Board Committees

The number of board meetings and committee meetings held during 2015 and attended by each Director was as follows:

 
Board
Audit & Risk Committee Finance Committee Remuneration Committee Nomination Committee
Number of Meetings Total
Attended Total Attended Total Attended Total Attended Total Attended
M. Chadwick 9 9 - - - - - - 2
2
G. Slark 9 9 - - 12 12 - - - -
D. Arnold 9 9 - - 12 12 - - - -
F. van Zanten 9 9 4 4 - - - - 1 1
R. Ryan 9 9 4 4 - - 3 3 2 2
C. M. Fisher 9 9 - - - - 3 3 - -
 P. Hampden Smith 3 - 1 - - - - - 1 1
A. Flynn 9 9 4 4 - - 3 3 1 1

Mr. Paul Hampden Smith was unavailable to attend Board Meetings due to pre-existing commitments at the date of his appointment to the Board on 27 August 2015.

The Board is assisted by Committees of Board members that focus on specific aspects of its responsibilities. The terms of reference of the Audit and Risk Committee, Remuneration Committee and Nomination Committee, which were approved by the Board and comply with the Code, are available from the Company and can also be found on the Group’s website at www.graftonplc.com. Membership of Board Committees is shown on page 42. The Company Secretary or Deputy Company Secretary is secretary to the Audit and Risk Committee. The Company Secretary is secretary to the Remuneration Committee.

Nomination Committee

The Nomination Committee (“the Committee”) currently comprises the Group Chairman and four Non-Executive Directors:

Mr. Roderick Ryan, Chairman, Mr. Mike Roney, Mr. Paul Hampden Smith, Mr. Charles M. Fisher and Mr. Frank van Zanten.

All members of the Committee are determined by the Board to be independent Non-Executive Directors in accordance with provision B1.1 of the UK Corporate Governance Code.

Duties

Under its terms of reference, which are available on the company website, www.graftonplc.com, the Committee, amongst other matters:

  • Evaluates the balance of skills, knowledge, experience and diversity of the Board and Committees and makes recommendations to the Board with regard to any changes;
  • Considers succession planning for Directors and other senior executives taking into account what skills and expertise are needed for the future;
  • Regularly reviews the structure, size and composition (including the skills, knowledge and experience) required of the Board and its Committees;
  • Identifies, and nominates for the approval of the Board, candidates for appointment as Directors and ensures there is a formal, rigorous and transparent procedure for the appointment of new Directors to the Board; and
  • Considers the re-appointment of any Non-Executive Director at the conclusion of their specified term of office and make recommendations to the Board.

It is the policy of the Committee to consider candidates on merit and against objective criteria and with due regard for the benefits of diversity on the Board, including gender, taking care that appointees have enough time available to devote to the position.

The Committee is satisfied that its role and authority include those matters envisaged by the UK Corporate Governance Code that should fall within its jurisdiction and that the Board has delegated authority to the Committee to address those tasks for which it has responsibility.

View the Nomination Committee’s terms of reference which are available from the company.

Finance Committee

The Finance Committee comprises Mr. Gavin Slark, Chairman, Mr. David Arnold, Chief Financial Officer and Mr. Charles Rinn, Secretary and Group Financial Controller. The Committee deals with acquisition opportunities up to the Board approval stage of the process, capital expenditure under the limit reserved from time to time for the Board and Group management and finance issues.

Audit and Risk Committee

The Audit and Risk Committee (“the Committee”) comprises four Non-Executive Directors:

Mr. Paul Hampden Smith, Chairman, Mr. Charles M. Fisher, Mr. Frank van Zanten and Mr. Vincent Crowley.

All members of the Committee are determined by the Board to be independent Non-Executive Directors in accordance with provision B1.1 of the UK Corporate Governance Code. In accordance with the requirements of provision C.3.1 of the UK Corporate Governance Code, Mr. Hampden Smith is designated as the Committee member with recent and relevant financial experience. The biographical details on pages 42 to 43 demonstrate that members of the Committee have a wide range of financial, taxation, commercial and business experience.

Duties

Under its terms of reference, which were reviewed and revised during 2013 and reflect best practice, the Committee:

  • Monitors the integrity of the Group’s financial statements and announcements relating to the Group’s performance;
  • Advises the Board on whether the Annual Report and accounts, taken as a whole, is fair, balanced and understandable, and whether it provides the information necessary for shareholders to assess the Group’s performance, business model and strategy;
  • Monitors the effectiveness of the external audit process and makes recommendations to the Board in relation to the appointment, reappointment and remuneration of the External Auditor;
  • Oversees the relationship between the Group and the External Auditor including the terms of engagement and scope of audit;
  • Reviews the effectiveness of the company’s internal controls;
  • Reviews the scope, resourcing, findings and effectiveness of the Internal Audit function;
  • Oversees the effectiveness of the risk management procedures in place and the steps taken to mitigate the Group’s risks; and
  • Reports to the Board on how it has discharged its responsibilities.

