Corporate Governance Report
At HBOS we believe that good corporate governance enhances our ability to perform well. It provides an effective framework for determining how authority and accountability exist throughout the organisation and sets an effective context for the Company’s interactions with its key stakeholders. This report gives detailed information on our corporate governance arrangements and clarifies how we apply the principles of the 2006 Combined Code (defined and explained below).
Compliance
In this report we have chosen to measure our compliance with the 2006 Combined Code (the ‘Code’) rather than the 2003 Combined Code, even though we will not be required to do so until next year. The Company considers that it has complied throughout the year with all the provisions within section 1 of the Code, other than provision C.3.1 on the composition of the Audit Committee, where we believe we have gone beyond the independence requirements of the Code, as a result of John Ormerod’s membership of that Committee. John is neither an HBOS plc Director nor an employee of the Group. His membership of the Audit Committee does not comply with the requirement that this Committee should comprise solely independent Non-executive Directors. In practice, John’s membership provides access to an experienced, additional resource and brings an even more independent perspective to the Audit Committee’s deliberations. Further information and biographical details for John are given on page 92.
The Board
Independence and balance
Throughout the year at least half of the Board of HBOS plc were independent Non-executive Directors. To be ‘independent’, the Board requires a Director to be independent in character and judgement and to be free of relationships or circumstances which could affect their judgement. Such circumstances might include being a former employee of the Group, having a material business relationship with it, having close family ties with any of the Company’s advisers, Directors or senior executives, being or representing a significant shareholder or having served on the Board for more than nine years.
With the Chairman, six Executive Directors and eight Non-executive Directors, the Board considers that it is of an appropriate size to oversee the Group’s businesses, with a suitable diversity of backgrounds and mix of experience and expertise to maximise its effectiveness. The size and composition of the Board, including the mix of skills and experience around the Board table, is kept under continuous review by the Nomination Committee. Further details of the Nomination Committee’s work are set out on page 97.
Balance of Executive and Non-executive Directors as at 31 December 2006
Division of responsibilities
The Group maintains and regularly updates its Board Control Manual which sets out the high level policy and decision-making arrangements within the Group, including details of those matters that are reserved to the Board (and its principal subsidiaries) as well as the terms of reference of the principal Committees of the Board. The responsibilities and specific accountabilities of the Chairman, the Deputy Chairman/Senior Independent Director, the remaining Executive Directors, the Non-executive Directors and other senior executives are all set out in the Board Control Manual.
The roles of Chairman and Chief Executive are clearly split, those positions presently being held by Dennis Stevenson and Andy Hornby respectively. Dennis is primarily responsible for leadership of the Board and Andy for running the Group’s business.
Chairman
The Chairman is responsible for ensuring the Board’s effectiveness, for the clarity and timeliness of information provided to the Board and for facilitating the effective contribution of all Directors. The Chairman has a key role in the joint development (with the Chief Executive) of the Group’s strategy, as well as oversight of strategy implementation and performance delivery. He ensures that there is a constructive, close, working relationship with the Chief Executive. Biographical information about the Chairman is set out on page 92.
During 2006, the Chairman’s work has included shaping how the Board discusses and decides on the Company’s strategic direction. For example, bringing proposals to the Board at a formative, rather than at a fully considered stage, to get the full benefit of the breadth of skill and experience of all Directors, in particular the Non-executive Directors.
In addition the Chairman (frequently along with the Deputy Chairman) has continued his policy of meeting executive teams across the business outwith formal Board meetings. The purpose of the meetings is to understand in more detail each team’s key deliverables and motivations, to inform the Chairman’s contributions to debate and support his leadership of Board meetings. Similarly, the Chairman strongly encourages Non-executive Directors to engage directly with executive management across the business, outwith formal Board meetings.
In January 2007 it was announced that the Chairman would be a member of the Board of Loudwater Investment Partners Limited, the Investment Advisor to Loudwater Trust Limited (‘Loudwater’), an AIM Listed venture capital business. The Chairman (in his personal capacity) is also an investor in Loudwater. The Company, through the Corporate business, is a significant shareholder in Loudwater. The Chairman’s involvement with Loudwater was reviewed in detail by the Deputy Chairman/Senior Independent Director, together with the Chief Executive, on behalf of the Board. The Board was and remains satisfied that no conflict arises as a result of this situation.
Senior Independent Director
Sir Ron Garrick, the Deputy Chairman, has been the Senior Independent Director since 2004. Biographical information about Sir Ron is set out on page 92. The Non-executive Directors meet on one occasion each year, without the Chairman or the Executive Directors present under the leadership of Sir Ron, to review the performance of the Chairman. As the performance of the Chairman and that of the Board are inextricably linked the meeting also reviews the Board’s functioning as a whole, as well as the relationship between the Chairman and the Chief Executive, which is key to the effective functioning of the Board.
