Directors’ Report on Corporate Governance

Compliance with the 2014 UK Corporate Governance Code

Grafton Group plc is incorporated in Ireland and subject to Irish company law. Its Units (shares) are listed on the London Stock Exchange and the UK Corporate Governance Code (“the Code”) sets out the standards for corporate governance to be applied by companies with a listing on the London Stock Exchange. The Code is publicly available from the Financial Reporting Council’s (FRC) website, www.frc.org.uk. This report describes how the Company has applied the main and supporting principles of the Code.

The Board believes that the Company has, throughout the accounting period, complied with all relevant provisions set out in the Code.

LEADERSHIP

Role of the Board and Division of Responsibilities

The Board routinely meets seven times a year and additionally as required by time critical business needs. Accordingly, the Board met nine times in 2015. There is also contact with the Board between meetings as required in order to progress the Group’s business. The Board takes the major decisions while allowing management sufficient scope to run the business within a centralised reporting framework. The Board has a formal schedule of matters specifically reserved for its decision. The matters reserved by the Board for its decision cover all strategic decisions, risk management, acquisitions, approval of interim and final dividends and share purchases, changes to the capital structure, tax and treasury management, major items of capital expenditure, approval of half-yearly and annual financial statements, budgets and material matters currently or prospectively affecting the Group and its performance. The Board’s responsibilities also include ensuring that appropriate management, development and succession plans are in place; reviewing the environmental and health and safety performance of the Group; approving the appointment of Directors and the Company Secretary; approving policies relating to Directors’ remuneration and severance and ensuring that satisfactory dialogue
takes place with shareholders.

It is Board policy that no individual or small group of individuals can dominate its decision making.

The roles of Chairman and Chief Executive Officer are split. There is a clear division of responsibility between the Chairman and the Chief Executive Officer. The Chief Executive Officer is responsible for day-to-day management of the Group including implementing the strategy agreed with the Board and reporting on the performance of the Group. He is accountable to the Board as Chief Executive Officer for all authority delegated to executive management. The Chairman is responsible for leading the Board and ensuring its effectiveness in all aspects of its role.

Non-Executive Directors act constructively to challenge management proposals and review the performance of the business and management. The Board has delegated some of its responsibilities to the Audit and Risk, Remuneration, Nomination and Finance Committees.

Senior Independent Director

Mr. Roderick Ryan is the Senior Independent Director. He is available to act as a sounding board for the Chairman, and as an intermediary for the other Directors, if necessary. He is also available to shareholders who may have concerns that cannot be addressed through the normal channels of Chairman, Chief Executive Officer or Chief Financial Officer.

Company Secretary

The Directors have access to the advice and services of the Company Secretary who advises the Board on governance matters. The Company’s Articles of Association and Schedule of Matters reserved for the Board provide that the appointment or removal of the Company Secretary is a matter for the full Board.

Attendance at Board and Board Committee Meetings During the Year Ended 31 December 2015

The number of board meetings and committee meetings held during the year 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.

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.

EFFECTIVENESS

Board Composition

It is the Company’s policy that the Board comprises a majority of Non-Executive Directors. At 31 December 2015, the Board of Directors was made up of seven members comprising the Non-Executive Chairman, two Executive Directors and four independent Non-Executive Directors. Mr. Roderick Ryan is the Senior Independent Director. Directors’ biographical details are set out on pages 42 to 43. The Board considers that its current size and structure is appropriate to the scale, complexity and geographic spread of its operations.

The number of Non-Executive Directors is considered sufficient to enable the Board and its Committees to operate effectively without excessive reliance on any individual Non-Executive Director. The Board believes that Executive and Non-Executive Directors between them have the necessary skills, knowledge and experience, gained from a diverse range of industries and backgrounds required to manage the Group. The skills, expertise and experience of the Board is used to review strategy, allocate capital, monitor financial performance and consider executive management’s response to market developments and operational matters.