The Committee is satisfied that its role and authority include those matters envisaged by the 2012 UK Corporate Governance Code that should fall within its jurisdiction and that the Board has delegated authority to the Committee to address those tasks for which it has responsibility. View the Committee’s terms of reference which are available from the company.

Meetings

The Committee met four times during the year. The Chairman of the Committee reports to the Board on the work of the Audit and Risk Committee and on its findings and recommendations. Meetings are attended by the members of the Committee and others being principally the Chief Executive Officer, the Chief Financial Officer, the Group Financial Controller and Company Secretary and the Group Internal Audit and Business Risk Director, who attend by invitation. Other members of executive management may be invited to attend to provide insight or expertise in relation to specific areas. The Audit Partner and Audit Director are invited to attend certain Audit and Risk Committee meetings. The Committee also meets privately with the External Auditor and the Group Internal Audit and Business Risk Director without executive management present. The Chairman of the Committee reports the outcome of the Audit and Risk Committee meetings to the Board.

Activities of the Committee During 2015

Financial Reporting

The Committee reviewed the draft financial statements and draft half-yearly results before recommending their approval to the Board. As part of this review, the Committee considered significant accounting policies, estimates and significant judgements. The Committee also reviewed the significant management letter points on internal controls in the Group’s individual businesses prepared by KPMG as part of the audit process.

The significant issues in relation to the financial statements considered by the Committee and how these were addressed are summarised as follows:

Valuation of Inventory

The Group carries significant levels of inventory and key judgements are made by management in estimating the level of provisioning required for slow moving inventory. In arriving at its conclusion that the level inventory provisioning was appropriate, the Committee received half year and full year updates from management on stock ageing and provisioning at business unit level and also sought the views of the Auditors who had considered the appropriateness of the level of inventory provisioning at the year-end on the basis of a review of stock aging and stock turn analysis using computer aided audit techniques. The Committee reviewed the basis for calculating the valuation of rebate attributable to inventory and was satisfied that inventory was appropriately valued.

Rebate Income and Rebate Receivable

Supplier rebates represent a significant source of income in the merchanting industry and is an area of risk due to the number, complexity and materiality of rebate arrangements. The Committee reviewed the basis used by management for calculating rebate income for the year and rebates receivable at the year end and was satisfied that the accounting treatment adopted was appropriate and that rebates receivable at the year-end were recoverable. In reaching its conclusion, the Committee reviewed information and reports prepared by the internal audit function which completed half year and full year reviews across all significant business units with the primary objective of providing independent assurance on the adequacy of the design and operating effectiveness of the controls in place over supplier rebate management. These reviews included re-performing calculations on a sample of rebate income for 2015 and rebate receivable at year end by reference to agreements with individual suppliers and reports of purchases made from suppliers. The Committee considered the work undertaken by KPMG on the completeness and accuracy of rebate income and rebates receivable at the year-end and its conclusion that rebate income recognised in the year and receivable at the year-end was materially correct. The Committee also reviewed the value of rebates received after the year end.

Goodwill

The Committee considered the goodwill impairment analysis provided by management and agreed with the conclusion reached that no impairment charge should be recognised in the year. In arriving at its decision, the Committee considered the impairment review conducted by management which involved comparing the recoverable amount and carrying amount of the cash generating units. The review by management involved discounting the forecasted cash flows of each cash generating unit (group of units) based on the Group’s pre-tax weighted average cost of capital and carrying out sensitivity analysis on the key assumptions used in the calculations including the revenue growth rate, the discount rate and the growth rate in perpetuity. The Committee also considered reports on the medium term macro-economic environment, analysts’ forecasts for the Group, the budget for 2016 and forecasts for 2017 to 2019 inclusive prepared by management.

The Committee noted the significant level of headroom in the value in use model prepared by management and considered the impact on the headroom of sensitivity analysis on the key assumptions used in the model. The Committee also compared the yearend market capitalisation of the Group to its net asset position and noted that it was materially higher than the net asset value. The Committee considered the review of the impairment model carried out by KPMG during the audit and its conclusion that goodwill was not impaired.

