directors considered the board to be working well, to be efficient and effective, and to have a good balance of the necessary skills required, although there was a general consensus that, with the forthcoming retirement of Thys Visser, a further non-executive director should be appointed in due course (this is currently being pursued – see above). The decision to split membership of the audit and CSR committees (see above) was also universally welcomed, and a review was suggested in 12 months’ time to see how the new structures are working. The

Review of the 2009 annual reports of the FTSE 200 companies

Page 18 of 78

www.icsaboardevaluation.co.uk

non-executive directors were highly supportive of the executive team and expressed their appreciation of the culture of openness and transparency within the group. In particular, they welcomed their access to management below the level of the management board, most frequently at the regional audit and CSR committee meetings.

The notice for this year’s Annual General Meeting confirms that the performance of the directors being proposed for reappointment continues to be effective and that they continue to show commitment to their role.

British Sky Broadcasting Group plc

During the year, the directors carried out a full evaluation of the performance of the board, its committees and individual directors. The evaluation consists of each director meeting individually with the chairman of the corporate governance and nominations committee. The evaluation confirmed that the board was satisfied with the board’s overall performance. The non-executive directors also meet separately without the chairman and executive directors present to evaluate the performance of the chairman.

BT Group plc

The nominating committee considered options for an independent third party conducting the sixth formal evaluation in 2008, and, following board discussion, this was subsequently carried out by Egon Zehnder during February–April 2008 by way both of questionnaire and interview. The review focused on unlocking greater effectiveness rather than grading the past. Private sessions were held with each director and feedback was given to them individually.

The board considered the results of the review and agreed a number of recommendations. Progress has been made in implementing them; in particular, the membership of the nominating committee has been increased, the remuneration committee has simplified the structure of executive remuneration, customer segment strategies have continued to be discussed and more time has been set aside in board meetings for the discussion of customer service and the ‘right first time’ initiative. A further review was carried out by the chairman and secretary through a questionnaire and discussion with directors in April 2009. The results of the work are currently being considered and reviewed by the board and an action plan will be produced. The deputy chairman reviewed the performance of the chairman taking into account the views of the non-executive directors.

Separate questionnaires about audit committee effectiveness were also completed and the outcome of the review are (sic) in the report of the audit committee.

Bunzl plc

The company has a formal performance evaluation process for the board, its committees and individual directors overseen by the chairman, Mr A J Habgood. This includes completion of self-assessment forms by, and individual discussions with, each director. Led by Mr J F Harris, the senior independent director, the non-executive directors also meet without the chairman present to appraise the chairman’s performance. These processes were carried out satisfactorily during the year. The chairman periodically holds meetings with the non-executive directors without the executive directors present. Finally, the chief executive, Mr M J Roney, annually presents a management succession plan which is discussed with the chairman and the non-executive directors.

Review of the 2009 annual reports of the FTSE 200 companies

Page 19 of 78

www.icsaboardevaluation.co.uk

Burberry Group plc

In each financial year since 2006/07, the board has undertaken a review of its performance and that of its committees and individual directors. In 2006/07, the evaluation was undertaken using an external facilitator and in 2007/08 and 2008/09 the process of evaluation was led by the chairman. The process for evaluation is reviewed on an annual basis.

In 2008/09, the evaluation was led by the chairman and involved holding a series of structured one-to-one interviews with each of the directors, together with the completion of a detailed questionnaire. The review considered the outcomes of previous evaluations, the current composition and responsibilities of the board and each of its committees, together with the frequency and structure of meetings. In addition, the review considered the contribution and effectiveness of the executive and non-executive directors.

Feedback from the review was considered and it was concluded that the board and its committees operate efficiently and effectively. As a result of this review, it was agreed that the board would dedicate more time to meeting with senior management worldwide to gain a more detailed understanding of the business.

The evaluation of the chairman, which was led by the senior independent director, was undertaken at a formal meeting of the non-executive directors

Cable & Wireless plc

Since the last annual report, the board has undertaken its annual evaluation of performance including a review of the performance and membership of its principal committees. Unlike the previous year when an external facilitator was appointed, the board elected to undertake this year’s evaluation in-house, led by the chairman. The process included the completion of a detailed questionnaire by each board member together with private meetings as appropriate. The conclusions of the board evaluation, including a review of progress against points raised in previous years, were collated by the company secretary and then presented to, and considered by, the whole board.