Directors’ Independence and Board Balance

Five Non-Executive Directors, Mr. Roderick Ryan, Mr. Charles M. Fisher, Mr. Mike Roney, Mr. Paul Hampden Smith and Mr. Frank van Zanten are considered by the Board to be independent in character and free from any business or other relationship which could materially interfere with the exercise of independent judgement. The Board has determined that each of the Non-Executive Directors fulfilled this requirement and is independent. In reaching that conclusion, the Board considered the principles relating to independence contained in the Code. Mr. Roderick Ryan has served for over nine years as a non-executive director.

Mr. Roderick Ryan was appointed to the Board in 2006 and, as the length of his service exceeds nine years, the Code provides that an explanation be made to shareholders concerning his continued independence. The Board believes that the integrity and independence of Mr. Ryan is beyond doubt. He is financially independent of the company and has other significant professional commitments. His professional experience and long-term perspective on the Group’s business is important to the work of the Board. The Board believes that Mr. Ryan demonstrates independence in his role and that he continues to make a valuable contribution to the Board. It is Board policy that all Directors including Mr. Ryan will retire and seek re-election at the 2016 AGM.

The Company’s Articles of Association provide that one third of the Directors retire by rotation each year and that each Director seek re-election at the Annual General Meeting every three years. New Directors are subject to election by shareholders at the next Annual General Meeting following their appointment. However, in accordance with the provisions of the Code, the Board has decided that all Directors should retire at the 2016 Annual General Meeting and offer themselves for re-election. It is Board Policy that Non-Executive Directors are normally appointed for an initial period of three years, which is then reviewed. Mr. Charles Fisher has two years of his third term of three years to serve, Mr. Frank van Zanten has completed his first term of three years and Mr. Roderick Ryan has agreed to remain on the Board for a period. Mr. Paul Hampden Smith was appointed during 2015 and will be subject to election by the shareholders at the 2016 AGM.

The Board undertakes a formal annual evaluation of its Directors and is satisfied that all Directors who are proposed for re-election continue to discharge their obligations as Directors and contribute effectively to the work of the Board and its Committees.

The overall composition and balance of the Board is kept under review as detailed in the programme of work undertaken by the Nomination Committee, set out in its report on pages 79 to 80. The Board will continue to manage the orderly succession of Non-Executive Directors.

Induction and Training

It is the policy of the Board that formal induction is offered to all Directors appointed to the Board. This includes on-site visits and meetings with Senior Management in the Group’s businesses and briefings from the Chairman, Executive Directors and the Company Secretary. Induction covers matters such as the operations of the Group, the role of the Board and matters reserved for its decision, powers delegated to Board Committees, corporate governance policies and the performance of the Group. Directors are advised on appointment of their legal and other duties and of their obligations as Directors of a listed company.

Information and Support

Directors have full and timely access to all relevant information in a form appropriate to enable them to discharge their duties. Reports and papers are circulated to Directors in preparation for Board and Committee meetings. All Directors receive monthly management accounts and board reports covering the Group’s performance, its strategy and other matters to enable them to review and oversee the performance of the Group on an ongoing basis.

All Directors have access to independent professional advice at the Group’s expense where they consider that advice is necessary to enable them to discharge their responsibilities as Directors.

The Board periodically holds meetings at Group locations and meets senior management in order to help Directors gain a deeper understanding of the Group’s operations and markets.

Evaluation of Board

A formal review of the performance of the Board, Board Committees and individual Directors is undertaken each year including an external evaluation every three years. The process is designed to ensure that the effectiveness of the Board is maintained and improved where possible.

An externally facilitated evaluation of the Board was conducted during 2015 by the Institute of Directors in Ireland with whom the Group has no other connection. The Institute of Directors in Ireland has extensive experience as a facilitator of board evaluations for listed companies and it also conducted the previous external Board evaluation in 2012. The use of an external facilitator to conduct Board evaluations at least once every three years complements evaluations conducted by the Chairman and/or the Senior Independent Director. The evaluation concluded that the Board and its Committees are operating effectively and to a high standard of governance and in compliance with best practice. The performance of the Board improved over all aspects of its work compared to the 2012 review which itself concluded that the Board operated to a very high standard. The report noted that the Board functions very effectively with no concentration of power and no restrictions on Directors to contribute to the development of strategy, provide good oversight of performance and constructively challenge management. The evaluation also concluded that the Board comprises an appropriate mix of skills and a good balance of Non-Executive Director and Executive Director skills and experience and a Committee structure which is adding value to the work of the board.