Property Impairment

The Group continues to hold a number of properties that are currently not in use but which are being actively marketed and categorised as held for resale. A number of other properties are being held as investment properties pending a recovery in the property market or with a view to enhancing their development potential by securing alternative use planning. The Committee reviewed the property valuation papers prepared by management and considered the key assumptions supporting the valuations including third party market data and advice received by management concerning local market conditions where there was limited or no precedent transaction data available. The Committee concluded as a result of its review that investment properties and properties held for resale were appropriately recorded on the balance sheet in accordance with the Group’s accounting policies. The Committee also considered the conclusions of the audit work undertaken by KPMG in relation to the assessment of fair value.

Internal Audit

The Committee considered reports and updates from the internal audit function which summarised the findings, recommendations and management responses to audits conducted during the year. These reports covered the work undertaken, findings, actions recommended and the response of executive management of the Group’s businesses to recommendations made. The Committee considered and approved the programme of work to be undertaken by the Group’s internal audit function in 2015. The Group Internal Audit and Business Risk Director reports to the Chief Financial Officer and also has direct access to the Audit and Risk Committee. The Committee met with the Group Internal Audit and Business Risk Director on three occasions during the year where he presented internal audit report findings and recommendations and updated the Committee on the actions taken to implement recommendations. The scope, authority and responsibility of the Internal Audit function are set out in the Internal Audit Charter which has been approved by the Committee.

IT Systems

As part of its review of principal risks, the Committee considered the adequacy of the governance structures, and IT policies and procedures to support a programme of investment in systems and infrastructure planned over a number of years that will result in the upgrading and consolidation of systems that support a number of businesses including the rollout of the AX trading platform in Buildbase and noted that there was a full strategy, business case and risk analysis for each project. The Committee also assessed the AX Trading Platform project and the quality of the processes in place in relation to its development and implementation.

Whistleblowing and Fraud

As noted in the 2014 Annual Report, the Group have introduced “Speak-Up”, a group wide confidential reporting service run by an independent company. It allows employees to report any concerns they may have regarding certain practices or conduct in their businesses including possible instances of fraud and theft. All concerns raised through this channel and the outcomes of investigations are reported to the Committee. The Committee also received reports of losses during the year related to fraud and the outcome of related investigations.

Anti-Bribery and Corruption

A Group Anti-Bribery and Corruption Policy was approved during 2015 setting out the main rules applicable to the Group, the core standards and procedures to be observed and practical guidance on dealing with bribery risk. An annual declaration of independence is signed by senior management and other individuals who are considered to be at higher risk of conflict of interest, including employees who have responsibility for contract negotiation with customers and suppliers.

External Auditor

The Committee reviewed the External Auditor’s overall audit plan for the 2015 audit of the Group and approved the remuneration and terms of engagement. The Committee also considered the quality and effectiveness of the external audit process and the independence and objectivity of the Auditor.

In order to ensure the independence of the external Auditor, the Committee received confirmation from the Auditors that they are independent of the Group under the requirements of the Auditing Practices Board’s Ethical Standards for Auditors. The Auditors also confirmed that they were not aware of any relationships between the firm and the Group or between the firm and persons in financial reporting oversight roles in the Group that may affect its independence. The Committee considered and was satisfied that the relationships between the Auditor and the Group including those relating to the provision of non-audit services did not impair the Auditors judgement or independence.

As indicated previously, KPMG have been the Group’s Auditors since 1993. Prior to 2015, the Group had not formally tendered the Audit since 1993. The Committee did however keep the effectiveness and independence of the audit process under regular review. KPMG’s audit partner rotation rules require the lead audit partner responsible for the audit to be rotated every five years. Cliona Mullen, the current lead audit partner was first appointed to the role for the year ended 31 December 2011 and 2015 is her fifth and final year as lead audit partner. In October 2012 the UK Corporate Governance Code introduced a new provision, on a comply or explain basis, requiring FTSE 350 companies to put their audit out to tender every ten years. The Committee deferred a decision in 2013 to put the audit out to tender pending finalisation in 2014 of new regulations by the European Parliament on audit reform and audit tendering, which requires public interest entities to tender their audit after a period of 10 years, rotate the auditor after a maximum period of 20 years and prohibits the external auditor from providing certain non-audit services.

In view of the new regulations which impose an obligation on listed companies to rotate their auditor periodically and the rotation of the lead audit partner by KPMG following the 2015 audit of the Group, the Audit Committee agreed to put the external audit out to tender in 2015. In view of KPMG’s length of tenure, the Board decided, following a recommendation from the Committee, to appoint a new firm to conduct the audit of the Group for the year ended 31 December 2016. As a result, KPMG were not invited to participate in the process.

