Corporate Governance Report
continued
Executive Committee
An Executive Committee, consisting of all HBOS plc Executive Directors plus the Company Secretary & Group Counsel (Harry Baines) and the Group Risk Director (Dan Watkins) met 14 times during 2006. The Executive Committee has no specific authorities delegated to it by the HBOS plc Board, but provides advice to the Chief Executive, in particular in relation to strategy and matters having cross-divisional or Group-wide implications. The Committee also takes the lead role in preparing the Group’s annual Business Plan, for submission to the Board, and reviews all issues and papers requiring HBOS plc Board or Audit Committee approval. It considers decisions and initiates appropriate actions following meetings of those bodies.
Internal control
The Board has overall responsibility for the Group’s system of internal control and risk management and reviews its effectiveness annually. The review covers financial, operational, compliance and risk management controls. The implementation and maintenance of the risk management and internal control systems are the responsibility of the Executive Directors and other senior executives. Systems are designed to manage the risk of failure to achieve business objectives, and provide reasonable assurance against material misstatement or loss.
Further details of the Group’s internal controls are disclosed in the Risk Management report on pages 81 to 89.
Election and re-election of Directors
The Company requires all Directors to stand for re-election at intervals of no more than three years, hence Anthony Hobson and Kate Nealon will retire at the forthcoming Annual General Meeting (‘AGM’) and will seek re-election by shareholders.
Sir Brian Ivory and David Shearer will retire at the forthcoming AGM and will not offer themselves for re-election. Sir Brian’s decision to stand down comes after serving nine years on the Boards of Bank of Scotland and, more recently, the Company. Whilst Sir Brian remains fully independent in terms of his approach and outlook, it is the Company’s policy that, except in exceptional circumstances, independent Non-executive Directors should not serve longer than nine years on the Board. David Shearer has decided to stand down to ensure that no conflicts arise in the future between his position as a Director of the Company and his other business interests. So that his talents are not totally lost to the Company, however, David has agreed that, given his experience and expertise, he will continue to work closely with the Company’s Corporate Division.
All Directors are subject to election by shareholders at the first AGM following their appointment, and accordingly Jo Dawson, Benny Higgins and Richard Cousins, all appointed Directors since the last AGM, will present themselves for election at the 2007 AGM. The Chairman has endorsed the effectiveness and commitment of all Directors standing for election or re-election at the AGM.
Induction
All new Directors and Committee members receive a full and tailored induction plan. Meetings were arranged for Karen Jones with the heads of all divisions, key business units and other functions, including Investor Relations and the Public Policy Unit. Karen also held separate meetings with the (then) Chief Executive, the (then) Chief Executive Designate and the Company Secretary & Group Counsel. Similar arrangements are in place for Richard Cousins. Induction for Jo Dawson and Benny Higgins, as Executive Directors, took place in the course of their activities within the Group. Induction for Risk Control Committee members is detailed on page 96.
Board and Director evaluation
The performance and effectiveness of the Board and each of its Committees is evaluated annually, with the involvement of the Chairman and all Directors (and where appropriate, other members of those Committees). The outputs or other findings of these evaluations lead to the development and implementation of detailed action plans. No material failings or weaknesses were identified during the year.
A number of enhancements were identified as a result of Board evaluation activity in 2006, including a decision that Board strategy over the long-term would be discussed in a specific meeting in the early part of 2007, where it would be the only agenda item.
Board committees
Audit Committee
Membership
Membership of the Audit Committee (as set out in the box on this page) is designed to ensure that the Committee can fulfil its role effectively. In 2006 it included four independent Non-executive Directors and one co-opted member, John Ormerod, who is neither a Director of HBOS plc nor an employee of the Group. John, whose biographical details are given on page 92, enhances the Audit Committee’s independence and brings additional experience, expertise, resource and perspective to its deliberations. The Secretary to the Audit Committee is Lysanne Black, Senior Deputy Company Secretary of HBOS plc.
Membership of the Audit Committee is reviewed by its Chairman and the Group Chairman (who is not an Audit Committee member) at regular intervals in consultation with the Nomination Committee. The Audit Committee’s structure requires the inclusion of at least one financially qualified member (as recognised by the Accounting bodies). The Board considers that Anthony Hobson, a Chartered Accountant and until 2001 the Group Finance Director of Legal & General, has the significant, recent and relevant financial experience to satisfy this requirement. In addition, both John Ormerod and David Shearer have the requisite expertise and experience to fulfil this requirement.
The Group provides an induction programme for new Audit Committee members and on-going training to enable them to carry out their duties. The induction programme covers the role of the Audit Committee, its terms of reference, expected time commitments and an introduction to key aspects of the Group’s business, including the main business financial dynamics and risks.