The Senior Independent Director attended various briefings and other meetings with analysts and other representatives of institutional investors during the year. The Board considers his contact with investors was sufficient to develop a balanced understanding of the issues and concerns of major shareholders, in accordance with provision D.1.1 of the Code.
In addition, the Senior Independent Director is available to meet shareholders on request. Should any shareholder have a concern which they feel cannot be resolved through the routine mechanisms for investor communication, or through the Chairman or Chief Executive (as appropriate), they are encouraged to contact the Senior Independent Director, initially via the Company Secretary at the Registered Office.
Company Secretary and independent advice
Harry Baines, Company Secretary & Group Counsel, is responsible for advising the Board on corporate governance matters and, in conjunction with the Chairman, for ensuring good information flows between the Board, its Committees, Non-executive Directors and senior executives. Biographical information about Harry is set out on page 92.
The Board, with advice from Harry, dealt with a number of corporate governance matters during 2006. As part of a drive to streamline Board processes, HBOS plc made changes to how management information is generated, which has resulted in the information supplied to Directors being produced more promptly. The Board also monitored the evolving legal and best practice requirements for the Operating and Financial Review and subsequently the Business Review legislation. Procedures to capture the information for the Business Review were then embedded in individual businesses, building onto well established, pre-existing financial reporting protocols.
Harry is an employee (but not a Director) of the Company and the Non-executive Directors have access to his advice and services. Additionally, if required in the furtherance of their duties, Non-executive Directors (along with any other members of the Board’s main Committees) are entitled to seek independent, professional advice at the Company’s expense.
Board proceedings
A formal schedule of matters specifically reserved to the Board of HBOS plc is published on the Company’s website, as are the Terms of Reference (which are reviewed at least annually) of its principal Committees. These are also set out in the Board Control Manual, which also covers the Company’s principal subsidiaries and key senior executives. Below are details of some of the Board’s work in 2006 and certain other key matters reserved to it.
- Approving the annual Business Plan which defines the Group’s strategic and operating objectives and the risk framework within which it operates. Following the Board’s approval, it is the responsibility of the Company’s management (under the supervision of the Board) to deliver the Business Plan in accordance with the Group’s policies and standards within the risk appetite defined by the Board.
- Strategy and risk – the Board sets and oversees the Group’s strategic direction, including the adoption of the Group’s policies and standards on financial and non-financial risks and other aspects of the corporate governance framework, which are developed and implemented by the Company’s management, under the leadership of divisional heads and the oversight of the Board.
- Regulatory/legal activity – including the approval of the Company’s results, dividends and other key documents. Any class 1 or 2 circulars (as defined in the Listing Rules), substantial transactions or any change in the Group’s activity require Board approval.
- Appointments – with input from the Nomination and Remuneration Committees, in 2006 the Board appointed Peter Cummings, Karen Jones, Jo Dawson and Benny Higgins to the Board and subsequently Richard Cousins.
- Training – is critical to enable Directors and Board Committee members to update their skills and to ensure they have the necessary knowledge and familiarity to perform effectively. During the year, the Board received extensive training and updates in relation to the capital treatment of Basel II and the implications for the Group of this revised approach, as well as other topics.
- Management oversight – the Board routinely reviews operating, financial and risk performance. Divisional heads normally report to the Board at each meeting and the Board challenges them, where appropriate, on performance and forecast results. Amongst many other things covered, the Board in the year has reviewed the Group’s business plan, internal controls, policies and standards on risk and the progress of Basel II implementation.
- Delegation – to subsidiary Boards and Board Committees is undertaken by the Board.
- Approval of capital expenditure and guarantees/indemnities/securities above pre-defined limits must be considered and approved by the Board.
- Approval of new or material changes to existing employee share schemes is a matter reserved to the Board and, where appropriate, shareholder approval is sought.
- Ethics – the Board has set out the standards to which the Group aspires in dealings with its key stakeholders in “The Way We Do Business”, a statement available in full from our website
www.hbosplc.com. The Board also monitors transparency, responsible lending, value for money and other corporate responsibility drivers, details of which are in the Corporate Responsibility Report on page 78.
| Frequency of, and attendance at, Board meetings | |
|---|---|
| Number of meetings held in year | 10 |
| Number of meetings attended in year: | |
| Dennis Stevenson | 10 |
| Andy Hornby | 10 |
| Peter Cummings | 10 |
| Jo Dawson | 6 |
| Jo Dawson attended all Board meetings held since becoming a Director on 1 May 2006 | |
| Benny Higgins | 6 |
| Benny Higgins attended all Board meetings held since becoming a Director on 1 May 2006 | |
| Phil Hodkinson | 10 |
| Colin Matthew | 10 |
| Sir James Crosby | 5 |
| Sir James stood down from the Board on 31 July 2006 | |
| Charles Dunstone | 9 |
| Sir Ron Garrick | 10 |
| Anthony Hobson | 8 |
| Sir Brian Ivory | 9 |
| Karen Jones | 10 |
| Coline McConville | 9 |
| Kate Nealon | 8 |
| David Shearer | 10 |