An invitation to tender document was issued to audit firms which the Committee believed have the appropriate international expertise, experience and network to perform the audit of the Group. Each of the firms was given access to a data room and meetings were arranged with Group and Business Unit management prior to the firms submitting their audit tender documents. The Committee evaluated the audit tender documents using a prescribed criteria and oral presentations were made by each of the firms invited to tender. The Committee subsequently recommended that PwC be appointed as external auditors in succession to KPMG. The appointment will take effect for the financial year ending 31 December 2016. The Board would like to thank KPMG for their service as auditor to the Group over a long period.

KPMG have confirmed that there are no matters in connection with their resignation as auditors which need to be brought to the attention of shareholders.

Non-Audit Services

The External Auditor is not prohibited from undertaking non-audit services that do not conflict with auditor independence provided the provision of the services does not impair the auditors objectivity or conflict with the their role as auditor and subject to having the required skills and competence to provide the services. The auditor is precluded from providing non-audit services that could compromise its independence or judgement.

The Committee monitors and reviews the nature of non-audit services provided by the Auditors. An analysis of non-audit services provided by KPMG for 2015 and 2014 is disclosed in Note 3 on page 113. The Committee has undertaken a review of non-audit services provided during 2015 and is satisfied that these services were efficiently provided by the External Auditor with the benefit of their knowledge of the business and did not prejudice their independence and objectivity. The non-audit services mainly included the provision of tax compliance services and submission of tax returns to the Revenue authorities in the UK, Ireland and Europe and advice on tax matters. KPMG is the Group Auditor and a substantial part of the non-audit services were provided by KPMG network firms in the UK and Europe.

In January 2016 the Committee approved a policy on non-audit services. Under this policy the External Auditor will not be engaged for any non-audit services without the approval of the Audit & Risk Committee. The External Auditor is precluded from providing certain services under Regulation (EU) No 537/2014, or from providing any non-audit services that have the potential to compromise its independence or judgement. With the exception of fees incurred in acquired businesses, fees for non-audit services in any financial year are targeted not to represent more than 20 per cent of the audit fee.

Internal Control and Risk Management

The Directors acknowledge that they have overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The Directors recognise that such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against material misstatement or loss.

A process for identifying, evaluating and managing significant risks faced by the Group, in accordance with the Guidance for Directors in the 2014 Code and the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, has been in place throughout the accounting period and up to the date the financial statements were approved. These risks are reviewed by the Committee and the Board. Executive management is responsible for implementing strategy and for the continued development of the Group’s businesses within parameters set down by the Board. Similarly, day to day management of the Group’s businesses is devolved to operational management within clearly defined authority limits and subject to very tight reporting of financial performance. Group and operating company management are responsible for internal control including the identification and evaluation of significant risks and for implementation of appropriate internal controls to manage such risks. Group management reports to the Board on key risks and internal control issues including the way in which these issues are managed.

The preparation and issue of financial reports, including the consolidated annual and interim accounts is managed by Group Finance with oversight from the Audit Committee. The Group’s financial reporting process is controlled using accounting policies and reporting formats issued by Group Finance to all reporting entities (including subsidiaries) in advance of each reporting period end. Group Finance supports all reporting entities with guidance in the preparation of financial information. The process is supported by a network of finance professionals throughout the Group who have responsibility and accountability to provide information in keeping with agreed policies and procedures. The financial information for each entity is reviewed by the Group’s senior management.

The key features of the Group’s system of internal control and risk management include:
  • Review, discussion and approval of the Group’s strategy by the Board;
  • Defined structures and authority limits for the operational and financial management of the Group and its businesses;
  • A comprehensive system of reporting on trading including a comparison of actual results with budget and the prior year on a monthly and cumulative basis, on operational issues and on financial performance incorporating results and cash flows, working capital management, return on capital employed and other relevant measures of performance;
  • Written reports from the Chief Executive Officer and the Chief Financial Officer that form part of papers considered by the Board at every board meeting;
  • Review and approval by the Board of budgets incorporating operating performance and cash flows;
  • Board approval of major capital expenditure proposals and all acquisition proposals. Capital expenditure proposals below Board level are approved by the Finance Committee; and
  • Review by senior management and the Audit and Risk Committee of the Internal Audit Report findings, recommendations and follow up actions.

