Governance structure
| Board | ||||
| Develops strategy – approves the financial plan – decides on allocations of capital – takes major business decisions – controls risk – monitors progress – ensures ethical standards. The primary goal which underpins all Board decisions is to create value for the long-term investor. | ||||
Audit
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Nominations
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Remuneration
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Ethics
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Risk
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The Board
Board attendance 2010
| Scheduled meetings eligible to attend | Meetings attended | |
|---|---|---|
| Sir Simon Robertson (Chairman) | 8 | 8 |
| Helen Alexander CBE | 8 | 8 |
| Peter Byrom | 8 | 8 |
| Iain Conn | 8 | 6 |
| Peter Gregson | 8 | 5 |
| James Guyette | 8 | 7 |
| John McAdam | 8 | 8 |
| John Neill CBE | 8 | 7 |
| John Rishton | 8 | 8 |
| Sir John Rose | 8 | 8 |
| Andrew Shilston | 8 | 8 |
| Colin Smith | 8 | 8 |
| Ian Strachan | 8 | 7 |
| Mike Terrett | 8 | 8 |
Sir Simon Robertson, as Chairman of the Board of directors, is responsible for leadership of the Board and ensuring its effectiveness on all aspects of its role. Sir John Rose is the Chief Executive. The division of responsibilities between them is set down in writing and agreed by the Board. Iain Conn is the Company’s Senior Independent Director. There are currently 14 directors on the Board comprising the non-executive Chairman, the Chief Executive, four other executive directors and eight non-executive directors. There were no changes to Board members during the year. However, on September 30, 2010 the Board announced Sir John Rose’s intention to retire as Chief Executive on March 31, 2011. John Rishton has been appointed to succeed Sir John. Accordingly, John Rishton stood down from the ethics, nominations and audit committees on September 30, 2010 as he is no longer considered by the Board to be independent.
The quality and broad experience of the directors, the balance of the Board’s composition and the dynamics of the Board as a group, ensure the Board’s effectiveness and also prevent any individual or small group dominating the Board’s decision-making. Each executive director receives a service contract on appointment and each non-executive director receives a letter setting out the conditions of his or her appointment.
Non-executive directors are appointed for an initial term of three years, which may be extended with the agreement of the Board, although reappointment is not automatic. Executive directors are employees who have executive responsibilities in addition to their duties as directors. Non-executive directors are not employees and do not participate in the daily business management of the Group.
Under the Company’s Articles of Association, one-third of the directors are subject to re-election every year. However, in accordance with the UK Corporate Governance Code, a resolution will be put to the 2011 AGM to amend the Articles of Association to require that all directors stand for re-election every year.
The Articles of Association also provide that no person may be appointed to the office of chairman (in an executive capacity) or to the office of chief executive, managing director or joint managing director of the Company, unless he or she is a British citizen. No person may be appointed to the office of director of the Company if, immediately following such appointment, the number of directors of the Company who are not British citizens would exceed one half of the total number of directors of the Company for the time being. A resolution will be put to the 2011 AGM to allow either the Chairman or the Chief Executive to be either a EU or US citizen provided the other is a British citizen. This proposed change has been approved by the HM Government (Special Shareholder). The Board believe that in a global business, it is essential to have a wider pool of talent to draw upon for such key positions.
Role of the Board
The Board is responsible to all the Company’s stakeholders for its conduct and for the performance of the Company. The day-to-day running of the Company is delegated by the Board to the executive team under the leadership of Sir John Rose, the Chief Executive. The Board retains responsibility for the approval of strategy and certain matters which affect the shape and risk profile of the Group, as well as items such as the annual budget and performance targets, the financial statements, payments to shareholders, major capital investments and any substantial change to balance sheet management policy.
The division of responsibilities between the Board and the executive team is set out in detail in a schedule approved annually by the Board, which also defines those decisions which can only be taken by the Board. In 2010, the schedule was amended to include an overriding requirement for any high-risk item to be referred to the Board irrespective of it falling within the delegated financial limit.
The Board’s primary goal and tasks
The primary goal of the Board is to ensure that the Company’s strategy creates value within an acceptable risk profile for the long-term investor. In line with its primary goal, the Board’s principal tasks are to:
- ensure the development of the Company’s strategy and keep it under rigorous review;
- monitor the implementation of the strategy, ensuring that the necessary financial and human resources are in place to deliver it and that effective controls exist to manage risk;
- safeguard the values of the Company, including its brand and corporate reputation and the safety of its products;
- oversee the quality and performance of management and ensure through effective succession planning and remuneration policies that it is maintained at world-class standards; and
- maintain an effective corporate governance framework that aspires to deliver long-term value to shareholders.
The work of the Board 2010
During the year, the Board received regular reports by executive directors on business and financial performance and engineering and technology and received presentations on business issues, health, safety and the environment, IT infrastructure and disaster recovery arrangements, corporate governance, corporate affairs and quality and process excellence. It received reports on the activities of its committees after each committee meeting. The Board reviewed strategy regularly and also held a day-long strategy meeting.