Attendance at meetings
The terms of reference require the Audit Committee to meet at least four times a year. During 2006 the Committee met on eight occasions, as shown in the box below. The quorum for an Audit Committee meeting is any two Audit Committee members. The Audit Committee invites the Chief Executive, senior executives from the Finance and Risk functions, the Head of Group Internal Audit and the external auditors to attend all of its meetings. Other senior management attend as requested by the Committee to enable it to discharge its duties.
| Membership of Audit Committee and frequency and attendance at meetings | |
|---|---|
| Number of meetings held in year | 8 |
| Number of meetings attended in year: | |
| Anthony Hobson (Chairman) | 8 |
| Coline McConville | 8 |
| Kate Nealon | 7 |
| David Shearer* | 8 |
| John Ormerod | 8 |
* David Shearer will step down from this Committee when he retires from the Board at the 2007 AGM.
Committee evaluation
The Audit Committee’s effectiveness was evaluated during the year. The evaluation was conducted by Group Internal Audit and the views of all members, as well as regular attendees from other key functions, were sought. Minutes, supporting papers and governance papers, including the Board Control Manual, were all used to review the Audit Committee’s effectiveness. The outcome of the Audit Committee’s review indicated that the Audit Committee was effective with a high degree of compliance with the Combined Code. A small number of potential, minor enhancements were identified, which resulted in the re-issuance of the Secretary’s guidance on the format and submission of reporting papers to ensure consistency and convenience.
Overview of the activities of the Audit Committee to discharge its duties
The Audit Committee’s terms of reference, which are reviewed annually, include all matters required by the Combined Code. Its activities include receiving and challenging reports from senior management and consulting, as necessary, with the internal and external auditors. The Audit Committee assists the Board in relation to the Group’s external financial and regulatory reporting requirements, its risk and internal control environment and the Group’s compliance with the Combined Code. In particular, in 2006 the Audit Committee:
- considered and approved the accounting policies, principles and practices as presented in the Group’s accounts;
- assessed significant accounting and reporting issues and the key accounting and audit judgements;
- considered the external auditors’ annual Internal Control Report and management’s response;
- monitored the relationship of the Group with its regulators;
- reviewed and advised the Board on the Group’s interim and annual financial statements, the control of financial and business risks (including whistleblowing arrangements), the nature and scope of the work performed by internal and external auditors, the results of this audit work and the responses of management;
- concluded a comprehensive external audit tender process, as described further below;
- assessed the resources, organisational structure and operational effectiveness of the internal audit function together with management’s response to the findings;
- reviewed the effectiveness of the Group’s system of internal control, including financial, operational, compliance and risk management on an on-going basis;
- reviewed other services provided to the Group by the external auditors, and monitored their independence, concluding that they had maintained their independence throughout the year;
- reviewed management procedures for identifying business risks and controlling their financial impact; preventing or detecting fraud; ensuring compliance with regulatory and legal requirements and monitoring the operational effectiveness of policies and systems;
- considered the activities of the divisional Risk Control Committees (‘RCCs’) (described below); and
- initiated a review of the Company’s control environment in the broad context of the Sarbanes-Oxley legislation, as a benchmark of the Group’s standard of control and compliance.
The Audit Committee also held private meetings on a regular basis with the external auditors, the Head of Group Internal Audit, the Group Risk Director, the Group Finance Director and other key members of the management team as part of the Committee’s work on the effectiveness of the risk management policies and procedures. The Group Risk Director and the Head of Group Internal Audit also have the right of direct access to the Chairman of the Audit Committee. The Chairman of the Audit Committee reports on the activities and recommendations of the Audit Committee at the Board meeting subsequent to each Committee meeting.
Risk Control Committees (‘RCCs’)
The Audit Committee is supported by divisional RCCs, which act under delegated authority from the Audit Committee, under detailed Terms of Reference. Each divisional RCC reviews, on behalf of the Audit Committee, the adequacy of that division’s system of internal control and risk management, the significant risks facing that business and how they are investigated and the techniques used to identify, assess and manage those risks particular to the business of the division. At each of its meetings the Audit Committee reviews the minutes and work of the RCCs.
The membership of the RCCs is shown below. Each RCC is chaired by a Non-executive Director and comprises a minimum of one Non-executive Director, an “independent” executive from another division and additional members drawn from outside the Group who are chosen for the relevance of their skills to the division. At least one Audit Committee member serves on each RCC.
The Group provides an induction programme for new RCC members focusing on meetings with key personnel in the relevant divisions. Meetings were also held with the Chairman, Chief Executive, Group Finance Director, the Audit Committee Chairman, Group Risk Director, Head of Group Internal Audit and the external auditors. Background reading, including the Memorandum & Articles of Association, the Board Control Manual and Model Code arrangements, is routinely provided to new Board and Committee members, alongside materials specific to the division on whose RCCs they sit.
* External appointment, neither HBOS plc Director nor a Group employee, selected to enhance the independence of the RCC and to provide an additional resource and perspective to their deliberations.
