The Company recognises the importance of, and is committed to, high standards of corporate governance. The Board is accountable to the shareholders for good corporate governance. This report describes how the Board applies the principles of good governance and best practice as set out in the UK Corporate Governance Code issued by the Financial Reporting Council ("the Code"), available on its website www.frc.org.
Throughout the financial year under review, the Board considers that the Company has complied fully with all applicable provisions recommended in the Code.
The information required under Rule 7.2.6 of the Disclosure and Transparency Rules of the Financial Services Authority is included in the Report of the Directors on pages 18 to 21.
The Company is headed by a Board of Directors collectively responsible for the success of the Company. The Board provides leadership within a framework of prudent and effective controls designed to enable risk to be assessed and managed. It sets the Company’s strategy and is responsible for reviewing management performance and for ensuring that the necessary financial and human resources are in place in order to meet the Company’s objectives. The Board also sets the Company’s values and standards mindful of its obligations to shareholders and other stakeholders.
The Board currently comprises the Chairman, three Executive Directors and three Non-Executive Directors. The Board regards K G Edelman, D J Houghton and P N Wilkinson as being independent. The Chairman and Chief Executive both have clearly defined roles and responsibilities which are set out in writing and approved by the Board. The Chairman has responsibility for the leadership and the running of the Board, including but not limited to ensuring that a fixed schedule of matters covering key areas of the Group’s affairs, including strategy, annual budgets, significant capital expenditure and major litigation, is exclusively retained for the Board’s review and approval and that a framework exists to allow the clear dissemination of relevant and timely information to all Directors for such discussion to occur. He is also responsible for communications with shareholders and for ensuring effective contributions from the Non-Executive Directors. The Chairman has commitments outside of the Company as detailed in his biography on page 16. All Directors are subject to reappointment by shareholders at the first AGM following their appointment and thereafter at intervals of no more than three years.
The Board meets regularly (normally nine times per financial year) and during the financial year under review there was full attendance by all Directors eligible to attend at the twelve Board meetings that took place. The Board regularly reviews the operational performance and plans of the Company and, as necessary, determines the Company’s strategy. The Executive Directors also meet under the chairmanship of the Chief Executive on a weekly basis to discuss operational matters and ensure that Board decisions are implemented. All Board members receive agendas and comprehensive papers prior to each Board meeting. All Directors have access to the services of the Company Secretary who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are adhered to. The Board maintains a register of potential conflicts of interest with its Directors and confirms no such conflicts exist. The register is reviewed and updated as necessary throughout the financial year. Directors may also obtain further information from any manager or employee of the Company and there is a procedure for Directors to obtain independent advice from external advisers, consultants or any such further professional individual or entity at the Company’s expense. The Company maintains appropriate liability insurance for the benefit of its Directors.
The Chairman meets at least annually with the Non-Executive Directors without Executive Directors present and the Non-Executive Directors, led by the Senior Independent Director, P N Wilkinson, meet annually to consider the Chairman’s performance, taking into account the Executive Directors’ views. The Senior Independent Director is also available to shareholders if they have any concerns that contact through the normal channels of the Chairman, Chief Executive or Finance Director has failed to resolve or for which such contact is inappropriate.
The terms and conditions of appointment of the Non-Executive Directors are available during normal business hours at the Company’s Registered Office and will be available for inspection at the AGM.
New appointments to the Board receive an appropriate induction to gain an understanding of the Company’s business, which includes meetings with senior management.
Given the skills and experience of the Non-Executive Directors, their general training requirements are left to their own discretion. The Company makes the necessary resources available to meet any identified requirements. The Chairman conducts a formal appraisal process for the Board, its Committees and individual Directors, including those Directors due to offer themselves for reappointment at the AGM, through use of a questionnaire and one-to-one meetings which facilitates a Board discussion and, where appropriate, agreed actions for improvements. The Executive Directors are also included in the Company’s annual performance appraisal arrangements, which include development and training requirements.
The Board delegates its authority for certain matters to its Audit, Remuneration and Nomination Committees. The Board approves the terms of reference of each of the Committees, which were recently reviewed and amended, and they are available on the Company’s web site, www.thorntons.co.uk, and upon request from the Company Secretary. During the financial year under review there were three meetings of the Audit Committee, two formal meetings of the Remuneration Committee and one formal meeting of the Nomination Committee with full attendance of all eligible Directors. In addition to formal Committee meetings, ad hoc decisions of the Committees are taken after discussion throughout the financial year as necessary through the form of written resolutions.
