I am pleased to introduce the 2018 Corporate Governance statement.
The merger with the Schneider Electric Industrial Software Business has been a central area of focus for the Board this year. This year has seen considerable changes in the composition of the Board and we are grateful for the tremendous contribution of the retiring Directors and, equally, look forward to the valued contributions that the experience and skills of the newly appointed Directors bring to the Company.
Composition of the Board
The composition of the Board is the Chairman, two Executive Directors and five Non-Executive Directors, three of whom are independent. In the course of the year ended 31 March 2018 and as announced by the Company, the Board has undergone several significant, planned changes to refresh and strengthen the Board, including the appointment of a new Chief Executive, a new Chief Financial Officer and two new Non-Executive Directors (see more in the Nomination Committee Report provided on page 51).
Brief biographical details of all Board members are set out on pages 44 and 45. The chairmanship, membership and attendance record of all Board Committees is set out on page 48.
Further to the announcement on 1 February 2018, David Ward stepped down from the Board of AVEVA Group plc with effect from 19 February 2018. The disclosure required under s.430(2B) of the Companies Act 2006 can be found here.
Operation of the Board
The Chairman, supported by the Company Secretary, ensures that the Board functions effectively and has established Board processes designed to maximise its performance and effectiveness. Key aspects of these processes are:
- Senior management are frequently invited to attend AVEVA Group Board meetings, ensuring the Board is well informed on technical and market factors driving the Group’s performance, as well as on financial outcomes.
- The Board had seven scheduled meetings during the year. These meetings, together with any Committee meetings, are generally held at the Group’s Head Office in Cambridge or in our London office and are approximately one day in duration.
- Each scheduled Board meeting has an over-arching theme. These include an annual technology review, business
plan/strategy day, succession planning, annual budget, presentations from Executive management, and interim and final results. The Board aims that Directors visit an AVEVA office or business event outside of the UK at least once per year. During the year the Chairman and other Non-Executive Directors visited offices in Hyderabad, Houston and California. Further, three of the Non-Executive Directors also attended the AVEVA World Summit in October 2017, which this year took place in Cambridge, meeting with staff and customers throughout the event. The Executive Directors visit non-UK AVEVA offices on a regular basis.
- In addition, the Board holds a full-day strategy meeting every year at which Executive Directors and members of the senior management team make presentations covering progress against current strategy and objectives and ideas for future investment.
- This year the Board also held a number of additional unscheduled meetings throughout the due diligence phase of the combination, to offer support, guidance and appropriate challenge to management.
- The Board delegates the day-to-day responsibility for managing the Group to the Executive Directors.
- To enable the Board to discharge its duties, all Directors receive appropriate and timely information. Briefing papers are distributed by the Company Secretary to all Directors, usually seven days in advance of Board and Committee meetings.
- A monthly reporting pack containing management accounts with commentary and reports from each member of the Executive team is distributed to the Board on a monthly basis.
- Meetings were held between the Chairman and the Non-Executive Directors during the year, without the Executives being present, to discuss appropriate matters as necessary.
- The Chairman ensures that the Directors take independent professional advice where they judge it necessary to discharge their responsibilities as Directors at the Group’s expense. All members of the Board have access to the advice of the Company Secretary.
- Non-Executive Directors and Executive Directors are encouraged annually to undertake training in furtherance of their specific roles and general duties as a Director.
Matters reserved for the Board
The Board is responsible to shareholders for the proper management of the Group. There is a formal schedule of matters specifically reserved for the Board’s decision and this was updated following completion of the combination with the software business of Schneider Electric. The schedule covers key areas of the Group’s affairs, which include:
- overall responsibility for the strategy of the Group;
- review of trading performance and forecasts;
- risk management; Board membership;
communications with shareholders; approval of major transactions, including mergers and acquisitions; and
- approval of the financial statements and annual operating and capital expenditure budgets.
Independence of Non-Executive Directors and segregation of duties
The Board has considered the independence of the Non-Executive Directors and believes that, with the exception of the two newly appointed Non-Executive Directors, all are currently independent of management and free from any material business or other relationships that could materially interfere with the exercise of their independent judgement. Their biographies on pages 44 and 45 demonstrate a range of experience and sufficient calibre to bring independent judgement on issues of strategy, performance, resources and standards of conduct which is vital to the Group.
The roles of the Chairman and the Chief Executive are distinct and the division of responsibility between these roles has been clearly established, set out in writing and agreed by the Board. The Chairman is responsible for the effectiveness of the Board and ensuring that it meets its obligations and responsibilities. The Chief Executive is responsible to the Board for the day-to-day management of the business, leadership of the Executive team and execution of the Group’s strategic and operating plans. The Chairman and Chief Executive meet regularly to discuss any issues pertaining to the Company’s performance, reputation and organisation.
The Board undertakes a formal and rigorous review of its performance and that of its Committees and Directors each financial year. In December 2017, an extensive review was externally facilitated by The Effective Board LLP, the independent board performance consultants, who also facilitated an extensive review in 2014. The review was carried out following one-on-one interviews with each Director, the General Counsel and the Deputy CFO and Company Secretary, following which an extensive report covering the operation of the Board as well as each Committee was prepared. One advantage of using the same consultants as in 2014 was that a comparison of matters was possible and progress against previous objectives could be tracked. The exercise also resulted in individual feedback for each Director as to areas of strength amongst the Board collective as well as comments where effectiveness might be improved. The final report was presented by The Effective Board LLP to the January 2018 Board meeting.
Overall, the review concluded that the Board and its Committees had demonstrated a high degree of effectiveness.
