Directors' Report
The Directors have pleasure in presenting the Report and Accounts to the members of HBOS plc in respect of the Group for the year ended 31 December 2006.
Principal Activities
HBOS plc is the holding company of the HBOS Group. The principal activities of the Group are the provision of banking and other financial services in the UK and overseas. A list of the main subsidiary undertakings, and the nature of each company’s business, is given in Note 18 to the Accounts on page 154.
HBOS Group Reorganisation Act 2006
As part of an internal reorganisation affecting the wholly-owned UK banking subsidiaries of the Group, Royal Assent was received to the HBOS Group Reorganisation Act 2006 on 22 June 2006. Under this Act it is expected that, during the year ended 31 December 2007, the businesses of Capital Bank plc, Halifax plc and HBOS Treasury Services plc (including all their property and liabilities) will transfer to The Governor and Company of the Bank of Scotland, which will at that time register under the Companies Act as Bank of Scotland plc. This transfer will not have any impact upon HBOS plc.
Business Review
The Companies Act 1985 requires the Directors’ Report to include a Business Review of the HBOS Group giving a fair review of the business of the Group and a description of the principal risks and uncertainties facing the Group.
The Group’s development and performance during the year, position at the year end and likely future prospects are reviewed by the Chief Executive on pages 8 to 13 and in the Divisional Reviews on pages 26 to 74. Financial aspects are covered in the Financial Review on pages 14 to 24, followed by Corporate Responsibility on pages 75 to 80 and the Risk Management report on pages 81 to 89. The information in all of these sections, which fulfils the requirements of the Business Review, is incorporated into this Directors’ Report by reference.
As stated above, in this year’s Business Review we are incorporating by reference the section on Corporate Responsibility on pages 75 to 80. This sets out the approach of the Group to our key stakeholders, including our suppliers and business partners. Further provisions introduced into the Companies Act 2006 shortly before its enactment will (when they come into force) require the Directors to consider whether information should be included about persons with whom the Group has contractual or other arrangements which are essential to the business of the Group. Information of this nature will be included in future Business Reviews as the Directors consider necessary.
The Annual Report and Accounts, including this Directors’ Report, have been prepared solely for the Company’s members, as a body. To the extent permitted by law, the Company, its Directors, employees, agents and advisers disclaim liability to any other persons in respect of information contained in the Annual Report and Accounts. By their nature, statements containing risks and uncertainties facing the Group, and any other forward-looking statements, involve uncertainty, since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect the knowledge and information available at the date of preparation of the Annual Report and Accounts and the Company undertakes no obligation to update these forward-looking statements. Nothing in the Annual Report and Accounts shall be construed as a profit forecast.
Results and Dividends
The Group profit attributable to shareholders for the year ended 31 December 2006, as shown in the Consolidated Income Statement, was £3,879m (2005 £3,230m). An interim dividend of 13.5 pence per ordinary share was paid on 9 October 2006. The Directors propose a final dividend of 27.9 pence per ordinary share to be paid on 14 May 2007 to shareholders on the register on 16 March 2007, subject to approval at the 2007 Annual General Meeting (‘AGM’).
Directors
Details of the present Directors are given on page 92. Peter Cummings and Karen Jones were appointed Directors of the Company on 1 January 2006 and 24 January 2006 respectively. Jo Dawson and Benny Higgins were appointed Directors on 1 May 2006 and Richard Cousins will become a Director on 1 March 2007; all three will retire at the 2007 AGM and offer themselves for election. Sir James Crosby stood down from the Board on 31 July 2006.
Sir Brian Ivory and David Shearer, both of whom remain fully effective members of the Board, will step down from the Board at the 2007 AGM and will not seek re-election. Anthony Hobson and Kate Nealon will retire by rotation and resolutions for their re-election will be proposed at the 2007 AGM.
The Chairman is pleased to confirm that the performance of all of the Directors seeking election or re-election continues to be effective and that they demonstrate commitment in their respective roles.
Particulars of Directors’ remuneration and interests in shares of the Company are given in the Report of the Board in relation to remuneration policy and practice on pages 99 to 119.
The Company provides directors’ and officers’ liability insurance, giving appropriate cover for legal action brought against its Directors, and has also agreed to indemnify Directors in circumstances where they are not considered to be culpable. The indemnity, which is a qualifying third party indemnity provision for the purpose of the Companies Act 1985, is for the benefit of all of the Company’s current Directors.