The Nomination Committee is composed of the three independent Directors and the Chairman of the Board, J A von Spreckelsen. The Committee is chaired (except if dealing with his own successor) by J A von Spreckelsen and is responsible for reviewing the credentials of each and every potential Director before such nominee is proposed to the Board. In considering potential appointments to the Board, the Committee evaluates the balance of skills, knowledge and experience on the Board when considering the role and capabilities required for a particular appointment. When appointments are being considered, the Committee uses professional external recruitment specialists as and when appropriate, as it did in relation to the appointments of M D Killick as Finance Director and K G Edelman and M George, who joins the Board on 1 November 2012, as Non-Executive Directors, as well as contacts of its Directors and the Company’s advisers. The Committee also reviews the contribution of those Directors offering themselves for reappointment by shareholders at the AGM.
The Remuneration Committee is composed of the three independent Directors and is chaired by P N Wilkinson. The Board has delegated authority to the Committee for setting the Chairman’s, the Executive Directors’ and the Company Secretary’s remuneration and performance-related awards. Further details of the Committee and Directors’ remuneration are set out in the Report on the Directors’ remuneration on pages 27 to 34.
The Audit Committee throughout the financial year comprised of two independent Directors, D J Houghton (Chair) and P N Wilkinson. It meets three times a financial year with the external auditors and considers any issues which are identified during the course of their audit work. The Board is satisfied that both Committee members have recent and relevant financial experience. Meetings are also attended, by invitation, by the Chairman, Chief Executive, Finance Director and Financial Controller. The Committee meets at least annually with the external auditors without any Executive Directors present.
The Audit Committee is responsible for: monitoring the integrity of the Company’s financial statements; reviewing the Company’s internal financial controls and internal control and risk management systems; monitoring and reviewing the effectiveness of the internal audit function; making recommendations to the Board regarding the appointment, reappointment or removal of the external auditors and approving their remuneration and terms of engagement; reviewing and monitoring the external auditors’ independence and objectivity and the effectiveness of the audit process; and developing and implementing a policy on the engagement of the external auditors to supply non-audit services.
In respect of safeguarding the objectivity and independence of the external auditors, the Committee has a formal policy regarding the provision of non-audit services by the external auditors including certain services which they cannot provide so as not to compromise their independence (for example, bookkeeping or other internal accounting services, internal audit, management roles or legal services). The policy also provides for tendering for services where appropriate and has specific pre-approved categories of work subject to the level of fees involved. A formal rotation policy of the audit partner also exists which limits tenure to a maximum of five years.
The Committee also specifically reviews the levels of all fees paid to the auditors for audit and non-audit services annually, which are set out in note 6 on page 52. The external auditors report to the Audit Committee each financial year on the actions they have taken to comply with professional and regulatory requirements and best practice designed to ensure their independence. The Committee reviews whether the auditors believe there are any relationships that may affect their independence and additionally the auditors formally confirm their independence in writing to the Board in respect of the period covered by these financial statements.
The Committee also receives regular detailed reports from the internal audit function and, to ensure its activities are appropriate, reviews its proposed work plan for future periods.
The Company’s control environment is the responsibility of the Company’s Directors and managers at all levels. The Board is therefore responsible for establishing and maintaining the Company’s system of internal control and for reviewing its effectiveness. No control system can provide absolute protection against material misstatement or loss but it is designed to manage rather than eliminate the risk of failure to achieve business objectives and to provide the Directors with reasonable assurance that problems should be identified on a timely basis and dealt with appropriately.
The Board has delegated responsibility for reviewing the Company’s system of internal control and its effectiveness to the Audit Committee. Due to the size of the Company, the Executive Directors are able to monitor performance and evaluate and manage on a continual basis the risks faced by the Company. The key procedures that have been established to provide effective internal control, including over the financial reporting process and the preparation of consolidated financial statements, and to comply with the Financial Reporting Council’s guidance on Internal Control: Revised Guidance for Directors on the Combined Code include:
The Board and Audit Committee review management reports prepared by the external and internal auditors and consider the suitability of suggested improvements to the system of internal controls.
The Board and Audit Committee have reviewed the effectiveness of the internal control system, including financial, operational and compliance controls and risk management, in accordance with the Code on an ongoing basis for the period from 26 June 2011 to the date of this report and have determined that they were not aware of any significant failings or weaknesses in the system of internal control.