The review highlighted that many of the recommendations of the 2014 report had been implemented prior to this latest review and this demonstrated strong signs of effectiveness. In particular, it was recognised that the Board’s response to the strategic changes required, as the profitability of the Company had declined since 2014, had been successful. The Board had also pursued a transformational deal with Schneider Electric which has the potential to meet the strategic objectives of the Company.
It was recommended that the Board review strategic objectives to redefine success for the new organisation following the appointment of the new CEO and completion of the integration plan. An induction programme for the Board in relation to the new SES business was also recommended to be undertaken.
Internal control and risk management
The Board has overall responsibility for the Group’s system of internal control and for monitoring its effectiveness. However, such a system is designed to manage rather than eliminate the risk of failure and by its very nature can only provide reasonable and not absolute assurance against material misstatement or loss. The principal risks and uncertainties the Group faces are set out on pages 32 to 34. There were no significant control failures during the year.
The Board has established a continuous process for identifying, evaluating and managing the significant risks the Group faces. The Board regularly reviews the effectiveness of the Group’s internal controls, which have been in place from the start of the year to the date of approval of this report, and believes that it is in accordance with the September 2014 Financial Reporting Council Guidance on Risk Management, Internal Control and Related Financial and Business Reporting.
The key elements of the system of internal controls currently include:
- each member of the Executive team has responsibility for specific aspects of the Group’s operations. They meet on a regular basis and are responsible for the operational strategy, reviewing operating results, identification and mitigation of risks and communication and application of the Group’s policies and procedures. Where appropriate, matters are reported to the Board;
- regular reports to the Board from the Executive team on key developments, financial performance and operational issues in the business;
- operational and financial controls and procedures which include authorisation limits for expenditure, sales contracts and capital expenditure, signing authorities, IT application controls, organisation structure, Group policies, segregation of duties and reviews by management;
- an annual budget process which is reviewed, monitored and approved by the Board;
- regular meetings between the Executive team, regional sales teams and key functional managers to discuss actual performance against forecast, budget and prior years. The operating results are reported on a monthly basis to the Board and compared to the budget and the latest forecast as appropriate;
- targeted internal audit reviews which focus on confirming the operation of controls in key process areas; and
- maintenance of insurance cover to insure all major risk areas of the Group based on the scale of the risk and availability of the cover in the external market.
The Board’s monitoring covers all material controls, including financial, non-financial, operational and compliance controls and risk management. It is based principally on reviewing reports from management to consider whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. The Board periodically carries out visits to the Group’s subsidiaries and receives presentations from local management on their operations.
The Board also twice annually undertakes a specific risk assessment which involves reviewing the Group’s risk matrix that is owned and maintained by the Group’s Risk Committee, with representatives involved from the Executive team and senior managers. These assessments consider all significant aspects of internal control necessary for the Company to successfully carry out the key business strategies of the Group, together with more generic inherent risks of the Group’s operations. The Audit Committee assists the Board in discharging its review responsibilities.
Indemnities to Directors
In accordance with the Company’s Articles of Association, Directors are granted an indemnity from the Company to the extent permitted by law in respect of liabilities incurred as a result of the performance of their duties in their capacity as Directors to the Company.
The indemnity would not provide any coverage to the extent the Director is proven to have acted fraudulently or dishonestly. The Company has maintained Directors’ and Officers’ liability insurance cover throughout the year.
Policy on appointment and reappointment
In accordance with the Articles
of Association, all Directors are
required to retire and submit
themselves for re-election at least
every three years by rotation and
also following their appointment. In
addition, as in the prior year and in
accordance with the UK Corporate
Governance Code, all of the Board
members are offering themselves
for re-election at the Annual
General Meeting (unless retiring).
Non-Executive Directors are appointed
for a term of three years. The terms
and conditions of appointment of
Non-Executive Directors are available
for inspection at the Company’s
registered office during normal
business hours and will be available
for inspection on the day of the
forthcoming Annual General Meeting.
Dialogue with institutional shareholders
Communication with shareholders is given high priority by the Board. The CEO, Deputy CEO and CFO and Head of Investor Relations have meetings with representatives of institutional shareholders and hold analyst briefings at least twice a year, following the announcement of the interim and full-year results, but also at other times during the year as necessary. Senior managers from Product Development, Business Strategy and Finance also attended analyst and shareholder meetings during the year to assist in providing more detail as to the business strategy and key areas of focus.
All of these meetings seek to build a mutual understanding of objectives with major shareholders by discussing
long-term strategy and obtaining feedback.
The Board also receives formal feedback from analysts and institutional shareholders through the Company’s financial PR adviser and financial advisers. The Board is appraised of discussions with major shareholders to ensure that Executive and Non-Executive Directors consider any matter raised by shareholders and to enable all Directors to understand shareholder views. In addition, when necessary, the Group consults with shareholders in respect of proposals for the remuneration of Executive Directors. The Senior Independent Non-Executive Director, Chris Humphrey, is available to shareholders if they have concerns which contact through the normal channels of Chairman, CEO or Deputy CEO and CFO has failed to resolve or if such contact would be inappropriate. The Chairman, Senior Independent and Non-Executive Directors are available for dialogue with shareholders at any time and attend (together with the other members of
the Board) the Annual General Meeting, but are not routinely involved in investor relations or shareholder communications. Corporate information is also available on the Company’s website, www.aveva.com.
Constructive use of the Annual General Meeting
The Board seeks to use the Annual General Meeting to communicate with investors and all shareholders are encouraged to participate. The Chairmen of the Audit, Remuneration and Nomination Committees will be available at the Annual General Meeting to answer any questions.