During the year, the non-executive directors again met privately both with and without the chairman being present, to consider management performance and succession issues. The non-executive directors appraised the chairman’s performance and carefully reviewed the relationship between the chairman and the joint group managing directors to ensure that the board structure and relationships continued to promote the creation of shareholder value. As part of this evaluation the senior independent director met with executive directors to discuss their views.

Cadbury Schweppes plc

During the year, with the assistance of an external consultant, Egon Zehnder, the board reviewed and evaluated its performance alongside those of its committees and individual directors. These reviews were conducted by way of detailed questionnaires that were completed by directors and followed by one to one interviews between directors and the external consultant. Feedback on individual directors was discussed with the chairman and this in turn was followed by private feedback meetings between the chairman and each of the directors. A report on the performance of the board as a whole and of the board committees was made to the board by the external consultant at a meeting in April 2008 and the issues arising debated and considered at length. A theme for development included the need to ensure continued board unity and effectiveness and to develop further the open and constructive lines of communication both within the board and between board and management that had proved successful during the year. Following these reviews the board and its committees concluded that they are operating effectively. Going forward, the board intends to continue to conduct evaluations annually employing the services of external consultants to assist the process where deemed appropriate.

Review of the 2009 annual reports of the FTSE 200 companies

Page 20 of 78

www.icsaboardevaluation.co.uk

Cairn Energy PLC

The board has a formal rigorous process of annual performance evaluation for the board, audit, nomination and remuneration committees and individual directors. The board reviews on an annual basis whether such performance evaluation should be conducted using an external resource. The board decided, however, that for 2008 there was value in conducting the process internally to develop an appropriately tailored approach and benefit first-hand from direct input from individual directors.

The performance evaluation of the board and the board committees was primarily based upon answers to a detailed questionnaire which had been updated since the previous year’s evaluation and which was prepared internally by the company secretary and chairman. The questionnaire was distributed to all board members and the company secretary. The areas covered in the questionnaire included the effectiveness of the board and board committees, performance against objectives, preparation for and performance at meetings and corporate governance matters. One particular area that the questionnaire addressed was the performance of those directors who are also non-executive directors of Cairn India in respect of the stewardship of that part of the group’s business. The questionnaire addressed all of the issues raised by the Higgs Review of the role and effectiveness of non-executive directors.

The review process carried out pursuant to the questionnaires can be summarised as follows:

Evaluators Chairman Executive directors Non-executive directors

Evaluating Board







_

_

_

_

_

_







Once a questionnaire had been completed by each member of the board and the company secretary, the chairman held a meeting with each director and the company secretary individually, as appropriate to discuss their responses. The chairman then reported the results of the process to the board at a board meeting, which discussed the comments and implemented the conclusions. The board and board committees are satisfied that they are operating effectively.

The deputy chairman sought the views of the executive directors and met with each of the other non-executive directors, in the absence of the chairman, to discuss and assess the chairman’s performance. The results of this review were then discussed with the chairman. The board (not including the chairman) is satisfied that the chairman’s performance is effective and that he demonstrates continued commitment to the role.

The performance evaluation process indicated areas for improvement, which have been or are being implemented. Following the performance evaluations, the board believes that all of the directors’ performance (including those of Todd Hunt, Dr Mike Watts, Phil Tracy and Hamish Grossart, who are standing for re-election at the AGM) continues to be effective and that they demonstrate commitment to the role.

A performance evaluation of the board, the board committees and individual directors will continue to be conducted annually and the method for such review will continue to be reviewed by the board in order to optimise the process.

Review of the 2009 annual reports of the FTSE 200 companies

Page 21 of 78

www.icsaboardevaluation.co.uk

The executive directors have their performance individually reviewed by the remuneration committee against objectives which are set annually. The bonuses payable to the executive directors under the company’s cash bonus scheme are linked directly to the results of these reviews.

Caledonia Investments plc

The board conducts an annual formal evaluation of its performance and that of its committees and individual directors. For the year ended 31 March 2009, the evaluation of the board as a whole and of its committees was led by the chairman and was conducted by inviting individual board members to complete a questionnaire regarding the operation and

effectiveness of the board as a whole and of its committees, the responses from which were collated by the company secretary and discussed. The evaluation of the performance of the chairman was led by the senior independent non-executive director and involved private discussion with other members of the board on his performance, the results of which were then considered at a meeting of the non-executive directors, without the chairman present, and also at a meeting of the governance committee.