In addition, the Board also approved:
- the Annual report for 2009 and the preliminary announcement and the 2010 half yearly results;
- the budget for 2011;
- the final payment to shareholders in respect of the year ended December 31, 2009 and the interim payment for the year ending December 31, 2010;
- the acquisition by Rolls-Royce Marine AS of Odim ASA;
- revised banking arrangements and facilities for the Group;
- the renewal of the terms of the Euro Medium Term Note Programme; and
- the actions to be taken to comply with the new UK Corporate Governance Code.
Board committees
Details of the work of the Board’s formal committees can be found in the Governance section. Terms of reference for each committee are available on the Group’s website at www.rolls-royce.com.
Executive committees
The executive governance structure evolved during the year. In 2010, three new committees were established which report to the Group Executive. The Executive Committee chaired by the Chief Executive and comprising the executive directors has nine scheduled meetings each year with other directors joining by invitation. It develops strategy, considers investment choices and provides leadership for the Group’s businesses. The Operations Executive chaired by the Chief Operating Officer provides operational leadership driving world-class levels of cost, quality and delivery. The Functional Executive, chaired by the Finance Director, drives functional maturity. In addition, as our businesses have grown and developed, the leadership structure has broadened, with each business now having a governance structure which replicates broadly that of the holding company.
Independence of the non-executive directors
The Board applies a rigorous process in order to satisfy itself that its non-executive directors remain independent. The Combined Code does not consider the test of independence to be appropriate to the chairman of a company. However, Sir Simon Robertson did meet the Code’s independence criteria upon his appointment as Chairman on January 1, 2005. His other significant commitments are described in the Board of Directors.
The Board reviews the independence of the other non-executive directors every year, based on the criteria in the Combined Code. This review was undertaken in 2010 and the Board concluded that all the non-executive directors were independent in character and judgement, although following the announcement on September 30, 2010 of the appointment of John Rishton as successor to Sir John Rose as Chief Executive, John Rishton has been treated as non-independent and has retired from his roles as a member of the audit, ethics and nominations committees.
The Board will again be asking shareholders to re-elect Peter Byrom as a director even though he has served as a director of the holding company (then Rolls-Royce plc) since January 1,1997. In so doing, the Board has taken full account of the Combined Code requirement to consider carefully a non-executive director’s independence where that director has served on the board for more than nine years from the date of his or her first election. The Board strongly remains of the view that Peter Byrom continues to be independent and there are no issues which are likely to affect his independent judgement and that he is in no way dependent on the remuneration he receives from the Company.
The Board believes that in a complex and technologically advanced company with a long business cycle from the development of an engine to its eventual retirement, it is highly desirable to retain at least one non-executive director with long-term experience.
Directors’ induction, training and information
Newly appointed directors participate in a structured induction programme and receive a comprehensive data pack providing detailed information on the Group. An existing executive director acts as a mentor to each newly appointed non-executive director, giving guidance and advice as required. As part of their briefing, non-executive directors visit key sites and meet a cross-section of managers and employees to gain a better understanding of the Group and its operations. Ongoing training is available for all the directors, including presentations by the executive team on particular aspects of the business. There is a procedure for directors to take independent professional advice at the Company’s expense. In addition, every director has access to the General Counsel and Company Secretary.
Board evaluation
The Chairman and the non-executive directors meet at least once a year without the executive directors present, in order to review the operation of the Board. The Chairman has an annual meeting with each non-executive director to review his or her contribution to the Board. The Senior Independent Director chairs an annual meeting of the executive and non-executive directors (excluding the Chairman) to review the performance of the Chairman, the outcome of which is reported back to him. Each year, the Chairman reviews the performance of the Chief Executive as part of the annual salary review process overseen by the remuneration committee. The Chief Executive reviews the performance of the other executive directors in the same way.
In 2009, the Board asked outside consultants to assist it with a review, which took the form of a facilitated self evaluation. In 2010, the Chairman led a review of the Board’s effectiveness without the assistance of outside consultants. This review consisted of confidential, unattributable, one-on-one discussions with each Board member and covered any subject Board members wanted to raise concerning the workings of the Board, including governance, effectiveness, strategy development, composition, operations and dynamics. The Board members unanimously agreed that the Board was working effectively. The review highlighted the importance of the evaluation of strategy; risks including engineering and technology risk; the continued focus on Board and executive succession planning; and the need to be aware of challenges to the business.
Conflicts of interest
Directors have a duty to avoid a situation in which they have, or can have, a direct or indirect interest which conflicts, or possibly may conflict, with the interests of the Company unless that situational conflict has been authorised by the Board. The Board has reviewed and authorised all directors’ situational conflicts and has agreed that while directors are required to keep confidential all Company information, they shall not be required to share with the Company confidential information received by them from a third party which is the subject of the situational conflict.
Indemnity
The Company has entered into separate Deeds of Indemnity in favour of its directors. The deeds provide substantially the same protection as that already provided to directors under the indemnity in Article 170 of the Company’s Articles of Association. The Company has also arranged appropriate insurance cover for any legal action taken against its directors and officers.