Following the introduction of the UK Corporate Governance Code, I am pleased to be able to provide a fuller view of the operation of the Board and to confirm how the Company has met its obligations.
The working of a Board cannot be captured and tabled by a ‘standard’ approach and this introduction, and the following pages, allied to the usual committees’ reports, will I hope provide a clear insight into the corporate governance structure and practices of Rolls-Royce.
The Board’s committee structure has been reviewed during the year and due to the importance of safety in our business, both in terms of the safety of our products and the health and safety of our employees, the Board has agreed to the introduction in 2012 of a safety committee, which will be chaired by Sir Frank Chapman. The safety committee’s terms of reference, once reviewed and approved by the Board, will be added to those of the other committees on the Group’s website.
In accordance with the provisions of the UK Corporate Governance Code (the Code), all Board directors are required to seek re-election at the AGM in 2012. Following the performance evaluation process, I am pleased to confirm that each of the non-executive director's performance and contribution continues to be timely, thoughtful, challenging and relevant. In addition, each has provided, and continues to provide, excellent commitment to the role, ensuring sufficient time is available for meeting preparation and non-scheduled meetings. However, I would advise that Sir Peter Gregson has decided to retire at the 2012 AGM and will not seek re-election.
The Board continues to support our longest serving non-executive director, Peter Byrom, who has been a Rolls-Royce Board member since 1997. We are a complex and technologically advanced company with a long business cycle from the development of an engine to its eventual retirement, and the Board greatly values Peter’s independent experience and his continuing contribution to debate. In supporting Peter, the Board has taken full account of the Code's requirement's 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 their first election.
The Group values its communications with existing and potential shareholders who offer a rich and diverse source of capital to fund the future growth of the Group. Our engagement with shareholders is described in more detail on page 42.
In 2011, the nominations committee commissioned an external review of the Board’s effectiveness by JCA Partners LLP. I am very pleased to report that the review found that all members of the Board were united in believing the Board worked very well and that it is seen as an effective Board with a unity of purpose. The review is described in more detail in the nominations committee report on page 48.
In September 2011, we issued our response to the Davies Report on women on boards confirming our support for the development of a diverse workforce. We govern this through our Global Diversity and Inclusion Steering Group, the membership of which includes main board directors and senior executives. The nominations committee discusses this topic regularly and expects to make demonstrable progress in this area by 2015.
In this report, the Board has taken account of the concerns expressed by the Financial Reporting Review panel (February 2011) about how companies are reporting risks and the discussions of the Financial Reporting Council (FRC) summarised in ‘Boards and Risk ’ (September 2011).
In December 2011, the Board received a detailed report from the risk committee (including a review of all internally significant risks), which, following discussion, confirmed and defined the Board’s tolerance for risk, ensured all directors understood the Group’s risk exposure and provided an impact review of potential changes in risk.
We have therefore endeavoured to make sure that the risks we identify in our Principal risks and uncertainties are indeed the key risks facing the Group, to ensure that we eliminate risks expressed in generic terms and to show how risks are managed. A description of our risk management process is set out in the risk committee report, detailed on page 51.
In December 2011, the FRC published a paper entitled ‘Developments in Corporate Governance 2011’ in which it expressed concern about the level of reporting of the activities of a company’s committees in the annual report, particularly the work of the audit committee. As a result, I have asked the committee chairmen to make personal reports in this year’s Annual report in order to provide greater insight into committee work.
In January 2012, the UK Government announced its intention to introduce reforms to the way directors’ remuneration is set, approved and reported. At Rolls-Royce, we believe strongly in the alignment of executive rewards to the creation of long-term shareholder value. In the report by the chairman of the remuneration committee on pages 52 to 54 we have endeavoured to provide a clearer view of how we believe we achieve that and we will engage in a positive way with the proposals outlined by the UK Government.
I believe that the strength of the Company’s corporate values, its reputation and its ability to achieve its objectives are influenced by the effectiveness of the Company’s approach towards corporate governance, which is why the Board will continue to attach the highest priority to its compliance with the Code’s principles.
Sir Simon Robertson
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- Risk committee report
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- Directors' remuneration report
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