Employees
HBOS is a ‘two-tick’ employer actively seeking applications for employment from disabled people and guaranteeing an interview where disabled applicants meet the essential criteria for the role being applied for. In the event of an existing colleague becoming disabled, HBOS works with external specialists to ensure that all possible reasonable adjustments are made to allow the colleague to continue in their existing role. If, after making all possible adjustments, a colleague is not able to continue in their current role, HBOS will look at suitable alternative roles within the Group. Training and career development opportunities are open to all colleagues including disabled colleagues and Group policies are designed with inclusion of disabled colleagues in mind.
Diversity and inclusion is an integral part of the business, with active commitment from the very top of the organisation. Andy Hornby, the Chief Executive, chairs the Diversity Steering Group. Membership of the Steering Group is made up of a number of senior leaders from across the HBOS Group. The key purpose is to provide strategic direction, challenge the Group’s businesses and remove barriers to progress in relation to the diversity strategy. HBOS has a clear plan of activity for the coming years and has recently launched the ‘Diversity Commitment’ which clearly sets out what colleagues can expect from HBOS.
HBOS adopts a multi-media approach when communicating with its colleagues throughout the Group. This principally involves e-mail, electronic and printed magazines, intranets, business television and face-to-face communication.
Each day several topical news stories are placed on the Company’s award-winning intranet site typically linked to other pages or sites for further information.
Television programmes are used to announce the Group’s annual and half-year results to colleagues. Others feature the Chief Executive being questioned by colleagues. A special television programme in January 2007 featured the short-listed charities for HBOS’s charity of the year, for which HBOS colleagues then voted electronically and by telephone.
A groupwide electronic magazine, entitled HBOS Today, is used to update colleagues on key business news. It is issued as required (rather than on a set publishing cycle). In 2006, 37 issues were published.
As well as groupwide communication, colleagues also receive more specific communication tailored at a divisional level.
In addition to the above, colleagues are also kept systematically informed of all matters of concern to them as employees via their local Human Resource teams. Details of Human Resource policies and joint agreements with recognised trade unions, which impact upon colleagues, can be readily accessed via the internal Intranet site.
The views of HBOS colleagues are sought on a regular basis, most notably through consultation with the recognised trades unions, ACCORD and AMICUS. The Company continues to support the colleagues’ rights to join trades unions. Around half of the current UK workforce are union members.
Colleagues are given the opportunity to contribute to the Company’s strategy and delivery via ACCORD and AMICUS, with whom the Company shares detailed information regarding the Group’s current and planned strategy. On a day-to-day basis, Union engagement at a local level is a common occurrence throughout all divisions.
The incentive arrangements for colleagues at all levels are, to varying extents, based on personal performance, operating divisional performance and Group performance. All-employee share plans form an integral part of those incentive arrangements, supporting the alignment of colleague and shareholder interests in a number of ways:
- Free shares - an award of shares, the value of which is determined by Group performance. An award was made in August 2006 set at 5% of salary, subject to a maximum award of £3,000 and a minimum of £500 (pro-rated for colleagues working part-time) with approximately 95% of colleagues electing to participate;
- Sharekicker - in 2006 colleagues had the opportunity to use their annual net cash bonus, which was determined on personal, divisional and/or Group performance, to buy HBOS shares - and get 50% extra shares after 3 years; and
- Sharesave - where colleagues have the option to buy HBOS shares - granted at a discount of up to 20% - after 3, 5 or 7 years.
Charitable and Political Donations
During the year the Group made charitable donations in the UK of £14.89m. The majority of donations were made to the HBOS Foundation, which provides grants to charities to fund initiatives relating to financial literacy and money advice. In addition, all funds raised by colleagues for the Million £ Challenge were matched by the HBOS Foundation and went to ‘I Can’, ‘Leonard Cheshire’ and ‘Crisis’. £1.76m in total has also been made available to charities as a result of their affinity to the Visa Charity credit cards offered by Halifax plc and Bank of Scotland. The affinity cards are offered in partnership with specific charities such as Cancer Research UK, Cancer Research UK (Scotland), the NSPCC and the SSPCA.