The evaluation of the performance of the chief executive was undertaken by the chairman and the non-executive directors. The performance of the non-executive directors was reviewed by the chairman, the chief executive and the senior independent non-executive director, with the senior independent non-executive director absent in respect of his own performance appraisal. As part of this review, non-executive directors were invited to complete self-assessment questionnaires in relation to their own effectiveness. The performance of the executive directors, which included further consideration of that of the chief executive, was undertaken by the remuneration committee as part of the annual executive salary review process. The results of the evaluation of the board as a whole and of its committees for the year ended 31 March 2009 were presented in a report to the board.

The key actions that arose from the performance evaluation were that the board should be provided with more formal reporting on business risks, as well as financial risks, facing significant investee companies and that the governance committee should formally consider each year whether the influence of the Cayzer Concert Party on Caledonia’s board is in the general interest of the non-concert party shareholders and to confirm in the annual report that it has done so. The governance committee subsequently met to consider this issue and concluded that the Cayzer Concert Party’s influence on the board was in the general interest of the non-concert party shareholders.

The nomination committee reviewed the size, structure and composition of the board in the light of the report to the board.

Capita Group Plc

An evaluation of board and committee effectiveness was conducted in 2008.The evaluation took the form of detailed questionnaires completed by each director in relation to the board and any committee of which they were a member at the time of the evaluation. The results of the evaluation were presented to the board in December 2008.The board concluded that the board and its committees continue to operate effectively.

The performance of individual executive directors is appraised annually by the chief executive, to whom they report. The performance of the chairman is reviewed by the non-executive directors, led by Martin Bolland, taking into account the views of the executive directors. The performance review of the chief executive is conducted by the non-executive chairman, taking into account the views of other directors. Non-executive directors’ performance is reviewed by the non-executive chairman, taking into account the views of other directors. The board considered, as it had in previous years, the merit of using an external body to manage the performance evaluation process. It concluded that it remained most appropriate for the company secretary and deputy company secretary to issue the questionnaires and collate and analyse the results.

Review of the 2009 annual reports of the FTSE 200 companies

Page 22 of 78

www.icsaboardevaluation.co.uk

Carillion plc

A detailed internal evaluation of the board’s corporate governance procedures and compliance was again conducted in 2008 by the chairman in conjunction with the company secretary. The internal evaluation took into account the views of each of the directors on:

(i) the role of directors

(ii) the performance of the board, the chairman and the non-executive directors (iii) board committees

(iv) leadership and culture (v) corporate governance (vi) directors’ remuneration

(vii) relations with shareholders, and (viii) board accountability and audit.

The board at its meeting in November 2008 reviewed the results of the internal evaluation and, where required, issues were acted upon in order to further enhance the effectiveness of the board’s procedures and working practices. This is the seventh year that this process has taken place and will be repeated annually as the board considers it satisfactory. In addition, reviews of the performance of each of the directors has taken place.

Carnival Corporation & plc

No information given.

The Carphone Warehouse Group PLC

During the period the balance of skills, knowledge and experience of the directors was reviewed. The board, and each individual director, also undertook performance evaluations. Using the Higgs ‘Suggestions for Good Practice’ as guidance, the individual directors initially completed separate questionnaires. The results were collated for and analysed by the chairman, the senior independent director, the chief executive officer and the board as a whole. The areas covered included the roles of the executive and non-executive directors, the board, the board committees, the chairman of the company, preparation for and performance at meetings, the effectiveness of each director, leadership, culture and corporate governance. The results were then considered by the board as a specific item of business. The board intends that these exercises or similar ones continue to be carried out each year. Following such performance evaluation the chairman confirms that all those non-executive directors seeking re-election at the Annual General Meeting continue to be effective and demonstrate a commitment to the role, including having time to attend all necessary meetings and to carry out other appropriate duties.

The chairman meets regularly with all the independent non-executive directors usually in the evening prior to a board meeting. This provides the opportunity to raise any questions regarding the performance of the executive directors or in respect of any other matters.

The senior independent director also met with the non-executive directors, in the absence of the chairman, to assess the chairman’s effectiveness, having first reviewed the results of a performance evaluation questionnaire completed by all the directors apart from the chairman.

The board is of the opinion that the chairman had no other significant commitments during the period that would have affected his performance in his role.