The Board confirms that each Non-Executive and Executive Director continues to perform effectively and demonstrate a strong commitment to the role.

Succession Planning

The Board’s general policy is to keep the overall composition and balance of the Board under review and to manage the orderly succession of Non-Executive Directors without compromising the effectiveness and continuity of the Board and its Committees.

The Board plans for succession with the assistance of the Nomination Committee. The Board believes that it is necessary to have appropriate Executive Director and Non-Executive Director representation to provide Board balance and also to provide the Board with the breadth of experience required by the scale, geographic spread and complexity of the Group’s operations.

The Nomination Committee takes account of the skills, knowledge and experience required by the Board, international business experience and diversity, including nationality and gender, in considering suitable candidates to serve as Non-Executive Directors as part of the ongoing process of Board renewal. The Committee also considers the need for an appropriately sized Board.

The Board considers senior management succession planning on a regular basis with a view to developing over the coming years a robust succession pipeline for key positions up to Executive Director level.

ACCOUNTABILITY

The Board is committed to providing a fair, balanced and understandable assessment of the Company’s position and prospects.

Responsibility for reviewing the Group’s internal controls, risk management and risk evaluation procedures has been delegated by the Board to the Audit & Risk Committee. Details of how these duties were discharged is set out in the Audit & Risk Committee Report on pages 51 to 55.

Following the updates to the UK Corporate Governance Code, in particular in relation to the risk management process and long term viability of the Group, an assessment of the viability of the Group over a three year period to December 2018 was carried out by the Board and details of this assessment are laid out on page 48.

Going Concern

The Directors, having made appropriate enquiries, believe that the Company and the Group as a whole has adequate resources to continue in operational existence for the foreseeable future, being 12 months from the date of approval of the financial statements and, for this reason, they continue to adopt the going concern basis in preparing the financial statements.

Viability Statement

The Directors have assessed the viability of the Group over a three-year period to December 2018, taking account of the Group’s current position and prospects, the Group’s strategy and the Group’s principal risks and how they are managed as documented on pages 56 to 58. Based on this assessment, the Directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2018.

In making this statement the Directors have considered the resilience of the Group, taking account of its current position, the principal risks facing the business in severe but reasonable scenarios, and the effectiveness of any mitigating actions that could be taken to avoid or reduce the impact or occurrence of the underlying risks and that realistically would be open to them in the circumstances. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period.

The Directors have determined that the three-year period to December 2018 is an appropriate period over which to provide its viability statement. The Group prepares five year plans as part of its annual budgeting process however, given the inherent uncertainties, the outer two years are more difficult to forecast. These two years are used mainly for scenario planning with the Board placing greater reliance on the initial three year period. In making their assessment, the Directors have taken account of the Group’s low net debt to equity position of 12 per cent, its strong financial position and headroom on loan facilities in place over the period, its key potential mitigating actions of reducing the Group’s cost base, capital expenditure or dividend payments and the Group’s ability to generate positive cash inflows in a scenario of falling revenue as working capital is unwound. These mitigating actions were tested to the fullest extent during the downturn in the Group’s businesses from 2008 to 2011 which highlighted the resilience of the Group’s business model to a severe and protracted economic downturn.

REMUNERATION

The Board has adopted remuneration policies that are considered sufficient to attract, retain and motivate Directors of the quality required to manage the company successfully whilst ensuring that the performance related elements are both stretching and rigorously applied. The Board has established a Remuneration Committee comprising three independent Non-Executive Directors. Details of the committee’s key responsibilities and a description of its work during 2015 are contained in the Report of the Remuneration Committee on pages 59 to 78.

