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 eight times a year and additionally as required by time critical business needs. The Board met on eight occasions during 2016. 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. The Group has arranged appropriate insurance cover in respect of legal action against directors.

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. Mr. Ryan has indicated that he will step down from the Board at the conclusion of the Annual General Meeting on 9 May 2017. Mr. Ryan will be succeeded as Senior Independent Director by Mr. Paul Hampden Smith.

Company Secretary

The Directors have access to the advice and services of the Company Secretary, Charles Rinn, 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 2016

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 8 8 - - - - - - 2 2
G. Slark 8 8 - - 11 11 - - - -
D. Arnold 8 8 - - 11 11 - - - -
F. van Zanten 8 8 4 4 - - 8 6 2 2
R. Ryan 8 8 - - - - - - 2 2
C. M. Fisher 8 8 4 4 - - 8 8 2 2
P. Hampden Smith
8 8 4 4 - - 8 8 2 2
M. Roney 6 6 2 2 - - 5 5 2 2
V. Crowley 1 1 - - - - - - - -
S. Murray 1 1 - - - - - - - -

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 website. Ms. Susan Lannigan, Deputy Company Secretary is Secretary to the Audit and Risk Committee. Ms. Paula Harvey, Group HR Director is Secretary to the Remuneration Committee and Mr. Charles Rinn is Secretary to the Nomination 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 considers the financing requirements of the Group and makes recommendations to the Board. It also considers amendments to the terms of existing bank facilities, approval of finance and operating leases, for assets other than property up to a specified level, and litigation matters.

EFFECTIVENESS

Board Composition

It is the Company’s policy that the Board comprises a majority of Non-Executive Directors. At 31 December 2016, the Board of Directors was made up of ten members comprising the outgoing Non-Executive Chairman, the Non-Executive Chairman Designate, two Executive Directors and six independent Non-Executive Directors. Following the Group’s AGM and assuming the election/re-election of those Directors going forward, the Group’s Board will comprise seven Directors being the Non-Executive Chairman, two Executive Directors and four Non-Executive Directors. The Board considers that its proposed size and structure following the AGM 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.

The terms and conditions of appointment of Non-Executive Directors, which include the time commitment expected from each Director, are available for inspection by any person at the Company’s registered office during normal business hours and at the AGM for 15 minutes prior to the meeting and during the meeting.

Directors’ Independence and Board Balance

The six Non-Executive Directors, Mr. Roderick Ryan, Mr. Charles M. Fisher, Mr. Paul Hampden Smith, Mr. Frank van Zanten, Mr. Vincent Crowley and Mrs. Susan Murray 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 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 was important to the work of the Board and the Nomination Committee during 2016. The Board believes that Mr. Ryan has demonstrated independence in his role and that he has made a very valuable contribution to the Board. Mr. Ryan has indicated that he will not seek re-election and that he will retire from the Board at the conclusion of the Annual General Meeting on 9 May 2017.

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 served two years of his third term of three years and he has indicated that he will retire from the Board at the conclusion of the Annual General Meeting on 9 May 2017. Mr. Frank van Zanten has completed his first year of his second term of three years and Mr. Paul Hampden Smith has completed half of his first term of three years. Mr. Vincent Crowley and Mrs. Susan Murray were both appointed during 2016 and will be subject to election to the Board at the 2017 AGM.

The Company’s Articles of Association provide that one third of the Directors retire by rotation each year and that each Director seek reelection at the Annual General Meeting every three years. Directors appointed since the last AGM 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 other Directors, with the exception of Mr. Ryan and Mr. Fisher who have indicated their intention to retire as set out above, should retire at the 2017 Annual General Meeting and offer themselves for re-election.

The Board undertakes a formal annual evaluation of the performance 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. Further details on the board evaluation is set out below.

The overall composition and balance of the Board is kept under review as detailed in the programme of work undertaken by the Nomination Committee. 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. Mr. Mike Roney, Mr. Vincent Crowley and Mrs. Susan Murray, who were appointed during 2016, completed a comprehensive induction programme including extensive site visits. 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. The training and development needs of the Directors were reviewed and agreed at meetings held during the year.

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 internal evaluation was conducted by the Senior Independent Director in respect of the year ended 31 December 2016, an externally facilitated evaluation having been conducted during 2015 by the Institute of Directors in Ireland, with whom the Group has no other connection. The internal evaluation involved each Director independently completing a selfassessment questionnaire that covered the running of an effective board, relationships with management, oversight of strategy and development, monitoring financial and operating performance and shareholder value creation. The Senior Independent Director collated the responses to the questionnaire and reported the results of the evaluation to the Board. The overall result of the evaluation was very positive with a high level of satisfaction among Directors concerning the matters covered by the evaluation. The Non-Executive Directors also met during the year without the Chairman present to appraise the chairman’s performance.

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.

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 2019 was carried out by the Board and details of this assessment are laid out below.

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 2019, 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 16 to 19. 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 2019.

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 2019 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 nine 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 during the downturn in the Group’s businesses from 2008 to 2012 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 four independent Non-Executive Directors. Details of the committee’s key responsibilities and a description of its work during 2016 are contained in the Report of the Remuneration Committee on Directors’ Remuneration.

RELATIONS WITH SHAREHOLDERS

Communication with Shareholders

The Company recognises the importance of communication with shareholders. Meetings are held with existing and prospective institutional shareholders principally after the release of half-yearly
and annual results. The Group also issues trading updates in January, May, July and November.

A presentation for analysts was held in London on 7 March 2017 following the announcement of the Final Results for 2016. The presentation by the Chief Executive Officer and the Chief Financial
Officer was broadcast on www.graftonplc.com/webcast and can be viewed or downloaded here.

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

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 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.