It is HBOS policy not to make donations to political parties.
Under the terms of the Political Parties, Elections and Referendums Act 2000 (‘PPERA’) companies are required to obtain shareholder approval before they can make any political donations, and to disclose any such payments in the Company’s Annual Report and Accounts. The PPERA is extremely wide in scope and many listed companies, including the Company, have therefore obtained authority from shareholders to make such payments as a precautionary measure, to enable legitimate business activities (which would not be regarded as political donations in the ordinary sense) to proceed.
At last year’s AGM, the Board accordingly obtained shareholders’ approval for the Company to make Donations to EU Political Organisations and/or to incur EU Political Expenditure up to defined limits.
Movement through Treasury of ordinary shares of 25p each for the year ended 31 December 2006
| Number of shares (millions) | No. as a % of issued share capital 31.12.2006 | Aggregate nominal value £m | Aggregate cost £m |
|
| Accquired by the Company and transferred into Treasury | 97.5 | 2.59% | 24.4 | 981.9 |
| Maximum held in Treasury at any time in the year | 13.0 | 0.35% | 3.3 | - - |
| Cancelled out of Treasury | 100.0 | 2.66% | 25.0 | - - |
During the last financial year, three employees were seconded part-time (normally for two days each week) by HBOS plc to the Cross Party Group on the Scottish Economy (‘CPG’) in the Scottish Parliament. The CPG is not a political party.
PPERA contains a specific exemption to the definition of EU Political Organisations for all party groups composed of members of the Westminster Houses of Parliament. There is no such specific exemption for all party groups of the Scottish Parliament. The Company is therefore disclosing a total amount of the donations made to the CPG during the last financial year of £17,602, representing the proportion of the employees’ salary paid by the Company during their secondment, not a cash donation.
Going Concern
The Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future and consequently the going concern basis continues to be appropriate in preparing the accounts.
Payment Policy
For the forthcoming period the Group’s policy for the payment of suppliers will be as follows:
- Payment terms will be agreed at the start of the relationship with the supplier and will only be changed by agreement;
- Standard payment terms to suppliers of goods and services will be 30 days from the date of a correct invoice that has been received for satisfactory goods or services which have been ordered and received unless other terms are agreed in a contract;
- Payment will be made in accordance with the agreed terms or in accordance with the law if no agreement has been made; and
- Suppliers will be advised without delay when an invoice is contested and disputes will be settled as quickly as possible.
HBOS plc complies with the Better Payment Practice Code. Information regarding this Code and its purpose can be obtained from the Better Payment Practice Group’s website at www.payontime.co.uk.
The Company’s main trading subsidiary undertakings, Halifax plc and Bank of Scotland, had trade creditors outstanding at 31 December 2006 representing 18 days of purchases for each company. The Company itself owed no amounts to trade creditors at 31 December 2006.
Share Capital
Full details of the movements in the authorised and issued share capital of the Company during the year are provided in Note 35 to the Accounts on page 173.
The Company has the authority to purchase up to 383,103,366 of its ordinary shares. The authority remains valid until the 2007 AGM or, if earlier, 25 July 2007. A resolution to authorise the purchase of up to 376,115,726 ordinary shares will be put to the 2007 AGM.
During the year the Company continued to manage its capital position actively, which resulted in returning around £1bn of capital to shareholders through a share buyback programme.
In 2007 there will be a further return of capital to shareholders through a share buyback programme, initially set at up to £500m.
Disclosable interests
As at the date of this report there is a disclosable interest in the voting rights of the Company, as notified to the Company in accordance with Chapter 5 of the UK Listing Authority’s Disclosure & Transparency Rules, as shown in the following table.
Disclosable interests
| Number of shares | Percentage of issued share capital |
|
| Legal & General Group plc and/or its subsidiaries | 157,221,080 | 4.175% |
Properties
The Directors are of the opinion that the current market value of the Group’s properties is not significantly different from the amount at which they are included in the balance sheet.
Auditors
A resolution to re-appoint KPMG Audit Plc as auditors will be put to shareholders at the 2007 AGM. The directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware:
- there is no relevant audit information of which the Company’s Auditors are unaware; and
- each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.
On behalf of the Board
Harry F Baines
Company Secretary & Group Counsel
27 February 2007