The internal audit function focuses on areas of greatest risk to the Group. It monitors compliance and considers the effectiveness of internal control throughout the Group. The Audit and Risk Committee reviews Internal Audit Reports and meets with the Group Internal Audit and Business Risk Director in order to satisfy itself on the adequacy of the Group’s risk management and internal control systems. In addition, the Audit and Risk Committee reviews KPMG Management Letter reports and meets with the KPMG Audit Partner to discuss the nature of the points raised. The Chairman of the Audit and Risk Committee reports to the Board on all significant matters considered by the Committee.

In the Board’s view, the ongoing information it receives is sufficient to enable it to review the effectiveness of the Company’s system of internal control. The Directors confirm that they have reviewed the effectiveness of internal control. In particular, they have during the year considered the significant risks affecting the business and the way in which these risks are managed, controlled and monitored.

The Committee and the Board have carried out a robust assessment of the principal risks facing the Group. It is not practical to document every risk that could affect the Group in this report. The risks identified on pages 56 to 58 are those that could have a material adverse effect on the Group’s business model, future performance, solvency or liquidity. The actions taken to mitigate the risks described in the Principal Risks and Uncertainties section on pages 56 to 58, cannot provide assurance that other risks will not materialise and adversely affect the operating results and financial position of the Group.

The Group has a framework in place to ensure the development, maintenance, operation and review of risk management controls that fulfil the Boards corporate governance obligations and support the Group’s strategic objectives. The Board is responsible for establishing and maintaining risk management controls and for evaluating their effectiveness. The Audit and Risk Committee oversees the effectiveness of the risk management procedures in place and the steps being taken to mitigate the Group’s risks. The Group’s Risk Management Committee (RMC), whose membership reflects a range of executive functions, skills, expertise, experience and levels, is responsible for the identification, reporting, mitigation and management of risk. The Risk Management Committee prepares an annual report of its activities and identifies areas for improvement and changes in the risk profile of the Group and presents it to the Audit and Risk Committee.

The Risk Management Committee meets four times a year and is chaired by the Group CFO and reports to the Audit and Risk Committee. The RMC is responsible for maintaining and monitoring the Corporate Risk Register, which records the Group’s material risks and the actions and controls, both in place and required, to manage each to an acceptable level of risk consistent with the Group’s risk appetite. Each of the Group’s business units are required to maintain a register of key business risks and report them quarterly to the RMC. The RMC initiates Group-wide actions to manage risks. Recent initiatives include the development and implementation of a new Group Code of Business Conduct and Ethics, with associated policies and awareness training, and a programme to formalise Business Continuity Planning arrangements throughout the Group.

The Group has established a risk management process to ensure effective and timely identification, reporting and management of risk events that could materially impact upon the achievement of Grafton’s strategic objectives or financial targets. The risk management process is closely aligned with the overall strategic development of the Group which is influenced by economic growth, organic growth through implants, new formats and greenfield expansion and acquisition related growth in the UK, the Netherlands and Belgium. Strategic projects are risk-assessed in conjunction with extensive commercial, financial and legal due diligence.

Remuneration Committee

The Committee currently comprises Mr. Charles M. Fisher, who chairs the Committee, Mr. Frank van Zanten, Mr. Paul Hampden Smith and Ms. Susan Murray, all of whom are Non-Executive Directors determined by the Board to be independent.

The Committee members have no personal financial interest, other than as shareholders, in matters to be decided, no potential conflicts of interests arising from cross directorships and no day-to-day involvement in running the business. The Non-Executive Directors are not eligible for pensions and do not participate in the Group’s bonus or share schemes. The Committee’s terms of reference can be found on the company website.

The Chairman of the Board attends meetings of the Committee by invitation and participates in the deliberations of the Committee. The Committee also consults the CEO as appropriate. The Committee is also assisted in its work by the Company Secretary who also acts as secretary to the Committee. The Executive Directors and Company Secretary take no part in discussions relating to their own remuneration and benefits. New Bridge Street is the Committee’s executive remuneration advisor and is a signatory to the Remuneration Consultants Group’s Code of Conduct.

The Committee met three times during 2015 and its schedule of work covered the following matters that fall within the scope of its duties and responsibilities:
  • Considered and determined bonus awards under the 2014 bonus scheme for the Executive Directors and Company Secretary;
  • Approved the 2015 grant of LTIP awards and determined the EPS and TSR performance conditions;
  • Reviewed and determined that 100 per cent of both the EPS and TSR components of the 2012 LTIP award was met and that in aggregate 100 per cent of the 2012 LTIP awards should vest; and
  • Agreed the framework for measuring financial targets for the 2016 bonus scheme.