RELATIONS WITH SHAREHOLDERS

Communication with Shareholders

The Company recognises the importance of communication with shareholders. Presentations are made to both existing and prospective institutional shareholders principally after the release of half-yearly and annual results. Interim Management Statements are issued in compliance with the EU Transparency (Directive 2004/109/EC Regulations 2007, as amended). The Group also issues trading updates in January and July.

It is planned to hold a presentation for analysts in London on 8 March 2016 following the announcement of the Final Results for 2015. The presentation by the Chief Executive Officer and the Chief Financial Officer will be broadcast live on www.graftonplc.com/webcast and can be viewed/downloaded at www.graftonplc.com.

Any significant or noteworthy acquisitions are announced to the market and the Company’s website www.graftonplc.com provides the full text of all announcements including the half-yearly and annual results and investor presentations.

The Group periodically holds a capital markets day for institutional investors and research analysts which provides an opportunity to update the market on the Group’s performance and strategy and for Executive Directors and members of the Executive Committee to engage with the investment community and to hear the views of investors on the Group.

While the Chairman takes overall responsibility for ensuring that the views of our shareholders are communicated to the Board as a whole, contact with major shareholders is principally maintained by the Chief Executive and the Chief Financial Officer. The Chairman is available to meet with shareholders if they have concerns which have not been resolved through the normal channels of Chief Executive Officer or Chief Financial Officer or where such contacts are not appropriate. The Board receives reports on feedback from investors and also receives analysts’ reports on the Group. Non-Executive Directors are offered an opportunity to attend meetings with major shareholders.

General Meetings

The Company’s Annual General Meeting (AGM), which is held in Dublin, affords individual shareholders the opportunity to question the Chairman and the Board. The Notice of the AGM, which specifies the time, date, place and the business to be transacted, is sent to shareholders at least 20 working days before the meeting. The AGM is normally attended by all Directors. Resolutions are voted on by either a show of hands of those shareholders attending, in person or by proxy, or, if validly requested, by way of a poll. In a poll, the votes of shareholders present and voting at the meeting are added to the proxy votes received in advance and the total number of votes for, against and withheld for each resolution are announced. This information is made available on the Company’s website following the meeting.

All other general meetings are called Extraordinary General Meetings (EGMs). An EGM called for the passing of a special resolution must be called by at least 21 clear days’ notice. Provided shareholders have passed a special resolution at the immediately preceding AGM and the Company allows shareholders to vote by electronic means, an EGM to consider an ordinary resolution may, if the Directors deem it appropriate, be called at 14 clear days’ notice.

A quorum for a general meeting of the Company is constituted by four or more shareholders present in person and entitled to vote. The passing of resolutions at a meeting of the Company, other than special resolutions, requires a simple majority. A special resolution requires a majority of at least 75 per cent of the votes cast to be passed.

Shareholders have the right to attend, speak, ask questions and vote at general meetings. In accordance with Irish company law, the Company specifies record dates for general meetings, by which date shareholders must be registered in the Register of Members of the Company to be entitled to attend. Record dates are specified in the notice of a general meeting. Shareholders may exercise their right to vote by appointing a proxy/proxies, by electronic means or in writing, to vote some or all of their shares. The requirements for the receipt of valid proxy forms are set out in the Notice convening the meeting. A shareholder, or a group of shareholders, holding at least 5 per cent of the issued share capital of the Company, has the right to requisition a general meeting. A shareholder, or a group of shareholders, holding at least 3 per cent of the issued share capital of the Company, has the right to put an item on the agenda of an AGM or to table a draft resolution for inclusion on the agenda of a general meeting, subject to any contrary provision in Irish company law.

Memorandum and Articles of Association

The Company’s Memorandum and Articles of Association set out the objects and purposes of the Company. The Articles detail the rights attaching to each share class; the method by which the Company’s shares can be purchased or re-issued; the provisions which apply to the holding of and voting at general meetings; and the rules relating to the Directors, including their appointment, retirement, re-election, duties and powers.

A copy of the Memorandum and Articles of Association can be obtained from the Group’s website.