As described above in the internal control procedures, key risks are reviewed by the Executive Directors and senior management. The assessment of risks on the basis of likelihood and potential impact, together with the controls and actions to manage or mitigate them, are reviewed by the Audit Committee and Board. The key risks and uncertainties facing the business are considered to be as follows:
The UK confectionery market has many strong players and maintaining a competitive position depends on Thornton’s continued ability to offer products that have a strong appeal to consumers and which are readily available in the places that they wish to purchase them. Any significant shift in consumer trends coupled with a failure to anticipate and react to such changes or a failure to invest adequately in our business could reduce demand for products resulting in loss of market share, reduced sales, reduced attractiveness to potential franchisees or harm to the image of the brand. Product innovation is critical to maintaining consumer relevance and the Company has a rigorous process for identifying, researching and developing new product ideas, which is regularly reviewed. The Company’s multi-channel strategy is also a means by which it can satisfy consumers’ needs better than some of its competitors, whilst also mitigating the overall risk to the business from a downturn in any specific channel.
During times of economic uncertainty or hardship consumer demand for products may fall or consumers may choose to purchase lower value consumer goods as opposed to higher value consumer goods resulting in a fall in demand for products. Thorntons consequently offers a range of products across various price points and has flexible trading and promotional plans that enable it to respond to consumer and market trends rapidly. The economic climate may also result in the failure of Commercial or Franchise businesses and consequently customers and/or franchisees defaulting on supply payments. Reduced sales as a result of an economic downturn or recession in the UK may have an adverse effect on the profitability and cash flow of the business.
Material adverse changes in certain commodity prices could affect the Company’s profitability. The Company buys key inputs forward and works with suppliers to choose the optimal time and quantity for purchases. Whilst this policy may sometimes preclude the Company from taking advantage of short-term dips in prices, it provides a stable cost base for the Company to make its trading decisions.
A major interruption or substantial decrease in the ability to supply customers could damage sales and brand reputation as well as relationships with customers and consumers. The majority of the Company’s products for sale are produced at Thornton Park in Alfreton, Derbyshire. Thornton Park has significant fire protection across the site, contingency and emergency recovery plans for IT, utilities and major incidents which are regularly reviewed and appropriate insurance cover is also in place.
Product contamination, accidental or malicious, is a risk faced by all food producers. Thorntons has extremely rigorous policies and security systems for guarding against accidental or malicious contamination of ingredients or finished products. In the unlikely event that these policies and systems fail, a robust process for product recall and consumer communication, in addition to comprehensive insurance cover, is in place.
Management evaluates the balance of skills, knowledge and experience within the team when considering the role and capabilities required for a particular senior appointment. The Company uses professional external recruitment specialists as and when appropriate, as well as contacts of its Directors and the Company’s advisers. Management aspires to keep colleagues informed of internal and external developments and regularly reviews how staff are feeling through surveys and communication sessions. A channel outside the normal line structures for communication and resolution of issues exists through the Joint Industrial Council for Thornton Park and the Retail Council for store-based colleagues. Strong recruitment processes, formalised succession planning together with ongoing individual training and development plans help mitigate the risk of the loss of key staff.
Communications with shareholders are given high priority. Following the announcement of the Company’s interim and final results, the Directors, normally represented by at least the Chairman, Chief Executive and Finance Director, make detailed business presentations to institutional shareholders and investment analysts. The Senior Independent Director is also available to all shareholders. Feedback directly from shareholders and via the Company’s brokers after these regular analyst and shareholder meetings ensures that the Board understands shareholder views. Finally, the Company’s web site, www.thorntons.co.uk/investor, allows shareholders to view Company results and announcements and other relevant information.
The Board uses the AGM to communicate with private and institutional investors and welcomes their participation. Each financial year the Board reviews any governance and voting guidelines issued by representative bodies of its shareholders. At each AGM the Directors present a business review to all attending shareholders who may ask any questions they wish. It is not a requirement that these be previously submitted to the Company in writing. Furthermore, at each AGM the Chairman aims to ensure that the chair persons of the Board Committees are available. All Code provisions regarding constructive use of the AGM are complied with.
The Directors are satisfied, on the basis of current financial projections and facilities available, that the Company and the Group have adequate financial resources to continue to operate for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.
Approved by the Board on 11 September 2012 and signed on its behalf by: